Buying and selling

Although some funds are exchange-traded, the shares or units of most mutual funds are bought and sold by making an application to the manager. This can be in writing, by telephone or via the Internet, directly by the investor or by the investor’s adviser or agent. Many managers have pre-printed application and redemption forms and their advertisements and other promotional mailing material often include an application form. Once accepted by the manager, applications constitute a binding contract, and the manager issues a contract note stating the details of the transaction.

For purchases, payment can be included with the application. Some managers may insist on this for the initial investment of a first-time investor. Alternatively, the contract note will specify when payment is required. For large investments, the manager may be required by law to obtain confirmation of the investor’s identification and of the source or destination of money involved in the transaction: if there is any suspicion that the money is being laundered, or used to support terrorist activity, the suspicion must be reported to the authorities.

FundsIf the order to purchase shares or units has been made through an intermediary, the investor might have a right to change his or her mind and cancel the transaction. This often applies when the investor has received advice or the transaction is not completed via face-to-face meetings at which fund documents can be supplied. In these cases, a notice of cancellation rights is sent direct to the investor, who typically is then allowed 14 days to exercise the right to cancel. With this as a protection, the EU’s Distance Marketing Directive, which seeks to outlaw other than face-to-face dealing, can be relaxed in cases where approved intermediaries place orders on behalf of their clients over the telephone or by electronic means.

For sales or redemptions, the holder may have to complete a form of redemption or renunciation, renouncing their interest in the shares or units being sold. The manager will not pay the proceeds until the form has been completed and returned. Client money regulations may be in place and require that proceeds be paid to the registered first-named holder, unless written and signed instructions have been received directing otherwise. Intermediaries, if authorised to handle their clients’ money, may receive proceeds from the manager but must hold it in a separate client money (bank) account.

Registration

A register of share- or unit holders must he maintained, and usually by the manager or an appointed registrar or transfer agent. In the case of a trust, responsibility sometimes lies with the trustee but for a company, it is usually performed by the company itself or delegated, either to the manager or to a specialist third party known as the registrar or transfer agent.

The entry on the register is the conclusive evidence of an investor’s title to the shares or units. Details recorded should include:

  1. the name and address of the holder;
  2. the number of shares or units of each type held by

3) each holder;

  1. the date on which the holder was registered.

Because the information held on the register is deemed to comprise the conclusive legal record of ownership, it must be accurate, complete and up to date. The register must also be available for inspection by the holders, for confirmation purposes, free of charge, during normal business hours, but may not necessarily be available to the general public.

As well as establishing and maintaining the register, the registrar or transfer agent is responsible for:

  1. ensuring that the number of shares or units recorded on the register reconciles with the total number of shares or units in issue;
  2. issuing certificates if there is a requirement for them;
  3. allocating net income to share- or unit holders;
  4. preparing and dispatching payments representing the distribution of income, which may include realized capital gains.

There are several types of transaction that the registrar will process:

Issues and redemptions - the registrar will register a holding once the manager confirms that payment and full registration details have been received and pay out the proceeds on redemption once written confirmation or renounced certificates have been received.

Transfers - shares or units in a mutual fund are transferable securities, and can be transferred from one holder to another, usually by completion of a stock transfer form, sent to the registrar with payment of any appropriate transfer tax or stamp duty.

`Operation of law’ - this refers to the transmission of title to a holding upon the death or bankruptcy of a holder (or liquidation in the case of corporate holders). In the case of a joint holding, if one of the joint holders dies, the surviving holders are recognised as having title to the shares or units, subject to any contradictory information concerning the nature of the joint holding arrangement. The registrar will need to see the death certificate. In the case of a sole holding, authority to deal with the holding rests with the executors or administrators of the deceased holder’s estate. They must supply the registrar with evidence both of death and of their authority to act but can then arrange with the registrar for either the transfer of shares or units to themselves or to the beneficiaries, or the sale of the holding.

Conversions - this may refer to reinvestment from one mutual fund to another run by the same manager (also called ’switching’), or to a change in type of share or unit held in a single fund.

Change of name or address - the registrar needs to be sure that the source of the instruction to make the change is proper, such as a written confirmation signed by the holder recorded on the register.

Enquiries and requests for information - to avoid breaching data protection regulations, specific details should be sent by mail only to the registered holder at the registered address, unless the manager or registrar is certain of the identity of the person making the enquiry.

Some jurisdictions allow the issue of bearer shares, and in this case no register is maintained. Holders receive coupons at the time of their original investment and, when income distributions are to be made, the bearer must present the relevant coupon to a paying agent to receive the entitlement. Coupons must be passed on to any subsequent purchaser.

Income allocations

After the net income (including if permitted net realised capital gains) per share or unit has been calculated, it is allocated to share- or unit holders in proportion to their holding. The tax authorities may require that allocations and distributions are processed net of tax, in which case tax credit vouchers are sent to the holders, stating how much tax has been paid on their behalf.

The registrar checks that the sum of all the individual payments of income being distributed and the amounts being retained or reinvested on behalf of holders is the same as the total amount allocated. This requires an equitable method of rounding payments to the nearest unit of currency.

Payment is made by one of the following methods:

  1. warrant (a guaranteed cheque), payable to the firstnamed holder, and sent to the address held on the register;
  2. warrant payable to a third party, if there are written instructions to this effect signed by the holders;
  3. direct credit to a bank or similar account, using a facility such as in the UK - the Bankers Automated Clearing System (BACS).

There are several advantages of using an automatic crediting facility. For the holder these include:

  1. no risk of the warrant being lost or delayed in the post;
  2. the payment is credited on the due date, with no clearing delay;
  3. the holder does not need to visit the bank to pay in the warrant.

For the registrar/transfer or paying agent:

  1. minimal paper handling;
  2. fewer reconciliation problems;
  3. reduced costs.

Warrants are only valid for a limited period, usually six months, and any not presented within this time will have to be returned to the paying agent for re-dating. If the payment remains unclaimed for a long time (typically six years but sometimes 12 years), it is transferred back into the capital property of the fund, and is not reclaimable.

COMMUNICATING WITH INVESTORS

Transaction confirmations

Regulators normally require managers to issue investors with transaction confirmations or contract notes within 24 hours of the transaction being executed, specifying details of the transaction, including the date and time of execution, fund name, quantity and type of share/unit, price, consideration or proceeds and of any charges added or deducted.

Statements

At periodic intervals specified by regulators or when payments are made to holders, or income is reinvested, a statement is sent to each holder showing:

  1. the number of shares or units currently held;
  2. the payment date and rate per share or unit;
  3. the amount of the payment;
  4. the amount of any tax credit.

A valuation of the holding and a list of transactions since the last statement may be included.

Accounts

The accounts of a mutual fund are usually included in the fund report. They are drawn up in accordance with the country’s regulations and accounting practice. The accounts provide:

  1. a statement of assets and liabilities;
  2. details of the capital account;
  3. details of the income and distribution accounts;
  4. notes describing the accounting policies used and giving explanations of certain items.

Fund reports

The manager is responsible for preparing the fund report, which is sent to share- or unit holders free of charge, and which must be available for inspection. It is also a useful guide for prospective investors.

The minimum content, frequency and latest publication dates are prescribed by regulations. In most countries annual and half-yearly or interim reports are mandatory, although it may be permissible to exclude some matters from the interim report. The manager must issue the report within a reasonable time from the end of the accounting period, e.g. eight weeks. Most managers find it convenient to send the report out with the income allocation statement, warrant and tax credit voucher (as appropriate).

Typically, a fund’s annual report contains:

  • the names and addresses of the manager, custodian,
  • depositary or trustee, registrar, auditor, investment adviser;
  • the fund’s investment objectives;
  • a review of the manager’s investment activities during the reporting period;
  • a description of any significant change in the prospectus or scheme particulars since the last report;
  • the value of the property of the fund at the beginning and end of the reporting period;
  • the portfolio statement;
  • details of changes to the investments since the last report;
  • the cost of purchases of investments;
  • the proceeds of sales of investments;
  • a comparative table detailing the performance record for the fund since it was launched, or for a shorter period if permitted, in terms o£ the highest and lowest prices each year
  • the net asset value of the property at the end of each year the number of shares or units in existence;
  • the trustee’s or depositary’s report confirming (or otherwise’ that the manager has managed the fund during the period in accordance with the regulations and investment objectives;
  • the auditor’s report confirming (or otherwise) that the accounts have been properly prepared, and give a true and fair view of the financial position of the fund at the end of the period and of the net income for the period;
  • accounts or financial statements.

Meetings - AGMs and EGMs

Mutual funds constituted as investment companies may be required to hold an annual general meeting (AGM) of shareholders, but those constituted as trusts do not. In either case, circumstances will arise that require there to be extraordinary general meetings (EGMs) for holders to agree to:

  1. any significant or material change to the fund’s constitution;
  2. the fund’s winding-up;
  3. amalgamate or merge the fund with another fund;
  4. any material departure from the investment objectives of the fund;
  5. removal of the manager.

Share- or unit holders must be given adequate notice of the meeting (usually 14 days), and the notice must set out the place, day and time of the meeting, and the terms of any resolutions to be proposed.

The meeting cannot proceed unless a quorum of share or unit holders is present. The quorum comprises holders present in person or by proxy, representing a specified minimum number or proportion of holders or of the value of the shares or units in issue at the relevant time. If a quorum is not present within, say, 30 minutes after the appointed time, the meeting is adjourned, but at an adjourned meeting the holders present may constitute a quorum, whatever their number.

Each resolution must be voted on separately. This may be by show of hands, or, if demanded, by a poll. A vote by poll allows one vote for each share or unit held, and is always demanded for material changes.

The manager, though entitled to receive notice of and attend meetings of holders, is not normally entitled to vote or be counted in the quorum.

Voting by proxy

Holders who would like to vote at a meeting, but are unable to attend, can use or send a proxy to vote on their behalf. A special form of proxy usually is sent to holders with the notice of meeting so that they may cast their votes in advance. Proxy forms must be returned within a specified time before the meeting, normally 48 hours.

In effect, the holder appoints someone (usually the chairperson of the meeting) as his or her proxy, to cast the votes for or against each resolution as specified on the proxy form. Alternatively, the holder may simply appoint a proxy to attend and vote on his or her behalf as the proxy sees fit. Should the holder decide to attend after all, he or she may, but is not obliged to, revoke the proxy and cast his or her votes personally.

A resolution is passed if a specified majority of votes cast are cast in favour. Ordinary resolutions require only a simple majority, i.e. 50% plus 1; extraordinary or special resolutions usually require a higher percentage, which in the UK must be at least 75%; in the US, it is 67% provided at least 50% of the total possible votes are represented at the meeting.

Minutes of meetings must be made, recording all proceedings and resolutions passed, including the results of voting. Minutes are usually the responsibility of the manager.

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