The trust in a unit trust is a trust with two limbs, a primary trust and a secondary trust. The primary trust is a trust whilst the scheme is a going concern. It may be interpreted as a trust of the Re Denley’s type or as a trust subject to the contractual provisions of the trust deed and, in the case of an authorized unit trust, the regulations made under section 81 of the Financial Services Act 1986. The secondary trustonly arises at the very moment when the trust scheme is terminated. It is a trust for sale and distribution.

The provisions to which the primary trust is subject depend on whether the unit trust is an authorized unit trust or non-authorized unit trust. The most important of these provisions will be those along the line of regulation 7.02.2 and regulation 7.09.1. Regulation 7.02.2 provides:

Subject to paragraph 1,  it is the manager’s right and duty to make decisions as to the constituents of the property of the scheme in such a way as appears to him likely to secure that the objectives of the scheme are attained and that any particular objectives specified in the scheme particulars are achieved.

And regulation 7.09.1 provides:

FundsIt is the duty of the trustee to take reasonable care to ensure . . . that decisionsabout the constituents of the property of the scheme do not exceed the powers conferred on the manager.

Under these provisions, the manager has ‘a right’ to make an investment decision but the trustee does not. The trustee’s obligation is one of oversight and does not extend to consider the merit of particular investments. In practice, since the trustee is the title holder of all scheme property, it has to execute all documents and implement the investment decision of the manager. And since it has no right to second-guess a particular investment decision, it means that it has to execute the directions given by the manager. In respect of an authorized unit trust, regulation7.10.1 accordingly provides that the trustee must take all steps and execute all documents which are necessary to secure that acquisitions, disposals, and loans properly made by the manager are completed.

Further provisions in the trust deed may limit the power to direct investment to certain descriptions of assets or may impose percentage restriction on certain investments or lay down some conditions which the manager must satisfy before making a particular investment. For example, an authorized unit trust constituted as a property fund is subject to percentage restriction on investment in approved immovables.Investment in approved immovables is also on condition that the manager obtains a report of an independent valuer stating that the immovable would be capable of being disposed of reasonably expeditiously at the valuation made by him. In a non-authorized property trust, where a single investment may constitute a substantial proportion of the trust fund, the trust deed may stipulate a detailed procedure for valuation and for submission of an investment proposal to the trustee.

In practice, any investment decision structure of an authorized unit trust must also be assessed with the knowledge that a manager is a company that manages a stable of unit trusts, investment trust companies, and other collective investment schemes. It is possible for a manager of a non- authorized unit trust or an offshore unit trust to perform investment advisory services for individuals, pension funds, or private trustees on a contractual basis. In fact, this is very common for managers offshore. This may affect the loyalty duties of the manager in directing the trustee to make any investment. It may also affect the trustee’s decision whether tofollow a particular direction.

In general, a research department of the manager will prepare research reports on the economic climate, prospect and outlook of an economic sector or of particular industries, assets or companies. The research will be utilized by many teams or individuals within the manager’s organization that are responsible for investment decisions. Even within a team, there may be allocated responsibilities for several unit trusts. Once a decision is reached, it will be communicated to the trustee for execution.’ Of course this only describes what may happen generally. The day-to-day process may vary with particular trust deeds or the course of dealing between a particular manager and a particular trustee.

Apart from investment decisions, there may be administrative matters where responsibilities may likewise be split between the trustee and the manager so that one is subject to the direction of the other. Depending on the terms of the trust deed, and (in the case of an authorized unit trust) the regulations, a manager may direct the trustee to create or cancel units, to exercise votes of shares forming part of the trust portfolio in a particular manner, to borrow money for the use of the scheme on terms that the borrowing is to be repayable out of scheme property,’” to insure trust assets, to distribute income to unitholders, and to make reimbursement of administrative expenses, and to pay out remuneration to the trustee and the manager and the fees of valuers, auditors, solicitors, experts or agents engaged. A trustee may direct the manager to rectify any incorrect pricing of units, to cancel any transaction that exceeds the manager’s investment power, to suspend the issue and redemption of units ‘if there is good and sufficient reason to do so having regard to the interests of participants or potential participants’, and to procure additional valuation of the properties of a property fund by the standing independent valuer.

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Investment Decision Structure in a Unit Trust