Under this rule, a fiduciary has to account for all gains obtained by reason of its position, or through an opportunity or information resulting from it.

A fiduciary may not obtain and retain secret gains. Thus, in a transaction that would be effected between a unit trust and a third party, the manager cannot interpose a nominee to deal with the trust first and arrange for this nominee to consummate the transaction with the third party at a profit. Any such profits must be accounted for. A fiduciary also cannot take any bribe or secret commission.

This no-profit rule forbids any profiting from the unit trust properties unless the profit is both disclosed and assented to. A trustee of a unit trust may have within its control investment assets of the trust. It is possible for it to use them to make a gain in some circumstances. For example, assets in its hands may be used to consummate a de facto short sale. If the trustee expects the market to fall, it will sell the assets; when the asset price does actually fall, it will acquire them again for the unit trust. Any gains so made must be accounted for. Under this rule, the manager or the trustee may not use the voting rights of the shares to vote themselves into office of directors of companies issuing such shares and gain directors’ remunerations. They can be directors if such positions are obtained not by reason of the use of such shares.

FundsThis rule also forbids any diversion of opportunities. This was the classic position of the trustee in Keech v. Sandford, a case which has been extended to a fiduciary in Chan v. Zacharia. Presumably, a manager of a property trust negotiating a property transaction cannot have the transaction consummated by itself or through its nominee.

This rule also forbids any use of insider information. Both the manager and the trustee are in the best position to know the actual asset value of the unit trust they manage. It is not difficult for them to know or estimate in advance both the offer and bid prices of the units of the trust before the next valuation point. A malpractice is for them to purchase units through nominees if the prices are going to rise and to sell if the prices are going to fall. Such practices would be a breach of the no-profit rule.

The above illustrations demonstrate some unfamilar dimensions of application of the loyalty duty to unit trusts. This apparently flows from two features of the unit trust.

The first is what was mentioned earlier. The unit trust deed is a contract for services—trustee services and investment services. The trustee and the manager are providing specialized financial services. It is inevitable that each of them may provide similar services to other persons. There will be more opportunities for conflicts arising from acting for multiple masters.

The second feature is the predominance of managers in the management of unit trust assets. This means that, in the unit trust context, the fiduciary duties of a person without legal title are of greater importance. This in turn generates unfamiliar issues relating to the role of the legal owner, the trustee, in relation to the exercise of powers by this fiduciary.

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