There is no question that the distinction between this case and those cases where the retirement of trustees was with a view to purchase is a valid one. Implicit in this judgment is the recognition that there is no absolute rule against self-dealing. The willingness of his Lordship to look at the reality is consistent with the approach of the court in Holder and the recent application of the no-conflict rule in other contexts.

If the broader approach of Holder is adopted, it must be a question of fact whether a trustee in a unit trust can purchase. The court may take into account the fact the trustee does not participate in the decision to make the sale.

On the other hand: lilt is debatable whether the observations of Danckwerts and Sachs LJJ, although sensible and pragmatic, will be followed. They are not easy to reconcile with the old law which has stood for over 200 years.’ Moreover, it is not hard to confine the case to its own special facts: `[the renouncing executor] had never acted . . . in a way which could be taken to amount to acceptance of a duty to act in the interests of the beneficiaries’. Indeed, it is still arguable that on the facts there was a renunciation by conduct. An authority that renunciation may be by conduct, Stacey v. Elph, was not cited in Holder.

Funds

The no-conflict rule also prohibits any ’scalping’ by the manager. Scalping is the practice of effecting personal transactions of the fiduciary before effecting transactions in the same or related properties for the beneficiary, followed by further personal transactions to profit from the resultant market activity. One simple example is for the manager to acquire a sizeable position of an obscure stock on the stock exchange, then direct the trustee to invest in such stock. The manager then sells in the market—presumably at a higher price as a result of the acquisition activities of the trustee.

The no-conflict rule also prohibits any ‘churning’ activities. Churning is the abuse where a fiduciary, without regard to the interest of its beneficiary, encourages or deliberately leads it to trade excessively and thereby gains from the excessive trading activities. This is primarily a broker-type of abuse since a broker earns commissions and more trades mean more income. As a unit trust manager’s fees are usually a percentage of the total assets of the trusts, churning should not be common. However, this may exist where the manager is associated with brokers in the financial markets and excessive trading of the trust assets, such as jogging between shares of the same risk profile, will generate more income for its associated companies. Any such activity will involve a breach of the manager’s fiduciary duty to the unitholders.

Under this rule, in the absence of authorization, the manager may not invest in companies or businesses in which it is interested.

The most obvious application of the no-conflict rule is that the fiduciary must not compete with the beneficiary. If the manager is investing its own money while at the same time managing the unit trust assets, the manager may be competing with the trust for opportunities. In a stock market boom, the manager may want to allocate good stock with limited supply to itself rather than to the trust. When the market is losing its strength, the question is: who goes out first? It seems that in such circumstances this rule requires the manager, as a fiduciary, not to compete with the trust, and therefore to give priority to the trust. In relation to the trustee, if it is merely executing the direction from the manager, there seems no reason why the trustee cannot enter into a competing transaction in circumstances where there is never any conflict of duty and interest.

Perhaps, a more serious problem is where the competition comes from another person or trust for whom the manager or the trustee acts as well. The fact that the unit trust is a medium of investment services inevitably means that the manager or the trustee will operate in more than one type of unit trust to cater for different demands of the market. It is unheard of that a manager should manage only one unit trust.

Two forms of conflict can result when the manager or the trustee serves two masters. The first is where two unit trusts compete for the same `undivided’ loyalty owed by the manager. If two unit trusts‘ investment criteria demand the acquisition of the same stock, the stockbroker instructed by the manager may acquire the bulk for the two trusts at different prices and the manager must decide how to allocate the shares with different prices to these two trusts. Conversely, in a falling market, the manager must decide which bulk of shares is sold first if its stockbroker can only do trades at different price levels. Presumably, all unitholders who acquire units with knowledge of the fact that the manager is managing a number of trusts must have impliedly given the requisite consent. Thus, the manager is not in breach of any duty by acting for more than one trust. But it does not follow that the manager may not be in breach of loyalty by favouring a particular trust in specific transactions. Indeed, it is known that sometimes a manager, for marketing reason, may ‘boost’ the performance of a particular trust at a particular time by allocating to that trust stocks or investments whose prices rise during the interval between acquisition and allocation. A speculative answer to the allocation problem posed here is that the manager must act on the principle that equality is equity and must make a pro-rata allocation of investments of different prices.

The second type of competition occurs when the fiduciary acts for both parties in one transaction. In principle, the rule forbids a situation where the fiduciary, acting for the seller, would be obliged to obtain the highest price from itself acting as a fiduciary of the purchaser, who would expect the lowest possible price. In normal circumstances this is unlikely to occur for two unit trusts which the manager manages because the manager should have a consistent economic outlook of a particular sector of the economy. However, it is possible it is intended that a particular trust is to maintain a more liquid position while another trust has funds to invest. In such circumstances, the manager cannot ‘marry’ the transaction for both trusts.

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The ‘No-Conflict’ Rule continue…