`It is a rule of universal application that no one having [fiduciary] duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with interests of those to whom he is bound to protect. Thus, the trustee or the manager is under a duty not to place itself in a position where there is an actual conflict of interests or where such conflict may potentially exist.
It follows from this general rule that a trustee or a manager must not enter into ’self-dealing’ transactions.” Except where market usage permits, the courts have never permitted a fiduciary, in the course of the same transaction, to approbate and reprobate on its undertaking by acting as a fiduciary on the one side, and as an undisclosed principal in its private capacity on the other. Read the rest of this entry »
As a general rule, directions given in a trust deed must be followed by the trustee. It follows that if the unit trust deed directs the trustee to follow the decision of the manager in the making or disposal of investments, the direction is imperative. But is this always the case?
Several cases in which third parties were given powers to direct the trustees have bearing on this point. Three aspects emerged. First, in all these cases, the courts approached this as a question of construction of the particular power involved. Read the rest of this entry »
There are two ways that a swap position can be interpreted: (1) as a package of forward/ futures contracts, and (2) as a package of cash flows from buying and selling cash market instruments.
Package of Forward Contracts Consider the hypothetical interest-rate swap described earlier to illustrate a swap. Let’s look at party X’s position. Party X has agreed to pay 10% and receive six-month LIBOR. More specifically, assuming a $50 million notional principal amount, X has agreed to buy a commodity called six-month LIBOR for $2.5 million This is effectively a six-month forward contract in which X agrees to pay $2.5 million in exchange for delivery of six-month LIBOR. If interest rates increase to 11%, the price of that commodity (six-month LIBOR) is higher, resulting in a gain for the fixed-rate payer, who is effectively long a six-month forward contract on six-month LIBOR. The floating-rate payer is effectively short a six- month forward contract on six-month LIBOR. There is therefore an implicit forward contract corresponding to each exchange date. Read the rest of this entry »
Few other innovations have made as big an impact on the fund industry as the mutual fund supermarket. Today’s popular version of the mutual fund supermarket was introduced by discount brokerage firm Charles Schwab in 1992 and has since transformed the way investors purchase and sell funds. Like the supermarket from which most people purchase food, fund supermarkets bring together a variety of similar products from different vendors. In other words, they allow investors to purchase and hold a broad range of funds from many different fund sponsors through a single brokerage account. Similar to the grocery version, fund supermarkets soared in popularity because of their ability to provide a high degree of convenience, breadth of product, ease of comparison and simplicity of transaction. Read the rest of this entry »
To give you a sense of how fund shareholders are serviced, let’s follow a typical series of transactions beginning immediately after a prospective customer decides to purchase fund shares. In the first step, the customer completes and returns an application for opening a new account to the transfer agent. The application may be returned in a number of ways, including by mail, at a branch office (if one exists locally) or through the Internet. Once the transfer agent receives the application, the transfer agent determines whether it is in good order. Although the definition of “in good order” can vary somewhat among fund complexes, many core elements are consistent. The transfer agent always makes certain to obtain a social security number or taxpayer identification number (in the case of corporate accounts) for tax reporting purposes. The transfer agent also ensures that the initial funding amount complies with any account minimums specified in the fund’s prospectus. If there is any issue with the application, the application is considered to be “not in good order.” In that event, the establishment of the account and the purchase of fund shares may be delayed until the issue can be resolved with the customer. Read the rest of this entry »
