B. Baker v. Archer-Shee in Unit Trusts
So far, the position is this. With regard to the number of beneficiaries, the effect of Nelson v. Adamson and New Zealand Insurance Co. Ltd. v. CPD is that Baker is not limited to trusts with one beneficiary and the existence of a number of beneficiaries, whether in successionor concurrently, does not affect their respective claims to proprietary interests in the subject matter of a trust. Ironically, the expansive application of Baker was achieved in New Zealand Insurance only at the price of admitting that a beneficiary may not have a proprietary interest in the trust assets in some fixed trust situations, such as where the beneficial interest is ‘a specified sum to be provided out of an unidentified part of a body of assets‘. Read the rest of this entry »
A eurobond is a debt security handled internationally by syndicates, groups of bankers and/or brokers who underwrite and distribute new issues of securities or large blocks of outstanding issues. It is typically in bearer (non-registered form) and is issued outside the country of the currency in which it is denominated.
Borrowers and lenders are spread around the world, while the intermediaries are spread across Europe, with the majority of business being done from London. The market was founded in the early 1960s and has provided a competitive source of funding for borrowers who can tap discreet but important sources of finance. Japanese banks, pension funds and insurance companies have become important lenders in recent years and there are still plenty of wealthy individuals who prefer the anonymity offered by bearer securities. The eurobond market is the world’s second largest securities market after the US bond market in terms of trading volume and the third largest after the US and Japanese bond markets in terms of debt outstanding. Read the rest of this entry »
In an interest-rate swap, two parties (called counterparties) agree to exchange periodic interest payments. The dollar amount of the interest payments exchanged is based on a predetermined dollar principal, which is called the notional principal amount. The dollar amount that each counterparty pays to the other is the agreed-upon periodic interest rate times the notional principal amount. The only dollars that are exchanged between the parties are the interest payments, not the notional principal amount. In the most common type of swap, one party agrees to pay the other party fixed-interest payments at designated dates for the life of the contract. This party is referred to as the fixed-rate payer. The other party, who agrees to make interest rate payments that float with some reference rate, is referred to as the floating-rate payer. The frequency with which the interest rate that the floating-rate payer must pay is called the reset frequency. Read the rest of this entry »
- Use of a broker affiliated with a fund A fund management company may have an affiliated broker-dealer and may use that broker-dealer to trade under certain circumstances. For example, Merrill Lynch may act as a broker on behalf of a fundfund to the NYSE for executionbroker in the trading crowd or an order held by the NYSE specialist. Rules adopted by the SEC under the 1940 Act generally permit a broker who is affiliated with a fund’s adviser to effect trades for the fund as an agent, so long as the commission charged is no more that the “usual and customary” commission prevailing in the market. The SEC’s rules require a fund’s board of directors to adopt procedures that are designed to monitor compliance in this regard and to make determinations on at least a quarterly basis that all trades carried out by a fund’s affiliated broker meet the “usual and customary” commission standard.
Although an affiliated broker may act as agent for the fund (and receive a brokerage commission for executing the fund’s trades), the 1940 Act broadly prohibits a fund’s adviser and affiliates of an adviser from acting as a dealer in relation to the fund—that is, from selling any security or other property to (or purchasing any security or property from) the fund. This core provision of the regulatory scheme is intended to preclude conflicts of interest that could arise if a fund’s affiliated broker “dumps” unwanted securities from its inventory into the portfolio of the fund. Read the rest of this entry »
The pricing and bookkeeping agent is responsible for maintaining the fund’s accounting records, pricing the fund’s portfolio each day, calculating periodic distributions, determining the fund’s cash availability, preparing financial statements and filing the fund’s tax returns. A fund’s accounting records are very similar to those of a small corporation, consisting of revenue, expenses, assets, liabilities and shareholder’s equity. The pricing and bookkeeping agent is responsible for maintaining these records each day. The accounting records are the basis for calculating the fund’s NAV, the price at which shareholders buy into and sell out of the fund, as well as for determining the distributions the fund makes to its shareholders. Read the rest of this entry »
The Problem
Since the beginning of 1997, the U.S.-sold Japan Fund has experienced substantial cash inflows and outflows from investors, and portfolio manager David Smith has voiced his concern recently about the volatility. He also noted that extremely large shareholder orders seem to coincide more and more with news affecting Japan, and cash flow management is taking up a large percentage of his time that might otherwise be spent selecting securities.
Smith suspects some shareholders are trying to increase their profits by “timing” the market—quickly moving their money from one fund to another within the complex. Furthermore, he speculates that these investors might be attempting to profit from the methodology that the fund complex uses to compute the daily NAV of the fund by trading on stock price information that may become available between the time when the Japanese markets close and the time the fund values its holdings. Read the rest of this entry »
BACKGROUND AND PURPOSE
The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.
In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramming’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) - this Act remains the cornerstone of US mutual fund regulation - and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s - the Securities Act 1933 and the Securities Exchange Act 2934 - these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following the Enron and Worldcom scandals. Read the rest of this entry »
Hong Kong - the Securities and Futures Ordinance enacted in March 2002 and operational from April 2003, combined into a single ordinance all previously existing ordinances for the regulation of the securities and futures markets, principally the 1974 Protection of Investors Ordinance and the Securities Ordinance. Hong Kong also has a series of Codes, the first of which - the Code on Unit Trusts - was enacted in 1978, when the Committee on Unit Trusts was formed to administer the Code. Read the rest of this entry »
Japan - funds analogous to investment trusts existed in Japan in 1937 in the form of investors’ associations, which, like the UK’s Foreign & Colonial Company’s original investment trust, faced challenges of legality and were dissolved in 1940, to be replaced in 1941 by undertakings that, modelled on the UK’s unit trust, found legal support. Post-war confusion led to these funds becoming closed to new investment in August 1945 and final dissolution in February 1950. Read the rest of this entry »
The policy of most jurisdictions is to treat the mutual fund as a company subject to corporate or income tax only on its ordinary business (i.e. net income arising from holding investments), and exempt it from taxation on its gains from buying and selling investments. In the US, provided the gains and net income are distributed, the fund does not pay federal income tax on either. Taxes are the responsibility of and paid by the shareholders under a ‘pass-through’ arrangement, whether they choose to receive cash or reinvest their entitlement. Read the rest of this entry »
Korea- like Japan, Korea in the late 1960s needed to mobilise domestic capital to facilitate long-term, stable financing of large-scale industrial and infrastructure projects. The securities investment industry naturally attracted special attention and the Securities Investment Trust Business Act (SITBA) was passed in 1969, to allow the setting up of contractual-type investment trusts, and the first of these, Korea Investment Corporation, was launched that year. Under SITBA, which was implemented by related Presidential Decrees and Enforcement Ordinances, the Ministry of Finance and Economy had, by 1989, authorised three investment trust companies to undertake operations nationwide and five in provincial areas to distribute investment trusts in Seoul and in their respective specified regional areas. Read the rest of this entry »
Canada - laws and regulations are made and enforced by each province and territory, which has its own securities regulator, a government agency usually known as a ‘Securities Commission’. Representatives from each commission serve on an umbrella body, the Canadian Securities Administrators, which occasionally creates national rules. In addition, the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Dealers Association of Canada (IDA) have been formed as Self Regulatory Organisations (SROs) to regulate specific industry groups within certain provinces. SROs are not government agencies but member bodies that operate subject to the oversight of the Securities Commissions.
China - although funds have existed in China since 1991, the initial experience was unsatisfactory and, in November 1997, the Provisional Regulation on the Management of Securities Investment Funds was published. The new regulation led to the launch of Jintai Fund and Tianyuan Fund on 23 March 1998, marking a new beginning for China’s fund management industry. Current legislation became effective on 1 July 1999 - the Securities Law of the People’s Republic of China - but as elsewhere, this is to be upgraded by a new piece of legislation, the Investment Fund Law. Regulatory responsibilities were shared between the People’s Bank of China and the China Securities Regulatory Commission, but the latter is now responsible for the detailed regulation of funds and fund management companies. An important role is also played by the Securities Association of China, established in 1991 but reformed in 1999 under the current legislation to exercise self-regulation over its members. SAC revised and improved its charter for this purpose in 2002.
Each mutual fund has one or more investment objectives. For example, to provide an above-average and increasing income and a yield about 50% higher than the relevant index. It is the investment manager’s task to achieve these objectives, by pursuing a stated investment policy. Each investment management company will adopt an appropriate policy for each of its funds hut will tend to have an overall ‘house style’ or strategy. Two contrasting approaches are:
- Bottom up’. Known as stock-picking. The manager looks for outstanding individual companies. They can be identified from research reports or from personal knowledge of their products, services and management.
- Top<down’. Starts with asset allocation. The manager reviews world or national economy trends first, determines his asset allocation model in terms of geographic and industrial spread, then examines industries in detail and finally selects companies that will benefit from the trends.
Another contrast in styles between different houses is between passive and active management. passive management occurs when portfolio changes are made cannot be breached by the investment manager, Regulations usually will specify also that the investment objectives and policy as set out in scheme documents cannot be changed materially without approval by vote of the share- or unit holders. Read the rest of this entry »
The investment management of a mutual fund’s assets is subject to compliance with the aims and policies stated in the prospectus (or equivalent offering document or explanatory memorandum) and to limitations imposed by regulations or, if more constraining, by the terms of the fund’s constituting deed or instrument of incorporation. This is the case if the investment management is carried out by the fund’s own sponsoring manager or management company, or by a third party appointed under contract to be portfolio manager or investment adviser.
Investors must be protected from unexpected and undesired changes in the purpose and practices of their chosen investment vehicle. Regulations therefore impose both a fiduciary responsibility and prescriptive rules on the operators of mutual funds to ensure there are no unauthorised or imprudent dealings.
Normally, investment is restricted to transferable securities that are listed on a recognised stock exchange, and, for funds that are to be marketed to the general public, investment in gold, oil, sugar and other physical commodities is generally not permitted but investment in property may be. The regulations usually reflect the general principles of collective investment, which are that the fund and its management should have the following characteristics: Read the rest of this entry »
MARKETING
The extent to which funds can be marketed within a state or country or across state or national borders varies from country to country and depends on local laws and the nature of any federation or other affiliation which determines where the ultimate authority lies.
Most jurisdictions permit the marketing of mutual funds, but the only funds they will allow to be marketed freely are those they have authorised or which have been authorised by a federated or affiliated jurisdiction as eligible for marketing or promotion to the general public and registered as such. The marketing of other funds or securities will be either prohibited or restricted to promotion to professional or institutional investors only. Read the rest of this entry »
