It cannot be denied that by entering into the trust deed, both the manager and the trustee are entering into a venture that provides services to their `customers’ and that produces their income. This is cooperation in business, but is unlikely to constitute them a partnership. Basically, the test of the existence of a partnership is by reference to the definition of a partnership discussed and also by reference to the statutory rules regarding co-ownership of assets, sharing of gross return, and also sharing of profit.
There is no business in common. The demarcation of functions under the unit trust deed draws the line of business between them. In essence, the trustee is carrying on the business as a professional trustee and the manager is carrying on the business of investment management. Read the rest of this entry »
In respect of the manager, the following functions and duties are conferred explicitly or implicitly by the statutory provisions or trust deeds:
(1) Dealer in units.
One of the attractions of a unit trust is liquidity. The manager has since the early days of the unit trust been the provider of a ready market for the acquisition and disposal of units of schemes under its management. Under the Financial Services (Regulated Schemes) Regulations 1991, the manager must at all times during the dealing day be willing to issue units and be willing to redeem units. Similar provisions may also be found in trust deeds of non-authorized unit trusts. Read the rest of this entry »
(1) Statutory Allocation of Powers and Duties
Against this background, a structure of dual administration in the unit trust is a logical step in the functional specialization of the powers and responsibilities previously found in the single person of the trustee. The unit trust was in the forefront of this development. The first regulation of unit trusts in the United Kingdom in 1939 made the trustee-manager structure a model for the management of unit trusts. This model was adopted by many statutes of common law countries and was followed closely by unregulated schemes. Read the rest of this entry »
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. Read the rest of this entry »
Section 84 of the Financial Services Act 1984 provides:
Any provision of the trust deed of an authorised unit trust scheme shall be void in so far as it would have the effect of exempting the manager or trustee from liability for any failure to exercise due care and diligence in the discharge of his functions in respect of the scheme.
This section only applies to authorized unit trusts. Exemption clauses in non-authorized unit trusts are not affected. 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 »
In most cases, mutual fund advisers vote to support the recommendations of company management. This is true not only for management’s proposed slate of directors, which routinely receive the support of 99% of those voting, but also for management proposals on other subjects. For instance, during the 2000 proxy season, management proposals on proxy statements were supported on average by 85% of the stockholders who voted; proposals opposed by management were opposed on average by 74% of the stockholders who voted. This high level of consensus between stockholders and management is not surprising, at least for actively managed mutual funds. Owning the stock of a company ordinarily indicates a belief in the ability of the company’s management; supporting management’s position in voting matters often follows as a matter of course. 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 »
Ireland - development of a mutual fund industry dates effectively from the establishment of the IFSC - the International Financial Services Centre -under legislation passed in the late 1980s as one of a number of measures to stimulate growth and employment in an otherwise poorly performing economy and capitalising on the EU’s UCITS Directive. The significant majority of funds established in Ireland are open-ended investment companies, usually listed on the Dublin Stock Exchange, designed for marketing throughout Europe. Under the Irish UCITS Regulations 1989, the Central Bank of Ireland was made responsible for authorising and supervising investment and insurance intermediaries but the Central Bank and Financial Services Authority of Ireland Act 2003 established on 1 May 2003 a single regulatory framework for the financial services industry and created the Irish Financial Services Regulatory Authority (IFSRA), with its own board and chief executive reporting directly to the Minister for Finance. Other relevant legislation includes the Unit Trust Act 1990, the Companies Acts 1963 to 1999, the Investment Limited Partnership Act 1994 and the Investment Intermediaries Act 1995.
Australia - the first unit trust to be offered in Australia was named just that - Hugh Dalton’s Australian Fixed Trusts offering units in the First Australian Unit Trust in late 1936, when the funds industry was largely unregulated. The Australian retail funds market is now fully regulated under the provisions of the Managed Investments Act (MIA) and, more recently, the Financial Services Reform Act of 2001, which changed the licens ing and disclosure requirements. The MIA requires managers to take on the duties and obligations of the single responsible entity, whereby they are obligated under statute law to uphold unitholder rights. Under this arrangement, trustee duties have been fused with manager duties, but whilst external custody is not mandatory, the majority of managers use independent custodian services. Superannuation funds also gain the regulatory protection of the MIA, as approximately 90% of these savings are invested in wholesale and retail MIA vehicles. Read the rest of this entry »
