A trustee that invests alongside its members shows confidence in the fund. It also creates an obvious conflict: the trustee sets the unit price and controls the information. The Capital Market Act 2015 permits the investment but hedges it with conditions.
The three conditions in section 197
“(1) The trustee may acquire and hold an interest in the scheme, but it shall only do so (a) for not less than the consideration which would be payable if the interest were acquired by another person; and (b) subject to terms and conditions which would not disadvantage other members; and (c) subject to the approval of the Commission to avoid conflict of interest situation. (2) A trustee who contravenes Subsection (1), commits an offence and every director of the trustee shall be liable to a fine not exceeding K1,000,000.00 or imprisonment for a term not exceeding five years, or both.”
Same price. The trustee must pay at least what an outside investor would pay. If the deed sets an application price including an entry fee, the trustee pays it too. It cannot issue itself units at net asset value while the public pays a premium, nor buy at a stale price after learning that a revaluation is about to lift the unit price.
No disadvantage. The terms must not disadvantage other members. A trustee that negotiated priority redemption rights, a guaranteed return or a special class of units for itself would breach this limb, and would also breach the duty in section 191(1)(d) to treat members of the same class equally.
Commission approval. Approval is required “to avoid conflict of interest situation”. The Act does not say whether approval is needed for each purchase or may be given once for a programme of purchases; a trustee should seek written guidance from the Commission and keep the approval on file. Section 189(3) contemplates Commission guidelines on trustee matters, which may address this.
The penalty falls on “every director” personally, not just on the company. See the duties of officers.
Why the trustee’s units are a concern
Section 191(1)(c) requires the trustee to act in the members’ best interests and to give them priority over its own on any conflict. Section 191(1)(e) forbids using information acquired as trustee to gain an improper advantage. A trustee that is also a unit holder knows the portfolio, the pending valuations and the redemption queue before anyone else. Buying before good news or redeeming before bad news would breach both paragraphs, and could amount to insider trading in the units if they are listed. The section 197 conditions, and the record-keeping they require, are the trustee’s protection against that suspicion. See the trustee’s duties.
The trustee and its associates cannot vote when interested
“(1) The trustee of a scheme and its associates are not entitled to vote on their interest on a resolution at a meeting of the scheme if they have an interest in the resolution or matter other than as a member. (2) Notwithstanding Subsection (1), where the scheme is listed on an exchange, the trustee and its associates are entitled to vote their interest on resolutions to remove the trustee and choose a new trustee.”
Each unit carries one vote (section 239). Without section 241, a trustee holding a large block of units could vote to approve its own fee increase under section 211(6), defeat a resolution to remove it under section 201, or block a winding up under section 268. The section removes those votes whenever the trustee’s interest in the matter goes beyond that of an ordinary member. The exception for listed schemes recognises that on an exchange the trustee’s holding is public and tradeable, but it applies only to resolutions about removing and replacing the trustee. See how voting works and removing the trustee.
Who counts as an associate
The ban extends to the trustee’s “associates”, so it cannot be sidestepped by parking units with friends. Section 3 defines when a person is “associated” with another. For a corporate trustee the list includes its directors and secretary, any related body corporate and that body’s directors and secretary, any employee or partner, any person in accordance with whose directions the trustee is accustomed to act, and any person with whom it has an agreement, arrangement or understanding, “whether formal or informal and whether express or implied”, about exercising votes or controlling a board. A trustee’s parent company, its chief executive personally, and a nominee holding units under an informal understanding are all associates whose votes are excluded. Section 3(3) excludes a lawyer or accountant who merely advises the trustee in a professional capacity.
Where the trustee or an associate holds units, the chair of a members’ meeting should identify those units before each vote and exclude them from any poll on a resolution in which the trustee is interested. Section 243 allows objections to a right to vote to be raised at the meeting; the register under section 250 should flag the trustee’s and associates’ holdings so this can be done.
Sources
- Capital Market Act 2015 — ss 3, 189(3), 191(1)(c)–(e), 197, 201, 211(6), 239, 241, 243, 250, 268
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.