A unit trust has moving parts: people who put money in, a company that holds it, a company that may invest it, a deed that sets the rules, a register that records ownership, and a way of getting money back out. Part V of the Capital Market Act 2015 deals with each in turn.
Who is involved
There are three parties. The unit holders (the Act also calls them members) contribute money and receive units. The trustee is a corporation holding a capital market licence that authorises it to operate a unit trust or managed investment scheme (section 189(2)); section 189(1) makes it “the principal responsible entity” of the scheme. The fund manager is optional. Section 190(2) lets the trustee appoint agents or outsource specific functions, and fund management (managing a portfolio of securities for another person, Schedule 2) is itself a regulated activity requiring a licence. A church investing surplus offerings or a landowner company placing royalty income deals with the trustee; the manager works behind it.
For the purpose of deciding whether there is a liability to the members, or whether the trustee has properly performed its duties, “the trustee is taken to have performed (or failed to perform) such duties or functions, which the agent or the person has performed (or failed to perform), even if such duties or functions were performed fraudulently or outside the terms of their engagement”.
Whatever the manager does, the trustee is liable to the members for it. See the difference between a trustee and a fund manager.
Units: what the investor gets
Section 2 defines a unit as “any right or interest in a unit trust or managed investment scheme by whatever name called”. A unit is not a share in a company and not a loan to the trustee. It is a beneficial interest in a proportion of the whole fund, so its value rises and falls with the fund’s assets. The deed must state the price of an interest (section 210(1)(a)), and the trustee must value the scheme property “at regular intervals appropriate to the nature of the property” (section 191(1)(h)). Each unit carries one vote at members’ meetings (section 239). See how units are priced.
Scheme property and the trust account
Section 183 defines scheme property widely: the contributions, money borrowed by the trustee for the scheme, property bought with contributions, and income and property derived from any of these. Section 191(2) requires the trustee to hold all of it “in trust for the unit holders or members”, clearly identified and kept separate from the trustee’s own property and from any other scheme (section 191(1)(g)).
Section 193 adds a banking rule. The trustee must open a trust account for the scheme’s assets and deposit assets into it by the next bank business day. Assets in the trust account are not available to pay the trustee’s own debts (section 193(5)). An outsourced fund manager “shall not accept or hold a scheme’s assets in trust” and may not open a bank account for the scheme (sections 193(6) and (7)). Under section 194 any person other than the trustee who keeps custody of scheme assets commits an offence, with directors personally liable to a minimum fine of K500,000 or up to five years’ imprisonment.
Breach of section 193 attracts a fine of up to K5 million, rising to K10 million or ten years’ imprisonment, or both, where there is intent to defraud (section 193(9)). Breach of the general duties in section 191(1) carries the same K10 million or ten-year maximum (section 191(4)).
The trust deed sets the rules
Everything the trustee does must be authorised by the trust deed, which the Securities Commission approves and registers under section 208 and which is “legally enforceable as between the members and the trustee” (section 212). The deed must cover the issue price, the trustee’s investment powers, the complaints procedure, winding up and the specific type of scheme (section 210(1)). Fees and borrowing powers exist only if the deed spells them out (sections 210(3) and (4)). See what the deed must contain.
The register of unit holders
Ownership is proved by the register. Under section 250 the trustee must record each member’s name and address, the number of units held, and the dates of entry and exit, and keep those particulars for seven years. The register is prima facie evidence of its contents (section 250(4)) and must be kept at the trustee’s registered office in Papua New Guinea (section 251). Failing to keep it is an offence carrying a fine of up to K5 million (section 250(7)).
Distributions and redemption
Income earned by the fund—dividends, interest, rent—is scheme property (section 183(e)) and is paid to members as distributions in the manner the deed provides. The Act does not fix how often; the deed does.
Getting capital back is called withdrawal or redemption. Section 257 allows the deed to let members withdraw at any time while the scheme is liquid, meaning liquid assets (cash, bank bills, marketable securities) make up at least 80 per cent of the scheme property (section 257(5)). If the scheme is not liquid—a property trust holding office buildings, for example—members can withdraw only through a withdrawal offer under sections 258 to 261. A trustee who allows withdrawals outside these rules commits an offence (section 257(3) and (4)). See how to redeem units and liquid and non-liquid schemes.
Before investing, ask the trustee for the registered deed, the current prospectus and proof of its licence. See how to invest in a unit trust.
Sources
- Capital Market Act 2015 — ss 2(1) (“unit”), 183, 189–194, 208, 210, 212, 239, 250–252, 257–261; Schedule 2 (fund management)
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.