The trust deed is the rule book of a unit trust. It decides what the trustee may invest in, what it may charge, when investors can get their money back and how the scheme ends. The Capital Market Act 2015 does not dictate the whole document, but section 210 sets a floor below which no deed may fall, and the Securities Commission will not register a deed that misses it.
The five mandatory matters
“The trust deed shall make adequate provision for — (a) the consideration that is to be paid to acquire an interest in the scheme; and (b) the powers of the trustee in relation to making investments of or otherwise dealing with, scheme property; and (c) the method by which complaints made by members in relation to the scheme are to be dealt with; and (d) winding up the scheme; and (e) the specific nature of the scheme.”
The test is “adequate provision”, not any particular wording. In practice a deed will state how the issue price of a unit is calculated from the value of the scheme property (see pricing and valuation), list the kinds of assets the trustee may buy and any limits on concentration or gearing, describe a complaints procedure with time limits and an escalation path to the Commission (see complaints), and set out how the scheme is wound up and assets distributed (see winding up).
Stating the nature of the scheme
Paragraph (e) requires the deed to say what kind of scheme it is. Section 210(2) lists the types “applicable under this Act”, and the Commission may add to the list by notice in the National Gazette.
| Type (s 210(2)) | Typical feature |
|---|---|
| Unit trust | General pooled fund issuing units |
| Property trust | Invests mainly in land and buildings |
| Managed fund | Broad term for a professionally managed pool |
| Hedge fund | Uses leverage, short positions or derivatives strategies |
| Derivatives fund | Invests through futures, options and similar contracts |
| Money market fund | Holds short-term deposits and bills |
| Guaranteed fund | A third party guarantees return of capital or a minimum return |
| Capital protected fund | Structured so the capital is protected at a set date |
| Umbrella fund | One deed with several sub-funds |
| Other prescribed funds | Added by Gazette notice |
The label matters because it fixes investors’ expectations. A deed that calls the scheme a “guaranteed fund” invites the question who gives the guarantee and how it is secured. See types of fund.
Fees, indemnity and borrowing: only if the deed says so
Section 210(3) deals with the trustee’s money. Where the trustee has any right to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses, those rights “shall be specified in the trust deed” and “shall be available only in relation to the proper performance of those duties”. Any other agreement that purports to give the trustee a fee or indemnity “has no effect”. A trustee cannot therefore sign a side letter with a fund manager that increases its take, and a trustee that performs its duties improperly loses the right to be paid for them. Section 190(3) extends this to agents: if a fund manager appointed by the trustee fails in a task, the trustee is treated as having failed, even where the manager acted fraudulently or outside its mandate. Section 210(4) applies the same rule to borrowing. If the trustee is to have any power to borrow or raise money for the scheme, the power must be in the deed and any other arrangement conferring it is void. See what fees a unit trust can charge.
Withdrawal rights and fairness
Members have no right to withdraw unless the deed gives them one. Under section 210(5), where members are to have a withdrawal right the deed must specify it; if the right can be exercised while the scheme is liquid (section 257), the deed must set out adequate procedures for making and dealing with withdrawal requests; and if it can be exercised while the scheme is not liquid (section 258), the deed must provide for the right to be exercised through the withdrawal-offer mechanism and any further procedures consistent with it. Section 210(6) adds an overriding standard: the right to withdraw and the procedures for it “shall be fair to all members”. A deed that let large institutional holders redeem ahead of small retail investors in a liquidity squeeze would fail that test. See withdrawing units and liquid and non-liquid schemes.
The Commission’s further requirements
Section 210 is not exhaustive. Section 208(4)(a) requires the Commission to refuse a deed that does not comply with the Act “or any other requirement as may be specified by the Commission”, and section 189(3) directs it to issue guidelines on the trustee and its functions. Expect the Commission to insist on provisions about valuation frequency (section 191(1)(h)), the register of unit holders (section 250), meetings consistent with Division 5, and the appointment and removal of any fund manager. The trustee has a continuing statutory duty under section 191(1)(f) to ensure the deed meets sections 210 and 211, and a deed that falls short is a ground for deregistration under section 272(1)(b).
Section 212 makes the deed “legally enforceable as between the members and the trustee”. Every clause the Act requires, from the complaints procedure to the fee cap, is therefore a promise a unit holder can hold the trustee to. See enforcing the deed and, for changes to it, amending the deed.
Sources
- Capital Market Act 2015 — ss 189(3), 190(3), 191(1)(f), (h), 208(4), 210, 211, 212, 250, 257, 258, 272(1)(b)
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.