7A.1 Structure of a UTS, the Trust Deed, the Parties and Modifying the Deed
Key Takeaways
A UTS is a non-incorporated collective investment scheme whose operation is governed by a deed registered with the SC.
The three parties to a UTS deed are the UTMC, the Trustee and the unit holders, and the study guide calls unit holders the most significant because they supply the capital.
The value of a unit equals the market value of the fund's net assets divided by the total units in circulation.
A change that may materially prejudice unit holders requires a unit holders' meeting and approval by not less than two-thirds of all unit holders.
Examples of materially prejudicial changes include changing the fund's nature or objective, risk profile or distribution policy, and introducing or increasing fees or charges.
The Structure of a UTS
A UTS is a non-incorporated collective investment scheme that pools investors' savings to be invested and managed for their mutual benefit. Professionals manage the investments, and controls such as the Trustee and other oversight functions protect unit holders. Fund features vary, but the structure is the same for every UTS.
The Deed as the Operational Reference
Each UTS is governed by a deed setting out the rights and obligations of the UTMC, Trustee and unit holders. The UTMC (usually the issuer and promoter) must operate the fund according to the deed and prospectus; the Trustee monitors operations and safeguards unit holders, who have remedies for breaches.
The deed covers the fund's operating aspects:
| Operating aspects in the deed | |
|---|---|
| Fees and charges | Distributions and NAV |
| Dealing in units | Measuring performance |
| Unit valuation and pricing | Base currency |
| Calculation of NAV | Financial period |
| Creation and cancellation prices | Termination of the fund |
| Selling and repurchase prices | Forward and historical pricing |
| Unit splits and NAV |
It also outlines the maximum fees, unit holders' meetings, permitted investments, how a unit's value is determined and how buying and selling prices are calculated. It states the fund's investment objective; if the strategy targets a style, asset class, sector, market or region, the UTMC must invest an appropriate portion accordingly.
The deed must not prejudice the interests of unit holders (or any class of them). Because a UTS is a trust, the deed must be registered with the SC and meet the minimum requirements of the UTF Guidelines, creating a trust between the UTMC and the Trustee.
The Parties to the Deed
| Party | Main roles |
|---|---|
| UTMC | Reports to the Trustee on buying, selling and managing investments; promotes and sells units directly or through IUTAs, CUTAs and Consultants; services unit holders; buys back units; keeps the accounting records needed to compute NAV and distributions; maintains the register of unit holders |
| Trustee | Safeguards the fund's assets and ensures they are invested under the deed; supervises the UTMC; is independent and can remove a UTMC that fails to manage the fund properly; approves and monitors financial transactions; holds title documents; collects income |
| Unit holders | The most significant party, because they supply the capital; the source of the UTMC's fees (from which Consultants are paid) and the Trustee's fees; each unit ranks equally with every other unit of the fund |
Value of a unit
Investors buy units by completing the application form in the prospectus.
Modifying the Deed
The deed can be changed, but only under the UTF Guidelines' safeguards:
- The UTMC must inform unit holders of any change to the fund.
- Where a change may materially prejudice unit holders, the UTMC or Trustee must convene a unit holders' meeting, and approval of not less than two-thirds of all unit holders must be obtained.
- If the change requires amending the deed, it is done by a supplementary deed, which must be registered with the SC.
Changes that may materially prejudice unit holders
| Change | Example |
|---|---|
| Nature or objective of the fund | A Malaysian equity income fund becomes a global technology growth fund |
| Risk profile | Allowing substantial derivative exposure for the first time |
| Distribution policy | Moving from regular income distributions to none |
| New category of fee or charge | Introducing a performance fee |
| Increase in fees or charges | Raising the maximum annual management fee |
Applying It
A UTMC wants to change a conservative bond fund into a high-yield bond fund that may invest in lower-rated paper. This changes the risk profile and possibly the objective, so it may materially prejudice unit holders. The UTMC must convene a meeting, win approval from at least two-thirds of unit holders, and register a supplementary deed with the SC. The Trustee watches the process to protect unit holders.
Exam Pointers
- Three parties to a UTS deed: UTMC, Trustee, unit holders.
- The Trustee (not FIMM or the SC) can remove a UTMC that fails to manage the fund in line with the deed.
- Two-thirds approval for materially prejudicial changes; supplementary deed registered with the SC.
- FIMM's practice question: the main role of the Trustee is to safeguard the assets of the UTS and the investors' interests.
A UTMC proposes a change that may materially prejudice unit holders' interests. What approval is required?
Approval of 75% of the Consultants who sell the fund
At least two-thirds of all unit holders at a meeting
The Trustee's written consent, without any meeting
A simple majority vote of the UTMC's board of directors
According to the study guide, which party to a UTS deed is the most significant?
The unit holders, because they supply the capital
The Trustee, because it holds the assets
The UTMC, because it manages the investments
The SC, because it registers the deed
Which of the following is an example of a change that may materially prejudice unit holders?
Publishing the NAV on an additional website
Updating the UTMC's office address
Correcting a typing error in the prospectus
Increasing the fund's fees or charges
Sections you finish are checked off in the contents.