<big>By Professor R.A. Hughes,
</big>School of Law,
University of the South Pacific
In this paper I will examine the basic features of unit trusts, concentrating for the most part on what are known as public unit trusts.(1) I will comment generally on the nature of the regulatory schemes involved in Australia, New Zealand, Fiji and Vanuatu and attempt to draw some comparisons between the different approaches to regulation which are adopted in these jurisdictions.
The Nature of A Unit Trust
A unit trust is a type of express trust. The trust instrument provides that the beneficial ownership of the trust is divided into units and these units are then allocated to beneficiaries. In many respects the units in the trust have features which are similar to shares. The holding of a unit carries with it certain rights which are defined in the trust deed. Most commonly, there is a divided structure of management of the trust between a manager and a trustee. It is a division which purported to provide for a trustee as a guardian of the interests of the unit holders and a separate management company which would have the day to day running of the scheme to which the trust relates. Whilst the division was adopted in the interests of investor protection it has created some confusion about the proper areas of authority of each.
The use of unit trusts as vehicles for investment is common throughout Australia, New Zealand, the United States of America and Europe. This is not yet so in the South Pacific. The only major unit trust operation in Fiji is the Unit Trust of Fiji. There is little evidence in other South Pacific jurisdictions of the promotion or growth of investment in unit trusts and it would be idle to speculate on whether this form of investment is likely to prove attractive in those regions at this time. Even so, the mechanisms are in place in some jurisdictions for the establishment of unit trust schemes. With it there comes the vehicle for regulation of certain types of investment, but it is doubtful whether the implications of this legislation for the promotion of schemes of investment in the South Pacific are widely known, much less complied with.
There are two types of unit trust: private and public. Private unit trusts tend to be used to provide the basis for the operation of commercial enterprises. The fact that the participants hold units allows ownership to be transferred, with or without the consent of the other parties, in the event that, say, one of the parties wishes to retire from the business. On the other hand, public unit trusts are used to attract investment from the public in a variety of investment schemes. This form of investment has a long history extending back to the early part of the nineteenth century in England when they competed with the company as a form of investment structure. Indeed they still do.
Public unit trusts are also know as corporate trusts or regulated trusts. In the United States, they are called mutual funds, or perhaps managed funds. Some superannuation schemes are structured as unit trusts. A superannuation scheme is an investment scheme which provides for a person to receive accumulated investment benefits on their retirement from work or in the event of their death. Most often these schemes are independently regulated by legislation.
Sometimes these entities behave in law as if they were corporate undertakings. In many respects their activities are regulated by specific legislation requiring a specific management structure. It has often been the case that the courts have applied the principles of corporate law, such as fraud on the minority, to public unit trusts. The legislation in question generally attempts to impose certain standards on the management of the trust and to provide safeguards to investors in units. They are public vehicles of investment and are therefore subject to investor protection policies on the same model as corporations. Often, for example, they are subject to the provisions which require that any offering of units must be accompanied by a prospectus providing certain minimum information to investors about the nature of the scheme in which they are investing.
The older types of public unit trust were either fixed trusts or flexible trusts depending on whether the trust must invest in specified types of assets or not. Most trusts now are types of flexible trust. In recent times there has been a tendency to classify trusts according to the types of investment in which the particular trust engages; for example, equity trusts, which invest in shares, bond trusts, cash management trusts, property trusts, time sharing schemes and even green trusts.
Notwithstanding their similarities with corporate structures, and their assimilation in Australia under the wing of corporate securities regulation, public unit trusts are still to be approached as trusts.(2) This basic proposition was upheld by the High Court of Australia in Charles v Commissioner of Taxation, where it was said :
"A unit held under this trust deed is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property, and if a portion of the company's assets is distributed amongst the shareholders the question whether it comes to them as income or as capital depends upon whether the corpus of the property (their shares) remains intact despite the distribution. But a unit under the trust deed before us confers a proprietary interest in all the which for the time being is subject to the trust of the deed, so that the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made"(3)
Put simply, the corporate entity principle requires that company shares be characterised as a form of property which exists independently of the property which is owned by the corporation or company itself; that is, as a separate juristic entity. Shares are property in their own right. Even if the value of the share might determined for some accounting purposes by reference to value of the underlying assets of the company, the shares do not indicate that the holder of the shares has any direct proprietary interest in the assets of the company. Those underlying assets are the assets of the independent entity which is the corporation itself. The shares constitute legal choses-in-action which belong to the share holders. They are bundles of rights which define the rights of participation which shareholders have in the corporation or company, the rights to receive distributions of profits from the company, the right to vote and so on.
It is true that in the case of public unit trusts the holder of units is accorded many similar rights to those of a shareholder, such as the right to receive a distribution of income and the right to attend and vote at meetings. These rights are defined mostly by the trust deed which performs a function again similar to the memorandum and articles of the company. But the point of difference concerns the nature of the interest of the shareholder on the one hand, and the holder of units in the trust on the other. The trust deed defines the nature of interest which the unit holder, as a beneficiary, has in the assets of the trust. It is equity which defines the nature of that interest which is enforceable against the trustee. There has long been a dispute in equity jurisprudence as to the nature of this interest - whether it is merely a right in personam, or whether it involves an interest in rem, that is, in the assets vested in the trustee. Yet, whatever the outcome of this protracted and at times tiresome debate, the interest of the unit holder is essentially the interest of a beneficiary under a trust and not that of the owner of a separate piece of legal property as is the case with a shareholder.
There is another significant difference between corporations and unit trusts. A corporation or company is a form of legal association. The shareholders are, as a consequence of their shareholding, participants in a common form of association. In the case of a trust this is not so because a trust developed as a form of property holding arrangement rather than a form of association, such as a company or a partnership. According to the mid nineteenth century English decision of Smith v Anderson(4) a unit trust was not to be considered a form of association even though the investors in it were, to some extent, investing in a common form of enterprise or undertaking. The fact that the investors were all recipients of beneficial interests in the one trust did not make the trust an association. Hence, according to that decision, the failure to register the trust as a company under the then Companies Act 1862 did not make it an illegal form of association. The Act required, as companies legislation still does, that any association with more than a certain minimum number of members must be registered as a company under the Act.
There has been some contentiousness about the rationale for the decision in Smith v Anderson(5) but it still seems to represent good law on the stated issue. The decision requires, perhaps, that rather artificial distinctions be drawn between a trust, on the one hand, and various legal forms of association on the other. These distinctions are not always easy to draw, given that the position of the unit holders under a very large investment trust, on an economic realist view of the matter, is hardly distinguishable in most respects from the position of the share holder who invests in a large corporation. But the distinction is still one which the decision requires to be drawn.
The Different Approaches to Regulation
The basic structures various schemes of regulation in respect of public unit trusts adopted in the South Pacific jurisdictions and their near neighbours are different in many ways. The current scheme of regulation in Australia was a product of an attempt in the 1950s to bring certain joint investment schemes within the scope of corporate regulation-particularly the prospectus requirements. Promoters of various non-corporate schemes had been able to avoid the prospectus disclosure requirements because the interests offered were not shares or other interests in a corporation.
Effectively, what the original legislation did was to bring non-corporate investment schemes within the scope of the Companies legislation by requiring that, where interests in prescribed investment schemes, were offered to the public, an approved trust had to be established with an approved trustee and a management company (being a public company). The approved deed had to contain certain covenants binding the trustee and the management company. Despite a number of subsequent refinements the same basic structure applies under the Corporation Law at the present time. Similar considerations attended the bringing into existence of the Prevention of Fraud (Investments) legislation in the United Kingdom in the late 1930s.
In fact, it should be noted unit trusts have most often had a chequered history. The need for regulation of trust investments has often been caused by the suspect activities of promoters of investment schemes which operate on the fringe of the corporate investment market. The history of the unit trust industry has been attended by a series of notable failures of large trusts and a lack of certainty about the rights of unit holders and the relationship between the two controlling entities; a trustee and a manager. In Australia in the 1980s a number of property trusts failed. This prompted a review of the legislation and a tightening of the obligations placed on the managing entities. However whilst these failures no doubt damaged investor confidence in the trust market it seems to have revived in the 1990s. No doubt this was due in large part to the relationship between the trust industry and the superannuation industry in Australia. To date unit trusts continue effectively in competition with the corporate securities market.
The main difficulty with the Australian scheme has been with the definition of prescribed interests.(6) The policy here has been to cast a wide net, almost so broad as to include any interest (proprietary or not) in any investment scheme or undertaking, and then to enumerate a number of exempt schemes in the primary and subordinate legislation. Also, the central regulating body, the Australian Securities Commission (ASC), is provided with a wide discretionary power to exempt particular schemes from the operation of the provisions. The policy is obviously designed to ensure that the regulatory schemes applies in principle to almost anything, thereby countering the ingenuity of investment promotion in developing new forms of investment to attract the interest of investors. This has often created consternation on the part of legal and other advisers, who have found it exceedingly difficult to determine whether any particular scheme is or is not a prescribed interest scheme. The definition of a prescribed interest, and the ancillary concept of a participation interest provide little comfort in this regard.
In Vanuatu the scheme of legislation relating to unit trust schemes is under the Prevention of Fraud (Investments) Act which is adapted from former United Kingdom legislation. As will be seen in due course the scope of the legislation is limited in that it applies only to certain types of unit trusts and not others. For example, it does not apply to real property trusts or to time sharing schemes. There is a requirement for a deed of trust which contains certain covenants aimed at protecting the interests of investors. There is also a requirement for licensing of persons who deal in securities, including units in a unit trust and provision for a divided structure of management along the lines mentioned above.
<big>Regulation in Fiji and New Zealand</big>
The Fijian and New Zealand legislative model is rather different from the approach from that adopted in Australia. In effect, it is somewhat narrower in scope and displays a little less of the institutionalised paranoia attending the need to regulate investment in Australia securities. Section 3 (1) of the Unit Trusts Act of Fiji prohibits the establishment of a unit trust without the prior approval of the Minister. Section 8 (1) prohibits the issuing or offering of interests in a unit trust to the public except on the basis of a prescribed form of prospectus.
The definition of ‘unit trust’ in section 2 of the Act assumes some importance. ‘Unit trust’ "means any scheme or arrangement that is made for the purpose or has the effect of providing facilities for the participation, as beneficiaries under a trust, by subscribers or purchasers as members of the public, in income and gains (whether in the nature of capital or income) arising from the money, investments, and other property that are for the time being subject to the trust." This is followed by a number of exemptions such as debentures, credit unions, friendly societies and certain superannuation schemes for income tax purposes.
The combined effect of section 3(1) and the section 2 definition would indicate that the only interests relevant for the purposes of the Fiji scheme of regulation are proprietary interests - in fact equitable proprietary interests of a beneficiary under a trust. We might leave aside the rather vexed question as to whether all beneficial interests under a trust are proprietary or not. Suffice it to say that where they are defined by reference to units in trust property, they would be so, unless they were the subject of a discretionary power of the trustee - which in this context is unlikely. The definition in section 2 clearly refers to participation "as beneficiaries under a trust" and to the derivation of benefits "arising from the money, investments and other property ..... subject to the trust." Thus one must conclude that the provisions apply only when the interest offered is an interest in something which is already structured as a unit trust. Hence, the Fijian and New Zealand policy is to impose a scheme of regulation of unit trust offerings per se.
This is not at all the Australian approach, which attempts to regulate all prescribed interest offerings; that is to say, interests in schemes which, in their inception and initial promotion, might have had nothing to do with a trust at all. The interest might have been an interest in the gains to be made by several investors in the ownership of a race horse, a speculative interest in the possible income of a joint venture or other enterprise, or an interest under certain franchise arrangements. These interests need not be proprietary in any sense, much less an interest under a trust. In Australia, a unit trust needs to be created only in order to comply with the regulatory scheme itself. Given a prescribed interest scheme, the legislation demands that it be converted into a unit trust with a certain structure as a condition of obtaining ASC approval.
Public Offering of Securities
The Corporations Law in Australia has dispensed with the notion that what needs to be regulated is the public offering of securities which are prescribed interests. The former Companies Codes of the Australian States had provided that a prospectus needed to provided where invitations or offers of securities were to be made to the public only. This concept was deemed to include offers to a member of the public. This requirement of a public offering, as extended, attracted some consternation on the part of the courts and criticism on the part of academic writers. It was described as a minefield. How could one determine just when an offer took on the characteristic of being made to the public? What would be an offer to a member of the public rather than to an individual in their capacity as a private (ie. non-public) individual? Usually it was the generality of the offer making it available to all and sundry in the community which was enunciated as the guiding principle here.(7) But that was not entirely free of difficulty when confronting offers to groups of individuals and sub-sections of the larger community.(8) The difficulties in providing answers to these questions prompted the drafts of the Corporations Law removing the element of public offering from the prospectus provisions altogether. Effectively, any offering of or invitation with respect to prescribed interests or other securities will attract the prospectus requirements, although again there are a number of stated exceptions to this.
Under the Fiji Unit Trusts Act, however, the requirement that the issue or offer of unit trust interests be to the public is firmly entrenched in section 8(1) in respect of prospectus requirements. Furthermore, the fact that section 4(1)(b) assigns to the management company the task of issuing or offering interests "to the public" clearly entrenches the idea that the legislation seeks to regulate only public transactions in unit trust interests. However, in this case there is no definition of ‘public’ or public offering in the legislation. There is no attempt, as with s. 5(4) of the former Companies Codes in Australia to include an offer to a member of the public within that concept. Nonetheless it does leave to case law the difficult task of determining just when an offer or invitation has the required element of publicity - a task which our past experience has proved exceedingly difficult.
The management structures of unit trusts are similar in Australia, New Zealand, Fiji and Vanuatu. All require a divided structure with both a trustee and a management company to be appointed. In Australia, the trustee must be approved by the ASC and this usually happens at the time when the deed of trust itself is approved. The trustee need meet no qualifications stipulated in the legislation, although the ASC has certain policy guideline to be met. The trustee could be an individual. The Australian scheme posits no particular requirement as to approval of the management company. This is presumably because the role which it plays is largely that of a promoter of a commercial scheme. The legislation provides only that it must be a public company. In practice it will usually have been formed by and be controlled by those individuals who were the promoters of the investment scheme to which the trust relaxes.
Under the Fiji legislation there is a mechanism for approval of trustees. Firstly, this would be a matter to be considered by the Minister when considering approval of the trust itself under section 3(1). It is certainly a factor which the minister might consider to be material pursuant to section 3(2) of the Act. Section 6 of the Act requires that the trustee be either a trustee corporation within the meaning of the Trustee Act (cap 65) or a company or bank approved by the minister either generally or in respect of a particular trust. The minister may require the deposit of a board. In respect of the manager section 5(1) requires that it be a company. Section 5(2) prohibits a company acting as manager of a unit trust unless a bond is lodged by a person approved by the minister. There is no approval of the management company as such, but the provision for payment of a bond provides at least some measure of security.
As indicated earlier, one of the areas of difficulty concerning public unit trusts is the divided structure itself. It was seen as appropriate to have the trustee established independently of the promoter of the operation. At one stage in Australia it was proposed that the divided structure be abolished in favour of having one responsible entity for public unit trusts. This would unify the total control of the trust, and both guardianship and managerial responsibilities, in one entity. However, as things stand, the trustee is invested with the trust property and is there to represent the interests of the unit holders. The management company, however, mainly has charge of the day to day operation of the scheme.
The division of roles, however, has always entailed some institutional confusion. At one stage it seems to have been thought that the trustee merely played the role of a watchdog and therefore was not under a duty actively to investigate the management company's conduct of the scheme. Very often this view was reinforced by reference to clauses in unit trust deeds which prohibited the trustee or the unit holders from interfering in the management of the scheme. However, the courts have since determined the position to be otherwise, casting on the trustee an active duty to inform itself of the management company's activities. A trustee who fails to do so could be liable at the hands of the unit holders should the scheme collapse.(9)
The other issue involved here concerns the nature of the relationship between the management company and the unit holders. The manager was viewed not as one who represented the unit holders whether directly or through the trustee. After all, it the management company interests were those who would have established the scheme in the first place as a commercial investment opportunity. There was debate from time to time about whether the management company was a fiduciary with a corresponding obligation imputed in equity in favour of the unit holders. It now seems reasonably well settled that this is so.(10) Whilst not a trustee, the position of the management company is clearly equatable to that of other fiduciaries, such as company directors and promoters both of whom are regarded as under fiduciary obligations to the entity which they serve. The difficulty is to work out the precise scope of the fiduciary obligation, which must be something less than that of a trustee. But that is no doubt something which will be worked out over time by the courts.
The Vanuatu Legislation
As noted above, the Prevention of Fraud (Investments) Act Cap 70 of Vanuatu is an adaptation of earlier United Kingdom legislation of the same name. The general import of the legislation is to impose a scheme of control on dealings in securities. It requires, for example, that dealers in securities obtain licences(11) and imposes liability on dealers in securities with respect to misleading and false statements.(12) So far as unit trusts are concerted, the approach is similar to that in Australia. The legislation sets up a mechanism for public approval of unit trust schemes. It requires that there be a trust deed which contains certain provisions aimed at investor protection and mandates a divided structure of management of the trust between a trustee and a manager. The legislation does not contain any extensive specification of the roles of the trustee and manager, notwithstanding that in other jurisdictions the differentiation of functions has proved to be a difficult one. Much is left to the trust relationship to provide protection to investors in the schemes.
Rights or interests in a unit trust are deemed to be securities by virtue of section 1(1). However, the definition is not as broad as that in Australia. The definition refers only to rights or interests "which may be acquired under a unit trust scheme under which all property for the time being subject to any trust created in pursuance of the scheme consists of either (a) " shares, debentures or rights or interests therein; (b) securities of the Government of Vanuatu or of any other country; or (c) rights, contingent or otherwise in respect of money lent to or deposited with any industrial and provident society or building society.
Thus the Act relates only to certain forms of equity or bond trusts. In Australia, New Zealand or Fiji the definition of securities would cover unit trusts which are established to operate time sharing schemes, forestry schemes, real estate investments schemes and so on. The definition of dealing in securities is also contained in section 1(1). The definition is exhaustive. "Dealing in securities "means
"… doing any of the following things (whether as a principal or agent), that is to say, making or offering to make with any person, or inducing or attempting to induce any person to enter into or offer to enter into
- any agreement for, or with a view to acquiring, disposing of, subscribing for or underwriting securities or lending or depositing money to or with any industrial or provident society or building society; or
- (b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities …"
Section 2 of the Act prohibits dealing in securities without a licence although certain transactions such as those on an approved stock exchange (which Vanuatu does not have) are excluded by section 3. The Minister is permitted to make rules relating to the conduct of business of licensed dealers, including the manner in which dealings might take place and the forms to be used in dealing contracts.(13) Section 11 contains a general prohibition against the making of false, deceptive or materially misleading statements in relation to the offer, subscription or acquisition or disposal of securities. Section 12 sets out provisions which are in the nature of prospectus requirements relating to the making of offers and invitations for the purchase or subscription of securities to which the Act applies.
Part IV of the Act deals with unit trust schemes. Section 13(1) empowers the Minister to declare by order that any unit trust scheme is an authorised unit trust scheme for the purposes of the Act. Certain conditions set out in the section must be fulfilled. Both the manager and the trustee of the scheme must be a corporation incorporated and having a place of business in Vanuatu. The scheme must be such that effective control over the affairs of the manager corporation is and will be exercised independently of the trustee corporation. The scheme must be such as to secure that any trust created in pursuance of the scheme is expressed in a deed providing, to the satisfaction of the Minister, for the matters set out in the Schedule to the Act. However the Minister is provided with a general power of dispensation with these requirements in special circumstances. The trustee corporation must have either (a) an issued capital of not less that 100 million vatu of which not less than half is paid up capital and the assets of the corporation are sufficient to meet its liabilities; or, (b) more than four fifths of the capital of the corporation is held by another corporation which meets the requirements under (a).
The requirements under the Schedule to the Act relate to certain provision which must be included in the trust deed relating to the scheme. There must be provision made :
- for determining the manner in which the manager’s prices for units on a sale and purchase, and the yield from the units, are respectively to be calculated and for entitling the holder of any units to require the manager to purchase them at a price calculated accordingly.
- for regulating the mode of execution and the issue of unit certificates and, in particular, for ensuring that no unit certificate shall be executed or issued in respect of rights or interest in any property until steps have been taken, to the satisfaction of the trustee, to secure that the property will be vested in him or, subject to any prescribed conditions, in a nominee for him approved by the Minister.
- for prohibiting or restricting the issue by or on behalf of the manager of advertisements, circulars, or other documents containing any statement with respect to the sale price of units, or the payments or other benefits received or likely to be received by holders of units, or containing any invitation to buy units, unless the document also contains a statement of the yield from units.
- For securing that any advertisement, circular or other document containing any statement with respect to the sale price of units or the yield therefrom, or containing any invitation to buy units, shall not be issued by or on behalf of the manger until the trustee has had a reasonable opportunity of considering the terms of the document, and shall not be so issued if, within a reasonable time after the document first comes under his consideration, he notifies his disapproval of the terms thereof in writing to the manager.
- For the establishment of a fund to be applied in defraying the expenses of the administration of the trust and for regulating the application of that fund.
- For the audit, and the circulation to the holders of units, of accounts relating to the trust (including the accounts of the manager in relation to the trust and statements of his remuneration in connection therewith).
- For requiring the manager (subject to any provisions as to appeal contained in the deed) to retire from the trust if the trustee certifies that it is in the interests of the beneficiaries under the trust that he should do so.
The Minister is given power by section 13(2) to require the manager and the trustee, in respect of any application for approval under Part IV to supply further information. The Minister may also revoke any approved scheme on certain grounds specified in the section. These include, for example, that the circumstances relevant to the making of an order have materially changed since it was made. The Minister also has power under section to appoint investigators to investigate and report on the administration of any unit trust scheme which it appears either that it is in the interest of the unit holder to do so and that the matter is one of public concern.
Obviously the models of regulation and their approach to regulation are quite different. The models adopted in the South Pacific jurisdictions of Fiji and Vanuatu maintain some features which are similar for example the divided structure of management of the trust. However, their scope of application is quite different. Both are different in fundamental ways from the securities regulation approach adopted in Australia.
Clearly the models are adapted from outside. The relevance of these models at least up to the present time, might indeed be questioned. There is no evidence that the legislation has been used extensively in Fiji or Vanuatu or that they have provided any significant degree of investor protection. The market for such types of investment simply exists at present in a primitive form in these countries. That is not to say that such market might open up at some time as both countries strive to open up their economies to international investment. With it usually come the promoters of various types of get rich schemes which originally prompted the brining into being of these schemes of regulation in the first place. At least one can say that these jurisdictions have some form of legislative scheme of regulation in place should that occur.