For most practical purposes a unit trust will operate and be regulated in much the same manner as a mutual fund. The matters later discussed relative to mutual funds apply equally to the establishment of a unit trust. There is an argument that the submission of a prospectus or explanatory memorandum relating to a unit trust to the BMA is not required. The better practice is to assume that such a document (as appropriate to a public or private offering) must in fact be filed.
Unit trusts are established by a Trust Deed made with a Bermuda-resident trustee. The deed will provide for the calculation of net asset value per unit and set out the terms for issue and redemption of units. It will also provide for the administration and management of the affairs of the unit trust, including provisions for an annual meeting of unit-holders, voting rights, audit and financial statements. The Bermuda-resident trustee(s) acts as custodian of the assets of the trust in addition to exercising other fiduciary duties owed to the unitholders.
While a unit trust attracts no annual registration fee, the Bermuda management company associated with the unit trust is required to pay a fee of BD$2,365 in respect of each unit trust scheme managed by it.
GENERAL PRINCIPLES
A Unit Trust requires that the "three certainties" (required of all trusts) of intention, object and subject matter be satisfied. Further, the same principles of fiduciary administration that apply to any trust will also apply. Unlike, say, a discretionary trust, the manager of a Unit Trust is not an agent or employee of the trustee. Because the promoter of a unit trust offers his management skills to the public, the trustee cannot have the same range of discretions a trustee would have under a private trust.
The trustee and the manager each supply a measure of supervision of the other for the protection of unitholders.
Features Of A Typical Simple Unit Trust Deed
PARTIES TO THE DEED
The manager and the trustee.
CONSTITUTION
The manager pays the trustee an initial subscription for units to be issued to the manager. Further units are created when subscribers' application monies are added to the trust fund or when vendors of property acquired by the trust receive units in exchange therefore.
DECLARATION OF TRUST
The trustee formally declares it holds the fund upon trust for the unitholders.
LIMITATION OF UNITHOLDERS LIABILITY
A unitholder's only liability is to pay the subscription for each unit. Unitholders thereby gain similar limited liability as that enjoyed by shareholders of a limited company. The limitation, however, arises out of the unitholders position under the Trust Deed rather than statutory company law.
Units
The units are declared to confer on unitholders an interest in the trust fund as a whole, without any interest in any separate part of the fund. Usually a maximum number of units is stated. Where units are listed on a stock exchange a restriction will be imposed on the issue of new units other than to existing unitholders in proportion to their existing units or as sanctioned at a uiiitholders meeting. The number of new units is arrived at by dividing the addition to the trust fund by the issue price.
UNITHOLDERS INTEREST
The unitholders interest consists of:
- a fraction of the beneficial ownership of all the trust assets; and
- rights compelling the manager to buy units back.
UNITHOLDERS PASSIVE
Unitholders normally cannot interfere with, or question, she actions of' the trustee or manager in relation to the trust fund. Further, it is clear that neither the trustee nor the manager is an agent of the unitholders. Otherwise liabilities incurred by the trustee or the manager to third persons might be sheeted home to the unitholders thus prejudicing their limited liability.
TRUSTEES COVENANTS
The office of trustee incorporates many equitable duties. In the deed however, the trustee further covenants to exercise all due diligence and vigilance, including the supervision of the manager. This duty might not (in the absence of such a covenant) otherwise arise, since the manager is not in general subordinate to the trustee.
MANAGER COVENANTS
The manager covenants to discharge its business in a proper and efficient manner. As promoter the manager owes fiduciary duties generally equating to the statutory duties of promoters of companies.
MANAGER AS BUYER OR REDEEMER OF UNITS
Unitholders need a market for their units. The deed will contain a covenant binding the manager, on request, to buy units from the holder at a price calculated pursuant to the provisions of the deed.
MANAGER AS ADMINISTRATOR
Administration rests with the manager rather than the trustee, and includes handling all investments, borrowings and liabilities of the trust fund. The trustee, as holder of trust property, must follow the lawful directions of the manager. The manager will also keep or cause to be kept a register of unitholders, and will issue and administer unit certificates.
CHANGE OF MANAGER
Retirement on notice is provided for, and a unitholder meeting may cause removal. The manager is also removable by the trustee, for example, where the manager goes into liquidation, ceases to carry on business or has, to the. prejudice of unitholders, failed in its duty to unitholders. The manager is in a fiduciary relationship with the unitholders and thereby liable to the extent the trust deed does not properly exonerate it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
