FIMM - Chapter 2

FIMM
CHAPTER 2
QnncuLATIoN oF THE UNIT TRUST INDUSTRY
LEARNING OBJECTIVES
This Chapter provides an overview of the basic elements in the regulation of the unit trust industry.
At the end of this Chapter, you should:
. be familiar with the regulatory structure of the Malaysian unit trust industry
. be aware of the principles and objectives of that regulation
. understand the major regulations with respect to:
. the UTMC . the trustee . the registered UTC
' understand important aspects of the SC's Guidelines covering key elements of investor protection
- prospectus contents, advertising and promotional materials , reporting, portfolio constraints, and the
distribution of units in a UTS.
I sncrloN 2.1 ovERVIEw oF THE
I nTcuLAToRYFRAMEwoRK
Proper regulation on all aspects of the financial system is important. lf investors (and other participants) do
not have confidence in Malaysia's capital markets, and those who play a role within those markets, there
will be little or no investment and the economy will fail to grow in line with government objectives and the
expectations of Malaysians generally.
The major elements of regulation of any financial system include: . the protection of investors' interests . proper disclosure to investors
' control over market participants, including restrictions on those who may be involved in the industry,
and . the prevention of improper market practices.
Regulation also commonly includes measures that assist the development of the financial system by setting
out the rights, duties and responsibilities of market participants.
ln this Chapter, we will see how these elements of regulation are applied by the Malaysian regulatory
authorities, in particular the SC, to the unit trust industry i.e. to UTMC, UTS, IUTA, CUTA and UTC.
As the unit trust industry is also guided by guidelines and regulations issued by FIMM, we will review some
elements of regulation introduced by the FIMM. The day-to-day aspects of the operation of a UTS are
supervised by'the trustee as stated in the deed. Therefore, in this section, we will examine some aspects
of regulation that affect the trustee of UTS.
FIMM
T SECTION z.IREGULATORY STRUCTURE
2.2.1 THE SECURITIES COMMISSION
It is important that a rapidly growing area such as the unit trust industry, as with all retail savings and
investment products, be regulated to protect the interests of the investing public. The main objective of all
regulations of the unit trust industry must be to protect the interests of prospective investors and existing
unitholders.
To this end, regulation of the unit trust industry has been entrusted to the SC under the Securities Commission
Act, 1993 and Capital Markets and Services Act 2007 ('the Act'). The SC's Mission Statement is "to promote
and maintain fait efficient, secure and transparent securities and futures markets and to facilitate the orderly
development of an innovative and competitive capital market."
The Act empowers the SC to regulate the unit trust industry. This includes introduction of the SC's Guidelines
on Unit Trust Funds, which govern the operations and administration of the UTS. Additionally, the SC has
powers to prosecute and impose penalties where breaches of the law are known to occur. lts powers are
wide-ranging, covering UTMC, UTS, IUTA, CUTA, UTC and fund managers responsible for investing the
assets of a UTS.
The SC has a number of other functions that are laid down in the Act, guidelines and other laws, namely:
. to advise the Minister of Finance (to whom the SC is responsible) on all matters relating to the
securities and futures industries . to regulate all matters relating to securities and futures contracts . to ensure that the provisions of the securities laws are complied with . to regulate the take-overs and mergers of companies . to regulate all matters relating to unit trust industry . to be responsible for supervising and monitoring the activities of any exchange, clearing house and
central depository . to take all reasonable measures to maintain the confidence of investors in the securities and futures
markets by ensuring adequate protection for such investors . to promote and encourage proper conduct amongst members of the exchanges, clearing houses,
centraldepository and all licensed and registered persons (including UTC) . to suppress illegal, dishonourable and improper practices in dealings in securities and trading in futures
contracts, and the provision of investment advice (by UTC and others) or other services relating to
securities or futures contracts . to consider and make recommendations for the reform of the law relating to securities and futures
contracts . to encourage and promote the development of securities and futures markets in Malaysia including
research and training in connection thereto . to encourage and promote self-regulation by professional associations or market bodies in the
securities and futures industries . to license and supervise all licensed persons as may be provided for under any securities law . to promote and maintain the integrity of all licensed and registered persons in the securities and futures
industries.
The SC's influence therefore affects every aspect of the unit trust industry. lt is pertinent to highlight that CMSA
2007 introduces new licensing framework for capital market intermediaries. Such new licensing framework
allows capital market intermediaries to hold one licence to carry on any one or more regulated activities.
FIMIUI
2.2.2 OTHER GOVERNMENT REGULATORS
While the SC is the primary regulator of the unit trust industry several other regulatory bodies also affect
the activities of participants in the unit trust industry.
The Companies Commission of Malaysia regulates the activities of all companies and businesses within
Malaysia. UTMC and trustees, therefore, have to meet the various requirements imposed on all corporations
under the Companies Act, 1965.
Bank Negara Malaysia (BNM) has a number of important functions, including management of the financial
system that is used by all participants in the unit trust industry. BNM is also responsible for the regulation
of insurance companies. Where a UTMC includes insurance cover as a package together with the sale of
a UTS, the requirements of BNM must be met by the insurance company. As BNM is also responsible for
foreign exchange markets, it affects the overseas investment activities of UTS.
Various other self-regulatory institutions, such as Bursa Malaysia, Bursa Malaysia Derivatives Berhad, Bursa
Malaysia Securities Clearing Sdn Bhd, Bursa Malaysia Derivatives Clearing Sdn Bhd and Bursa Malaysia
Depository Sdn Bhd, lay down business rules and other requirements that affect the unit trust industry. For
example, a listed UTS must meet Bursa Malaysia's Listing Requirements in addition to those imposed on
all UTS by the SC.
2.2.3 ROLE OF FIMM
ln terms of regulation, a major objective of the FIMM is to provide self-regulation for the unit trust industry
through the formulation of "sound and ethical business practices to promote the interest of the unit trust
industry and provide investor protection."
The FIMM works closely with the SC in the development and growth of the unit trust industry. ln particular,
the FIMM is the body approved by the SC to register all UTC and to conduct unit trust examinations for
persons wishing to become UTC.
The FIMM has also developed a series of guidelines for the unit trust industry. The revised Guidelines for
Registration of lnstitutionalAdvisers for the Marketing and Distribution of Unit Trusts was issued in October
2007. Subsequently, the FIMM has introduced a new group of distributors known as Corporate Unit Trust
Advisers (CUTA) with the issuance of the Guidelines for Registration of Corporate Unit TrustAdvisers (CUTA)
for Marketing and Distribution of Unit Trusts in October 2007.
The FIMM has also issued its Code of Ethics and Standards of Professional Conduct for the Unit Trust
lndustry, its By-Laws Relating to the Procedures for Disciplinary Proceedings (see Chapter4) and lnvestment
Management Standards (l MS).
FIMIUI
2.2.4 LAWS AND REGULATIONS
The major sources of regulation affecting the unit trust industry (including the activities of UTC) are:
. the Securities Commission Act, 1993 . a series of Guidelines on the unit trust industry issued by the SC including: . Guidelines on Unit Trust Funds . Prospectus Guidelines for Collective lnvestment Schemes . Guidelines on Marketing and Distribution of Unit Trust Funds . Guidelines on Unit TrustAdvertisements and Promotional Materials . Guidelines on Real Estate lnvestment Trust . Guidelines on Online Transactions of and Online Activities in Relation to Unit Trusts . Guidelines for the Appointment of a Related-Party Trustee . Guidelines on lslamic Real Estate lnvestment Trusts . Guidelines for the Offering, Marketing and Distribution of Foreign Funds . Guidelines on lslamic Fund Management . Guidelines on Exchange Traded Funds . Guidelines on Due Diligence Conduct for Corporate Proposals
' Guidelines on Prevention of Money Laundering and Terrorism Financing for Capital Market
lntermediaries . Licensing Handbook under CMSA . Guidance Notes to the above Guidelines and Handbook
. lssued by the FIMM
' Guidelines for Registration of lnstitutibnalAdvisers for the Marketing and Distribution of Unit
Trusts
' Guidelines for Registration of Corporate Unit Trust Advisers (CUTA) for the Marketing and
Distribution of Unit Trusts . lnvestment Management Standards (lMS) . By-Laws Relating to the Procedures for Disciplinary Proceedings
' Code of Ethics and Standards of Professional Conduct for the Unit Trust lndustry
Copies of the above should be readily accessible to UTC and which are available online at FIMM's Website.
Extracts from some of the Guidelines that are most relevant to the activities of UTC are included in this
book.
The major features and principles of the various regulations are described below.
FIM]UI
I sECTroN 2.3 REGULATToN oF THE urMC
2.3.1 KEY REQUIREMENTS OF UTMC
While the day-to-day functions of UTMC are covered throughout this book, in this section we look at the
requirements of UTMC from a regulatory perspective. We will examine some of the most important elements
of regulating the activities of UTMC. ln summary, the key requirements of UTMC are:
. to safeguard the interests of unitholders
' to act in accordance with the deed of a UTS, the SC's Guidelines on Unit Trust Funds, the Act and
other applicable laws
' to manage and administer a UTS in accordance with the deed, the SC's Guidelines, the Act, other
securities laws and "acceptable and efficacious business practice within the unit trust industry"
' to ensure that, at all times, the deed and prospectus of a UTS comply with the SC's Guidelines, the
Act and securities laws
' to ensure that the assets of a UTS are clearly identified and properly segregated
' to ensure that the assets of a UTS are properly valued and units in the UTS are properly priced (Note
that material errors must be reimbursed by the UTMC such that unitholders do not suffer as a result
of such errors)
' to protect the investment of unitholders by avoiding unnecessary costs or risk (Note that a UTMC
must not invest in a manner that would result in undue advantage for itself. A UTMC is not able to
act as principal in relation to securities and assets purchased and sold by a UTS. The trustee of a
UTS can decline any investment proposal put to it by a UTMC that it believes is not in the interests
of unitholders) . to keep proper records of a UTS
' to ensure that information acquired is not improperly used by the UTMC or any of its officers and
delegates . to provide each unitholder in a UTS with the UTS annual report . to call a meeting of unitholders in a UTS in certain circumstances . to keep a register of unitholders in a UTS in the approved manner
' to provide information in relation to its business and in relation to a UTS to the SC and the trustee
(and trustee-appointed auditor) as requested.
UTMC must observe high standards of integrity and fair dealing in managing a UTS "to the best and exclusive
interest of unitholders." They are required to act with due care, skill and diligence in managing a UTS, and
employ the resources and procedures necessary for the proper performance of the UTS. UTMC must account
to the trustee of the UTS for any loss suffered by the UTS as a result of the UTMC's failure to exercise the
degree of care and diligence required in managing the UTS. Of course, this does not mean that the UTMC
guarantees the investment performance of a UTS.
UTMC are only entitled to receive the fees laid down in the deed of a UTS. UTMC are not permitted to
make any additional profits or receive any other benefits in the discharge of their fiduciary responsibilities.
Any secret commissions for transactions and trades would constitute an illegal profit. UTMC are required to
disclose their policy on rebates and soft commissions in the UTS prospectus and reports.
Any conflicts of interest between UTMC and UTS are to be avoided. However, any conflicts that should arise
are required to be disclosed to unitholders. Transactions should be carried out on an 'arm's length'basis.
For example, a UTMC may place a cash deposit of a UTS with the parent bank of the UTMC, or use the
services of a related broker to execute a UTS transaction in securities. This should be only on terms that are
'no less favourable'to the UTS than from an arm's length transaction between non-related parties.
FIIUIM
Should a decision relating to a UTS be made that requires a meeting of unitholders, the UTMC is responsible
for the UTS and the UTMC's nominees are not permitted to vote, regardless of who called the meeting or
what matters are to be considered at the meeting.
ln the remainder of this section, we will look at the practical application of the requirements imposed on
UTMC.
2.3.2 APPROVAL OF UTMG AND UTS
UTS must be managed by UTMC that are approved by the SC, which must be obtained before commencing
operation. The SC may impose such terms and conditions as it deems fit in approving UTMC. The SC
has the power to revoke its approval at any time, should there be any breach of the terms and conditions
imposed by it.
To minimise the risk of an approved UTMC failing to properly carry out its role and duties, the SC assesses
the resources and ability of each UTMC applicant. To be eligible to act as a UTMC, an applicant must:
. be an entity incorporated in Malaysia . be a license holder under CMSA . comply with Bumiputra and foreign ownership requirements
' satisfied a minimum shareholders'funds at all times as prescribed by the Act
A UTMC is a company that: . establishes a fund
' issues, offers for subscription, makes an invitation to subscribe for or purchase units of the fund;
and . operates and administers the fund
Where a UTMC carries on any regulated activity specified in Schedule 2 of the CMSA, the UTMC should
be a holder of a Capital Market Services Licence to carry on the regulated activity, and should observe and
comply with the relevant guidelines issued by the SC for licence holders.
. have adequate resources including:
' adequate human resources with the necessary qualification, expertise and experience to carry on
business as a management company
' adequate and appropriate systems, procedures and processes to undertake the business in a
proper and efficient manner
' establish and maintain risk management systems and controls to enable to identify, assess, mitigate,
control and monitor risks in relation to the fund it operates and manages.
A UTMC applicant's shareholders, directors and key personnel must be persons of integrig and accountability,
who must act honestly and diligently in performing theirduties. Directors of a UTMC should comprise at least
two independent members, while maintaining a minimum ratio of at least one-third independent members
at all times. These independent directors are particularly responsible for representing and safeguarding the
interests of unitholders.
FTMIUI
Shareholders and directors must not have been: . subjected to any winding-up petition or bankruptcy proceedings . convicted for fraud or dishonesty or any other offence punishable with imprisonment of one year or
more . involved in unethical practices and activities or . subjected to any inquiry/investigation by any governmenVstatutory authority or body in which an
adverse finding was found.
The Chief Executive Officer (CEO) of a UTMC must be registered with the SC as a full-time officer and is
also required to meet high standards. UTMC must undertake the necessary due diligence to ensure CEO
is fit and proper and suitably qualified to assume the position. CEO candidates could be disqualified if they
have been: . subjected to any bankruptcy proceedings or have been declared bankrupt . convicted for fraud or dishonesty or any other offence punishable with imprisonment of one year or
more . involved in unethical practices and activities or . subjected to any inquiry/investigation by any governmenUstatutory authority or body in which adverse
finding was found.
The names of the person responsible for the investment management of a UTS, and of the senior compliance
officer within the UTMC, must also be advised to the SC.
UTMC must ensure that employees are properly qualified, experienced and provided with training to improve
and upgrade skills and expertise. UTMC must spend at least 3o/o of gross salary expense on training for
UTMC officers.
APPROVAL OF UTS
The SC's approval of its UTMC is the first step in the approval process for a UTS, which encompasses the
following:
. Approval for the establishment of a new UTS, including for a company to act as management company
of the UTS and a company to act as trustee of the UTS . Registration for the appointment of the management company's directors and key personnelaswell
as members of the UTS lnvestment Committee, Syariah Committee (and/or Syariah Adviser) and
Panelof Advisers. . Registration of the deed and supplementary deed of the UTS (the deed will have been prepared and
vetted by the corporate advisers of the UTMC and trustee) . Post-vetting and registration of the UTS prospectus (first issue, renewal, supplementary and
replacement) . Post-vetting of advertisements and/or promotional materials within two weeks after publication or
issuance of the same pursuant to the Guidelines on Advertisement and Promotional Materials. . Approval for an increase in the size of the UTS . Approval for exemption or variation from the SC's Guidelines . Approval for delegation of function of a UTMC to a person not licensed by the SC (including the
appointment of investment manager or investment adviser) . Approval for the reconstruction, amalgamation or any change in the shareholding of the UTMC with
respect to its eligibility to be a UTMC . Approvalfor investment in foreign markets . Approval for UTMC to establish channels for marketing and distributing the UTS . approval for notices issued or published before the registration of a prospectus, pursuant to Section
241 (4) of the CMSA.
FIMM
Both the deed and prospectus must meet the SC's requirements as a key step in protecting investors. Once
the UTS, deed and prospectus are approved by the SC, the deed is signed under seal by the UTMC and
trustee, the prospectus is signed by the directors of the UTMC, and the UTS may be offered to investors.
2.3.3 PROSPECTUS OF A UTS
The prospectus offering investors units in a UTS is an important legaldocument. lts issue must be authorised
by the directors of the UTMC. lt must comply with the Act and guidelines, and its contents must reflect the
SC's requirements.
PURPOSE
The purpose of a prospectus is to inform intending investors about a UTS so that their decisions to invest
are made on an informed basis. The Act protects investors by requiring that a person shall not issue, offer
for subscription or purchase, or make an invitation to subscribe for or purchase, any securities unless a
prospectus in relation to the securities has been registered by the SC and it complies with the requirements
or provisions of the Act.
Further, an application form for a UTS cannot be provided to an investor without a copy of the prospectus
of the UTS. UTMC now incorporate an application form in the prospectus of a UTS.
CONTENTS
The SC will not register a prospectus if it does not comply with the Act or if, in the SC's opinion, the prospectus
contains false or misleading statement or information, or material omissions in any of its statement or
information.
A copy of the prospectus must be registered with the SC together with other required documents. However,
registration does not mean that the SC recommends investment in the UTS or takes responsibility for
statements in the prospectus. Therefore, a disclaimer to that effect must be included in the prospectus. The
directors of the UTMC remain responsible for the prospectus. A UTMC that issues a prospectus, which does
not meet the requirements of the Act, will be guilty of an offence. The penalty is a fine of up to RM3 million
or up to 10 years'imprisonment or both.
As part of its efforts to further enhance disclosure standards and transparency of fund-raising exercise, the
SC may also publish for public comments, the registrable prospectus before prospectus be registered. No
securities are allowed to be offered to the public untilthe prospectus is finally registered with the SC.
The Act states that a prospectus of a UTS should contain "all such information that investors and their
professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the
purpose of making an informed assessment of (a) the assets and liabilities, financial position, profits and losses and prospects of the issuer and ... of
the scheme; (b) the rights attaching to the securities; and (c) the merits of investing in the securities and the extent of the risk involved in doing so."
ln determining what information is required to be included in accordance with the Act, those responsible for
preparing the prospectus should consider the following: . the nature of the UTS
' the persons likely to consider acquiring units in the UTS (e.9. the level of knowledge of investment
and investment experience of potential investors)
' the fact that certain matters may be expected to be within the knowledge of professional advisers
including UTC who potential investors may expect to consult before investing.
FIMM
Significant care (due diligence) must be taken in issuing the prospectus of a UTS. All persons involved in
issuing prospectus are required to have high standards of due diligence and accountability in providing
investors and professional advisers with the information. The information given must not be only adequate,
accurate, and not misleading but must also be given in timely manner. lt is a criminal offence to authorize
or cause the issue of a prospectus that contains false or misleading statements or information. An investor
may be able to recover any losses incurred in such an event from the directors or other persons involved
in the issuance of the prospectus.
To assist a UTMC in developing a prospectus that meets the content requirements under the Act, the SC
has issued a Checklist of Disclosure Requirements as Appendix ll of the Guidelines on Unit Trust Fund
Prospectus.
SUPPLEMENTARY PROSPECTUS AND REPLACEMENT PROSPECTUS
The Act prescribes that the prospectus must be dated. The life of a prospectus is restricted to one year,
as the information contained within a prospectus is likely to become outdated. A new prospectus is then
required, which must be registered with the SC before issuing the prospectus.
But what if the information in a registered prospectus is found to be false or misleading during the life of
the prospectus? Or what if the information becomes false or misleading, perhaps through no fault of the
directors of the UTMC, e.g. because of a change to taxation law affecting investors? Where the information
in a prospectus becomes misleading, the law requires the prospectus to be withdrawn from the market by
the UTMC. Alternatively, the UTMC may issue a 'supplementary prospectus'that corrects the misleading
nature of the original prospectus, or contains details of the significant change or information. UTMC may also
replace a prospectus previously issued with a replacement prospectus bearing a clear and bold statement
stating that it is replacement prospectus.
A supplementary prospectus forms part of the original prospectus and UTC must ensure that every original
copy of the prospectus provided to investors contains the supplementary prospectus. Note that there can
potentially be several supplementary prospectuses issued during the life of the original prospectus.
There will be occasion when an investor applies for units in a UTS and the UTMC delivers a supplementary
or replacement prospectus to be registered with the SC before the units are issued to the investor. As soon
as the supplementary or replacement prospectus is registered by the SC, the investor must be notified and
given at least 14 days from the date of notice an opportunity to withdraw his or her application. lf the investor
decides to withdraq he or she must receive a refund of the full application amount.
ADVERTISING OF A UTS
The Act sets out various requirements relating to the contents of the advertisements of a UTS. ln addition,
the SC has issued its Guidelines on Unit Trust Advertisements and Promotional Materials that sets out its
policies on the same.
The general principle is that advertisements and promotional materials should be based on the principles
of 'good faith' and 'fair dealing'. Advertisements and promotional materials must not, therefore, mislead
or deceive prospective investors in UTS. They should reflect the likely level of understanding of potential
investors, and particular care is to be taken by UTMC in relation to the use of terms such as 'secure', 'safe',
'risk-free'and 'guaranteed'. Advertisements are required to be accurate and 'honest', e.g. graphs should
be properly drawn and provide a fair representation; and performance statistics or benchmarks for a UTS
should be sourced from an independent third party.
FIMM
A'fair'advertisement will include reference to the associated risks of investing in a UTS, and the SC requires
a number of clearly displayed 'warning statements' to be included in advertisements and promotional
materials, such as: . lnvestors should read and understand the prospectus before investing, and in particular consider the
fees and charges involved . The price of units and distributions can go down as well as up . Past performance of the UTS is not to be taken as an indicator of its future performance . lnvestors should read and understand the unit trust loan financing risk disclosure statement before
borrowing to purchase units.
Following registration of the prospectus, any advertisement and promotional material by UTMC are subject
to vetting by the SC. UTC is only allowed to use advertisement and promotional materials produced by
UTMC, lUTAor CUTAand failure to do so will attract penalties. This is to ensure that all advertisements and
promotional materials meet the high standards required by the SC.
2.3.4 THE INVESTMENT COMMITTEE, SYARIAH COMMITTEE/ADVISER/PANEL OF ADVISERS
UTMC are required to appoint an investment committee (and where necessary a Syariah commiftee/adviser)
to oversee the prudent and efficient investment of each UTS for which they are responsible. ln the case of
lslamic funds, investments have to be based on Syariah principles. The committee members/adviser are
required to act with due care, skill and diligence in carrying out their duties and responsibilities.
The Syariah Adviser/Committee member registered with the SC must comprise at least three individuals
(where individuals are appointed) or engage at least one Syariah expert (where a corporation is appointed).
Such member must be of good repute and character, with appropriate qualifications, expertise and experience,
particularly in fiqh muamallah and lslamic jurisprudence. An lslamic bank or a licensed institution approved
by BNM to carry on an lslamic banking business may also be appointed as Syariah Adviser. The Syariah
committee/adviser provides expertise and guidance in all matters relating to Syariah principles in the
management and administration of the UTS.
An investment committee of a UTS must be registered by the SC and should comprise at least three individual
members and at least two independent members, while maintaining a minimum ratio of at least onethird
independent members at all times. lndividuals appointed to the investment committee are identified in the
prospectus of the UTS and are required to be suitably qualified in terms of expertise and qualifications, and
be of good repute and character. They must ensure that all investment decision-making is structured and
subject to the relevant policies outlined by the UTMC to the trustee of the UTS. The investment committee
must meet at least once a month.
The role of the investment committee is "to formulate, implement and monitor the investment management
policies of the UTS to ensure consistency with: . the objectives of the UTS . the deed, Guidelines, the Act and securities laws . 'acceptable and efficacious business practice'within the unit trust industry."
The investment committee therefore selects appropriate strategies to achieve the proper performance of
the UTS according to its investment management policies and ensures that the strategies are implemented.
The committee also monitors, measures and evaluates the investment performance of the UTMC.
Where a UTS is managed and administered in accordance with specific principles (other than Syariah
principles), a panel of advisers of at least three independent advisers, who must be registered with the SC,
are to be appointed. They must be of good repute and character, and possess the necessary qualifications,
expertise and experience in their respective fields.
FIMM
2.3.5 THE COMPLIANCE UNIT AND INTERNAL AUDIT UNIT
A UTMC is required to set up a compliance unit to ensure compliance with all the requirements imposed
upon it and an internal audit unit to ensure that it operates in a proper and efficient manner.
Both units must report directly to the board of directors of the UTMC, such is the importance of their roles.
The units should table their reviews on a regular basis to the UTMC board. The compliance unit is also
responsible for maintaining a compliance manual and a code of conduct for the employees of the UTMC,
including UTC (See Chapter 4).
2.3.6 REGISTER OF UNITHOLDERS
It is very important to know who the unitholders are in a UTS. UTMC are required to maintain an accurate
register of unitholders and their various entitlements (i.e. number of units held). The register needs to hold
basic information relating to each unitholder - name and identity card (or business registration) number,
address, date of entry and exit from the register, date of each sale and repurchase of units, distributions of
income, and other personal data. These records need to be maintained in Malaysia at the registered office
of the UTMC.
2.3.7 PORTFOLIO CONSTRAINTS
ln addition to the prudential measures described above, there is also a number of specific constraints (in
the Guidelines on Unit Trust Funds) relating to the construction and management of the investment portfolio
of a UTS. These constraints, which are designed to reduce the risk of loss for investors in UTS, will affect
investment decisions relating to: . the establishment of suitable portfolio objectives . portfolio construction . portfolio operation (e.9. when varying the investment portfolio to reflect changes in the number of units
in circulation).
The major constraints on investment portfolios included in the Guidelines are described in general terms
below. The Guidelines themselves should be referred to for specific details.
GENERAL CHARACTERISTICS OF UTS INVESTMENTS
A UTS may only invest in the following that are consistent with its objectives: . transferable securities (include equities, debentures and warrants) . cash, deposits and money market instruments . units/shares in collective investment schemes; and . derivatives
Transferable securities and money market instruments held by the UTS must be traded in or under the rule
of an eligible market.
A UTS may also invest in warrants, derivatives and structured products as well as participate in securities
lending but conditions and restrictions apply. Special rules apply to the investment by a UTS in another
UTS.
It is possible for a UTS to invest in unlisted securities, but to a maximum of 10o/o of the NAV of the UTS.
However, the SC requires that the policies and procedures of UTMC for the valuation of unlisted securities
must be appropriate.
FIMM
Subject to approval by BNM and the SC (where required), investment by UTS in foreign markets is possible
and is generally limited to markets where the regulatory authori$ is a member of the lnternational Organization
of Securities Commission (IOSCO). However, in orderto maximise the poolof savings invested in Malaysia,
there may be restrictions on the amount of the NAV of a UTS that can be invested overseas.
Apart from any SO-imposed constraints on the investment portfolio of a UTS, UTMC can only invest in
securities authorised in the deed of the UTS. This ensures that all investments are within the broad investment
objectives envisaged in the deed. ln practice, the prospectus of a UTS may also contain limitations to its
investments.
LIQUIDITY
It is important that UTS maintain adequate liquidity so that unitholders can receive the proceeds from the
disposal of their units quickly.
The SC therefore requires the UTMC of a UTS to maintain arrangements to enable it to meet any repurchase
request. ln determining the level of liquidity, the UTMC should have regard to the repurchase arrangement,
expected level of repurchases of units and the investment objectives and policies of the UTS.
Such ability to meet any repurchase request is important even if a UTS is to invest primarily in shares traded
on Bursa Malaysia, in times of market uncertainty, it might be impossible to sell a particular portfolio of shares.
A UTS can maintain liquidity by holding a portion of its assets in cash, short-dated fixed income or money
market instruments or through short-term borrowing.
The result is that as units in a UTS are repurchased from unitholders by the UTMC, the units are able to be
cancelled by the trustee for cash from the UTS, and the investors can be promptly paid.
BORROWING
Subject to fulfilling certain conditions, UTS are allowed to borrow for a period not exceeding one month
in order for UTS to meet redemption requests without the need to dispose off assets in a fund's portfolio,
which may otherwise affect the interests of the remaining unit holders. Borrowings should not exceed 10%
of the fund's NAV.
Specialized UTS, for example, wholesales funds that are offered only to institutional investors and other
sophisticated investors are allowed to borrow money to make further investment in addition to meeting
redemption requests. The leverage or gearing effect is positive if the market value of the portfolio of assets
rises. Similarly, losses could be substantial if markets fall sharply.
Except for securities lending, none of the cash or investment of the UTS may be lent. Further, the UTS may
not assume, guarantee, endorse or otherwise become directly or contingently liable for or in connection with
any other obligation or indebtedness of any person.
CONCENTRATION AN D EXPOSU RE
To further reduce risks to investors in a UTS, the SC specifies the maximum exposure of a UTS's portfolio
to specific investments. ln limiting exposure, the portfolio of the UTS is inadvertently diversified over a wide
spread of investments. The limit can be in the form of exposure to a single issuer, class of securities or
group of companies.
FIMM
The following table summarizes the core requirements that apply to non-specialized funds. For specialized
funds, the requirements may be different. UTC may refer to the Guidelines on Unit Trust Funds for further
details.
(1) The limits and restrictions does not apply to securities/ instruments issued or guaranteed by the Malaysian government
or Bank Negara Malaysia.
(2) The exposure limit does not apply to
(a) Equities yet to be listed but have been approved by the relevant regulatory authority for the listing and are ofiered
directly to the fund by the issuer;
(b) Debentures traded on an organized OTC market; and
(c) Structured products.
(3) Such limit may be exceeded by index funds provided that the investment in any component securities does not exceed
its respective weightings in the underlying index.
(4) Bond/ fixed income funds:
(a) The funds should not invest more than 20% of the fund's NAV in debentures issued by any single issuer. However,
this limit may be increased to 30% if the debentures are rated by any domestic or global rating agency to be of the
best quality and offer highest safety for timely payment of interest and principal.
(b) Not more than 30% of the fund's NAV is allowed to invest in debentures issued by any one group of companies.
(5) The exposure of the underlying assets must not exceed the respective investment spread limits.
(6) The limit is waived if the counter-party has a minimum long-term rating by any domestic or global rating agency that
indicates very strong capacity for timely payment of financial obligations provided and if the structured product has a
capital protection feature.
lnvestment Destrictions and Limits - Core Requirement ( 1 )
A. Overdl €xposure Limit
L Maximum value of investments in unlisted securities (2) 10% of NAV
B. lnveslmenl $prcad Limit single issuer
2. Maximum value of investments in ordinary shares issued by any single issuer (3) 10% of NAV
3. Maximum value of investments in transferable securities and money market
instruments issued by any single issuer (4) 15% of NAV
4. Maximum value of placement in deposits with any single institution 20% of NAV
5. Maximum value of investments in Over-the-Counter (OTC) derivative transaction
with any single counter-party (5) 10% of NAV
6. Maximum value of investments in structured products issued by any single
counter-party (6) 15% of NAV
7. Maximum value of investments in units/ shares of any collective investment
scheme 20% of NAV
8. Maximum aggregate value of investments in transferable securities, money
market instruments, deposits, OTC derivatives and structured products issued
by or placed with any single issuer/ institution
25% of NAV
C. lnvestrnent $pread Limit-Group of companies
9. Maximum value of investments in transferable securities and money market
instruments issued by any group of companies (3) & (4) 20% of NAV
D. Concentration
10. Maximum value of investments in transferable securities (other than debentures)
issued by any single issuer
10o/o of
instrument issued
11. Maximum value of investments in debentures issued by any single issuer 20o/o ot
instrument issued
12. Maximum value of investments in money market instruments issued by any
single issuer
10o/o ol
instrument issued
13. Maximum value of investments in collective investment schemes issued by any
single issuer
25o/o ot
instrument issued
FIMM
We shall briefly explain how the exposure limits relate to one another in the following examples.
Example 1 - Spread of investments
An equity UTS with an NAV of RM10 million normally can hold no more than RM1 million worth of ordinary
shares of ABC Berhad (10% of NAV is the maximum holding of share capital of a single issuer) and a further
RM0.5 million worth of fixed income securities issued by that company (15o/o of NAV is the maximum holding
of securities issued by a single issuer).
Example 2 - Concentration and spread of investments
Under the concentration exposure limit, a UTS normally cannot hold more than 10% of the ordinary share
capital (class of security) of a single issuer. lf a company has 10 million ordinary shares in issue, a UTS
cannot hold more than 1 million ordinary shares. Of course, the value of such a holding must be less than
the exposure limit based on the NAV (10% of the NAV) of the UTS.
While the SC's exposure limits applyto individual UTS, a UTMC may manage several UTS. The SC therefore
encourages UTMC to develop internal prudential limits and restrictions that take into account aggregate
exposures across all UTS.
INSURANCE OF UTS ASSETS
It is the responsibility of a UTMC to ensure that all the insurable assets of a UTS are insured. For instance,
if a UTS invests in real propefi, the UTMC must insure the property. The cost of insurance cover will be an
expense of the UTS.
2.3.8 REAL ESTATE TNVESTMENT TRUSTS (RE|T)
Given the nature of real estate as an asset class for UTS, there are specific requirements relating to the
operation of REIT.
The Guidelines on REIT require the following:
Listed REIT . At least 75% of assets are to be invested in real estate, single-purpose companies, real estate-related
assets or liquid assets
' At least 50% of assets are to be invested in real estate or single-purpose companies and
' The remaining 25o/o of assets may be invested in real estate-related assets, non-real estate-related
assets or asset-backed securities
Unlisted REIT
' At least 70% of assets are to be invested in real estate, single-purpose companies or real estaterelated
assets (at least 50% in real estate or single-purpose companies)
' At least 20% of assets are to be invested in liquid assets at all times and
' The remaining 10o/o of assets may be invested in real estate-related assets, non-real estate-related
assets or asset-backed securities.
The SC requirements regarding REIT also cover the asset quality and valuation of real estate being purchased
for the UTS, including its disposal, since there may be links between the promoter of a UTS and the seller
of the real estate purchased on behalf of the UTS. All valuations of real estate must strictly comply with the
SC's Guidelines on Asset Valuation.
o
FTMIUI
There are a number of major differences between the requirements relating to REIT and other types of UTS,
largely reflecting the difference in the investment portfolios:
Valuation of real estate held by a UTS is more difficult than, say, equities listed on Bursa Malaysia.
The Guidelines provide details of how valuations of real estate must be carried out and require that
the same approved valuer cannot do more than two consecutive valuations of any particular real
estate. The trustee shall cause a revaluation of any parcel of real estate directly held by the trust, or
indirectly held via the holding of the equity of a single-purpose company, to be carried out at least
once in every three years from the last valuation date.
While a listed REIT is not required to repurchase units from unitholders (investors may instead selltheir
units through Bursa Malaysia), an unlisted REIT will normally be expected to repurchase units from
investors within 30 days (14 days where the UTMC temporarily repurchases units from unitholders
before either on-selling or cancelling the units with the trustee) from the date of receipt of the repurchase
request. lf the trustee believes that cancellation of units is not in the interests of unitholders, e.g. where
the real estate assets of the UTS cannot be sold at an appropriate price or on adequate terms, the
trustee may, with approval of the SC, suspend the repurchase covenant (obligation) under the deed.
The trustee of the UTS must then call a meeting of unitholders to consider the future of the UTS.
The initial minimum size of a REIT must be RM100 million, although this may be increased for
subsequent launch of the UTS. Borrowings may be used to acquire real estate and single-purpose
companies (for both listed and unlisted REIT) and to redeem units (for unlisted REIT). However, total
borrowings must not exceed 50% of the total asset value of the UTS at the time the borrowings are
incurred.
2.3.9
The UTMC of a REIT may pledge the assets of the UTS to
permitted above. Prior approval of the trustee and SC must
borrowings permitted.
EXCHANGE TRADED FUNDS
secure the borrowings up to the level
be obtained to go beyond the level of
As a listed index-tracking fund with primary objective to achieve the same return as a particular market index
by investing all or substantially all of its assets in the constituent securities of the index, the Guidelines on
ETF require the underlying index that is tracked by an ETF to fulfil the following requirements: . Have a cleady defined objective . Appropriately reflect the characteristics of the market or sector
' Able to reflect price movements of its component securities, and change the composition and weightings
of the component securities . Broadly based . Sufficiently liquid . Transparent and conveniently accessible by investors.
Additionally, the Guidelines also imposed some investment restrictions that include, among others:
' lnvestments in securities that are not traded in an eligible market must not exceed 1Oo/o of the fund's
NAV
' The fund may use warrants and options for minimizing the tracking error of the fund. However, the value
of such investments, based on its premium, shall not exceed 10o/o of the fund's NAV in general
' The investment in other collective investment schemes must not exceed 10o/o of the NAV of the
fund . The fund can participate in futures contracts for hedging purposes provided the fund's net market
exposure owing to its futures contract position shall not exceed the fund's NAV . lnvestments abroad by an ETF are subject to the limit approved by BNM
Depending on the nature of funds and investment objective, the SC may consider a variation of limits and
restrictions upoh request from UTMC.
FIMM
n sECTIoN z.4.REGULATIoN oF THE TRUSTEE
2.4.1 KEY REQUIREMENTS OF A TRUSTEE
The trustee plays a very important role in the successful operation of a UTS. The trustee of a UTS must
be a trust company registered under the Trust Companies Act, 1949 or incorporated pursuant to the Public
Trust Corporation Act, 1995. The trustee must be registered with the SC, who may impose such terms and
conditions as it deems fit in approving a trustee to a UTS. Furthermore, the SC has the power to revoke its
approval at any time, should there be any breach of the terms and conditions imposed by it.
Generally, the trustee must be independent of the UTMC and UTS, i.e. it must not beneficially hold shares
in the UTMC or units in the UTS. The trustee must have adequate financial as well as qualified and trained
human resources to carry on the business of being a trustee. lt must also have the appropriate systems,
procedures and processes to carry out its duties and responsibilities in a proper and efficient manner.
The trustee of a UTS must meet certain capital requirements as stipulated in the Guidelines on Unit Trust
Funds.
lf the trustee is the shareholder of UTMC, beneficially entitled to the monies owed by the UTMC or is
related corporation of UTMC. Under such circumstances, the SC's specific approval is required for trustee's
appointment and additional conditions may apply.
The trustee's role includes the following key aspects: . to safeguard the interests of unitholders . to act as custodian, i.e. to hold allthe assets belonging to a UTS . to act in accordance with the deed of the UTS, the SC's Guidelines on Unit Trust Funds, the Act and
other laws . to ensure that the UTS is managed and administered by the UTMC in accordance with the deed, all
the SC's Guidelines, the Act, other securities laws and "acceptable and efficacious business practice
within the unit trust industry" . to conduct independent reviews and not depend on information submitted by the UTMC . to ensure that it is fully informed of the investment policies of the UTS and any changes to them and,
if the trustee views that the policies are not in the unitholders' interests, it should, after considering
the UTMC's representations, instruct the UTMC to take appropriate actions as the trustee deems fit,
and/or call for a unitholders' meeting to give instructions which the trustee thinks proper . to immediately notify the SC if it becomes aware of any irregularity, breach of the deed, the Guidelines,
the Act or other securities laws; any inconsistency between the prospectus and the deed; and of any
other matter that may not be in the interests of unitholders . to provide information in relation to its business and a UTS to the SC as requested . to keep, and to ensure the UTMC keeps, proper records of a UTS . to ensure that all the terms of the deed are followed and that the prospectus is consistent with the
terms of the deed. . to ensure that information acquired is not improperly used by the trustee or any of its officers and
delegates . callforunitholders'meeting.
ln the remainder of this section, we will look at the practical application of the requirements imposed on the
trustee of a UTS.
FIMM
2.4.2 CUSTODY OF THE ASSETS OF A UTS
All assets of a UTS are held in the trustee's name for safekeeping. This means that the assets of a UTS
cannot be sold or transferred by a UTMC without the expressed permission of the trustee. The trustee holds
the assets of a UTS for the unitholders, and those assets must be separately identified (from the trustee's
own assets and those of other UTS and clients) as being assets of the UTS. A sub-custodian may be
appointed (with the approval of the SC), but the trustee remains responsible for the actions of the approved
sub-custodian.
The trustee is responsible for ensuring that a UTS receives the income (and any other entitlements) from
its investment portfolio, and that the net income of the UTS is appropriately distributed to unitholders. The
trustee needs to be satisfied that the fees payable to the UTMC from the assets of a UTS are reasonable
and in accordance with the deed and prospectus.
2.4.3 INVESTMENT POLICIES AND TRANSACTIONS
The trustee must be aware of the investment policies of a UTS (set by the UTMC), and check that the
policies are as described in the prospectus of the UTS. The trustee must also be satisfied that the investment
policies are sound and in the interests of unitholders. Once satisfied, the trustee acquires or disposes of
investments in accordance with the instructions of the UTMC. The UTMC should submit daily investment
reports to the trustee.
The trustee is also required to ensure that investments are not made to further the interest of the UTMC (or
any party related to the UTMC), or to cause detriment to unitholders. ln other words, there must never be a
conflict between the interests of the UTMC and those of unitholders of the UTS.
2.4.4 DEALING IN UNITS
The trustee will create and cancel units in a UTS (i.e. vary the number of units in circulation) when the
UTMC requests, and in accordance with the Guidelines on Unit Trust Funds. The Guidelines specify, for
example, that the UTMC must create units only for cash (which must be paid to the trustee within 10 days),
and at a price determined in accordance with the deed and Guidelines, The trustee must also ensure that
the investment valuation and unit price calculation process is carried out by the UTMC in accordance with
the deed and Guidelines.
2.4.5 ACCOUNTSANDAUDIT
The trustee of a UTS must keep, and ensure that the UTMC keeps, accounting and other records that will
ensure that the UTS is properly managed in compliance with the deed, Guidelines and laws.
As a further safeguard to unitholders, the accounts of a UTS are required to be audited at the end of each
financial year of the UTS by an approved auditor appointed by the trustee. The auditor must be independent
of the UTMC and the trustee. However, the auditor of the UTMC and UTS is often the same. The trustee
may from time to time, if it is deemed appropriate, remove the appointed auditor and appoint another in
its place. Unitholders in a UTS holding not less than two-thirds of the units in circulation can also make a
requisition to have the auditor replaced.
The auditor is required to report any form of non-compliance by any party to the SC.
2.4.6
FIMM
REPORTS TO UNITHOTDERS
The UTMC of a UTS is responsible for reporting to unitholders on the financial condition of the UTS by
publishing at least two reports (an interim and an annual report) in respect of each financial year of the
UTS. Reports, three copies of which have to be lodged with the SC, must be sent out for the period covered
within two months of the end of that financial period. The interim and annual report of the UTS must include
the financial statements of the UTS (including any auditors'report). Financial statements in an annual report
must be audited by an approved and independent auditor appointed by the trustee.
Also included within the annual report of the UTS is the report of the trustee to unitholders of the UTS (called
the Trustee's Statement). ln the Statement, the trustee states whether, in its opinion: . the UTMC has managed the UTS in accordance with the limitations on investment powers of the UTMC
under the deed, the SC Guidelines on Unit Trust Funds, the Act and other relevant and applicable
laws . the valuation/pricing is carried out in accordance with the deed and any regulatory requirements . the creation and cancellation of units are carried out in accordance with the deed and any regulatory
requirements.
lf, in the trustee's opinion, the UTMC has not done the above, the trustee must highlight this to unitholders
and set out the steps it has taken to correct the situation.
2.4.7 REPORTING TO THE SC
The trustee must report to the SC if it is of the view that the UTMC of a UTS has not acted in the interest
of unitholders, or in accordance with the deed, or has failed to comply with the deed, the Guidelines or the
requirements of the SC.
FIMIUI
fr srcrroN 2.5 REGULATToN oF MARKETTNG
T AND DISTRIBUTION OF UNIT TRUSTS
Regulating the marketing and distribution process is an important part of the regulation of the unit trust
industry in Malaysia. In this section, we will look at the requirements that apply: . to those who wish to become registered UTC . to the agency structure of UTC
and, briefly, . at the registration process relating to IUTA and CUTA.
ln Chapter 4, we shall look in detail at the controls that apply to the day-to-day activities of UTC.
2.5.1 INTRODUCTION
Until 1999, a unit trust salesperson has only to meet the internal requirements of a UTMC before being
appointed by that UTMC to sell units in its UTS.
However, given the vital role of salespersons in the unit trust industry it was quickly recognised by the SC
and FIMM that such persons should be registered and properly authorised to market and distribute units in
UTS. Consequently, a process of registration and examination was developed. Successful candidates were
then formally accredited as registered UTC and entitled to distribute units in UTS managed by UTMC.
Since February 2000, the FIMM issued and has revised the Guidelines for Registration of lnstitutional
Advisers for the Marketing and Distribution of Unit Trusts to expand the distribution to include organisations
with a large branch network and strong regulatory supervision such as banks, financial companies, dealers
in securities and other UTMC.
Following the introduction of the Guidelines for Registration of Corporate Unit Trust Advisers (CUTA) for the
Marketing and Distribution of Unit Trusts in October 2007, the access to unit trusts is further expanded to
include financial planners licensed by the SC.
Employees of IUTA or CUTA, who meet the requirements to be registered as UTC, are able to sell units in
UTS issued by a UTMC that has entered into a distribution agreement with the IUTA and / or CUTA.
All those entering the unit trust industry with the intention of marketing and distributing are required to meet
minimum educational standards and pass an examination before registration is completed. Only registered
persons ('UTC')are allowed to market and distribute UTS.
All registered UTC can be broadly categorized as follows:
UTMC.DESIGNATED DISTRIBUTORS
There are two categories recognised by the FIMM:
' tied-agent attached to the UTMC, i.e. an agent appointed by a UTMC to sell only units in a UTS
managed by that UTMC . a staff of the UTMC.
FIIUIM
IUTA.DESIGNATED DISTRIBUTORS
There are two categories recognized by the FIMM: . tied-agent attached to the IUTA that are also UTMC . staff of the IUTA.
CUTA.DESIGNATED DISTRIBUTORS
A staff of CUTA is recognized by the FIMM. Any directors, staff or personnel of a CUTA intending to market
and distribute UTS must first be licensed by the SC as Financial Planning Representative before applying
to be a UTC.
An IUTA and CUTA must nominate 'Distribution Points' at which its UTC will be based. IUTA and CUTA must
ensure that a minimum of two UTC are stationed at each Distribution Point at all times.
Staff at 'Collecting Points'within the IUTA and CUTA distribution network need not be registered UTC, as
their role does not involve 'dealing in unit trusts' (see below). Such staff must not offer, sell, market and
distribute unit trusts. Neither are they allowed to prepare and complete an order form for a transaction in
UTS nor sign as a UTC.
2.5.2 DEALING IN UTS
All persons involved in the marketing and distribution of units are 'dealing in unit trusts'and must therefore
be registered UTC. They must comply with allthe requirements and obligations of UTC.
"'Dealing in unit trusts' means, whether as principal or agent, making or offering to make with any person,
or inducing or attempting to induce any person to enter into or to offer to enter into
(a) any agreement for or with a view to acquiring, disposing of, subscribing for, or underwriting any interest
in unit trust funds; or (b) any agreement the purpose or avowed purpose of which is to secure a profit to any of the parties from
the yield of any interest in unit trust funds or by reference to fluctuations in the value of any interest
in unit trust funds."
UTMC, IUTA and CUTA are responsible for ensuring that all persons involved in the marketing and distribution
of units (i.e. persons who 'deal in unit trusts') are registered with and authorised by the FIMM to market
and/or distribute units.
FITIM
2.5.3 ELIGIBILITY REQUIREMENTS FOR AN AUTHORIZED PERSON WHO IS AN INDIVIDUAL
Persons who wish to market and/or distribute units must comply with the relevant requirements of the
Eligibility Requirements for an Authorized Person Who is an lndividual ( see Appendix 1 ) before being
registered with the FIMM.
Such persons must: . be at least 21 years of age . have attained at least Grade 3 SPM (or its equivalent as determined by the FIMM) . obtain a pass result in the Unit Trust Examination for Unit Trust Consultants conducted by the
FIMM . 'be honest, of good character and good repute' and 'display efficiency, reliability and a high level of
integrity'. ln this respect, a person must sign a statutory declaration to the effect that he or she: . has not been found by a court to have acted fraudulently or dishonestly . has not been convicted of a criminal offence . has not been censured or reprimanded by, or denied or become disqualified from membership of
a professional or trade body . has not had a regulatory licence, registration or similar approval refused or revoked . is not an undischarged bankrupt or subject to bankruptcy proceedings or has failed to meet any
judgement debt.
The statutory declaration must be attached by the person to include the person's undertaking to comply
with all the provisions of the Code of Ethics and Standards of Professional Conduct (see Chapter 4). Before
swearing the statutory declaration, those'applying for registration should be aware that any non-disclosure
or inaccurate disclosure in the statutory declaration is an offence under Malaysian law and will also result
in de-registration as UTC.
Full registration requires compliance with all the requirements of the Eligibility Requirernents for an Authorized
Person Who is an lndividual, including passing the Unit Trust Examination for Unit Trust Consultants prior
to registration.
2.5.4 AUTHORISATION CARD
Persons registered with and authorised by the FIMM to market and distribute units are issued with an
Authorisation Card. Only a card issued by the FIMM is recognised for the purposes of marketing and
distributing units. (Chapter 4 covers obligations of UTC relating to the use of the Authorisation Card.)
2.5.5 AGENCY STRUCTURE
Only UTMC, their authorised institutional advisers, corporate advisers and the registered UTC of each of
them are allowed to market and/or distribute UTS. A person who 'issues or invites any person to subscribe
or purchase units in a UTS', which basically means sell or offer to sell units in a UTS, must be a registered
UTC.
The SC aims to protect investors by imposing limits on the size and structure of agencies organised by UTMC.
These limits are described in the Guidelines on Marketing and Distribution of Unit Trusts (see Appendix 2)
and are designed to ensure that proper supervision is applied to the activities of each agent. The standard
agency structure (referred to in the Guidelines as a 'Unit') required by the SC comprises a Group Agency
Manager, an Agency Manager, an Agency Supervisor and an Agent, and that there must be no more than
four tiers. However, the SC strongly encourages UTMC to have agencies with fewer tiers. A Unit must not
exceed 50 persons in total at alltimes.
An Agent is not allowed to recruit other agents.
FIMTUI
I sECTroN 2.6 sulnneny
A number of different parties, principally the SC, FIMM and trustee of a UTS, play a part in the regulation of
the unit trust industry in Malaysia. The SC enforces the law and further protects investors through issuing
various Guidelines that regulate the manner in which UTMC, the trustee and UTC operate in carrying out
their roles. ln the distribution process, we have noted the co-regulatory role played by the FIMM in regulating
the activities of UTC through registration and examination.
This also includes the guidelines issued that aim to provide guidance to the IUTA and CUTA in carrying out
their roles and responsibilities as unit trust distributors.
We have also examined the r:ole played by other government regulators, the investment committee, the
Syariah committee/adviser/panel of advisers of UTMC, and auditors of UTS in safeguarding investors in
unit trusts.
From a practical perspective, we have reviewed some of the major requirements of UTMC, the trustee and
UTC including:
' disclosure to investors through regulation of prospectus contents, advertising and promotion, and the
requirement for regular reporting . investment safeguards through the trustee, the appointment of an investment committee, Syariah
committee/adviser/panel of advisers, and several portfolio constraints covering liquidity, borrowings
and investments
' a requirement to have a trustee (and therefore a custodian of UTS assets) to oversee the activities
of a UTMC in relation to a UTS and to monitor conflicts of interest
' the appointment of an auditor by the trustee to report to unitholders of a UTS
' a requirement for the UTMC, trustee and UTS to be approved by the SC following a vetting process
involving capital adequacy, integrity checking of directors and senior personnel
' a strict process of registration and examination for those involved in the distribution of UTS
' a requirement for auditors and trustees to advise the SC of any issues that come to their attention.
The regulation of all participants in the unit trust industry is an important safeguard for investors. Those
given the responsibility for regulation have an obligation to protect both existing unitholders and prospective
investors, By successfully protecting investors, the future of the unit trust industry will be properly enhanced
and promoted.
FIMM
SELr-TBsr QussrroNs ON CHeprnn 2
1.
2.
Why is it important that the unit trust industry be properly regulated?
Who is the major regulator responsible for the unit trust industry? What other functions does it
have?
List the other parties responsible for the regulation of the unit trust industry in Malaysia.
List the major responsibilities of UTMC.
'Any corporation can form a UTS.'Discuss critically.
What is required to be included in a prospectus for the issue of units in a UTS?
Describe the role of the investment committee of a UTS.
List the major responsibilities of the trustee of a UTS.
Why is it necessary to restrict the investment portfolio of a UTS? List the major portfolio restrictions
in an equi$ trust.
What safeguards exist to protect investors from false claims of future returns from investing in a
UTS?
3.
4.
5.
6.
7.
8.
9.
10.
FI]UIM
APPENDIX 1:
ELIGIBILITY REQUIREMENTS FOR AN
AUTHORIZED PERSON WHO IS AN INDIVIDUAL
An individualmust-
(a) not be below 21 years of age; and (b) possess at least Grade 3 Sijil Pelajaran Malaysia (SPM), or its equivalent as determined by a
body approved by the SC or a recognized self-regulatory organization.
The individual should be honest, of good character, and good repute. Further, he must also be efficient,
reliable, and possess a high level of integrity. He must not have been- (a) found by a court or other competent authority to have acted fraudulently or dishonestly; (b) convicted of a criminal offence; or (c) censured or reprimanded by, or denied/disqualified from membership of, a professional or trade
body; or a regulatory license, registration or similar approval has been refused or revoked.
The individual should not be an undischarged bankrupt, neither should he be subjected to any
bankruptcy proceeding. Similarly, he will not qualify if he has failed to meet any judgment debt.
The individual must sign a statutory declaration attesting to the requirements set out in (2) and (3)
above (the statutory declaration should be filed with the management company concerned). Any nondisclosure
or inaccurate disclosure in the statutory declaration is an offence under Malaysian law and,
among other consequences, will result in the deregistration of the individual concerned.
The individual must first pass a qualifoing examination conducted by a body approved by the SC or
a recognized self-regulatory organization.
1.
2.
4.
5.
Sntr-tnst oNS ON CHeprEn 2
3.
4.
5.
6.
7.
8.
9.
10.
FIMM
Why is it important that the unit trust industry be properly regulated?
Who is the major regulator responsible for the unit trust industry? What other functions does it
have?
List the other parties responsible for the regulation of the unit trust industry in Malaysia.
List the major responsibilities of UTMC.
'Any corporation can form a UTS.'Discuss critically.
what is required to be included in a prospectus for the issue of units in a urs?
Describe the role of the investment committee of a UTS.
List the major responsibilities of the trustee of a UTS.
Why is it necessary to restrict the investment portfolio of a UTS? List the major portfolio restrictions
in an equity trust.
What safeguards exist to protect investors from false claims of future returns from investing in a
UTS?
L:
ELIGIBILITY REQUIREMENTS FOR AN
AUTHORIZED PERSON WHO IS AN INDIVIDUAL
1.
2.
3.
4,
5.
FTIUIIUI
APPENDIX
An individualmust-
(a) not be below 21 years of age; and (b) possess at least Grade 3 Sijil Pelajaran Malaysia (SPM), or its equivalent as determined by a
body approved by the SC or a recognized self-regulatory organization.
The individual should be honest, of good character, and good repute. Further, he must also be efficient,
reliable, and possess a high level of integrity. He must not have been-
(a) found by a court or other competent authority to have acted fraudulently or dishonestly; (b) convicted of a criminal offence; or
(c) censured or reprimanded by, or denied/disqualified from membership of, a professional or trade
body; or a regulatory license, registration or similar approval has been refused or revoked.
The individual should not be an undischarged bankrupt, neither should he be subjected to any
bankruptcy proceeding. Similarly, he will not qualify if he has failed to meet any judgment debt.
The individual must sign a statutory declaration attesting to the requirements set out in (2) and (3)
above (the statutory declaration should be filed with the management company concerned). Any nondisclosure
or inaccurate disclosure in the statutory declaration is an offence under Malaysian law and,
among other consequences, will result in the deregistration of the individual concerned.
The individual must first pass a qualifying examination conducted by a body approved by the SC or
a recognized self-regulatory organization.
FIMM
APPENDTX2z
AGENCY STRUCTURE AND SIZE
Tiers in Agency Structure
1. Where independent individuals (i.e. non-salaried employees of the management company) are
appointed to deal in units of unit trust schemes and agency units are formed, the number of tiers in
an agency unit must be standardised and not exceed four tiers, comprising-
(a) group agency manager;
(b) agency manager;
(c) agency supervisor; and
(d) agent.
2. The management company, however, is strongly encouraged to reduce the number of tiers in an
agency structure to a minimum in the interest of investors.
Size of Agency Unit
3. An agency unit should not exceed 50 persons at all times.
4. A unit comprises a "supervisor'' (defined as the upper three tiers only, i.e. either group agency manager
or agency manager or agency supervisor) and his direct downlines.
5. An agent is not allowed to conduct recruitment.