General Overview of Unit Trust in Malaysia

  1. INTRODUCTION

    1.1 The unit trust industry in Malaysia is governed under the Securities Commission ("the SC ") and regulated by the Capital Markets and Services Act 2007 ("the CMSA ").

    1.2 As at 31 December 2011, there are approximately 40 approved unit trust management companies in Malaysia.

    1.3 Unit trust can be defined as a collective investment scheme that pools monies from investors in a unit trust fund managed by professional fund managers.

    1.4 The pooled monies from the unit trust fund will then be invested in a diversified portfolio of securities and other assets in accordance with the unit trust fund's investment objectives.

    1.5 The investment scheme in a unit trust involves the relationships between three parties, namely:-

      (a) fund management company ("Management Company "), which is a company that establishes a unit trust fund; issues and offers for sale of units of the unit trust fund; and operates and administers the unit trust fund[1] ;

      (b) the trustee, who holds all the asset of the unit trust fund ("Trustee "); and

      (c) the unit holder, the investor who purchases units in the unit trust fund.

    1.6 Any Management Company must be approved by the SC before it can act as a management company to a unit trust fund.[2]

    1.7 The obligations and rights of the Management Company, the trustee and the unit holder are specified in a trust deed.

  2. DIFFERENCE BETWEEN UNIT TRUST FUND AND MUTUAL FUND

    2.1 The terms of unit trust fund and mutual funds are normally used interchangeably.

    2.2 However, it should be noted that there are slight differences between the two.

    2.3 A unit trust fund is generally considered as a low-risk, low-return investment as compared to mutual funds. Unit trust fund typically incurs lower annual operating expenses because they are not buying and selling shares.

    2.4 A mutual fund is normally established as a limited liability company, where investors are like shareholders in a company, while a unit trust fund operates under a trust system where investors' assets are entrusted to trustees.

  3. LAWS GOVERNING UNIT TRUST FUNDS IN MALAYSIA

    3.1 The Guidelines On Unit Trust Funds issued by the SC pursuant to Section 377 of the CMSA set out the requirements to be complied with by any person intending to establish a unit trust fund in Malaysia and issue, offer or invite any person to subscribe or purchase units of the unit trust fund ("the SC Unit Trust Guidelines ").

    3.2 Section 232(1) of the CMSA requires a person to register a prospectus whenever it wants to issue, offer for subscription or purchase of any securities (including unit trust).

    3.3 Under the Prospectus Guidelines for Collective Investment Schemes issued by the SC, any fund's prospectus has to meet the minimum requirements provided therein.

    3.4 Any person engaged in dealing, marketing and distribution activities for unit trust funds or online transaction/activities for unit trust funds should adhere to the following guidelines:-

      (i) Guidelines on Marketing and Distribution of Unit Trust Funds;

      (ii) Guidelines on Unit Trust Advertisements and Promotional Materials; and

      (iii) Guidelines on Online Transactions of, and Online Activities in Relation to, Unit Trusts.

  4. Eligibility of Management Company[3] and Trustee[4] :

    4.1 Management Company:

      (a) Incorporated in Malaysia:

        (i) Must be an entity incorporated in Malaysia.

        (ii) Must have a minimum of 30% Bumiputera equity.

        (iii) Must not have more than 49% foreign equity.

        (iv) Must have a minimum shareholders' fund of RM10 million at all times.

        (v) Must have at least 2 independent directors[5] and to maintain a minimum ratio of at least 1/3 independent directors at all times.

        (vi) Must appoint a chief executive officer (CEO) who is a full-time officer.

        (vii) Must appoint an individual as a designated person[6] responsible for the fund management function of the unit trust fund.[7]

        (viii) Must appoint a compliance officer who should report to the board of directors to ensure compliance with the trust deed, prospectus disclosures, the SC Unit Trust Guidelines and securities laws.

        (ix) Must appoint an investment committee[8] for a fund and where applicable Shariah adviser for a Shariah compliant fund or a panel of advisers to be managed by a set of specific principles[9] .

        (x) Must maintain an internal audit function.

        (xi) Must only hold up to a maximum of 3 million units or 10% of the units in circulation, whichever is the lower.

        (xii) Must obtain the SC's approval for any delegation of its function as a management company, except for the function to the delegated person in (vii) above.

        (xiii) May outsource its back office function to external parties by complying with the guidelines issued by the SC.

      (b) Foreign Management Company:

        (i) Must have more than 50% foreign equity and incorporated in Malaysia.

        (ii) Must obtain a licence from the SC to carry out fund management activities.

        (iii) Must have a paid-up capital of at least RM2 million.

        (iv) Must carry out its activities from an office in Malaysia.

        (v) Must have a parent company or holding or related company which has a sound track record in the international fund management industry.

        (vi) Must have at least 30% shareholding held by local interest if the Foreign Management Company intends to manage funds sourced from within Malaysia.

        (vii) Must be 100% owned by foreign interest if the Foreign Management Company intends to manage funds sourced from and on behalf of clients outside of Malaysia.

        (viii) Must pay tax as follows:-

          - If the Foreign Management Company is 100% owned by foreign interest, 10% tax on income arising from services provided to clients outside Malaysia;

          - If the Foreign Management Company is owned at least 30% by local interest, 10% tax on income arising from services provided to clients outside Malaysia and subject to prevailing corporate tax for services rendered to local Malaysian clients.

    4.2 Trustee:

      (i) Must be approved by and registered with the SC.

      (ii) Must be a trust company registered under the Trust Companies Act 1949 or incorporated pursuant to the Public Trust Corporation Act 1995.

      (iii) Must have a minimum issued and paid-up share capital of at least RM500,000.

      (iv) Must take custody and control of the fund's property and hold in trust for the unit holders in accordance with the trust deed, the SC Unit Trust Guidelines and securities law[10] .

      (v) Must not hold units or other interest in the fund.

      (vi) May delegate the custodial function for the fund's property.

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[1] Guideline 3.02 of the SC Unit Trust Guidelines.
[2] Guideline 3.01 of the SC Unit Trust Guidelines and Sections 288(2) and 289(1) of the CMSA.
[3] Chapter 3 of the SC Unit Trust Guidelines and the Guidelines for the Establishment of Foreign Fund Management Companies.
[4] Chapter 4 of the SC Unit Trust Guidelines.
[5] Its definition is provided in Guideline 2.01 of the SC Unit Trust Guidelines.
[6] The designated person must be a holder of a Capital Markets Services Representative's Licence to carry on the regulated activity of fund management. If the designated person is in a foreign fund management company, the designated person must be licensed/registered/approved/authorized to carry on the activity of fund management by the relevant regulator in his home jurisdiction.
[7] This function can be undertaken internally by the Management Company or delegated to an external party. If the function is delegated to an external party, the Management Company must ensure that the delegated party appoints a designated person for the fund.
[8] For Shariah compliant fund, the Investment Committee must comprise of at least 2 Muslim members [Guideline 6.06 of the SC Unit Trust Guidelines].
[9] Guideline 6.02 of the SC Unit Trust Guidelines.
[10] Section 300(1) of the CMSA.

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