Dealing in

UNIT TRUSTS

Federation of Investment Managers Malaysia (Company No. 272577-P)

19-07-3, 7th Floor, PNB Damansara, 19, Lorong Dungun, Damansara Heights, 50490 Kuala Lumpur, Malaysia.
Tel: 603-20932600 Fax: 603-20932700 Email: info@fimm.com.my
Copyright © 2005 by Federation of Investment Managers Malaysia (FIMM).
All rights reserved. No part of this publication may be transmitted in any form or by means of electronic, mechanical, photocopying,
recording, or otherwise without the prior written permission of the FIMM.

This book Dealing in Unit Trusts has been produced by the Federation of Investment Managers Malaysia
(FIMM), an association formed to enhance the professional standards and image of the unit trust industry.
The views expressed are not the official opinions of the Federation, its Council or any of its Committees. The
FIMM shall not be responsible or liable for any claims, loss, damages, cost or expenses arising in any way
out of or in connection with any person relying upon such views. Neither the FIMM nor any person involved
in the preparation of this book accepts any contractual, tortious or other form of liability for its contents or
any consequences arising from its use.

For significant recommendations concerning unit trust investments, reference should also be made to relevant
legislation, guidelines and circulars.

No part of this book may be used or reproduced in any manner whatsoever without written permission except
in the case of brief quotations embodied in critical articles and reviews. In the latter, reference to same will
be appreciated.

This book Dealing in Unit Trusts may be purchased for educational, business, or unit trust industry promotional
use. For further information, please write to:

Executive Director
Federation of Investment Managers Malaysia
19-07-3, 7th Floor, PNB Damansara
19, Lorong Dungun, Damansara Heights
50490 Kuala Lumpur

Tel: 603-2093 2600 Fax: 603-2093 2700

E-mail: info@fimm.com.my Website: www.fimm.com.my

Dealing in Unit Trusts

Second Edition published in December 2005
(previously published by the FIMM in 1998 as Understanding Malaysian Unit Trusts)
Designed by LASERCOMdotcom Sdn Bhd

The National Library of Malaysia has catalogued the editions as follows:

First Edition: Understanding Malaysian Unit Trusts

Includes glossary
ISBN: 983-99350-0-03

Second Edition: Dealing in Unit Trusts

Includes glossary
ISBN: 983-99350-1-1

i
CONTENTS
Abbreviations vi
Foreword vii
Federation of Investment Managers Malaysia viii
Dealing in Unit Trusts x
Additional Reading xi

CHAPTER 1 - UNDERSTANDING UNIT TRUSTS

Learning Objectives 1-1

1.1 Overview 1-2

PART A
1.2 Basic Features of UTS 1-2
1.3 The Structure of UTS 1-9
1.4 Types of UTS 1-11
1.5 Size of the Malaysian Unit Trust Industry 1-16
1.6 Collective Investments in Malaysia 1-17
1.7 History of UTS in Malaysia 1-18

PART B
1.8 UTS Prospectus 1-24
1.9 Fees and Charges 1-29
1.10 Measuring Performance 1-33
1.11 Unit Pricing 1-39
1.12 Unit Splits and NAV 1-43
1.13 Distributions and NAV 1-45
1.14 Summary 1-46

Self-Test Questions on Chapter 1 1-47

Appendix 1: UTS in Malaysia 1-48

Appendix 2: Extract from the State of Play of the Capital Market Masterplan: 1-49
Investment Management

ii
CHAPTER 2 - REGULATION OF THE UNIT TRUST INDUSTRY
Learning Objectives 2-1

2.1 Overview of the Regulatory Framework 2-1

2.2 Regulatory Structure 2-2
2.3 Regulation of the UTMC 2-5
2.4 Regulation of the Trustee 2-16
2.5 Regulation of Marketing and Distribution of Unit Trusts 2-19
2.6 Summary 2-22

Self-Test Questions on Chapter 2 2-23

Appendix 1: Eligibility Requirements for an Authorized Person Who is an Individual 2-24

Appendix 2: Agency Structure and Size 2-25

CHAPTER 3 - SERVICING CLIENTS AND MARKETING UNIT TRUSTS

Learning Objectives 3-1

3.1 Overview 3-1

PART A
3.2 Purchase of Units in UTS 3-3
3.3 Repurchase of Units in UTS 3-6
3.4 Reporting to Unitholders 3-9
3.5 Income Distributions 3-11
3.6 Account Maintenance 3-15
3.7 Client Queries and Complaints 3-16
3.8 EPF Transfers 3-17
3.9 Financing the Purchase of Units 3-21

PART B
3.10 Basic Principles of Marketing UTS 3-25
3.11 Investment Alternatives to UTS 3-26
3.12 Unit Trusts as an Investment 3-29
3.13 Summary 3-36

Self-Test Questions on Chapter 3 3-37

Appendix 1: SC’s Unit Trust Loan Financing Risk Disclosure Statement 3-38
Appendix 2: Six Ways to Turn Savings into Investments 3-39

iii
CHAPTER 4 - INDUSTRY CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT
Learning Objectives 4-1

4.1 Overview 4-1

4.2 Basic Principles 4-2
4.3 What is ‘Compliance’? 4-2
4.4 What do we mean by ‘Ethics’? 4-4
4.5 FIMM Code of Ethics and Standards of Professional Conduct for the Unit Trust Industry 4-4
4.6 FIMM Disciplinary Proceedings 4-10
4.7 Summary 4-12

Self-Test Questions on Chapter 4 4-13

Appendix 1: FIMM Code of Ethics and Standards of Professional Conduct for the Unit Trust 4-14
Industry
Appendix 2: SC’s Guidelines on Marketing and Distribution of Unit Trusts : Code of Ethics and 4-31
Standards of Professional Conduct
Appendix 3: FIMM Flowchart Showing Structure for Disciplinary Proceedings 4-35

CHAPTER 5 – PERSONAL FINANCIAL PLANNING

Learning Objectives 5-1

5.1 Overview 5-1

5.2 What is ‘Personal Financial Planning’? 5-2
5.3 Areas in Financial Planning 5-3
5.4 Steps in Financial Planning 5-4
5.5 Skills Required of a Financial Planner 5-4
5.6 Personal Financial Planning and the UTC 5-5
5.7 Client Types 5-6
5.8 Difference Between a Financial Planner and UTC 5-8
5.9 Remuneration of a Financial Planner 5-8
5.10 Summary 5-9

Self-Test Questions on Chapter 5 5-10

Appendix 1: Effect of Inflation, Taxation and Costs on Investment Returns 5-11

iv
CHAPTER 6 - OPERATIONS OF SYARIAH-BASED UTS
Learning Objectives 6-1

6.1 Overview 6-1

6.2 Capital Market Masterplan 6-1
6.3 Development and Key Milestones of the Islamic Capital Market in Malaysia 6-3
6.4 What is a Syariah-based UTS? 6-4
6.5 The Regulatory Framework 6-6
6.6 Relationship Between Parties in a Syariah-based UTS 6-7
6.7 Investment Portfolio 6-8
6.8 Potential Risks 6-10
6.9 Appointment of the Syariah Committee/Syariah Adviser 6-11
6.10 Syariah Compliance Review 6-13
6.11 Procedures for Disposal of Syariah Non-compliant Securities 6-14
6.12 Summary 6-15

Self-Test Questions on Chapter 6 6-16

Appendix 1: Syariah Adviser’s Report 6-17

CHAPTER 7 – GLOSSARY 7-1

v
ABBREVIATIONS
ASB - Amanah Saham Bumiputra
ASN - Amanah Saham Nasional
BNM - Bank Negara Malaysia
Bursa Malaysia - Bursa Malaysia Securities Berhad
CIC - Capital Issues Committee
CMSA - Capital Markets and Services Act, 2007
CUTA - Corporate Unit Trust Adviser(s)
EPF - Employees Provident Fund
ETF - Exchange Traded Fund(s)
FIMM - Federation of Investment Managers Malaysia
IUTA - Institutional Unit Trust Adviser(s)
KLCI - Kuala Lumpur Composite Index
NAV - Net Asset Value
PNB - Permodalan Nasional Berhad
PTR - Portfolio Turnover Ratio
REIT - Real Estate Investment Trust(s)
SC - Securities Commission
SRO - Self-Regulatory Organisation
UTC - Unit Trust Consultant(s)
UTE - Unit Trust Examination for Persons Unit Trust Consultants
UTMC - Unit Trust Management Company (Companies)
UTS - Unit Trust Scheme(s)

vi
FOREWORD
With investors becoming better educated and increasingly sophisticated, the demands on Unit Trust
Consultants (UTC) to provide professional and quality service are greater. Thus, the need for UTC to be
examined on their knowledge and understanding of unit trusts and the requirement that they be registered
with the Federation of Investment Managers Malaysia (FIMM).

The FIMM has published this second edition of Dealing in Unit Trusts to help UTC in fulfilling the requirements
of the Unit Trust Examination for Unit Trust Consultants (UTE). The first edition was published in June 1998.
The publication of both editions of this book has been possible due to the collaborative effort of many, and
in this regard, I wish to acknowledge and thank the following:

• Council Members
• Chairman of the Distribution Standards Committee
• Kathy Tan, the previous Executive Director of FIMM
• Lee Siew Hoong, the current Executive Director of FIMM
• Richard Stokes, Stokes Partners International, Sydney, Australia
• Islamic Banking and Finance Institute Malaysia
• Volunteers from the various member companies in the working committee:
- Amanah Saham Kedah Bhd
- AmInvestment Services Bhd
- Apex Investment Services Bhd
- ASM Mara Unit Trust Management Bhd
- BIMB Unit Trust Management Bhd
- HLG Unit Trust Management Bhd
- MAAKL Mutual Bhd
- OSK-UOB Unit Trust Management Bhd
- Prudential Unit Trusts Bhd
- Public Mutual Bhd
- SBB Mutual Bhd
• FIMM Secretariat, in particular Research & Development Department

The Council and I wish each of you success in the UTE. We look forward to working with you to make unit
trusts the preferred choice for savings and retirement planning.

TUNKU DATO’ YA’ACOB TUNKU ABDULLAH

PRESIDENT, FIMM
Kuala Lumpur
December 2005

vii
FEDERATION OF INVESTMENT MANAGERS
MALAYSIA
The Federation of Investment Managers Malaysia (FIMM) was formed on 7 August l993 as a company limited
by guarantee and not having a share capital.

As at 31 December 2005, the FIMM had 37 Ordinary Members (all UTMC are Ordinary Members of the
FIMM) and 23 Associate Members.

The FIMM provides a common platform for UTMC to discuss issues relating to the unit trust industry. It
works closely with the Securities Commission (SC) and other regulators in the development and growth of
the unit trust industry.

The FIMM’s principal functions are to conduct its affairs in the best interests of unitholders and the unit trust
industry, to encourage and foster amongst its members conduct, ethics and standards of practice that will
best serve, maintain further and protect the interests of unitholders and the unit trust industry.

(A) FIMM’S VISION, MISSION AND OBJECTIVES

VISION

To develop the unit trust industry so that unit trusts become the preferred vehicle for savings and
retirement.

MISSION

To educate and develop awareness of the investing public on unit trusts and to further enhance the prestige
and reputation of member companies, both locally and internationally.

OBJECTIVES

• To improve the regulatory, fiscal and legal environment for unit trusts

• To formulate sound and ethical business practices towards promoting the interests of the unit trust
industry and providing investor protection

• To provide information, assistance and other services to its members

• To promote public awareness of the benefits and risks of investing in unit trusts.

(B) FIMM’S VALUES

• Professionalism

• Integrity

• Consistency

viii
These values are important to the growth and image of the unit trust industry. It is critical for UTC to uphold
these values in their relationships with their clients and others within and outside the industry.

(C) STRUCTURE OF THE FIMM COUNCIL

The members of the FIMM Council consist of a President, a Vice-President, eight elected Councillors and a
maximum of three other Councillors appointed by the President in accordance with Article 56A of the Articles
of Association of the FIMM and approved by the SC.

(i) Council Presidents

1993 – 1994: Steven Soh Teck Toh (Pro-tem Council)

1994 – 1995: Dato’ Malek Merican
1996 – 1997: Dato’ Kamaruddin Mohamed
1998 – 2003: Dato’ Abdul Azim Mohd Zabidi
2004 – Present: Tunku Dato’ Ya’acob Tunku Abdullah

(ii) Executive Directors

1995 – 1998: Jacob Thomas

1998 – 2004: Kathy Tan Chai Fong
2004 – Present: Lee Siew Hoong

ix
DEALING IN UNIT TRUSTS
OBJECTIVES

The FIMM has developed Dealing in Unit Trusts primarily to enable prospective UTC to acquire a basic
knowledge and understanding of unit trusts in preparation for the UTE.

All persons involved in the marketing and distribution of UTS are required to sit for and pass the UTE before
obtaining authorisation from the FIMM to market and distribute units in UTS. As at 31 December 2005, the
total number of registered UTC was 34,439.

This book deals with the fundamental skills required of those intending to pursue a career in unit trust
marketing and selling. The unit trust industry is a rapidly growing industry and it is crucial that those responsible
for marketing and distributing UTS have a high level of knowledge and skill so as to provide their clients
with professional service.

Dealing in Unit Trusts, covers the syllabus developed by the SC for the UTE. The examination is conducted
in three languages: English, Bahasa Melayu and Chinese at UTE centres that are set up throughout
Malaysia.

This book will also be useful to others with an interest in the unit trust industry in Malaysia as it:

• provides an overall understanding of the unit trust industry, including the regulatory environment within
which it operates
• explains the principles and mechanics of UTS, together with the benefits and risks of investing in
UTS
• describes the operations, management and administration of UTS
• emphasises the need for prospective UTC to be professional by practising ethical practices in order
to build long-term relationships between UTMC, IUTA, CUTA, UTC and clients.

STRUCTURE

Dealing in Unit Trusts, which was previously published as Understanding Malaysian Unit Trusts, has been
extensively updated, revised and restructured. Each Chapter begins with objectives and ends with self-test
questions to assist prospective UTC in assessing understanding of the key points covered.

The FIMM may issue Addenda to Dealing in Unit Trusts to reflect significant changes since the book
went to print. Prospective UTC should ensure, prior to attending the UTE, that they have the most recent
Addendum.

EXAMINABLE AND NON-EXAMINABLE MATERIAL

The UTE syllabus will cover Chapters 1 to 7. Materials that are covered before Chapter 1 and under Additional
Reading on Legislation, Guidelines & Regulations as well as industry overview and development are non-
examinable. However, candidates are encouraged to read these materials to get a better understanding of
the unit trust industry.

OTHER RESOURCES

Prospective UTC should ensure that:

• they possess a calculator
• they read the financial press on a regular basis each day
• they access relevant websites, including those of the FIMM and the SC.

x
ADDITIONAL READING
(A) LEGISLATION

• Companies Act, 1965

• Securities Commission Act, 1993
• Securities Industry Act, 1983
• Trust Companies Act, 1949

(B) GUIDELINES & REGULATIONS

(i) Issued by the SC:

The most relevant Guidelines are:

• Guidelines on Unit Trust Funds
• Guidelines on Marketing and Distribution of Unit Trusts
• Guidelines on Loan Financing in the Sale of Unit Trust Funds
• Guidelines on Unit Trust Advertisements and Promotional Materials
• Guidelines on Real Estate Investment Trust
• Prospectus Guidelines for Unit Trust Funds
• Guidelines on Exchange Traded Funds

Practice Notes to the Guidelines on Unit Trust Funds, Real Estate Investment Trusts and Exchange Traded
Funds.

(ii) Issued by the FIMM:

• Guidelines for Registration of Institutional Advisers for the Marketing and Distribution of Unit Trusts
• Code of Ethics and Standards of Professional Conduct for the Unit Trust Industry
• By-Laws Relating to the Procedure for Disciplinary Proceedings

(C) INDUSTRY OVERVIEW AND DEVELOPMENT

• Capital Market Masterplan (SC, 2001)

Note: Additional Reading is non-examinable but UTC should be familiar with the contents. A non-examinable extract from the Capital
Market Masterplan is included in this book (Chapter 1).

xi
CHAPTER 1

❙ UNDERSTANDING UNIT TRUSTS

LEARNING OBJECTIVES

This Chapter focuses on providing UTC with a basic knowledge of UTS, which will be developed in subsequent
Chapters.

At the end of this Chapter, you should:

• appreciate the structure of UTS, and be able to explain their basic features

• be able to describe the benefits of investing in UTS, and some of the disadvantages

• be familiar with the different types of UTS available to Malaysian investors, and how they may be used
to meet the needs of investors with different investment objectives

• be aware of the history, current state of development and future of the Malaysian unit trust industry

• appreciate the importance of the unit trust industry within the investment management industry in
Malaysia

• be familiar with the contents of a prospectus of UTS, and be able to explain each section to prospective
investors in UTS

• understand the fees and charges of UTS and their impact on investors in UTS

• be able to measure UTS investment performance and to understand the FIMM-endorsed UTS
performance tables

• be able to explain how UTS selling and repurchase unit prices are determined, and the impact of unit
splits and distributions.

1-1
❙ SECTION 1.1 OVERVIEW
This Chapter provides, in Part A, an explanation of UTS, how they work, their structure and the reasons
why investors use them.

We examine the various types of UTS - open-end and closed-end, listed and unlisted - and the differences
between them. We look at one method of classification of UTS, and see how UTS can be used to meet the
basic investment objectives of different investors.

We review the history of the unit trust industry in Malaysia and measure its significance within the investment
management industry. The future of the unit trust industry, and therefore of the role played by UTC, is
promising and is reflected in the Malaysian Capital Market Masterplan.

Part B of this Chapter looks at some areas particularly relevant to UTC, including the contents of UTS
prospectuses. The various fees and charges payable by investors are explained, and the impact on the
investment performance of UTS is described. Several measures to assess the performance of UTS are
introduced. The calculation of unit prices is key to the measurement of UTS performance, so UTC need to
know and understand how UTMC determine the selling and repurchase price of a unit in UTS. The impact
on unit prices of unit splits and distributions must also be understood by UTC so that investors can make
informed investment decisions.

PART A

❙ SECTION 1.2 BASIC FEATURES OF UTS

1.2.1 WHAT ARE UTS?

A UTS is a form of collective investment that allows investors with similar investment objectives to pool
their savings, which are then invested in a portfolio of securities or other assets managed by investment
professionals.

Investors in UTS do not purchase the securities in the portfolio directly. Ownership of the portfolio is divided
into units of entitlement and each investor is known as a ‘unitholder’. A unit in a UTS represents a proportionate
‘share’ of the pool of investments. As the investments within the UTS portfolio increase or decrease in value,
the value or ‘unit price’ of each unit increases or decreases accordingly. Where the portfolio is not subject to
changes in value, as in some Government-sponsored funds, the unit price is fixed at RM1.00.

Unitholders in UTS are not shareholders in a company but are rather beneficiaries under a trust set up by
the promoter of UTS (the UTMC). Under the UTS constitution or ‘ deed’ , there must be a trustee who looks
after the interests of the investors. The trustee is the legal owner of all the assets of UTS on behalf of the
unitholders, and must act for the benefit of the unitholders towards whom it has a fiduciary relationship, i.e.
the trustee must put his or her own interests behind those of the unitholders. Unitholders in UTS have a
beneficial interest in each and every asset of that UTS, but are not entitled to direct UTMC on how to invest
the portfolio of investments.

As evidence of their interest in UTS, each investor receives a confirmation of entitlement, either in the form of
a statement or unit certificate. The number of units in UTS held by each investor depends on the unit selling
price at the time the investment was made and the amount of application money contributed by the investor.
Investors in UTS apply for units after reading and understanding a prospectus, which explains everything
an investor needs to know before investing in that UTS, and by completing an application form.

1-2
The return on investment for unitholders in UTS is usually a combination of a regular income payment (a
‘distribution’) and capital appreciation, derived from the pool of investments held within that UTS. Each unit
represents an entitlement to an equal amount of income (determined by the level of distribution declared by
UTMC) and capital appreciation or depreciation that is normally reflected in the unit price of that UTS.

In some countries, the number and types of investment options available through UTS are almost endless.
An investor may find it difficult to choose the type of UTS he or she would like to invest in. In Malaysia,
the number and variety of UTS are growing quickly. Examples include income and capital growth funds;
equity (share), real estate and fixed income (bond) funds; and funds managed in accordance with Syariah
principles.

Investors in UTS are typically those with relatively small amounts to invest, who neither have the time nor the
inclination to hold portfolios of direct investments in shares or other assets. Rather, they prefer to invest in a
regulated investment vehicle. UTS allow small investors to have easy access to a wide range of investments
to which they would not normally have ready access.

In Malaysia and throughout the world, collective investments (such as UTS, mutual funds, and open-end
investment companies) have experienced phenomenal growth in the past few years. This growth reflects the
suitability of collective investments - in Malaysia, the UTS - as a means for the smaller investor to accumulate
capital over the longer term.

As investors want good returns on their savings, UTS provide an ideal way for them to gain exposure to
investments that, in the long run, can produce returns superior to those from traditional savings accounts
and fixed deposits.

The ‘cost’ of these potentially higher returns is, of course, the risk that accompanies the investment. In the
short run, the certainty of investment returns of most UTS is far less than those offered by fixed deposits.
However, in the medium to long term (i.e. over five years), investment in many UTS can provide far better
returns at an acceptable level of risk.

1.2.2 BENEFITS OF UTS

For investor who is unable or unwilling to research and analyse investment markets on his or her own, UTS
are an ideal way of investing.

To maintain a portfolio of directly held investments, an individual needs to keep up-to-date with market
information and sentiment. In today’s fast-moving and increasingly sophisticated financial markets, this
means keeping track of a wide range of information from many sources. For many individual investors, this
is difficult, time-consuming and expensive.

Investing in UTS transfers most of the stress of investing to those best equipped to handle it - professional
fund managers.

There are a number of other significant benefits of investing in UTS that should be noted:

DIVERSIFICATION

A larger pool of funds allows the fund managers managing UTS to purchase a wide range of investments.
Rather than limiting an investment portfolio to one or two investments, a portfolio comprising many investments
can be held. UTS investors therefore may benefit from the ‘portfolio effect’, i.e. generally, the greater the
number of investments, the less volatile (variable) the investment returns will be. In other words, for investors
unable to acquire a wide range of investments because of limited savings, investment in UTS implies less
risk.

1-3
READY ACCESS TO FUNDS

Most investors require that their investments be liquid, i.e. the investment can easily be sold within a short
period of time. UTS provide this benefit, as units can be bought and sold readily through UTMC, IUTA,CUTA
and UTC. An investment that is expected to produce an excellent return but which cannot be sold does not
necessarily constitute a good investment, as poor liquidity forms an additional risk factor for the investor.

Under the Guidelines on Unit Trust Funds, the UTMC should pay the proceeds of the repurchase of units to
unitholders as soon as possible, at most within 10 days of receiving the repurchase request.

PROFESSIONAL MANAGEMENT

The fund managers making investment decisions on behalf of investors in UTS are professionals. Their
training and background should ensure that the investment process adopted by UTS is structured and follows
basic investment principles. UTS enjoy the depth of knowledge and experience that skilled personnel can
bring to investment decision-making. In the long term, it is this expertise that could generate above-average
investment returns for investors in UTS.

There are other skilled and experienced personnel within UTMC who can also provide benefits to investors
in UTS - for example, client service staff, accounting and tax experts, etc.

INVESTMENT EXPOSURE

For the smaller investor, it is sometimes difficult to gain exposure to a particular asset class or to certain
securities. For instance, if an investor with RM1,000 wished to invest in real estate, international securities
markets or corporate bonds, it would be impossible for him or her to hold a direct investment in any or all of
these markets. With UTS, it is possible for the investor to invest his or her savings in one, or a combination
of all, of these investments. The investor can therefore tailor his or her investment exposure to meet his or
her objectives.

INVESTMENT COSTS

When making direct investments, the smaller investor faces transaction costs, e.g. stockbroker commissions,
that are much higher than those paid by large institutional investors such as UTMC fund managers. UTMC
fund managers invest large amounts on behalf of UTS, so economies of scale apply. Also, because fund
managers invest in much larger amounts, they are able to gain access to institutional rates of return and
to investments to which smaller investors may have no, or only limited, access. For instance, the smaller
investor cannot directly access the Malaysian Government Securities market, where the amount of each
transaction generally is in millions of ringgit. Fund managers have ready access to this market because of
the amount that they can invest at any one time. Institutional investors, including UTS fund managers, often
receive preferential allocations of initial public offerings of shares of companies seeking to be listed, to which
smaller investors are excluded or limited.

1.2.3 DISADVANTAGES OF UTS

RISK

Any investment involves risk. Investment in UTS also has its risks. Thus it is important that an investor is
aware of these risks before making a decision to invest in UTS.

UTC must ensure that an investor in UTS is given an explanation of these risks before he or she invests
by directing the investor to the relevant sections of UTS prospectuses. The UTS performance tables and
other UTMC-approved promotional material can also be useful in explaining to investors the differences in
investment risk between UTS.

Further details of the risks involved in UTS are given in Chapter 3.

1-4
LOSS OF CONTROL

Investors in UTS lose the right to direct how their savings are invested. If UTMC fund managers invest UTS
investment portfolios in accordance with the prospectus and deed, there is little that the unitholders can do
if they disagree with investment decisions made by the fund manager.

UTMC fund managers must invest in accordance with the prospectus and deed even if market conditions
or investment ‘fashion’ change.

FEES AND CHARGES

The services provided by UTMC are not without cost. Hence there are fees and charges payable by investors
in UTS. These can have an impact on unitholders’ returns although such fees should be measured against
the professional expertise available to investors through UTS.

OPPORTUNITY COST

As with any decision, an investor who invests in UTS may have produced better returns by investing directly
in the markets. This excess represents the ‘opportunity cost’ of investing in UTS.

Especially when UTS performance is disappointing, investors can argue that they could have ‘done better’ by
investing their funds themselves. While this may be true, one aspect of investment that tends to be forgotten
by direct investors is the level of risk taken to achieve those returns. Investment through UTS provides a high
level of diversification for smaller investors with limited savings. A single direct investment may produce a
return in excess of that from investment through UTS, but clearly the risk level accepted by a direct investor
is significantly greater than that through investing in UTS.

1.2.4 METHODS OF INVESTING

There are several ways to invest in UTS.

LUMP SUM PURCHASE

A lump sum purchase is the most common means by which savings are invested in UTS. Provided that the
amount of investment meets the UTMC’s minimum application amount, the investor can invest his savings in
UTS after he or she has completed an application form from a prospectus. With a lump sum purchase, there
is no further commitment to add to the initial investment in UTS. Over a period of time, it is expected that the
initial investment in most UTS will grow as investment income and capital gains are earned by UTS. When
the investor ultimately disposes of his or her units, the repurchase price of a unit will reflect the accumulation
and compounding of investment returns over the period since purchase. It is the compounding of investment
returns over time that makes investments, such as UTS, so attractive to investors.

For example, a recently inherited sum of money may be invested in UTS and held for an extended period
for some specific purposes, e.g. children’s education, retirement planning, house purchase. At the end of
the period, the proceeds from disposal of the units will reflect the initial investment made plus any returns
on that amount compounded over the relevant period. Of course, if the investment returns are negative, the
investor will not receive (on disposal of the units in UTS) the amount of his or her initial investment.

1-5
REINVESTMENT OF INCOME

By reinvesting distributions from UTS (i.e. by directing UTMC to use the distribution payable to a unitholder
to buy more units in UTS for the unitholder), an investor can acquire, on a regular basis, small numbers
of additional units that, over time, can add significantly to total returns from investing in UTS. Often, small
amounts of distributions from investing in UTS are dissipated rather than saved by investors. Reinvestment
of distributions is therefore a simple and easy way to increase an investment in UTS.

Where a unitholder instructs UTMC to reinvest distributions, the amount of the distribution is used to purchase
additional units (usually at the selling price quoted one month after the ex distribution date). Some UTMC
automatically reinvest distributions; others provide additional units through a unit-split (see Section 1.12).
The beneficial effect of compounding investment returns is the same.

REGULAR SAVING

Some investors invest in UTS by making regular (e.g. monthly) contributions to UTS - in effect, a series of
smaller lump sum investments. Contributions are not contractual and can be stopped at any time without
penalty. This is a disciplined, useful and flexible way for investors to accumulate capital for a future need. By
making regular contributions over a period of time, the sum (including investment returns) accumulated at the
end of the period may be expected to be significant compared to the amount of each regular contribution.

At the end of the period, the proceeds from disposal of the units will represent the accumulation of all
contributions, plus returns generated by each contribution. Clearly, the amount accumulated is likely to be
greater the longer contributions are made and the units held. This form of saving is the basis of retirement
savings through, for example, the EPF.

Investing in UTS through regular saving is very attractive to smaller investors because they can participate
with a capital outlay of typically as low as RM100.

BORROWING TO INVEST IN UTS

An investor can obtain a loan from a financial institution for the purpose of investing in UTS.

To maximise potential investment returns, some investors investing in UTS borrow the application money
to invest, expecting that the rate of return from investing in UTS will exceed the borrowing costs, thus giving
rise to additional profit. This is known as leveraging (or gearing) an investment in UTS.

Lenders usually require investors to have some of their own money to invest alongside the borrowed
application money. The technique allows a small amount of an investor’s savings plus a borrowed amount
to be invested into UTS. The UTS investor is, in effect, using the lender’s funds as well as his or her own
to gain exposure to the desired investment. Using someone else’s funds comes at a cost - lenders charge
interest, and other charges and fees may apply.

The leveraging effect refers to the potential for investors to earn greater returns than they could have achieved
if they had restricted investment in UTS to their own savings.

However, there is a very significant potential downside. The value of the investment in UTS could fall, for
example, in line with a falling share market. Whilst the value of the investment in UTS may decrease, the
amount of the loan taken out to finance the purchase of units remains constant (and may increase with the
accumulation of interest payable). If the value of the investment in UTS declines and the amount of the loan is
increasing, an investor’s savings can be eroded and the investor will need to sell his or her units at a loss, or
increase the security offered to the lender. If the units are sold at a loss, the investor will be required to repay
the difference between the proceeds of disposal of UTS and the amount of the loan out of other savings.

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Most banks and finance companies in Malaysia offer borrowing facilities to investors who wish to leverage
their investment in UTS. Loans are generally for periods of up to 10 years at interest rates generally higher
than personal finance and housing loans (depending on the borrower). Amounts usually range between a
minimum of RM10,000 and a maximum of RM250,000. The rate of interest is usually variable based on the
lender’s Base Lending Rate plus a margin.

The maximum loan-to-valuation ratio or margin (i.e. the amount of finance offered compared to the cost or
value of the investment in UTS) is 67%. This means that an investor who wishes to invest RM100,000 in
UTS could be able to borrow up to RM67,000.

Borrowers must be over 18 years, and should be less than 55 years at the end of the term of the loan. This
is to ensure that the borrower is within the income-earning age group. Monthly loan repayments do not
normally exceed one-third of the borrower’s gross monthly income to ensure that the borrower is able to
meet his or her other financial obligations.

The SC requires that UTMC ensure that UTC do not, directly or indirectly, encourage the sale of units through
loans. Loan financing for UTS is therefore normally provided by a panel of UTMC-approved lenders. The
SC has imposed a number of requirements relating to loans and UTS, including the need for an investor
to sign a Unit Trust Loan Financing Risk Disclosure Statement, reflecting the risks of investing in UTS with
borrowed funds (see Chapter 3).

1.2.5 RISKS OF BORROWING TO INVEST IN UTS

Should an investor borrow to invest in UTS? Each investor’s position is unique, so generalisations are
difficult to make. Prospective investors must carefully consider the implications of investing with borrowed
funds before committing themselves to a loan. If the investor doesn’t understand UTS and the financing
arrangement, he or she should not be borrowing.

INTEREST RATE FLUCTUATIONS

Interest rates for UTS loans are usually variable rates, i.e. the borrower is subject to changes in the lender’s
Base Lending Rate. The total cost of financing an investment in UTS cannot therefore be predicted. This
increases the uncertainty of the expected profits to be derived through borrowing to invest in UTS.

DEFAULT IN REPAYMENT OF LOAN

Where there is a default in repayment of the loan (which may be on a regular monthly payment basis), the
lender is entitled to liquidate the investment in UTS. Action may be taken with or without the consent of the
borrower. Units may be sold by the lender at a time that is determined by the lender (which may be at the
lowest point in the market cycle), i.e. the borrower loses control over the decision to sell units. Any shortfall
between the proceeds from disposal of units and the amount of the loan has to be paid by the investor.

PREMATURE REPAYMENT OF LOAN

Borrowing for investment in UTS is a long-term commitment - the loan period may be up to 10 years. Due
to unforeseen circumstances, e.g. loss of employment, the borrower may wish to repay the loan before the
agreed repayment date.

1-7
Premature repayment may adversely affect the expected returns from investment in UTS. Research shows
that most loans are repaid within the first five years of the agreed loan period, i.e. before the investment
in UTS has had chance to perform. Studies show that, on average, the probability of losing money in an
investment in the share market (i.e. Bursa Malaysia) can be up to 35% in any one year, 28% over two years,
and 21% over five years. Investors may therefore face a high risk of losing capital if they repay the loan
earlier than expected, and dispose of the units in UTS.

MARGIN CALL

The value of UTS may vary from time to time. As a result, lenders may find that the value of the units in UTS
that are held as security (collateral) for the loan provides them with insufficient margin over the amount of
the outstanding loan. The lender will then ask that the borrower ‘top up’ the level of security, i.e. a margin
call will be made on the borrower. A failure to pay the additional amounts on top of your normal installments
can cause the lender to sell units in UTS held as security, possibly at the worst time, to reduce the amount
owed.

It may be more prudent for UTC to suggest to clients that the regular saving method is a more appropriate
way of investing in UTS than borrowing money.

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❙ SECTION 1.3 THE STRUCTURE OF UTS
A UTS is a non-incorporated collective investment scheme formed for the purpose of pooling the savings
of investors with the intention that those savings be invested and managed for their mutual benefit. The
structure of UTS is shown in the diagram. Whilst there are many variations between UTS, the structure is
the same.

The operation of each UTS is governed by a deed, which names its UTMC and trustee and details the way
in which that UTS is to operate. UTMC are responsible for the operation of UTS and normally act as the
promoter. Under the deed, a trustee is appointed to supervise the operation of UTS. The duties of UTMC
and trustee are set out in the deed and in the law.

THE STRUCTURE OF UTS

(Mode of Operations Governed by the Deed)

UNITHOLDERS

Money
Possible
Pooled from
Distributions
Investors

Administers
Safeguards
the
TRUSTEE the Assets UTS UTMC
Operations of
of the UTS
the UTS

Possible
Capital Gain & Invests
Income

AUTHORISED
INVESTMENTS

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Unitholders are bound by the deed and their obligations are set out in that document. They have rights and
therefore have access to various legal remedies described in the deed, should the terms of the deed are
not be adhered to.

The assets of each UTS are held in the name of its trustee. This is a legal safeguard, as it separates the assets
of UTMC from those of UTS. This segregation safeguards the investor, should UTMC go into liquidation. The
UTS assets are held ‘on trust’ for the unitholders of that UTS. This means that the UTS assets are held by
the trustee on behalf of unitholders and, should the trustee go into liquidation, the assets are not legally able
to be paid to the trustee’s creditors. While UTS assets are registered in the name of its trustee, the beneficial
ownership of those assets lies in the hands of the unitholders (the beneficiaries under the trust).

1.3.1 PARTIES TO A DEED

The parties to a deed, and the role of each, are as follows:

UTMC

UTMC of UTS make reports to the trustee regarding the purchase, sale and management of the investments
of UTS. UTMC also promote and distribute or sell units in UTS either directly or through IUTA, CUTA and
UTC, service the unitholders, and buy back units from those unitholders who wish to dispose of units.
UTMC generally keep the accounting records of UTS since these are required to calculate unit selling and
repurchase prices, and to determine the amount of distributions payable to unitholders. UTMC also maintain
a register of unitholders in each UTS showing the units held by each unitholder.

TRUSTEE

The trustee is responsible to unitholders for safeguarding UTS assets and ensuring that they are invested
in accordance with the terms of the deed. The trustee supervises the operations of UTS to ensure that
its objectives are followed by UTMC and that the interests of the unitholders are protected. The trustee is
independent of UTMC and can remove one that fails to manage effectively and in accordance with the deed.
The deed sets out the various responsibilities of the trustee. Major responsibilities include approving and
monitoring all financial transactions, holding title documents of all UTS assets, and collecting all income
entitlements on investments held.

UNITHOLDERS

Of the three parties to a deed, the unitholders are the most significant since they supply the capital to be
invested by UTMC on their behalf. As such, they are responsible for the fees earned by UTMC (and hence
salaries and commission payments of UTC) and the trustee.

Unitholders hold units, each unit ranking equally with all other units of that UTS. The value of a unit is
determined by using a formula set out in the deed, which is based on dividing the market value of the net
assets of the UTS by the number of units currently in circulation. Unitholders purchase units in UTS by
completing an application form contained within a UTS prospectus.

1.3.2 DEED

A deed shows the rights and obligations of UTMC, the rights and duties of the trustee, and the rights of the
unitholders. It will also include the maximum fees payable; describe the investments in which UTS can be
invested; prescribe how the value of a unit is to be determined; and determine how the price at which a unit
to be sold to investors, and bought from them, by UTMC is to be calculated.

The deed will also outline the way in which changes can be made to the deed. This will sometimes require
the consent of UTS unitholders who will be asked to vote on the proposed changes. The responsibilities of
the auditor of UTS, appointed by the trustee under the deed, will also be set out in that document.

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1.3.3 PROSPECTUS

Where UTS are to be offered to the public, it is required by law that potential investors receive sufficient
information about UTS, its UTMC and the trustee to allow them to make an informed investment decision.
This information is contained in a prospectus for the issue of units in UTS.

The prospectus must be registered with the SC and contain certain information as required by law. The
information provided must be accurate and not misleading. Those involved in the preparation of a prospectus
are held accountable for its contents. There are legal remedies available to investors against those who
have made misrepresentations or who have caused misleading information to be included in a prospectus.
By completing and signing an application form from UTS prospectuses, investors become unitholders and
a party to the deed.

1.3.4 AGENTS OF UTMC AND TRUSTEE

Several other parties are involved with UTS, although they are not parties to the deed.

A trustee may appoint a sub-custodian to hold UTS assets on its behalf (perhaps where UTS investments
are listed on overseas share markets). UTMC may appoint fund managers, asset consultants, managers of
real estate, and other specialists to assist it in its role.

The trustee and UTMC are responsible for the actions of any agent they appoint. The deed clearly sets out
the duties of the trustee and UTMC, and these cannot be avoided.

We will consider the roles of UTMC and trustee of UTS, and the legal requirements relating to UTS prospectus
and deed in greater detail in Chapter 2.

❙ SECTION 1.4 TYPES OF UTS

There are numerous ways in which collective investments, including UTS, can be classified. Each country,
as a result of different investor requirements and regulatory regimes, has its own collective investments and,
in turn, its own classification system and terminology.

In Malaysia, we can distinguish between:

• listed UTS, which are closed-end, and

• unlisted UTS, which are usually open-end but which may also be closed-end.

Another way of categorising UTS is by the investment objective (for example, income or capital growth) or
by the class of investment in which UTS are invested (for example, equity or fixed income). Further sub-
classification into, say, ‘smaller company’ equity growth UTS also occurs. Such classifications are significant
to investors since these classifications are used to distinguish between UTS for the purpose of measuring
comparative performance.

1.4.1 LISTED UTS (CLOSED-END FUNDS)

Listed UTS have units quoted and traded on a stock exchange. The prices of these units will fluctuate
daily based on the supply of, and demand for, units from investors, i.e. it is the investors in the market who
determine the buying and selling prices of the units rather than UTMC.

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Currently, all listed UTS in Malaysia are closed-end in that the number of units is limited at the time the UTS
were floated on Bursa Malaysia. An investor who wishes to purchase units after the initial public offering
must approach a stockbroker who, through the market, will acquire those units from a selling investor.

UTMC do not buy and sell units in UTS after the initial public offering. The sole responsibility of UTMC after
listing is management of that UTS in accordance with the deed and the terms of the prospectus. If UTS wish
to expand after listing, new units can generally only be issued by way of a rights offer to existing unitholders.
A placement of units to institutional investors may also be made.

Listed UTS operate similarly to a limited liability company with shares listed on Bursa Malaysia. The Amanah
Small Cap Fund is an example of a listed closed-end investment company – i.e. not a UTS - although from
an investor’s perspective, it operates in a similar way to listed UTS.

All listed UTS in Malaysia are currently Real Estate Investment Trusts (REIT). Property, as an asset class, is
most suitable for a listed and closed-end structure since the unitholders can only sell units to other investors
and, following the initial public offering, UTMC can be certain of having raised sufficient application money to
purchase the nominated real property. An open-end unlisted property UTS can be disastrous if every investor
wishes to dispose of his or her units at the same time, as UTMC are required by the SC to repurchase those
units. The property market is highly illiquid in comparison with securities markets, so realisation of real property
by the trustee to repay unitholders within a short time frame could be impossible and inefficient.

An example of a listed UTS is AmFirst Property Trust. The prices of listed UTS are quoted in the newspapers
alongside other companies listed on Bursa Malaysia.

A major disadvantage of listed UTS is that the market price of a unit in UTS usually varies from the NAV of
a unit. Generally, the NAV per unit of a listed UTS is greater than the market price, i.e. listed UTS usually
trade ‘at a discount’. There are many reasons for this but, put simply, the price of any listed securities is
determined by buyers and sellers in the market. The price of a listed UTS reflects this rather than the NAV
of the UTS. In an unlisted UTS, the unit price is based on the NAV, so no significant discount or premium
can apply.

A new type of listed UTS has been launched in overseas markets - the Exchange Traded Fund (ETF). An
ETF is a listed but open-end UTS. Overseas experience has shown that an ETF does not generally trade at
a discount to NAV. Yet an ETF offers UTMC the advantage of constructing a long-term investment portfolio,
without fearing that the trustee may have to realise investments to raise cash for UTMC to meet repurchase
of unitholders. The first ETF, i.e. ABF Malaysia Bond Index Fund was launched in July 2005.

1.4.2 UNLISTED UTS (OPEN-END FUNDS)

These are UTS whose units are not quoted on a stock exchange. The price of units is determined by UTMC
of the UTS. The selling and repurchase unit prices are arrived at by first valuing the investments of UTS and
determining its NAV, and then dividing by the number of units in circulation.

Unlike a listed UTS, where orders to buy and sell units are placed through a stockbroker, investors’ sales and
repurchases of units in unlisted UTS are transacted directly with UTMC, often with the assistance of UTC.

UTMC of unlisted UTS publish the NAV of units in national newspapers on a daily basis. This NAV of units
serves as the latest selling price at which units can be bought by investors as well as the repurchase price
at which investors may dispose off units to UTMC.

Unlisted UTS are usually open-end, i.e. there is no limit to the number of units that can be sold and unitholders
have the right to dispose off units to UTMC at any time. (Note that in practice, the SC retains control of the
total number of units in UTS through approving limits to the maximum number of units that each UTS may
issue, but this limit can usually be raised on application to the SC.)

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Some UTMC do, for marketing purposes, place a limit on the total number of units in UTS (called ‘closed’
UTS) that can be issued. Once the total issue has been sold, only units repurchased from investors by UTMC
can be sold on to investors. An example of a closed UTS is Wawasan 2020 Fund.

Unlisted UTS commonly have a current prospectus for the sale of units, as most UTMC are continuous
issuers of units in UTS.

1.4.3 CLASSIFICATION OF UTS

Currently, the range and type of UTS available in Malaysia are not as extensive as that available overseas.
The unit trust industry is still relatively young, but over time, the range and number of UTS will increase as
regulations are relaxed and UTMC develop new UTS to cater to investors’ needs - and as investors become
better informed of investment choices.

The main categories of UTS in Malaysia currently include:

EQUITY UTS

Equity UTS are the most common UTS in Malaysia. The major portion of equity UTS portfolios are shares
of listed companies.

Equity UTS are popular as they provide investors with exposure to companies listed on Bursa Malaysia
(and some overseas share markets). The performance of most equity UTS is therefore closely linked to
the performance of Bursa Malaysia. A rising share market will normally result in an increase in the value of
units in equity UTS, and vice-versa.

There is a wide array of equity UTS available in the market, ranging from UTS with higher risk-higher return
characteristics to those with lower risk-lower returns. Equity UTS labelled ‘aggressive growth’ generally
invest in companies with higher capital growth potential, but with associated higher risk. The expectation of
both UTMC and investors is that these UTS could produce high returns based on increases in the price of
shares held in the portfolio, rather than from dividend income received by UTS. However, the prices have
higher volatility. Aggressive growth UTS may include the category of ‘smaller company’ equity UTS, which
invest in the shares of listed companies with a relatively smaller market capitalisation. Companies with a
large market capitalisation are usually considered to be more stable, and may therefore be included in ‘blue
chip’ equity UTS, sometimes referred to as ‘growth and income’ equity UTS.

For example, the objective of the Public Aggressive Growth Fund is “to seek high capital growth over the
medium to long-term period through investment in situation and high growth stocks.” The Public Savings
Fund’s objective, on the other hand, is “to achieve long-term capital appreciation while at the same time
producing a reasonable level of income.”

Another type of equity UTS is the ‘index’ UTS. These UTS invest in a range of companies that closely match
(or ‘track’) companies comprising a particular Index, for example the Kuala Lumpur Composite Index (KLCI).
Investors who participate in this type of UTS will expect to generate investment returns that closely resemble
the KLCI, both in terms of risk and return.

Equity UTS can also be invested with an income objective. This means that the equity UTS will invest primarily
in companies that are expected to pay significant dividends, rather than companies that are expected to
pay little or no dividends.

International equity UTS, investing primarily in overseas share markets, are now available to Malaysian
investors. Examples include the MAAKL Pacific Fund, PRUAsia Pacific Equity Fund, Hwang DBS IM
Guaranteed Fund and RHB Dividend Valued Equity.

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FIXED INCOME UTS

These trusts invest mainly in Malaysian Government Securities, corporate bonds, and money market
instruments such as bankers acceptances and fixed deposits. The objective of a fixed income (or bond)
UTS is usually to provide regular income, with less emphasis on producing capital growth for investors. It is
possible, however, for fixed income UTS to generate both capital gains and losses during periods of volatile
interest rates.

Generally speaking, the volatility or risk associated with fixed income UTS is lower than that of equity UTS.
Fixed income securities are usually more secure, especially if held to maturity. It is therefore expected
that over the long-term, the returns offered by fixed income UTS will be lower than those offered by equity
UTS. However, this is not always the case and there have been instances where fixed income UTS have
outperformed equity UTS, and with significantly less risk.

Returns from fixed income securities can vary with the remaining life of the securities. Generally, fixed income
securities with a short period to maturity are less volatile than those with a longer period to maturity. Some
UTMC have promoted ‘short-term’ fixed income UTS, where income represents most of the total return
achieved by investors and changes in unit prices are minimal.

Often, fixed income UTS are held by an investor as part of his or her investment portfolio as these UTS can
provide diversification to reduce the risk level of the portfolio. This is because investment returns from fixed
income securities can have a negative correlation with those of equities, i.e. when returns from investing
in share markets are falling, the returns from fixed income securities may be more positive. This negative
correlation can be a useful tool in the management of risk in an investor’s portfolio.

MONEY MARKET UTS

One of the most popular types of UTS overseas is the money market (or ‘cash management’) UTS. In the US,
the amount invested in money market mutual funds now exceeds that saved through the banking system.

Money market UTS operate in a similar way to a bank account - the unit price is normally set at a fixed
amount, say RM1.00 , and there are no entry or exit charges levied by UTMC. Money market UTS invest in
low risk money market instruments that are, in effect, short-term deposits (loans) to banks and other - low
risk - financial institutions, and in short-term government securities. The weighted average maturity of money
market UTS (i.e. the average time before such loans are repaid to the trustee) is normally no more than,
say, 90 days and usually much less. The money market UTS is therefore highly liquid and ideal for use as a
short-term ‘parking place’ for investors’ savings, or for longer periods. Income distributions to investors are
paid regularly and frequently, and reflect the generally higher interest rates available to institutional investors
in the money markets.

In Malaysia, money market UTS are currently not common. The AM Cash Management Trust is an example
of a money market UTS.

REAL ESTATE INVESTMENT TRUSTS

Real Estate Investment Trusts, or REIT, invest in real property, usually prominent commercial (office)
properties, and provide the investor with an opportunity to participate in the property market in a way which
is normally impossible for the smaller investor. An investor with, say, RM1,000 who wants to invest in
commercial property would find it impossible. By acquiring units in a listed REIT, however, it is possible to
invest small amounts to gain exposure to the property market.

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Returns from property comprise net rental income plus or minus any change in the value of the property over
the period. The prices at which units in REIT trade on Bursa Malaysia will reflect these returns. A unitholder
in listed REIT receives a distribution paid from the net rental income and can make a profit or loss on selling
units. The price of units in a listed REIT should approximately reflect the market’s assessment of the value
of the real property held by the UTS.

Of course, real property valuations reflect a number of factors including rental and vacancy rates, management
expenses, location and physical attributes of the property. These factors, therefore, also need to be taken
into account when investing in REIT.

The maximum rate of initial service charges and exit fee to be imposed by each distribution channel are
required to be disclosed too.

Because of the illiquidity and indivisibility of property, most REIT are closed-end, and the units are listed on
a stock exchange. Units in listed REIT can be bought and sold through stockbrokers, and UTC would not
normally arrange to buy or sell units for an investor.

EXCHANGE TRADED FUNDS

An Exchange Traded Fund or ETF is like a listed index UTS whose investment objective is to achieve the same
return as a particular market index. It will primarily invest in all of the securities or a representative sample
of the securities that are included in a selected market index. For example, ABF Malaysia Bond Index Fund
invests in Government and quasi-Government bonds that tracked by iBoxx ABF Malaysia Bond Index.

ETF often have low expense ratios and can be bought and sold throughout the trading day through a
stockbroker, on an exchange like listed shares. Unlike traditional UTS, through, unit prices of the ETF are
set throughout the day by the laws of supply and demand.

BALANCED UTS

Some investors may wish to have an investment in all the major asset classes to reduce the risk of investing
in a single asset class. There are two ways to achieve this - either invest directly in a range of single asset
class funds (e.g. an equity UTS and a fixed income UTS and REIT); or invest in a single UTS that invests in
several asset classes. A balanced (or ‘diversified’) UTS generally has a portfolio comprising equities, fixed
income securities, cash and property - although property exposure may be obtained through holding units
of listed REIT and shares of real estate or construction companies. Direct property will not normally be held
as it is illiquid.

Balanced UTS exhibit lower volatility than most single asset class UTS (except money market UTS) but offer
some prospect of returns higher than those available from money market UTS, savings accounts and fixed
deposits. Some balanced UTS have a higher component of growth assets (principally equities) to appeal
to investors comfortable with some risk, whereas lower risk investors may prefer to invest in balanced UTS
that invest a higher proportion of the portfolio in more defensive assets (i.e. fixed income securities and
cash). A more defensively invested balanced UTS may produce a higher level of distribution, but produce
lower capital growth. The Mayban Balanced Fund and MAAKL Balanced Fund are examples, with the latter
having a more defensive, income objective.

SYARIAH UTS

The main objective of Syariah (or Islamic UTS) is to provide an alternative avenue for investors sensitive to
Syariah requirements. The utmost task of Syariah UTS is to always invest in a portfolio of halal companies,
Islamic Debt Securities and bonds or other securities in accordance with Syariah principles. Halal companies
will exclude those companies involved in activities, products or services related to conventional banking,
insurance and financial services, gambling, alcoholic beverages and non-halal food products.

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The returns of Syariah UTS will also avoid the incidence of riba or usury interest through a unique systematic
process of cleansing or purification in removing the amounts representing all non-Syariah permissible
elements. Such amounts are normally donated to charities. Amanah Saham Bank Islam and Dana Al-Aiman
by ASM Mara Unit Trust Management Berhad are examples of Syariah UTS.

GOVERNMENT-SPONSORED UTS

The modern era of the unit trust industry in Malaysia started in 1981 with the launching of the Skim Amanah
Saham Nasional (ASN), a government-sponsored UTS managed by Permodalan Nasional Berhad (PNB).
The UTS was launched to mobilise the savings of the Bumiputra and to invest in Malaysian companies under
the then New Economic Policy. Such was the success of the ASN that PNB has since promoted several
other UTS and state governments, too, have launched UTS with similar objectives.

Government-sponsored UTS represent the bulk of UTS (by value) managed by the unit trust industry in
Malaysia. They generally invest on a balanced basis although equity-invested UTS are also available. Equity
invested government-sponsored UTS may have a fluctuating or variable unit price while those UTS investing
in more balanced portfolios normally have a fixed RM1.00 unit price and operate on an account basis, i.e.
an ‘earnings’ rate (representing the total returns of the investment portfolio UTS for the year) is credited
annually to each investor’s account balance.

❙ SECTION 1.5 SIZE OF THE MALAYSIAN UNIT

TRUST INDUSTRY
The current size of the unit trust industry in Malaysia is outlined in Appendix 1. It is important to keep this
table up-to-date and UTC should refer to the FIMM and SC websites on a regular basis.

The range and number of UTS have increased dramatically over the past few years. This trend is likely to
continue as investors demand a wider range of services, and UTMC strive to produce new and innovative
UTS to complement the current range.

The updated list of all the FIMM members can be found on its website -www.fimm.com.my. You are
encouraged to review this website so as to be well acquainted with the participants of the industry and the
UTS offered.

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❙ SECTION 1.6 COLLECTIVE INVESTMENTS IN
MALAYSIA
A ‘collective investment scheme’ is a generic term that includes a range of pooled investment opportunities
available to investors. In a collective investment scheme, a number of investors hand over their savings to
a professional fund manager who manages the pool to produce a return that is shared by those investors.

UTS are a type of collective investment scheme.

Collective investment schemes in Malaysia also include pension and provident funds, insurance funds
and pilgrims’ funds. UTS represent the bulk of funds under the management of Malaysia’s investment
management industry.

A description of the investment management industry in Malaysia, and of the major role played by the unit
trust industry, is included as Additional Reading (Appendix 2).

INVESTMENT-LINKED FUNDS

While a detailed review of the various types of collective investment schemes lies outside the scope of this
book, it is important that UTC are familiar with type of schemes that is camparable to UTS - the investment-
linked fund by life insurance companies.

An investment-linked fund promoted by life insurance companies operates in a broadly similar way to a UTS.
The investor acquires a life insurance policy, which represents a number of units in an investment pool,
managed by the life insurance company. The policy may be purchased with a single premium (lump sum
investment) or with regular premium payments, rather like a regular savings plan promoted by many UTMC.
Unlike most UTS, the policy provides life insurance cover although this may be smaller in amount than the
cover available through term life policies, and through whole life and endowment policies.

The premiums, less the cost of providing life insurance cover and entry fees, are added, at the investor’s
direction, to one or more separate investment pools, each of which holds different investments and has
its own investment objective. The pools are unitised like UTS, and the entitlement of a policy is to the
investment return from a particular pool. The value of a policy is the number of units held multiplied by a
unit price. Units have both a buy and sell price. Net premiums are invested at the pool’s unit selling price,
and on surrender of the policy, those units are cashed-in at the pool’s buying price as calculated by the life
insurance company.

The value of a unit in a pool is based on the market value of the investments within the pool. Investment
management fees and other ongoing charges and expenses are taken out of the pool.

The investment returns relating to the pool are subject to tax at the rate applicable to a life insurance company.
The unit price therefore reflects tax payable by the life insurance company on the investment income and
realised profits on the disposal of investments. A provision for tax on unrealised capital profits is deducted
from the value of investments in the pool before the unit prices are determined.

UTC must note that investment-linked funds are not subject to scrutiny by the SC, nor are they subject to
monitoring by a trustee. They are not sold through a prospectus and are therefore not required to meet
the detailed and comprehensive disclosure provisions within the law that apply to UTS. Investors must be
informed of this significant difference between UTS and investment-linked funds.

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❙ SECTION 1.7 HISTORY OF UTS IN MALAYSIA
The world’s first unit trust, The Foreign and Colonial Government Trust, was established in London in 1868
but UTS did not become particularly popular until much later. In the United States, in the 1950s, a collective
investment scheme similar to UTS became popular - an open-end investment company, known as a mutual
fund. In the 1960s and 1970s, UTS gained popularity in several countries including the United Kingdom
and Australia.

Malaysia introduced the concept of UTS relatively early compared to its Asian neighbours when, in 1959, a
unit trust was established by a company called Malayan Unit Trust Limited.

The development of the unit trust industry in Malaysia can be presented as follows.

1.7.1 THE FORMATIVE YEARS: 1959 - 1979

The first two decades in the history of the unit trust industry were characterised by slow growth in the sales
of units and a lack of public awareness of the new investment product. The industry was also regulated by
several parties including BNM, the Registrar of Companies and the Public Trustee.

1959 Malayan Unit Trust Limited was the first UTMC to be formed. The first UTS to be established
was the First Malayan Fund, which had a limited life span of 10 years.

1965 Following the departure of Singapore from Malaysia, the operations of Malayan Unit Trust Limited
were divided into two parts: a Singapore-based company called Singapore Unit Trust Limited
took over the Singapore operations, while the Malaysian entity went to Asia Unit Trusts Berhad,
a subsidiary of South East Asia Development Corporation Berhad (SEACORP).

1966 Malaysian Investment Fund, the first totally Malaysian UTS, was launched by Asia Unit Trusts
Berhad on 2 December 1966.

1967 On 24 June 1967, Amanah Saham Mara Berhad (ASMB) launched the First Mara Bumiputra
Fund to cater to the needs of Bumiputra investors.

1974 Amanah Saham Pahang Berhad, the first state-owned UTMC, was established.

1975 Kuala Lumpur Mutual Fund Berhad (now known as Public Mutual Berhad and currently the largest
private sector UTMC) was established.

1977 MIC Unit Trust Berhad (later renamed MIC-TPG Unit Trust Berhad but now called KLCity Unit
Trust Berhad) was established.

1979 The government decided to utilise UTS as a vehicle to achieve its goal of redistributing national
wealth under the New Economic Policy. Through UTS, the government intended to achieve the
New Economic Policy objective of increasing Bumiputras’ shareholding in public and private
limited companies to 30% of total equity ownership.

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1.7.2 THE PERIOD FROM 1980 TO 1990

During this period, the Informal Committee for Unit Trust Funds was set up to regulate the unit trust industry.
The Committee was made up of representatives from BNM, the CIC, the Public Trustee of Malaysia and
the Registrar of Companies.

1981 PNB launched the first national Bumiputra UTS - the Amanah Saham Nasional (ASN), which
was sold at the opening price of RM1.00. This price was to remain unchanged until 1990.

1989 Arab-Malaysian Property Trust Management Berhad (now known as AmProperty Trust
Management Berhad) launched Malaysia’s first listed REIT on the Kuala Lumpur Stock Exchange
(now Bursa Malaysia).

1990 The second national Bumiputra UTS - the Amanah Saham Bumiputra (ASB) - was launched at
a fixed price of RM1.00 a unit.

In a move to further encourage the growth of the unit trust industry, stamp duty on transfer of
units in UTS was waived.

1.7.3 THE PERIOD FROM 1991 TO 1999

This period witnessed the fastest growth of the unit trust industry in terms of the number of new UTMC
established and growth in funds under management. The introduction by the SC of its Guidelines on Unit Trust
Funds and the enactment of the Securities Commission Act, 1993 brought about even greater awareness of
the unit trust industry and contributed towards its tremendous growth prior to the 1997 Asian financial crisis.
Following the crisis, the steady growth in funds under management continued.

Total funds under management grew more than threefold from RM15.72 billion at the end of 1992 to RM59.95
billion at the end of 1996. The period also saw greater product innovation and deregulation of the industry.

1991 The Guidelines on Unit Trust Funds were introduced by the SC to provide clear operational
procedures and regulations to govern the unit trust industry.

1993 The Securities Commission Act was passed. This Act vested the SC with the responsibility of
regulating all matters relating to the unit trust industry.

The FIMM was established as a body to represent UTMC.

The first Syariah UTS was launched by Arab-Malaysian Unit Trusts Berhad (now known as
AmInvestment Services Bhd).

1994 The SC revised the Guidelines on Unit Trust Funds to streamline the procedures and to ensure
a fair and consistent application of policies in considering proposals by UTMC.

1995 Pelaburan Johor Berhad launched the Dana Johor, the first state UTS to be opened to both
Bumiputra and non-Bumiputra investors.

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The first UTS to be offered with free term life insurance protection for unitholders on a blanket policy basis
was introduced. Previously, life insurance cover was offered with the UTS on a partially subsidised basis,
or the insurance cover was to provide unitholders who invested under loan plans with insurance to protect
the interests of the lenders.

The revised Guidelines on Unit Trust Funds allowed UTMC to invest up to 10% of the NAV of UTS in foreign
securities (subject to other approvals).

The first fixed income or bond fund in Malaysia was launched.

The SC issued Guidelines on the operations of property UTS, Guidelines allowing UTMC to delegate functions
and appoint external fund managers, and Guidelines on loan financing of sales of units in UTS.

The FIMM Secretariat was set up, headed by a full-time Executive Director.

1996 In an effort to open up the industry further, the SC introduced a number of new measures
including:

• the Securities Commission (Unit Trust Scheme) Regulations, 1996

• stockbroking houses with a minimum RM100 million paid-up capital were allowed to set up
UTMC

• foreign fund management companies were allowed to set up operations under new Guidelines
issued by the SC

• EPF contributors were allowed to withdraw part of their money from their retirement account
(Account 1) to invest in approved financial institutions including UTS.

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The Malaysian Unit Trust Administration Course began. This course provides an introduction to the way a
UTMC operates and was jointly developed by the FIMM and the Securities Industry Education, Australia.
The latter conducted the training.

The unit trust industry moved towards a new era when PNB launched the RM3 billion Wawasan 2020 Fund,
which was opened to all Malaysians (including non-Bumiputras) between the ages of 12 and 40. Like the
ASB and the ASN earlier, the Wawasan 2020 Fund would remain at RM1.00 until further notice from PNB.

The Malaysian Unit Trust Funds Performance Table prepared by Micropal Asia Ltd (now known as Standard
& Poor’s) was introduced. The purpose of this table was to provide investors with a means to monitor and
evaluate the performance of the various UTS.

1997 The SC issued revised Guidelines on Unit Trust Funds.

The FIMM Secretariat began registration of UTC to improve the standards and professionalism
of those distributing UTS.

The regional financial crisis began, causing a significant decline in funds under management
of the unit trust industry.

1998 The FIMM published Understanding Malaysian Unit Trusts to assist UTC in meeting
the requirements of the Unit Trust Pre-Registration Examination. UTC need to pass this
examination in order to be authorised to distribute and market UTS.

The SC commenced issue of Practice Notes to Guidelines on Unit Trust Funds to assist industry
participants in meeting its requirements, and to update the Guidelines.

Lipper was endorsed by the FIMM as the second supplier of UTS performance data.

Following the Asian financial crisis, the unit trust industry began a steady upward trend in funds
under management.

1999 The FIMM successfully bid to host the XVII International Investment Funds Conference in
2003.

The Unit Trust Examination (previously known as Unit Trust Pre-Registration Examination) was
introduced. All distributors of UTS must pass the examination before becoming an authorised
UTC to distribute UTS.

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1.7.4 THE NEW MILLENNIUM

2000 The unit trust industry’s preparations for the Y2K ‘bug’ proved successful.

The FIMM issued its first Guidelines for the registration of IUTA for Marketing and Distribution
of UTS.

The FIMM issued By-Laws covering its Disciplinary Proceedings against members.

RHB Bond Fund, the first UTS with a single selling and repurchase unit price with no entry
fee, is launched.

RHB Islamic Bond Fund, the first Islamic bond fund investing in bonds and other Islamic debt
securities in accordance with Syariah principles, is launched.

The SC issued Practice Note 15 on Distribution of Returns from Unit Trust Funds - a total
returns approach is adopted to measure and assess the performance of UTS. Major revisions
to the Guidelines on Unit Trust Advertisements and Promotional Materials are issued.

The FIMM hosted the Fifth Asia-Oceania Regional Meeting of the International Investment
Funds Conference.

The first Malaysia Unit Trust Week was launched jointly by the FIMM and PNB.

The Securities Commission (Amendment) Act replaced the Securities Commission (Unit Trust
Scheme) Regulations. The regulation of UTS is now in a single Act.

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2001- The Malaysian Capital Market Masterplan is announced by the SC, highlighting significant
2005 opportunities for growth in the unit trust industry over the next 10 years, including:

• online trading of units in UTS

• investigation of possible tax incentives for investors through UTS
• support for continued promotion of the benefits of investing through UTS
• encouragement for the further development of the financial planning industry
• development of private pensions as an alternative to EPF
• improved eligibility for EPF transfers to approved UTS
• review of restrictions on overseas-invested UTS
• streamlined UTS approval procedures through the SC
• promotion of Syariah UTS
• development of derivatives UTS
• removal of restrictions on UTS investing in exchange-traded derivatives
• promotion of bond UTS
• introduction of ETF
• introduction of venture capital trusts

The FIMM hosted the XVII Annual Assembly of the International Investment Funds
Associations.

The computerised UTE and registration of UTC were introduced by the FIMM.

The SC issued Guidelines on Real Estate Investment Trust.

The SC issued Guidelines on Exchange Traded Funds.

ABF Malaysia Bond Index Fund, the first exchange traded fund was launched by AmInvestment
Services Bhd.

MAAKL Pacific Fund, the first foreign UTS was launched by MAAKL Mutual Bhd.

The FIMM issued the first Standard and Practice Note on Standard Cut-off Time for Unit
Purchases and Redemptions.

Dealing in Unit Trusts, the second edition of UTE manual was published to further strengthen
the standards and professionalism of those seeking registration as UTC.

1-23
PART B

❙ SECTION 1.8 UTS PROSPECTUS

UTS prospectuses are very important documents. No sale of units in UTS can be made without a prospectus,
which must comply with the law and SC requirements. Further, the prospectus must be updated at least
once every 12 months. It is an offence to issue a prospectus to prospective investors that is misleading, and
UTMC are required to constantly review the prospectus during its life.

We will examine the legal requirements relating to the issue of prospectuses in Chapter 2. In this section,
we will provide UTC with a review of the contents of a prospectus, and describe the requirements in the
Prospectus Guidelines for Unit Trust Funds.

1.8.1 KNOWING THE PROSPECTUS

UTC must ensure that an investor is given a current prospectus and should provide him or her with an in-depth
explanation of the prospectus before an application is made. The prospectus is a legal document containing
legal, accounting and investment terms that many investors find difficult to understand. It is mandatory for
UTC to be thoroughly familiar with the prospectus of each UTS they distribute. UTC are required to draw an
investor’s attention to the various sections of a prospectus.

In response to public comments, UTMC now take great care to make UTS prospectuses more investor-
friendly. UTC should be aware, though, that the purpose of a UTS prospectus is to provide investors with
all the necessary information to make an informed decision to invest in that UTS.

While there are variations in layouts and design, UTS prospectuses must be legible, be in type size of not
less than eight point, and must contain the information prescribed by the SC as set out below.

COVER PAGE

The cover page will provide the name of the UTS, and the name and registration number of its UTMC and
trustee. All prospectuses must carry the date of issue and an expiry date. A general warning statement is
also required to advise investors to read and understand the prospectus and, if in doubt, to refer to their
adviser.

INSIDE COVER (OR FIRST PAGE)

The prospectus of UTS is issued by the directors of its UTMC, who take full responsibility for the contents
and any omissions. A statement to this effect is required in the prospectus.

Although a prospectus is lodged and registered with the SC, the SC takes no responsibility for the contents,
and a statement to this effect is also required to be given in the prospectus. Also required is a statement
that registration of a prospectus is not to be taken as a recommendation to invest in that UTS and a warning
statement that investors should themselves assess the merits and risks of an investment.

Finally, there must be a statement that units will not be sold later than one year after the date of the prospectus.
It is important that only the current prospectus is provided to prospective investors and referred to by UTC.
Units in UTS cannot be sold on the basis of a prospectus that has expired.

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TABLE OF CONTENTS, DEFINITIONS, CORPORATE DIRECTORY

UTMC may issue a prospectus that offers units in a single UTS or a prospectus (called a ‘master’ prospectus)
that offers units in several UTS. Consequently, the size of a prospectus has increased in recent years. A
clear contents page is therefore considered by the SC to be essential.

The SC requires a glossary of abbreviations and technical terms to assist prospective investors in their
understanding of a prospectus prior to investment.

A corporate directory listing the directors, company secretaries, and members of the Investment, Syariah,
Audit and Compliance Committees must be provided. Names and contact details of UTMC and trustee are
also required. The names and addresses of auditors, reporting accountants, tax consultants, solicitors,
principal bankers, agency office and Syariah adviser (where applicable) must also be given.

If an expert’s report is included within a prospectus, the expert’s name, address and qualifications must be
provided.

KEY DATA SECTION

This section provides an executive summary of the prospectus showing its key features. It is designed to
be concise and is often presented in a tabular format with cross references to the relevant section of the
prospectus. It allows investors and UTC to make a quick comparison of different UTS issued by UTMC. Being
a summary, the information will be incomplete, and for full details the whole prospectus should be read.

The section will include details of the parties involved in that UTS, its investment objectives, the type of
investor to whom the UTS is directed, approved fund size and units currently in circulation, the various fees
and charges payable (see below), minimum investment and repurchase transaction size, any repurchase
restrictions, the cooling-off right, switching and transfer facilities, exit and re-entry options, and whether
distribution reinvestment is available.

The maximum rate of initial service charges and exit fee to be imposed by each distribution channel are
required to be disclosed too.

Distribution data relating to the last financial year is also required to be disclosed - amount, form (e.g. payment
or additional units), and the various components (e.g. interest, dividend income, realised capital gains).

A series of warning statements is required to be disclosed to the effect that

• there are fees and charges that should be considered before investing
• past earnings and distributions are not a guarantee or reflection of future earnings and distributions
• prospective unitholders should read and understand the contents of the prospectus, and consult their
advisers, if necessary (possible sources of advice should be given by UTMC)
• unit prices and distributions (if any) may go down as well as up.

INTRODUCTION TO UTS

In this section of UTS prospectuses, investors will be provided with a general introduction to UTS without
specific reference to the UTS offered in the prospectus. This will incorporate details of how UTS work, the
parties involved and the regulatory framework. The general benefits and risks of investing in UTS and the
specific UTS offered will also be disclosed - especially in relation to alternative investments such as bank
deposits and direct investment. The benefits and risks disclosed should relate to the profile of the typical
investor, e.g. the investor’s investment outlook, risk level and other investment criteria.

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UTMC DETAILS

The SC requires disclosure in UTS prospectuses of how the UTS will be managed and administered.
Details will be given of a UTMC’s experience in managing investment portfolios; its financial strength; its
directors’ and Investment Committee members’ experience in funds management; securities markets and
risk management; the experience of senior management and other key personnel - especially of those
responsible for investment management (including details of external fund managers).

Any conflicts of interest will be disclosed in this section together with UTMC policy in dealing with such
situations, e.g. how personal securities dealing by directors, employees and Investment Committee members
are handled.

Powers of UTMC to remove and replace the trustee will also be described.

TRUSTEE DETAILS

The SC requires details of the trustee of UTS to be disclosed to investors, including its experience and
capacity as a trustee and its financial strength, its duties and responsibilities, and the circumstances in
which it may retire, be removed or be replaced. The UTMC is also to confirm in the prospectus the trustee’s
willingness to assume its position and accept its responsibility to unitholders.

The trustee’s powers to remove, retire or replace the UTMC of the UTS will also be described.

FUND INFORMATION

The prospectus will include in this section details of the UTS, such as its type and investment objectives, the
investment management strategy (including asset allocation, risk management strategy, type of investments
to be held, hedging policy) to be adopted by UTMC, its permitted investments and any limits or restrictions,
liquidity and gearing policies, how investments are to be valued, and its distribution policy.

HISTORICAL FINANCIAL HIGHLIGHTS

In this section of UTS prospectuses, the SC requires disclosure of information relevant to prospective investors’
assessment of UTS past performance. For example, details of the last five years’ distributions per unit, UTMC
and trustee fees, related party benefits, UTS expenses, NAV at each year-end, brokers commissions paid,
the Portfolio Turnover Ratio and Management Expense Ratio (see below) and explanations of how these
are calculated and their meaning, top five portfolio investments and top three foreign and unlisted securities
(if applicable), and details of suspended companies and how they have been valued.

PORTFOLIO TURNOVER RATIO (PTR)

The PTR provides an investor with an indication of the approach of UTMC to investment of the UTS
portfolio.

The calculation of PTR for a particular year is:

1/2 x [total investment acquisitions + total investment disposals]

average fund size

1-26
Example:

During the year ended 30 November 200X, the fund managers of ABC Growth Fund sold investments with
gross proceeds of RM1,159,206 and purchased additional investments at a gross cost of RM921,458. The
average fund size during the year was RM3,122,250.

Calculate the PTR of the Fund for the year ended 30 November 200X for disclosure in the prospectus of
the Fund.

PTR = 1/2 x [RM921,458 + 1,159,206]

RM3,122,250
= 0.33 times (or 33%)

If the PTR is maintained at the same level for a period, it means that, on average, the portfolio of the Fund
will be completely turned over (replaced) about once in every three years, i.e. a typical investment in the
portfolio is held for about three years before being sold.

A UTS with a relatively high PTR (compared to other UTS) may indicate a more aggressively managed
(trading) portfolio where shares of companies are bought and sold relatively quickly. A low PTR may indicate
a more conservatively managed (buy and hold) strategy where companies are held for the medium or long-
term. A low PTR indicates that UTMC are incurring fewer transaction costs. The amount of stockbroker
commission, etc. incurred in managing UTS, of course, adversely impacts UTS performance.

The SC requires that UTS prospectuses include a calculation of the PTR for the last financial year of UTS
together with an explanation of the result, especially in comparison with previous years’ PTR.

SALES AND PURCHASES OF UNITS

Details of how unit prices are calculated, including the valuation point and whether forward or historic pricing
is adopted, will be disclosed in this section. Where historic pricing is adopted, a warning that re-pricing
can occur (where valuations in excess of 5% arise since the previous valuation points) must be given.
Commission rates payable to UTC must be disclosed, together with details of where units may be bought
and sold back to UTMC.

The cooling-off right must also be disclosed together with full details of the fees and charges payable on
buying and selling units, the fees payable to UTMC and the trustee, and the MER of the UTS and how it is
determined (see below).

UNITHOLDER’S RIGHTS AND LIABILITIES

A unitholder’s rights will be explained in UTS prospectuses. These include the right

• to receive a distribution from UTS

• to participate in any increase in the capital value of units
• to call for meetings of unitholders
• to vote for the removal of UTMC or trustee through a resolution at unitholders meeting
• to exercise the cooling-off right
• to receive UTS annual and interim reports.

Other rights, such as the right to information and to have units bought back by UTMC as described in the
deed, will also be disclosed.

1-27
A unitholder’s liabilities are limited to payment of the initial service charge, and there is no obligation to
indemnify the trustee or UTMC, should either incur liabilities on behalf of UTS.

TAXATION

The prospectus will contain a report on the tax position of UTS, reflecting its investments and on the taxation
obligations of unitholders.

ACCOUNTANT’S REPORT

A UTS prospectus is required to contain an accountant’s report, dated not more than six months prior to the
prospectus date, showing the past five financial years of the UTS’s

• statements of income and expenditure

• statements of assets and liabilities
• distributions.

The profit and loss statement and balance sheet of UTMC for the past five financial years will also be
shown.

OTHER PROSPECTUS DISCLOSURES

These include:

• statements of consent of those named in the prospectus

• any SC-granted exemptions and variations
• UTMC policy on soft commissions
• details of how unitholders can keep up-to-date with information on UTS
• unclaimed moneys policies and procedures
• customer services provided by UTMC
• any other information required by the SC
• any other information required to evaluate the merits and risks of investing in UTS
• a list of the documents - such as the deed, audited accounts and consents - that are available for
inspection.

DIRECTORS’ DECLARATION

The prospectus will include a declaration signed by all directors of UTMC that they have approved the
prospectus and take full responsibility for the information it contains, and that there are no omissions which
would make any statement in the prospectus misleading.

APPLICATION FORM AND SALES OFFICE DIRECTORY

A prospectus is required to incorporate an application form and Unit Trust Loan Financing Risk Disclosure
Statement. Previously, these documents could be provided to investors separately from the prospectus by
UTMC.

Finally, the prospectus will include a list of places where units can be bought and sold back to UTMC.

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❙ SECTION 1.9 FEES AND CHARGES
It is important that investors fully understand the fees, charges and other costs associated with investment
in UTS. As with all financial services, they are delivered to the investor at a cost. Whilst investing in UTS is
an economic method of investing in a range of investments, the costs are not insignificant and should not
be overlooked.

There are two classes of fees and charges in UTS - those borne directly by an individual client, and those
which are deducted from the assets of UTS and which are therefore suffered indirectly by unitholders in
proportion to the number of units each holds.

1.9.1 DIRECT FEES AND CHARGES

INITIAL SERVICE CHARGE

The first cost that an investor incurs in relation to UTS is the initial service charge (sometimes called the
service, sales, entry, or ‘up front’ charge). This is the cost to an investor of investing in, or entering, UTS and
it is levied primarily to cover the UTMC costs of marketing and distributing units, and the costs of opening
an account in the unit register for a unitholder.

The cost of investing in UTS is based on the NAV of UTS. Most UTS in Malaysia would levy a charge of 5
to 7%, although some UTS charge less and some do not charge at all.

The initial service charge imposed on the sale of units to investors must not exceed the maximum amount
stated in the UTS prospectus and allowed under the deed of each UTS.

Under the single pricing regime which came into force on 1 July 2007, the transparency of service charges
is further enhanced. The maximum rates of service charge to be imposed by each distribution channel are
now required to be disclosed in the prospectus in order for investors to compare the costs of investing in
unit trusts associated with different channels of distribution.

UTMC, UTCs and distributors are required to clearly inform the investors the actual rate of charges payable
at the point the investors make an investment. All charges paid will be separately disclosed in the statements
confirming investors’ purchase/ disposal of units.

Also, the practice of providing discounts and rebates by way of quoting a higher rate of charge but actually
imposing a lower charge is prohibited.

Assuming that a typical UTS charge is in the range of 5 to 7%, this means that for every RM1,000 an
investor invests, an amount of between RM50 and RM70 will be taken by UTMC – this is like a stockbroker’s
commission that is added to the cost of shares purchased on behalf of an investor. Investment in most UTS
should not, therefore, be for the short term, as the cost of investing is reasonably high. When spread over
a longer time frame, these costs become less significant. Rapid purchase and sale of units in UTS can,
because of the costs of investing, become a significant drain on an investor’s capital.

In some cases, UTMC may reduce the cost of investing in UTS, e.g. during the initial launch period of UTS
(when a one per cent of free units is given during the offer period of 21 days), or where an investor is switching
(i.e. disposing of units and reinvesting the proceeds in another UTS managed by that UTMC). This is one
way that UTMC seek to attract or maintain interest in their range of UTS, while saving on marketing costs.

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FEES FOR SPECIFIC SERVICES

Some UTMC charge a unitholder, who requests certain services, a separate fee or charge that must be
paid directly to UTMC by the unitholder. For example, UTMC that do not normally issue unit certificates to
unitholders may be prepared to do so for an individual investor on payment of an appropriate fee. A fee may
also be charged to transfer units to another unitholder. Some switching fees can also be charged as a fixed
amount rather than charged on a per unit basis.

EXIT FEE

Sometimes called a repurchase charge, this fee represents a deduction by UTMC from the proceeds of
disposal of a unitholder’s unitholding. Exit fees may be charged as an alternative to an initial service charge
but they are rare in Malaysia.

1.9.2 NON-DISCRETIONARY FEES AND CHARGES

ANNUAL MANAGEMENT FEE

UTMC are usually entitled, under the deed of UTS, to receive an annual management fee calculated on the
Gross NAV of UTS. This fee is paid out of UTS assets and is therefore borne by investors on the basis of
the number of units each holds.

Annual management fees that average around 1.5% per annum are levied by UTMC to cover the costs of
managing UTS. Some UTS charge less, particularly fixed income UTS and money market UTS - arguably
reflecting the lower costs of managing these UTS. Such costs would include salaries, office rent, computer
systems, depreciation, compliance, training, marketing and distribution costs, funds management and other
operating costs and general overheads of UTMC.

Annual management fees are approved by the trustee before being paid from UTS assets. As such, they are
reflected as a reduction in NAV and, therefore, a reduced unit price. In some UTS (those with a fixed unit
price), the annual management fee is deducted from the distribution payable to unitholders. In both cases,
the annual management fee reduces the return to investors and the performance of UTS.

In addition to proper disclosure of the annual management fee in UTS prospectuses, the SC also imposes
other obligations on UTMC. The annual management fee is the only remuneration to be received by UTMC
for managing UTS. The maximum amount of the fee must be stated in the deed, although UTMC may
charge a lower fee with the trustee’s agreement. A higher fee (subject to the maximum in the deed) than
that described in the last prospectus may be charged to investors (with the trustee’s approval), but only after
they have been given notice of the change. A prospectus (or supplementary prospectus) must be issued
disclosing that the new rate will apply after not less than 90 days of the date of issue.

The trustee is required to ensure that at all times the annual management fee is reasonable, given the
services provided by UTMC, the fund size, the nature of the UTS investments, and the success of UTMC
in meeting the objectives of UTS and its performance.

Should the trustee believe the annual management fee to be unreasonable, it is required to take appropriate
action - which may include convening a meeting of unitholders - to ensure the fee is appropriate for the
services provided by UTMC.

The annual management fee accrues, and is charged to UTS, daily at the agreed rate. It is calculated each
day from UTS gross NAV (i.e. before deducting that day’s annual management and trustee fees).

1-30
TRUSTEE FEE

The trustee of UTS is remunerated for its services in a similar way to UTMC, but the rate charged is much
lower. The SC requires that trustees charge a minimum rate of 0.08% per annum of the UTS gross NAV
(calculated as above), and a separate amount may be charged for acting as custodian of UTS assets. No
other fees may be charged by the trustee to cover its operating expenses, although it may reimburse itself
for any expenses properly incurred in the performance of its duties and responsibilities (for example, external
legal advice). The maximum amount of the fee must be stated in the deed, and the actual fee charged (within
the maximum and SC minimum) must be agreed with UTMC and reflect the role, duties, and responsibilities
of the trustee, and the interests of unitholders.

The fee must be disclosed in UTS prospectuses.

UTS EXPENSES

In addition to annual management and trustee fees, other expenses directly related and necessary to the
operation of UTS may be deducted from the assets of UTS. These include:

• the transaction costs of buying and selling UTS assets

• income tax and other government duties
• auditors fees and expenses
• investment valuation fees
• legal costs incurred in amending the deed (except in relation to changes for the benefit of UTMC)
• costs of holding meetings of unitholders (except those held for the benefit of UTMC)
• cost of issuing a prospectus (but only where unit selling prices do not include an initial service
charge).

Management and administration expenses of UTS that should be payable by UTMC from its annual
management fee are not reimbursable from UTS assets. The trustee is required to ensure that all reimbursed
costs are legitimate and reasonable.

1-31
MANAGEMENT EXPENSE RATIO (MER)

The MER represents a single measure (or summary) of the various operating costs of UTS borne annually
by unitholders on each unit held. It must be disclosed to investors in UTS prospectuses.

The calculation of MER for a particular year is as follows:

(fees + recovered expenses) x 100

average fund size

The amount represented by ‘fees + recovered expenses’ must equal the total expenses incurred by UTS as
shown in UTS financial statements for the year.

Example:

For the year ended 30 November 200X, the financial statements of ABC Growth Fund show that the following
expenses were incurred:

RM

Management fee 31,764

Trustee fee 6,078

Auditors fee 1,200

Bank charges & other expenses 2,482

TOTAL 41,524

The average fund size of ABC Growth Fund during the year was RM3,122,250.

Calculate the MER of the Fund for the year ended 30 November 200X for disclosure in the prospectus of
the Fund.

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 MER = RM41,524 x 100
RM3,122,250
= 1.33%

The MER allows investors and UTC to assess the previous year’s cost of holding units in a UTS and to
compare it to past and prospective returns, to the MER of competitor UTS, and to the costs of other investment
opportunities. It is a simple measure that replaces the multitude of fees, charges and costs listed above.

A gradually decreasing MER over a period of several years indicates that a UTMC may be managing its
operating costs efficiently for its fund size. UTC should note that UTS with a larger fund size should generally
have a lower MER than smaller UTS, as there may be some economies of scale that can be shared with
unitholders. However, this need not necessarily be so.

A newly launched UTS will have no MER. Some UTMC may include in a prospectus for a new UTS an
estimate of the likely MER.

❙ SECTION 1.10 MEASURING PERFORMANCE

Clients expect an investment in UTS to provide them with returns better than those of relevant benchmarks,
e.g. interest on bank deposits, KLCI movements, competitor UTS returns, etc. The correct measurement of
investment performance is therefore very important.

Analysis of UTS performance can be difficult because of the different ways investment performance can be
measured. When making performance comparisons, it is important to ensure that the investment methodology
has been consistently applied.

There are many different ways to express investment returns and it can become quite confusing, especially
when returns over various time periods are measured. Returns can be legitimately calculated in a number
of ways, and this can create confusion.

In order to properly assess UTS investment performance, it is important to standardise the measure of
investment performance. Common forms of expressing returns in relation to UTS include:

RAW RETURN

Raw return is the investment return that measures the total return achieved by holding an investment over
a particular period.

Example:

An investment purchased in 1994 for RM1.00 and sold in 2004 for RM2.00 is said to have produced a raw
return of 100%. If the investment had instead been sold in 1999 at the same price, the return is still 100%.

The problem with raw return is that it is difficult to compare returns over different periods. 100% earned by
UTS over a five-year period is clearly a much better return than a return of 100% over a 10-year period - but
how much better? And how do these returns compare with a UTS that has returned 55% over six years?

1-33
COMPOUNDED ANNUAL RETURN

Compounded annual return shows the annual compound rate of return achieved by an investment over
its holding period. In the previous example, the former annual compound rate of return on the investment
would be 14.9% per annum (i.e. per year) over the five-year period, and the latter 7.2% per annum (i.e.
significantly lower) over the 10-year period. A UTS that produced 55% total return over six years produced
an annual return of 7.6% per annum.

Compounded annual return is superior to the raw return since it adds a more meaningful, and standardised,
time dimension to the measurement of investment performance. Also, most investors are familiar and
comfortable with the term ‘per cent per annum’ and of the difference between ‘simple’ and ‘compound’ interest.
Most interest rates for fixed deposits and borrowings over one year are expressed as rates per annum and
are calculated on a compound interest basis.

Since benchmarks, such as the KLCI and one-year fixed deposit rates, are normally expressed as an annual
rate of return, comparison with UTS performance measured in the same way is valid, i.e. we are comparing
‘apples with apples’.

Compounded annual return is therefore a more useful tool in measuring and comparing investment
performance.

1.10.1 HOW IS UTS PERFORMANCE MEASURED IN MALAYSIA?

Investment performance is measured in terms of the total return received from an investment over the
holding period. Total return is the difference between the amount the investor invests and the amount he
or she receives on disposal of the investment, plus any income (or other entitlements) received during the
period of ownership of the investment.

In measuring the performance of UTS, a number of issues arise. Total returns from investing in UTS are
affected by fees - both initial service charges (a ‘one-off’ fee), and management and other expenses (which are
on-going). The impact of these on performance, particularly an initial service charge, can be significant.

The initial service charge only impacts the investor who pays it, and it is not an amount that is available to
UTMC to invest in accordance with UTS investment objectives. If we are trying to assess UTMC’s ability to
invest, should we therefore ignore initial service charges? From an investor’s perspective, total returns should
almost certainly be calculated after all charges and expenses - especially if they are to be compared with
other investment opportunities that do not incorporate any fees, for example, fixed deposit rates. However,
initial service charges are much more significant to total returns over shorter periods than over longer periods
when they tend to become relatively insignificant.

Generally, UTS performance tables exclude the cost to the investor of investing in a UTS but do incorporate
the effect of management and other expenses.

The FIMM has collaborated with two international research houses, Lipper and Standard & Poor’s, to
produce UTS performance tables for the unit trust industry. Both are highly regarded international research
houses who produce performance tables and other data, and conduct research into collective investments
throughout the world.

The performance tables divide UTS into categories in order to provide more meaningful comparisons. The
categories are broadly as described in section 1.4.3.

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Lipper measures UTS performance by taking the NAV of UTS at the beginning and end of a period and
adjusts this for any distributions (and unit splits) that an investor would become entitled to during that period.
Standard & Poor’s computes the performance over a period by comparing the buying prices of units in UTS
at the beginning and end of a period. An adjustment is also made for distributions (and unit splits) during the
period. Both NAV and buying prices exclude the impact of initial service charges. These slight differences
in approach become insignificant over reasonable periods.

The distributions received by an investor during the measurement period are assumed by both organisations
to be reinvested in additional units in UTS. The investment return of an investor, who receives distributions
that are not reinvested, will therefore not be the same as those shown in the UTS performance tables.
However, treating distributions in this way is consistent with accepted practice in calculating returns in the
share market, and in most share market indices.

Both Lipper and Standard & Poor’s UTS performance tables calculate total returns over a specified period
rather than convert the total returns to an annual compound rate of return. This may make the returns more
difficult to compare to returns from other investments - particularly fixed income securities and EPF rates
of return.

1.10.2 UTS PERFORMANCE TABLES

The investment performance of UTS is presented in the form of a performance table. Performance tables
are extremely useful in that they summarise the performance of the whole unit trust industry in a single table
over standardised periods, and on a consistent and objective measurement basis. The performance tables
may incorporate the performance of relevant benchmarks for comparison purposes.

In many countries, the performance tables alone provide the basis for selection of UTS, such is the perceived
significance of the information contained in the tables.

UTS performance tables usually include a number of elements relevant to the measurement of UTS
performance:

TOTAL RETURN OVER VARIOUS TIME PERIODS.

Commonly, the performance of UTS in performance tables is standardised over one, three and six months,
and over one, three and five years (and sometimes longer). One drawback of UTS performance tables is that
they can cause investors and UTC to focus on the short-term performance of UTS. Short-term performance
is a measure of how UTMC have coped with recent market conditions, but this may not be relevant over the
time period for which UTS is purchased. If UTS is to be held for say, five years or more, is its performance
over one, three or even 12 months relevant? Performance over long periods shows how UTMC have invested
UTS over a range of market conditions and economic cycles. This may be more relevant to a long-term
investor than performance over the short term.

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RANKINGS AND QUARTILES

Having measured the performance of each UTS over various periods, it is clearly logical and useful to list
them in order (rank), usually from the highest or best performing UTS to the lowest or worst performing.
The best performing UTS over a period is ranked 1 (i.e. first) over that period; the second best performing is
ranked 2 (i.e. second), and so on. The number of UTS ranked is usually provided so that the reader of the
performance table can see readily how a particular UTS ranks relative to the total number of UTS measured
in the table.

To assist users, some UTS performance tables are divided into quartiles. A quartile includes a quarter of the
UTS measured, and a ‘top quartile’ UTS is one that ranks in the top 25% of UTS measured over the period.
A second quartile UTS ranks in the second 25%, and so on. Being ‘bottom’ or ‘last’ quartile is a position that
UTMC will clearly try to avoid a UTS falling into but, of course, some UTS must be placed in the last 25%
of all UTS measured - even if their total returns are good.

We have seen that it is important to compare ‘apples with apples’, and it is common for UTS performance
tables to group UTS with similar investment objectives. This means that rankings and quartiles become
more relevant and useful.

FUNDS UNDER MANAGEMENT

Funds under management (usually referred to in UTS performance tables as ‘fund size’) are often provided
for each UTS. This may be helpful in assessing UTMC performance as it is sometimes the case that UTS
of a larger fund size perform differently than UTS with a smaller amount of funds under management. The
same may be suggested of UTMC with different amounts of funds under management.

BENCHMARKS

While it is useful to rank similar UTS and to divide them into quartiles, it can also be helpful to incorporate
into the performance tables the total return or ‘performance’ of a relevant benchmark such as the KLCI,
interest rate, and sometimes the inflation rate and EPF returns. The performance of individual UTS or the
‘average’ UTS (i.e. the middle ranking UTS, or the average return of all UTS) can then be compared with
other UTS or benchmarks, for marketing and other purposes.

It is sometimes difficult to choose the most appropriate benchmark against which to compare and analyse
UTS performance, especially those UTS with more complex investment objectives.

For example, an equity UTS would tend to use one of the indices produced by Bursa Malaysia as a
benchmark. However, a balanced UTS with elements of cash, fixed income, equities and property would
make the selection of a relevant benchmark much more difficult.

RISK MEASURES

Two UTS investing with similar investment objectives may produce identical investment performance over
the same period. However, the UTMC of one UTS may have taken fewer risks than the other in achieving
a similar return. Clearly, the UTS that achieved the return whilst taking fewer risks is the superior. In recent
years, UTS performance tables have increasingly considered this aspect of quantitative measurement of
performance.

While a detailed understanding of risk lies outside the scope of this book, it is relevant to see how some
Malaysian UTS performance tables assess this aspect of UTS performance.

1-36
As an indicator of risk, Lipper assesses UTS potential for losses by calculating, for each UTS in the UTS
performance table, the worst three months’ and the best three months’ performance during the last three years.
A less risky UTS will, on this definition of risk, be a UTS with a narrower range between these two extremes.
The range over these two quarters can also be compared with the return over the three-year period.

Standard & Poor’s assesses risk as the standard deviation of UTS performance over the last three years.
Standard deviation is a statistical measure of the volatility (or variation) of UTS performance compared to
the average performance over the period. UTS with a lower standard deviation are less risky than those
with a higher standard deviation.

1.10.3 WEAKNESSES OF UTS PERFORMANCE TABLES

Care should be exercised by UTC and others who use UTS performance tables.

It should be remembered that, while the performance tables are factually correct, they are based on historic
quantitative information. A number of studies of UTS investment returns have shown that ‘past performance is
not an indicator of future performance’. Therefore considerable care should be used in using UTS performance
tables in selecting UTS for investment, or for a decision to dispose of UTS.

Further, while the historic results shown may be accurate, they are subject to a number of potential
weaknesses. For example, because returns over one, three and five years, for example, are measured to
the same end period, they are sensitive to the more recent returns achieved. A good one-year return will also
boost the returns over three and five years, perhaps resulting in the appearance of a more consistent longer
term performance. A top ranking UTS over three years, for example, may have performed exceptionally
well over only the last three months, which compensated for abysmal performance over the preceding 33
months.

The returns shown in UTS performance tables for a particular period will not show that the returns achieved
by UTS perhaps came from investment in only one or two highly successful companies, i.e. very high risks
were being taken by UTMC. In a bull market, the ability of UTMC to obtain large allocations of initial public
offerings can considerably boost UTS performance - especially in comparison with an index that may not
initially include those companies. Is this a fair reflection of UTMC investment skill?

Over longer periods, it is also quite likely that those fund managers responsible for the track record of UTS
have changed. Is it reasonable to consider past UTS investment performance when those responsible for
achieving it are no longer employed by UTMC?

As a result of these - and other - concerns, research houses have started to examine other factors that may
be relevant to the assessment of investment performance of UTS.

CONSISTENCY

We have seen that the performance of UTS can be very sensitive to the period that is selected for
measurement. UTMC may select a highly successful investment period to report UTS performance in
advertising and promotional materials, so such claims should be carefully considered.

Of more significance to long-term investors is the consistency of a UTS’s performance over a range of time
periods. If UTMC have produced consistently above average UTS performance for the past three, six and
12 months, as well as the past three, five and seven years, then the track record may indicate that they
are likely to produce the same superior results in the future. UTMC whose UTS produce, historically, more
variation in returns may not be as reliable in the future as the historically consistent performer.

1-37
Again, we must stress that past performance is not necessarily indicative of future performance. But it does
show how a UTS has performed against competitor UTS in both good and bad times. Long-term investors
look to invest in UTS that perform well throughout all market cycles. After all, most equity UTS tend to
perform well when the stock market is going up. It is UTS that outperform competitors when the market is
not performing well that deserve consideration. Investors should therefore look to invest in those UTS that
have consistently outperformed the relevant benchmark and competitor UTS over reasonable periods.

The Standard & Poor’s Star Rankings (which are part of its UTS performance tables) is one method of
evaluating the consistency of UTS performance. Based on the performance of a single UTS relative to its
competitor (peer) UTS, the Star Rankings are awarded to UTS on the basis of consistency in outperforming
competitor UTS.

QUALITATIVE FACTORS

The qualitative analysis of UTS performance is complementary to quantitative analysis. It involves obtaining
an understanding of how a UTMC operates, the investment process, the structure of the organisation, and its
people. The objective of qualitative analysis is to review the performance of UTS based on an understanding
of the factors that may have contributed to measurable, historic returns.

A qualitative analysis of UTMC will include such elements as:

• UTMC credibility. Who is the UTMC? Who is its parent company? Are they both credible organisations?
What affiliations do they have? Are the senior management - particularly the fund managers - qualified
to fulfil their responsibilities and obligations?

• Investment management style. What is the investment management style of the fund managers?
Are they constantly looking for quick profits, resulting in high portfolio turnover? Or are they ‘growth’
or ‘value’ investors? Are they speculative in their investment choices or is the investment process
structured and subject to rigorous scrutiny and ongoing development? Do they rely on their own
research or the advice of brokers?

• Service aspects. Is the UTMC responsive to investors’ demands and requests? Are the UTMC business
processes geared to providing above average service? Are they committed to the unit trust industry
and investing in administrative and customer service systems?

Following a review of such qualitative factors, some research houses are recognising (often through the
award of stars on a scale of, say, one to five) UTS that are expected to achieve the investment objectives
set by UTMC. Investors can then better assess competing UTS before investing.

1.10.4 SUMMARY

UTS performance tables published by research houses endorsed by FIMM can be a useful tool for monitoring
investment performance. However, UTC should be aware that the information they provide is only one of
the factors that should be considered in making a decision to invest in UTS.

1-38
❙ SECTION 1.11 UNIT PRICING
In a listed UTS, units are bought and sold in the same way as listed shares on Bursa Malaysia. A unitholder
disposing of units in a listed UTS - through the market - negotiates a price with a potential buyer of those
units. A transfer of ownership takes place when the register of unitholders is altered to reflect the new owner
of the units. This is also the position where the UTS is a closed UTS, i.e. an unlisted UTS, where the limited
number of units available, once sold, can only be purchased from other unitholders.

In an open-end UTS (i.e. a non-listed UTS that is a continuous issuer of units), units are sold to investors
by UTMC and then repurchased by UTMC when investors wish to dispose of those units. UTMC act as a
principal in both transactions. UTMC act like any other supplier of a product and hold a stock of units in each
UTS, from which units are sold to investors or repurchased from them. As the level of stock fluctuates from
day to day, UTMC may need to replenish stocks by acquiring more units through the trustee of the UTS (a
‘creation’ of units); or, if UTMC hold too much stock, the stock of units can be reduced by asking the trustee
to extinguish units in the UTS (a ‘cancellation’ of units).

Consequently, there are two sets of unit prices:

• a selling and a repurchase price at which UTMC transact with investors, and

• a creation and a cancellation price at which UTMC transact with the trustee.

With effective from 1 July 2007, the industry has changed the regime for pricing of UTS from one that is
based on dual-pricing to a single-pricing regime. Under the old dual-pricing method, buying and repurchase
prices are incorporated with initial service and exit charges respectively and are quoted and used separately
for transactions involving buying and selling of units.

However, under the new single pricing regime, all buying and selling of units will be transacted based on a
single price i.e. unit NAV.

In this section, we will see how each of these prices is determined. The common thread in the calculation
of each is the determination of NAV of UTS. Under the single pricing regime, both sets of unit prices must
be the NAV of that UTS, so the calculation of NAV is vital. If NAV is inadvertently miscalculated, the effect is
that the integrity of that UTS is undermined since, for example, investors currently invested may have their
interests (i.e. proportionate share of UTS net assets) reduced or diluted by new investors paying a price
below that of the true NAV.

Some UTS have a fixed unit price at which units may be sold to, and repurchased from, investors by UTMC.
In these UTS, the NAV is fixed at RM1.00 and all unit transactions with investors and with the trustee are
completed at the same price of RM1.00.

1-39
1.11.1 CALCULATION OF NAV

The NAV of UTS comprises the sum of the following:

INVESTMENTS AT MARKET VALUE

The SC Guidelines on Unit Trust Funds include the approved methods by which investments held by UTS
must be valued. Clearly, investments should be valued at ‘fair value’. In relation to investments listed on a
stock exchange, for example, the two permitted bases are

• the last transacted sale price prior to the point in time (called the ‘valuation point’) at which the NAV
is to be determined, and

• the mid-price between the last quoted bid and offer prices prior to the valuation point.

Whichever method is chosen by UTMC, the Guidelines require that it be applied consistently from valuation
to valuation. This helps ensure the integrity of the NAV calculation.

LIQUIDITY (CASH AVAILABLE FOR INVESTMENT)

Liquidity is represented by money market instruments (such as bankers acceptances and call deposits). Net
cash flow in UTS is sourced from:

• creations less cancellations of units in UTS. When UTS arrange creation of units through the trustee,
cash for the units created must be paid by the UTMC to the trustee to be held for unitholders in that
UTS. Similarly, when units are cancelled, the trustee will pay cash from that UTS to the UTMC. Both
payments must be made within 10 days of a UTMC’s instruction to the trustee to create or cancel
units.

• proceeds from the sale of UTS investments, less payments for purchases of investments.

• investment income (e.g. dividends, interest, rent, etc) from the UTS portfolio less fees and charges
of UTS.

• less Malaysian income tax paid on taxable income of UTS and withholding tax suffered on overseas
investment income received by the trustee on behalf of UTS.

• other assets less liabilities, e.g. income receivable less accrued expenses; amounts receivable from
the sale of investments (but not yet received) less amounts payable for investments purchased (but
not yet paid); income tax outstanding on UTS taxable income for the previous year and provision for
income tax on the current year’s taxable income.

1.11.2 TRANSACTION COST FACTOR (TCF)

The transaction cost factor (or expense allowance) is a small addition (in percentage terms) to the NAV of
UTS. It may be made by UTMC in accordance with SC requirements when units are created (or deducted
from NAV when units are cancelled) in order to protect the interests of the unitholders in UTS. Each time
investments of UTS are bought and sold, transaction costs (such as brokers’ commissions on securities
traded on Bursa Malaysia) are incurred. If no allowance was made for such costs in determining unit prices of
UTS, the interests of unitholders who were not responsible for that UTS incurring those expenses (because
they were not buying or selling units) would be diluted. Therefore, to protect investors in UTS, an allowance
for transaction costs may be added to the NAV in order to determine the unit prices of UTS.

1-40
If the transaction costs are not material, no adjustment need be made. In Malaysia, a transaction cost factor
is usually only applied in determining the creation price of a unit in UTS. With declining transaction costs in
relation to securities listed on Bursa Malaysia following deregulation of the rate of stockbroker commissions
(in line with other international markets), there is likely to be less adjustment necessary to NAV to reflect
transaction costs. Any transaction cost factor applied in determining unit prices must be disclosed in the
prospectus of UTS. The SC requires that UTMC review the amounts regularly and, if necessary, revise them
to reflect changes in actual transaction costs.

1.11.3 CREATION AND CANCELLATION PRICES

The creation price is determined in accordance with the formula:

Creation Price = NAV + TCF

The cancellation price is determined as follows:

Cancellation Price = NAV - TCF

During the launch period of a new UTS (a period usually not exceeding 21 days), the creation price is equal
to unit NAV. In the relatively unlikely event that units are cancelled during the launch period, the applicable
cancellation price is equal the creation price.

1.11.4 SELLING AND REPURCHASE PRICES

These prices are the most important from the perspective of UTC and investors as they represent the prices
quoted by UTMC, those advertised in the press, and those often used in UTS performance tables.

The selling and repurchase prices of a unit must be the NAV of the UTS.

The selling and repurchase prices of UTS are calculated as follows:

Example:

Assume the NAV of ABC Growth Trust is determined as RM45,626,788 and that there are 65,500,000 units
in circulation. Also assume that no transaction cost factor applies as transaction costs are not material.

Calculate the selling and repurchase prices of a unit by rounding up the unit prices to four decimal places.

NAV per unit NAV of UTS

=
Units in Circulation

RM45,626,788
=
65,500,000

= RM0.69659218

RM0.6966 is the selling price at which UTMC can sell units to an investor. The same unit NAV will also be
the repurchase price quoted by UTMC for investor wished to dispose of his or her units on the same day.

The SC requires that the unit NAV be published daily in at least one national Bahasa Malaysia newspaper
and one national English newspaper.

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1.11.5 FORWARD AND HISTORIC PRICING

The selling and repurchase prices of UTS must be the NAV per unit at the valuation point. Traditionally, UTS
in Malaysia have been completing unit transactions with investors on an historic pricing basis. An investor
buying or disposing of units in UTS would be quoted a unit price by UTMC at NAV determined at the close
of business on the previous business day. By contacting UTMC during the day, an investor could be advised
of the unit prices before making an application or requesting a repurchase of units.

While this is convenient for investors and UTC who can advise the precise number of units in UTS that an
investor may obtain (assuming the application is received by UTMC on the same day), it leaves available
an opportunity that may disadvantage others and which is, therefore, considered inequitable.

Assume that Bursa Malaysia rises strongly today. If UTMC operate on an historic pricing basis in relation to
UTS, an investor may submit an application form with application money, the amount of which will be divided
by the selling price of units that is similar to the NAV determined at the close of business the previous day,
i.e. before today’s market rise. The investor can be almost certain that next day, the selling price will be
higher. Therefore, by applying today, the investor has acquired more units than he or she should equitably
be entitled to. This gain is at the expense of other existing unitholders in the UTS.

A more equitable method for determining the number of units to be allotted as a result of an application (and
also the amount of proceeds from a disposal of units) is for UTMC to adopt forward pricing. Under forward
pricing, the investor described previously would become entitled to the number of units resulting from dividing
his or her application money by the selling price which is the NAV at close of business on the day of receipt
by UTMC of the application. The investor pays (or, in the case of a repurchase, obtains) a fair price and
UTMC can create (or cancel) units with the trustee of UTS on the basis of the same NAV calculation.

The Guidelines on Unit Trust Funds state the SC’s view that UTMC should transact on a forward pricing
basis - which is considered to be best practice internationally. However, the use of historic pricing is permitted
by the SC where there are acceptable reasons for doing so, and where UTMC agree to recalculate the
selling and repurchase prices of UTS if there is a significant market movement, i.e. where the NAV would,
if recalculated, be different by 5% or more.

1.11.6 UTMC STOCK OF UNITS

We have seen that UTMC may hold a stock of units in UTS to facilitate sales and repurchases of units,
and to reduce the number of creations and cancellations of units with the trustee. The value of its stock of
units can rise and fall in line with the NAV of that UTS. UTMC may, in common with all unitholders, make
a gain or loss through holding units in UTS and this can be a source of profits (or losses) for UTMC. The
SC has set maximum holdings of units for UTMC in UTS in order to limit the UTMC’s financial exposure in
this aspect.

UTMC (or their nominees) may hold no more than 3 million units or 10% of the units in circulation in a
particular UTS, whichever is the lower. These limits, shall not apply to creation of new units under the EPF
Members Investment Scheme.

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❙ SECTION 1.12 UNIT SPLITS AND NAV
A split is the division of a single unit in UTS into two or more units. Sometimes, a split is erroneously
referred to by UTMC as a ‘bonus’ issue of units. A dictionary definition of a ‘bonus’ is ‘something extra’. As
the following example shows, no additional value accrues to a unitholder who becomes entitled to a bonus
issue of units in UTS.

Example:

The directors of UTMC of ABC Growth Fund declare a split of 1:2 (i.e. one additional unit for every two units
held). An investor with a holding of 1,000 units in the ABC Growth Fund before the split occurs will therefore
be entitled to 1,500 units after the split has occurred.

Is the investor better off?

NAV before the split RM180,000,000

Units in circulation before the split 100,000,000 units
NAV per unit RM1.80

NAV after the split RM180,000,000

Units in circulation after the split
150,000,000 units
(100,000,000 + 50,000,000)
NAV per unit RM1.20

An investor holding 1,000 units before the 1:2 split has an investment with an NAV of RM1,800 (1,000 x
RM1.80) and after the split, he or she will hold 1,500 units valued at RM1,800 (1,500 x RM1.20). The split
does not add value to the unitholding.

The effect of splitting units in UTS does not affect the NAV of that UTS; nor does it affect the value of a
unitholder’s investment.

1-43
So why do UTMC declare splits? There are a few simple reasons.

• The effect of a split is to reduce the stated selling and repurchase prices of a unit after the split has
occurred. Although it makes no difference to the NAV of UTS to do so, for psychological reasons,
investors seem to prefer to hold a larger number of low-priced units rather than a smaller number of
high-priced units. Hence, UTMC like to maintain a smaller unit price simply because the investor can
hold a larger number of units in UTS with the same amount of application money than if the unit price
was higher. By splitting units, a high-priced unit becomes a lower-priced unit and new investors may
be more inclined to purchase units - especially in comparison with competitor UTS that may have
high-priced units.

• By reducing the selling and repurchase unit prices and the NAV of UTS, UTMC profit margins on
selling units become less significant in sen per unit, i.e. the spread between selling and repurchase
prices is reduced.

By retaining within the UTS the amounts that could have been distributed in cash, there is no effect on UTS
NAV (and the value of unitholdings) and unitholders receive no income that need be declared for income tax
purposes. By maintaining UTS NAV (and the value of unitholdings), unitholders are maximising the value of
the investment in UTS and, since capital gains on realising units held are not generally subject to income
tax, investors are maximising the after-tax return from investment in that UTS.

In the past, many UTMC declared ‘bonus’ issues of units in UTS - sometimes several times in each UTS
accounting year. In some cases, it could be argued that unitholders in UTS were likely to be misled as to the
true investment returns made by UTS. Consequently, the Guidelines require that UTMC declare splits only
at the time of the annual distribution of returns, i.e. on the last day of the accounting year of the UTS.

A unit split is processed by UTMC by closing the register of unitholders of UTS while the number of units of
each holder is altered to reflect the split. Statements of new holdings or unit certificates are then forwarded
to investors.

1-44
❙ SECTION 1.13 DISTRIBUTIONS AND NAV
In most UTS that have unit prices that fluctuate in line with NAV (i.e. where UTS does not have a fixed unit
price of RM1.00), the effect of declaring and paying a distribution to unitholders in UTS is to reduce the
NAV of UTS by exactly the same amount as the distribution. In other words, the payment of a distribution
is not a ‘bonus’.

Example:

Assume the directors of UTMC of ABC Growth Fund declare a distribution of 10 sen per unit. The Fund’s
NAV is RM180 million and there are 100 million units in circulation.

Is a unitholder wealthier following the payment of the distribution?

NAV before the distribution RM180,000,000

Units in circulation 100,000,000 units
NAV per unit before the distribution RM1.80

NAV after the distribution

RM170,000,000
(RM180,000,000 - 10,000,000)
Units in circulation 100,000,000 units
NAV per unit after the distribution RM1.70

A unitholder in UTS, after receiving a distribution, would find that the NAV of his or her investment falls by
the amount of that distribution.

Position of unitholder before the distribution payment:

NAV of 1,000 units at RM1.80 RM1,800

Position after the distribution payment:

RM
NAV of 1,000 units at RM1.70 1,700
Distribution received (1,000 units at 10 sen) 100
1,800

In a listed UTS, too, the NAV of UTS should fall as the distribution is declared and theoretically, the market
price of a unit should fall by the same amount. However, and as with all securities listed on a share market,
the market price of units reflects the actions of buyers and sellers and the market price may fall or rise by
more than this amount.

In a fixed price UTS, the net income earned by UTS is accounted for by UTMC separately from the NAV (or
capital value of a unit). Consequently, when UTS income is paid out to unitholders as a distribution, there
is no effect on NAV per unit.

1-45
❙ SECTION 1.14 SUMMARY
A UTS is an investment structure or vehicle that allows investors, who share similar financial objectives,
to pool their money. A professional fund manager is employed to invest the pooled funds into a portfolio of
investments.

The portfolio of investments may include one or more of the major asset classes, depending on the category
and investment objectives of the UTS. The Malaysian unit trust industry offers investors a range of UTS
designed to meet investors’ differing investment objectives.

UTS offer investors a simple, convenient way to gain exposure to a range of investment opportunities that
may, normally, only be available to larger investors. A significant benefit is diversification - investors in UTS
can usually access a broader range of securities or other investments than they could by investing directly
and individually. Such a diversified portfolio can reduce investors’ risk. An investor holding a single investment
that falls in value can only suffer a loss. By exposure to many investments held through UTS, the impact of
a single investment falling is considerably reduced.

Investors in UTS also benefit from having full-time professional fund managers looking after their interests.
Furthermore, their investment in UTS is liquid, and investors are able to buy and sell units in UTS easily.

While the benefits of investing through UTS are significant, there are perceived disadvantages - the major
one is the fees and charges payable by unitholders to the promoter of the UTS (the UTMC) and to the trustee.
The fees and charges impact investors’ returns through reducing distributions and the NAV of UTS. In fact,
investing in unit trusts is much more cheaper than direct investment into shares market.

The fees and charges levied by UTMC (which cover the operating costs of UTMC) are regulated and are
required to be fully disclosed to investors in UTS before they invest. Detailed disclosure through a UTS
prospectus means that investors are able to make an informed investment decision.

Determination of NAV is the starting point for the calculation of unit prices. Unit prices of UTS are a key
element in the measurement and assessment of UTS investment performance. Understanding how unit
prices are calculated will assist UTC in explaining to investors that unit splits and distributions do not increase
the value of a unitholding in UTS.

1-46
SELF-TEST QUESTIONS ON CHAPTER 1
1. What is a UTS? List the benefits and disadvantages of investing in UTS.

2. Describe the structure of UTS and the role of each of the parties in UTS. Who owns the assets of
UTS?

3. What documents govern the operation of UTS?

4. Outline the major differences between an equity UTS and a real estate UTS (REIT) from the perspective
of an investor.

5. Explain clearly the difference between an open-end and a closed-end UTS. What is a ‘closed’ UTS?
How may investors buy units in an open-end and a closed-end UTS, and in a ‘closed’ UTS?

6. What is the current size of the unit trust industry in Malaysia? Do you think the unit trust industry will
grow? Give reasons.

7. List the major sections of a UTS prospectus. What are the major costs associated with investment in
UTS?

8. Describe how the performance of UTS can be measured.

9. How is the selling price of UTS determined by UTMC?

10. What impact does a split have on the value of a unit in UTS? Give a numerical example to illustrate
your answer. Will the payment of a distribution affect the value of an investor’s holding in a UTS?

1-47
 APPENDIX 1: UTS IN MALAYSIA
SUMMARY OF STATISTICS
(as at 31 December)

1996 1997 1998 1999 2000 2001 2002 2003 2004

No. of UTMC* 30 31 32 34 34 37 39 36 36

No. of Approved UTS* 77 84 95 107 127 164 188 226 291

Total Approved UTS Size*

47.105 55.710 61.876 74.351 90.351 110.018 134.962 174.842 218.052
(billion units)

Units in Circulation
38.983 45.250 46.539 52.632 63.846 71.392 84.534 97.387 118.627
(billion units)

No. of Accounts 7,963,929 8,263,241 8,588,316 8,910,082 9,581,689 9,989,988 10,175,049 10,221,476 10,425,317

1-48
Total NAV of UTS
59.955 33.572 38.728 43.257 43.299 47.346 53.698 70.084 87.385
(RM’ billion)

Bursa Malaysia Market

806.770 375.800 374.520 552.690 444.350 464.990 481.620 640.280 722.040
Capitalisation (RM’ billion)

% of NAV to Bursa Malaysia

7.43% 8.93% 10.34% 7.83% 9.74% 10.18% 11.15% 10.95% 12.10%
Market Capitalisation

* includes UTS approved but not yet launched

Note: Statistics may be subject to revision

Source : Securities Commission

APPENDIX 2:
THE STATE OF PLAY OF THE CAPITAL MARKET
MASTERPLAN: INVESTMENT MANAGEMENT
Investment management funds in Malaysia consist
of, among others, funds managed by provident and
pension funds; unit trust management companies;
asset management companies and insurance
companies.
BACKGROUND
The provident and pension fund sector in Malaysia
is dominated by the EPF. The EPF, the world’s
oldest publicly managed provident fund, was
first established on 1 October 1951 by an Act of
Parliament under the EPF Ordinance 1951 and
operates as an open-ended defined contribution
fund.62 EPF provides a compulsory savings scheme
to ensure security and well-being of its contributors
in old age. Currently, the EPF statutory rate is 23%
of the value of Malaysian employees’ monthly
remuneration (the employee contributes 11% of
his salary while the employer contributes 12% of
the value of the monthly remuneration). As at end-
September 2000, the EPF had over RM167.09 billion
of funds under its management.63 Currently, the EPF
Board oversees the formulation and implementation
of EPF policies. The MOF appoints the EPF Board,
and the EPF Investment Panel that devises EPF
investment policies.
Other (non-EPF) provident and pension funds
include the LTAT, Malaysian Estates Staff Provident
Fund, Teachers Provident Fund, Kumpulan Wang
Amanah Pencen (KWAP) or the Pensions Trust
Fund, SOCSO and six other provident and pension
funds. The largest of these is KWAP, which was set
up under the Pensions Trust Fund Act 1991 to provide
pension benefits to public employees. Financing for
KWAP comes directly from the Budget allocations
and employer contributions. Another important
component is the SOCSO, which unlike the EPF, is
funded on the basis of social insurance principles.
The LTAT which is based on the Armed Forces Act
1973, applies to servicemen who enlisted on or after
1972 and who are not eligible for pensions.
62
Source: Employees Provident Fund.
63
See footnote 62.
1-49
Unit trust funds are a form of collective investment
that allow investors with similar investment objectives
to pool their funds to be invested in a single
portfolio of securities managed by professional fund
managers. Malaysia introduced the unit trust fund
concept relatively early compared to other countries
in the region. The first unit trust fund in Malaysia was
established in 1959 by The Malayan Unit Trust Ltd.
However, it ceased operations in 1969. From 1960–
80, five new unit trust companies were established,
namely: Asia Unit Trust Bhd in 1966; Amanah Saham
Mara Bhd in 1968; Kuala Lumpur Mutual Fund in
1975; Pelaburan Johor Bhd and MIC Unit Trust Bhd
in 1977. These five companies launched a total of 18
funds over the same period.
During the period 1960– 80, the unit trust industry
was regulated jointly by the ROC, the Public
Trustee of Malaysia, the Minister of Domestic Trade
and Consumer Affairs and BNM. Such a diverse
involvement of bodies necessitated the setting up of
a committee (comprising representatives from each
authority) to co-ordinate the approval process for
the establishment of unit trust schemes. Accordingly,
the Informal Committee for Unit Trust Funds was
established in 1975. This period also witnessed the
launching of Skim Amanah Saham Nasional (ASN) or
the National Unit Trust Scheme by the government in
1981 with the purpose of inculcating savings habits
among the Bumiputera community and to encourage
Bumiputera ownership in the corporate sector. In
1990, the Amanah Saham Bumiputera (ASB) or the
Bumiputera Trust Fund was launched to replace ASN
as a fund that transacted based on daily pricing of
its NAV.
The extensive marketing strategies adopted by the
ASN and ASB played a key role in making unit trusts
a “household product” in Malaysia. In 1993, the SC
became responsible for the regulation of the local
unit trust industry with the enactment of the Securities
Commission Act 1993 (SCA).
Asset management companies, commonly referred to Malaysia has a relatively high propensity to save
as fund managers, are companies that manage funds (Figure 69). From 1990– 99, Malaysia’s average
on behalf of a client for the purpose of investment. savings rate of about 32.4% of GDP was on average
Under section 15A of the SIA, asset management higher than that of developed countries such as
companies in Malaysia are required to be licensed. the US, Canada, Germany and Japan. It was also
As at end-1999, there were 71 licensed asset comparable to Hong Kong’s. The value of savings
management companies. At that time, local asset mobilised by banking institutions has grown more
management funds totalled RM40.7 billion. The bulk than five-fold during the 1990s, thus increasing
of local funds under management, approximately the domination of the banking sector over the EPF
RM33.0 billion (or 80.9% of total local funds under and other forms of managed funds (such as unit
management by asset managers) were from unit trust trust funds and insurance funds), which have not
funds that had chosen to outsource their investment expanded as rapidly (Figure 70).
functions to external fund managers.64
���������
Insurance companies also form a significant source ���������������������������������
��������������������������������������������������
of institutional funds in Malaysia. General and life
���
insurance companies, together with Takaful play
a major role in managing funds on behalf of their
���
policyholders. As at end-September 2000, local
insurance funds had a total of RM50.4 billion worth
���
of assets under management.65
�� ��������

���

DOMESTIC OVERVIEW
���

���
DEPLOYMENT OF DOMESTIC FUNDS
�
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Figure 69
National savings rate as a percentage of GDP (1990–99 average)

60
Sources: Bank Negara Malaysia; Securities Commission
Notes : a) Funds managed by banking institutions refers to deposits of the financial
50 system, which includes commercial banks, finance companies, merchant
banks, discount houses, Islamic banks and BSN
b) Funds managed by the EPF refer to total accumulated contributor’s balances
40 c) Fund managed by other provident and pension refers to assets of non-EPF
Pe r ce n t a g e p o in t s

provident and pension funds which include the LTAT, Malaysian Estates
Staff Provident Fund, Teachers Provident Fund, KWAP, SOCSO, and six
other provident and pension funds
30 d) Funds managed by insurance companies refers to total assets of life and
general insurance funds
e) Funds managed by unit trust companies refers to total NAV of unit trust
20 companies
f) Funds managed by asset management companies refers to total funds
managed by asset management companies
g) Data for funds managed by the banking sector and other provident and
10
pension funds are preliminary

0 p
St a t e s

It a ly

Ge r m a n y
Un it e d
Kin g d o m
U n it e d

Ca n a d a

Fr a n ce

Ja p a n

M a la ys ia

Ho n g
Ko n g

Sin g a p o r e

In 1999, about RM560 billion of Malaysia’s financial

assets were channelled into the banking sector in
Sources : Securities Commission; Wharton Econometrics Forecasting Associates
the form of deposits; by contrast, managed funds,
Group; Bank Negara Malaysia; Monetary Authority of Singapore; United including EPF, amount to less than half that amount
Nations Economic and Social Commission for Asia and the Pacific; Census
and Statistics Department, Hong Kong Special Administrative Region (Figure 71). Nevertheless, managed funds (especially
Note : National savings rate equals gross domestic saving divided by nominal
GDP
unit trusts) have enjoyed growing popularity in recent
*p-preliminary years. The dominance of the banking sector in
Malaysia compares with the situation in Japan and
Australia (Figure 72 and Figure 73) but is in stark
contrast with that of the US, where capital market
64
Source: Securities Commission. intermediaries play a far larger role in savings
65
Source: Bank Negara Malaysia. This is a preliminary figure.
mobilisation (Figure 74).

1-50
��������� ���������
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�������������������������������������������������� ��������������������������������������������������������

��� ���

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Sources: Bank Negara Malaysia; Securities Commission Sources: Reserve Bank of Australia; Securities Commission
Notes : a) Funds managed by banking institutions refers to deposits of the financial
system, which includes commercial banks, finance companies, merchant
banks, discount houses, Islamic banks and BSN
b) Funds managed by the EPF refer to total accumulated contributor’s balances
c) Fund managed by other provident and pension refers to assets of non-EPF
provident and pension funds which include the LTAT, Malaysian Estates
Staff Provident Fund, Teachers Provident Fund, KWAP, SOCSO, and six
other provident and pension funds
d) Funds managed by insurance companies refers to total assets of life and
general insurance funds
e) Funds managed by unit trust companies refers to total NAV of unit trust
companies
f) Funds managed by asset management companies refers to total funds
managed by asset management companies
g) Data for funds managed by the banking sector and other provident and
pension funds are preliminary

��������� ���������
��������������������������������� ��������������������������������������������������������������
������������������������������������������������������� ��������������������
�����
�

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Sources: Bank of Japan; Securities Commission Sources: Federal Reserve; quoted from Bank of Japan; Securities Commission
Note: Figures refers to value of financial assets Note: Figures refer to value of financial assets

1-51
From 1994– 99, foreign and local institutions
represented on average less than 3% of the total
number of KLSE investors (Figure 75), but held about
43% of the total value of KLSE equities (Figure 76).
Figure 77 shows the investor profile by value of total
equity held on the KLSE and selected exchanges as
at end-June 1998.
The investment management industry in Malaysia
is dominated by provident and pension funds, in
which the EPF features strongly (Figure 78). In 1999,
provident and pension funds handled 66% of total
assets under management in Malaysia.66 Meanwhile,
unit trust companies and asset management
companies only accounted for about 15% and 3%
respectively of total assets under management in
Malaysia in 1999 (Figure 79).

��������� ���������
����������������������������������������������������������� ���������������������������������������������������������������
��������������������������������������
�������
�������� �������������� ���������������
���� ������ �������������������� ���������������������
�������� ����
�������� ���
�����

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����

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��

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���
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Sources:Kuala Lumpur Stock Exchange; Securities Commission

Sources : Arthur Andersen; Kuala Lumpur Stock Exchange;Salmon Smith

Barney; Stock Exchange of Hong Kong;Taiwan Stock Exchange;
Tokyo Stock Exchange

��������� ���������
��������������������������������������������������� �������������������������������������
��������������������� ����������������������������

�������������������������� ���������������
������ ���������������� ����������������� ���
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Sources:Kuala Lumpur Stock Exchange; Securities Commission
Sources : Bank Negara Malaysia; Securities Commission
Notes: a) Data for asset management companies funds under managementwere not
available for the period 1990-94. 1998 figures are as atend-June. Other
provident and pension funds include the LTAT, Malaysian Estates Staff
Provident Fund, Teachers Provident Fund, KWAP, SOCSO and six other
provident and pension funds
b) Data for funds managed by other provident and pension fundsin 1999 are
preliminary

66
A statutory requirement that up to 23% of employees’ remuneration must be contributed to the EPF is thought to be a major
reason for this.

1-52
 ��������� ���������
������������������������������������� ��������������������������������������������������������
�������������������������������������������

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Sources: Bank Negara Malaysia; Securities Commission

Sources: Bank Negara Malaysia; Securities Commission Note: Non-EPF provident and pension funds include the LTAT, Malaysian
Note: Data for funds managed by other provident and pension funds Estates Staff Provident Fund, Teachers Provident Fund, KWAP, SOCSO
arepreliminary and six other provident and pension funds

���������
PROVIDENT AND PENSION FUNDS �����������������������������������������������������������

�
Provident and pension funds represent the most ���
������������������������������������
����������������������������������
significant sector of the Malaysian investment ���
�����������������������������
management industry. The sector is dominated by ��� �

the EPF, which manages 86% of overall provident ���

and pension funds (Figure 80). The absolute value ��� �
�� ��������

of EPF investments continued to rise steadily during ���

the 1990s, although it declined in proportion to total
�� �
unit trusts’ NAV from 1992 to 1996 and 1997 to 1999,
��
reflecting the increasing popularity of unit trust funds
as a savings vehicle (Figure 81). Currently, pension �� �

and provident funds’ investment portfolios are ��

concentrated in low risk assets. In 1999, for instance, � �

���� ���� ���� ���� ���� ���� ���� ���� ���� �����
about 75% of the overall provident and pension fund
portfolio consisted of PDS, MGS, straight loans and Sources: Bank Negara Malaysia; Securities Commission
banking sector deposits (Figure 82).67

���������
����������������������������������������������������������
����������������������

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Sources: Bank Negara Malaysia; Securities Commission

67
Source: Bank Nagara Malaysia.

1-53
INSURANCE FUNDS
The assets of Malaysian insurance funds have been
growing rapidly (Figure 83). Life insurance funds, in
particular, have accounted for most of the sector’s
funds under management. In 1999, 69% of insurance
funds’ assets belonged to life insurance funds (Figure
84). During the same period, local asset management
companies managed RM289.6 million of insurance
funds.68
In 1999, insurance funds in Malaysia concentrated
their investments in non-equity instruments (Figure
85 and Figure 86). In the same year, around 90%
or more of life and general insurance funds were
invested in cash and deposits, MGS and PDS. The
bulk of life insurance funds (42%) were invested in
corporate debt securities, while 53% of general life
insurance funds were held in the form of cash and
deposits.

��������� ���������
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Sources:Bank Negara Malaysia; Securities Commission Source: Bank Negara Malaysia

��������� ���������
������������������������������������������������������ ���������������������������������������������������������������
����������������������

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���� ����

Sources:Bank Negara Malaysia; Securities Commission

Source: Bank Negara Malaysia

68
Source: Securities Commission.

1-54
UNIT TRUST MANAGEMENT COMPANIES ���������
��������������������������������������������������������������

Unit trust funds, which are managed by unit trust ���

�����������������������������������
��
management companies primarily for local retail �����������������
���������������������������������
��� ��
investors, have enjoyed growing popularity since the
beginning of the 1990s. The financial crisis of 1997– ���
��

98 notwithstanding, growth in NAV of Malaysian ��

unit trust management companies during 1990–99 ��
��
has generally trended upwards (Figure 87). From
��
1993–96, the NAV of local unit trust management ��
companies more than doubled from RM28.6 billion ��
��
in 1993 to RM60 billion in 1996. With the onset of the
Asian financial crisis, NAV declined sharply by 44% �� �

from 1996 to 1997 but has since recovered, albeit � �

���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����
more gradually.

Sources : Bank Negara Malaysia; Securities Commission

Notes: a) Data for 2000 is as at end-September 2000b)1993-2000 figures include
funds approved but not yet launchedc)1990-92 figures only include
launched funds

��������� ���������
�������������������������������������������������������� ���������������������������������������������������������������
��������������������������
�� ��
�� ���� �������������������������������
�������������������������� �����������������������������������
��������������������������� �� ��
���������������������������
��
����
�� ��
��
����
�� �

� ������
�������
�� ��������

��
���� �� �
��

���� �� �
��

�� �
����
��

� �
���� ���� ���� ���� ���� ���� ���� ���� ���� ����
� ����
���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����

Sources: Bank Negara Malaysia; Securities Commission

Sources: Bank Negara Malaysia; Securities Commission Note: 2000 data is as at end-September
Note: 2000 data is as at end-September

��������
Growth of the Malaysian unit trust industry can be ������������������������������������������������
seen from a rise in the number of unit trust funds ������������������������

available, management companies established, ������������ ���������������

unitholders and units in circulation (Figure 88
������������������ ��
and Figure 89). Currently, Malaysian unit trust
management companies offer mainly equity-based ������������� ��

products (Table 36), and have tended to concentrate �������������� ��

their investments within the domestic market (Figure ���������� �

90). ������������������ �

������ ���
Source: Lipper Analytical Services
Note: The categories above are those of Lipper Analytical Services

1-55
���������
�������������������������������������������������������������� Malaysia’s unit trust management industry
����������������������
is characterised by a high degree of industry
�������
concentration (Figure 92). Five large companies
����������
���� manage 85% of the total funds in the industry, while
������
������
the remaining 29 companies manage only 15% of
����
total funds. This is reflective of the small size of
the industry, as well as because Amanah Saham
Nasional Bhd (ASNB), a unit trust management
��������
company wholly owned by Permodalan Nasional
����������
���� Berhad (PNB), manages almost 70% of the unit
������
trust industry’s NAV. Nevertheless, concentration
����������
����� remains high even when the impact of ASNB is taken
into account, with the next five largest companies
managing about 59% of total funds in the industry
(Figure 93).
Source: Securities Commission

���������
As a result, the risk-return profile of funds managed �������������������������������������������������������
�����������������������������
by the local unit trust industry appears to be limited.
Figure 91 illustrates a hypothetical case of a balanced ���
investment portfolio composed of 50% bonds and
50% equities. If fully invested domestically, the
��������� ���� �� ���������� ��

portfolio would have an annual return of 4.6% with ��

an annualised standard deviation of 17.5% during the

period 1990– 99. If the portfolio invested globally in
stocks and bonds, it would increase its annual return ��

to 7.6% and reduce its standard deviation to 12.7%

during the period. Thus, global investing improves the
��
risk/return profile of the investment portfolio.

��������� ��
� � � � � �� �� �� �� �� �� �� �� �� �� �� ��
����������������������������������������������������������������
������������������������������������������������������������� �����������������������������������������

Source: Securities Commission

���
�����������������������
�������������������������������
���
���������������������
�������������������������� ���������

��� ��������������������
������������������
��� �������������������
�����������������������
����������������������
��� ����������������������������
�������������������
������������������
��� ���������
�������������������
��� ����������������������

���
�������������������
��� ������������������
������������
��� �������������������
����������������������
���
� � �� �� �� �� �� �� �� �� ��
������������������������������������������������

Sources : Securities Commission; Datastream/ICV

Note: Estimates are based on historical figures. Monthly returns on the three-
month Malaysian treasury bill for the period 1990–99 were used as a proxy
for the return on Malaysian bonds. Monthly returns on the JP Morgan G-7
Bond Index for the same period were used as a proxy for global bond
portfolio returns. Monthly returns on the KLCI for the period 1990–99 were
used as a proxy for the return of Malaysian stocks. Monthly returns on the
Morgan Stanley Capital International Index (MSCI) Global Equity index
over the sameperiod were used as a proxy for the return on a global equity
portfolio.

1-56
��������� ��������
������������������������������������������������������ ��������������������������������������������
�������������������������������������������� ������������������

��� Local Foreign

Type of fund
(RM million) (RM million)a

1999 1998 1999 1998

��
��������� ���� �� ���������� ��

Charitable funds 163.9 149.0 - -

�� Corporate funds 2,843.9 1,933.7 1,048.4 423.3

EPF 1,066.0 589.0 - -

�� Government funds 432.0 309.7 - -

Individual funds 650.4 387.3 111.7 106.0

��
Insurance funds 289.6 300.6 5.7 -

Islamic funds 95.3 56.3 1.9 2.3

�
� � � � � �� �� �� �� �� �� �� �� �� �� �� ��
Other funds 1,355.0 1,076.9 1,984.7 1,135.1
�����������������������������������������
Private pension funds 866.3 590.1 6.5 8.4
������� ���������������������
Unit trust funds 32,976.5 26,659.5 112.5 80.2

TOTAL 40,739.1 32,052.2 3,271.4 1,755.3

ASSET MANAGEMENT COMPANIES Source :

Note : a)
Securities Commission
Converted from US Dollars at a rate of US$1.00=RM$3.80

Asset management companies manage discretionary ���������

funds on behalf of individual and institutional clients ������������������������� ����������������������������
�������������������������������
(Table 37). The bulk of funds under management by
asset management companies were from unit trusts.
Unit trust funds under management totalled RM33
billion at end-1999 compared with RM27 billion at �������
��������
����
end-1998. As at end-1999, this amount represented
80.9% of asset management companies’ funds under
management compared with 83.2% as at end-1998.
Other types of funds under management include
charitable funds, corporate funds, EPF funds, funds
of government bodies, individual funds, insurance ������
funds, Islamic funds and private pension funds. The ��������
�����
local asset management industry invested most
of its funds domestically (Figure 94). As at end-
1999, around RM41.0 billion or about 93% of asset
������� ���������������������
management industry funds were invested within
Malaysia, while only RM3.3 billion or about 7% was
invested abroad. Foreign participation in the asset management
industry is small (Figure 95). In 1999, 78% of asset
management companies were 100% locally-owned,
while only 3% were fully-foreign owned. The remaining
18% of asset management companies consisted of
joint ventures with foreign fund managers.

1-57
���������
������������������������������������������������������������
��������������

�������������
�������������
�������
���������
�����
�������������
�����
����

�������������
�������������
��������������� �������������
���� �����
�����

������� ���������������������

1-58
CHAPTER 2

❙ REGULATION 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.

❙ SECTION 2.1 OVERVIEW OF THE

REGULATORY FRAMEWORK
Proper regulation on all aspects of the financial system is important. If 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.

In 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.

2-1
❙ SECTION 2.2 REGULATORY 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, l993 and Capital Markets and Services Act 2007 (‘the Act’). The SC’s Mission Statement is “to promote
and maintain fair, 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. Its 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,
central depository 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. It 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.

2-2
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

In 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. In 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 Institutional Advisers 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 Trust Advisers (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
Industry, its By-Laws Relating to the Procedures for Disciplinary Proceedings (see Chapter 4) and Investment
Management Standards (IMS).

2-3
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 Investment Schemes
• Guidelines on Marketing and Distribution of Unit Trust Funds
• Guidelines on Unit Trust Advertisements and Promotional Materials
• Guidelines on Real Estate Investment 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 Islamic Real Estate Investment Trusts
• Guidelines for the Offering, Marketing and Distribution of Foreign Funds
• Guidelines on Islamic 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
Intermediaries
• Licensing Handbook under CMSA
• Guidance Notes to the above Guidelines and Handbook

• Issued by the FIMM

• Guidelines for Registration of Institutional Advisers 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
• Investment Management Standards (IMS)
• By-Laws Relating to the Procedures for Disciplinary Proceedings
• Code of Ethics and Standards of Professional Conduct for the Unit Trust Industry

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.

2-4
❙ SECTION 2.3 REGULATION OF THE UTMC
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. In 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.

2-5
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.

In the remainder of this section, we will look at the practical application of the requirements imposed on
UTMC.

2.3.2 APPROVAL OF UTMC 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 integrity and accountability,
who must act honestly and diligently in performing their duties. 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.

2-6
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 government/statutory 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 government/statutory 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 3% 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 personnel as well
as members of the UTS Investment Committee, Syariah Committee (and/or Syariah Adviser) and
Panel of 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
• Approval for 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.

2-7
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 legal document. Its issue must be authorised
by the directors of the UTMC. It 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 until the 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.”

In 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.g. 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.

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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. It 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 II 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. If the investor
decides to withdraw, 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. In 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.

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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:
• Investors 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
• Investors 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, IUTA or CUTA and 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 committee/adviser)
to oversee the prudent and efficient investment of each UTS for which they are responsible. In the case of
Islamic 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 Islamic jurisprudence. An Islamic bank or a licensed institution approved
by BNM to carry on an Islamic 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 one-third
independent members at all times. Individuals 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.

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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

In 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.g. 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 10% 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.

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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 authority is a member of the International Organization
of Securities Commission (IOSCO). However, in order to maximise the pool of 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 SC-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. In 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. In 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 AND EXPOSURE

To further reduce risks to investors in a UTS, the SC specifies the maximum exposure of a UTS’s portfolio
to specific investments. In 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.

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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.

Investment Destrictions and Limits - Core Requirement ( 1 )

A. Overall Exposure Limit
1. Maximum value of investments in unlisted securities (2) 10% of NAV
B. Investment Spread 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
15% of NAV
instruments issued by any single issuer (4)
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
10% of NAV
with any single counter-party (5)
6. Maximum value of investments in structured products issued by any single
15% of NAV
counter-party (6)
7. Maximum value of investments in units/ shares of any collective investment
20% of NAV
scheme
8. Maximum aggregate value of investments in transferable securities, money
market instruments, deposits, OTC derivatives and structured products issued 25% of NAV
by or placed with any single issuer/ institution
C. Investment Spread Limit-Group of companies
9. Maximum value of investments in transferable securities and money market
20% of NAV
instruments issued by any group of companies (3) & (4)
D. Concentration
10. Maximum value of investments in transferable securities (other than debentures) 10% of
issued by any single issuer instrument issued
11. Maximum value of investments in debentures issued by any single issuer 20% of
instrument issued
12. Maximum value of investments in money market instruments issued by any 10% of
single issuer instrument issued
13. Maximum value of investments in collective investment schemes issued by any 25% of
single issuer instrument issued

Notes: (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 offered
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.

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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 (15% 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. If 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 apply to 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 property, the UTMC must insure the property. The cost of insurance cover will be an
expense of the UTS.

2.3.8 REAL ESTATE INVESTMENT TRUSTS (REIT)

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 25% 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 estate-
related 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 10% 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.

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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 sell their
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. If 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.

• The UTMC of a REIT may pledge the assets of the UTS to secure the borrowings up to the level
permitted above. Prior approval of the trustee and SC must be obtained to go beyond the level of
borrowings permitted.

2.3.9 EXCHANGE TRADED FUNDS

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 clearly 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:
• Investments in securities that are not traded in an eligible market must not exceed 10% 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 10% of the fund’s NAV in general
• The investment in other collective investment schemes must not exceed 10% 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
• Investments 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 upon request from UTMC.

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❙ SECTION 2.4. 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. It 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.

If 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 all the 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
• call for unitholders’ meeting.

In the remainder of this section, we will look at the practical application of the requirements imposed on the
trustee of a UTS.

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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. In 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 ACCOUNTS AND AUDIT

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.

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2.4.6 REPORTS TO UNITHOLDERS

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). In 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.

If, 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.

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❙ SECTION 2.5 REGULATION OF MARKETING
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.

In 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 Institutional
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.

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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 all the 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.

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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 Individual ( 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’. In 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 Requirements for an Authorized
Person Who is an Individual, 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 all times.

An Agent is not allowed to recruit other agents.

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❙ SECTION 2.6 SUMMARY
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. In 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 role 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.

2-22
SELF-TEST QUESTIONS ON CHAPTER 2
1. Why is it important that the unit trust industry be properly regulated?

2. Who is the major regulator responsible for the unit trust industry? What other functions does it
have?

3. List the other parties responsible for the regulation of the unit trust industry in Malaysia.

4. List the major responsibilities of UTMC.

5. ‘Any corporation can form a UTS.’ Discuss critically.

6. What is required to be included in a prospectus for the issue of units in a UTS?

7. Describe the role of the investment committee of a UTS.

8. List the major responsibilities of the trustee of a UTS.

9. Why is it necessary to restrict the investment portfolio of a UTS? List the major portfolio restrictions
in an equity trust.

10. What safeguards exist to protect investors from false claims of future returns from investing in a
UTS?

2-23
APPENDIX 1:
ELIGIBILITY REQUIREMENTS FOR AN
AUTHORIZED PERSON WHO IS AN INDIVIDUAL
1. An individual must–
(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.

2. 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.

3. 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.

4. 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 non-
disclosure 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.

5. The individual must first pass a qualifying examination conducted by a body approved by the SC or
a recognized self-regulatory organization.

2-24
APPENDIX 2:
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.

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CHAPTER 3

❙ SERVICING CLIENTS AND MARKETING

UNIT TRUSTS
LEARNING OBJECTIVES

This Chapter provides a basic knowledge of how to service clients in the unit trust industry and how to
market a UTS to potential clients.

At the end of this Chapter, you should:

• understand the major UTMC business processes, of which UTC need to be aware, including:
• how an investor’s purchase of units is processed
• how an investor’s disposal of units is processed
• the various reports a unitholder can expect to receive
• how a unitholder’s income distribution is determined, paid and subject to income tax.
• be aware of what quality service is in the unit trust industry, and how to handle a client’s queries and
complaints
• understand the process of transferring funds from an EPF account to purchase units in a UTS, and
how loan financing can be used to purchase units in a UTS
• be familiar with the fundamentals of marketing unit trusts to potential investors
• be able to describe the benefits and risks of investing through UTS, particularly in comparison with
direct investment
• be aware of the advantages of regular investment in UTS.

❙ SECTION 3.1 OVERVIEW

Providing superior service to clients in the financial services industry is of paramount importance. Some
of the world’s most successful financial service companies have built their businesses on providing quality
service.

Potential investors in UTS are not just buying an investment - they are also entering into a financial relationship
(in the broadest sense) with the UTC, UTMC, IUTA,CUTA and trustee. The success of this relationship is
not only measured in quantitative terms (represented by the performance of the UTS) but also in qualitative
terms such as:

• the ease with which transactions can be made

• the responsiveness to requests and complaints made by the investor
• the depth of knowledge of customer service staff of UTMC, IUTA,CUTA and UTC
• the quality of ongoing reporting and customer care.

Today, businesses pay close attention to business processes, such as forms, ease of conducting transactions,
and to increasing the quality of customer service. Further, technology is playing a crucial role in the unit trust
industry, thus providing even greater opportunities for better service.

3-1
In the unit trust industry, most new business comes from repeat business with existing clients or through
the network of existing satisfied clients. Therefore, it is important to always have the client’s needs in mind
when providing service.

It should be pointed out that the definition of a satisfied client is not necessarily restricted to the short-term. A
client’s level of satisfaction will invariably vary over the life of his or her investment in UTS - often reflecting
the underlying performance of the investment portfolio, but also the quality of service and ongoing customer
interfaces with the UTMC, IUTA, CUTA and UTC.

However, in the long term, satisfied clients are the ones that get exactly what they thought they were
purchasing – i.e. an investment that is as described in the prospectus, with no unexpected investment
surprises. This reinforces the fact that in the selling process, UTC should make sure that what is promised
in the sales pitch can, in fact, be delivered.

In the past, many investors have been enticed into UTS by the promise of high, extraordinary returns, only
to be disappointed by subsequent failure to achieve unrealistic claims. It is essential that the selling process
includes a full explanation of the various risks associated with investment in UTS - effectively ‘managing your
client’s expectations’. If a client’s expectations are met, then he or she will most probably be satisfied.

An important part of properly servicing clients and investors is ‘knowing your product’, so we will start Part A
with an outline of the major UTMC business processes associated with the purchase, ownership and sale of
an investment in UTS. The processes outlined are necessarily generic and may not apply to all transactions
or to every UTMC. They are a summary of detailed processes, and serve to illustrate the major steps that
might be involved and of which UTC must be aware.

In Part B, we will examine some basic marketing concepts and offer pointers to help UTC market UTS,
including a review of the main features of the alternatives to investing in UTS.

3-2
PART A

❙ SECTION 3.2 PURCHASE OF UNITS IN UTS

The following flowchart shows the major steps involved when an investor purchases units in UTS.

Registered Fund
Investor UTMC Trustee Bank
UTC Manager

Advises on
Understands Structure
UTS and Type of
Unit Trust

Completes Checks
Form & Application
Payment and Passes
Details to UTMC

Processes Deposits
Application Funds into
& Banks Trustee
Cheque Account

Trustee
Reviews
Client
Portfolio of
Records
Sales Updates Investments
Updated
Commission Unitholder
Received Register

Customer
Issues Trustee Completed
Receives
Certification Investment Required
and Files
and Sends Records Market
Certificate/
to Customer Updated Transactions
Statement

Updates
Unit Prices
& Portfolio
Reports

3-3
The flowchart is self-explanatory.

The purchase process begins when an investor becomes interested in, or aware of, the advantages of
investment in a particular UTS and finishes when he or she receives a statement indicating the number of
units purchased in the UTS. (Note that where a UTC represents an IUTA or CUTA an application will normally
be forwarded to the IUTA or CUTA before being passed to the UTMC for processing.)

You should try to link the purchase process in your organisation to the generic process shown in the
flowchart.

Some specific aspects of the purchase process are commented on below.

UTC

In many cases, UTC bring about the purchase process.

It is important to note that the role of UTC should be more than merely to ‘sell’. UTC should be actively
involved in providing information to the investor, both during the selling process and on an ongoing basis.
As the market develops, and as investors become more financially aware, the unit trust industry is moving
from ‘selling’ to relatively unsophisticated (in investment terms) customers, to a situation where informed,
demanding and, increasingly, high net worth clients purchase units in UTS that are needed to achieve their
financial goals. The rise of the financial planning industry in Malaysia is evidence of this (see Chapter 5).

UTC, therefore, need to justify the commission they earn, and that involves demonstrating UTCs’ regular
involvement in a process that does not end at the point where an application form is lodged with UTMC. UTC
should be involved in the process to ensure that customers receive quality service. To meet the requirements
of increasingly sophisticated consumers, UTC must fine-tune product knowledge and maintain high ethical
standards in marketing skills. They are also expected to provide timely, value-added advice to their customers
on how to manage the investments, such as portfolio rebalancing.

UTMC

The role of UTMC is obviously important to the entire purchase process. UTMC have a pivotal role in co-
ordinating and controlling the various stages in the process, from receiving the application form, banking the
cheque, informing the trustee, updating their records and then, finally, issuing the statement (or certificate)
confirming an investor’s purchase.

UTMC need to be well-organised and well-equipped in terms of technology, human and other resources, to
ensure that the process works according to plan. There are many interfaces and connections in the process;
if only one of them goes wrong, it could create a problem for the client. Staff members of UTMC need to
keep focus on quality at all stages. A simple data entry error can cause great inconvenience for the client.
The simple admonition of ‘do it right, do it once’ is highly relevant for the UTMC. UTC, too, can assist by
ensuring application forms are properly and legibly completed.

3-4
TRUSTEE

The role of the trustee is supervisory in the purchase (and in the subsequent disposal as well) of units. The
trustee will receive a great deal of information throughout the purchase process, and monitors and controls
the process by reviewing the information given to it and by making its own reviews and enquiries.

The trustee is required under the SC’s Guidelines on Unit Trust Funds to ensure that the procedures and
processes used by UTMC in buying, selling, valuing and pricing of units are adequate and in accordance with
the deed and regulatory requirements. Should the trustee feel that UTMC processes are inadequate, it will
report this to unitholders - together with the steps it has taken to ensure the shortcomings are corrected.

If everything goes according to plan (and, of course, according to the deed and the law), the trustee’s
intervention in UTMC business processes will be minimal. However, where inconsistencies, errors, or even
fraud, are detected, then the trustee, as watchdog, will become actively involved in safeguarding the interests
of the unitholders and investors, and in ensuring the process is corrected.

BANK

The bank’s role in the purchase process is basically to maintain the UTS bank accounts and, on the
instructions of the trustee, to receive funds and to honour cheques drawn.

FUND MANAGER

In some UTMC, the fund manager is very much part of the business; whilst in others, the responsibility to
manage the investment portfolio of UTS is mandated to an external fund manager (although often part of
the same corporate group as the UTMC).

In either case, the fund manager needs to keep an eye on cash flows into and out of the UTS, and to make
sure that the UTS is invested as the law, the prospectus, the deed, and prudent investment policy dictates.
At the end of the day, investors are purchasing the fund manager’s expertise in deriving returns from the
portfolio of investments managed by them. The fund manager, therefore, needs to keep a watchful eye on
the portfolio.

For example, consider a situation where a client invests in a UTS with an investment objective of high capital
growth and minimal investment in cash. Assume that the fund manager has not invested in accordance
with the investment policy, but has kept a large portion of the UTS assets in cash. Should the market then
rise sharply, the investor will be exposed to cash (rather than, say, growth equities), which is not what the
investor had expected and this will subsequently lead to investor queries and complaints.

3-5
COOLING-OFF RIGHT

As a safeguard to an investor who may have purchased units without fully understanding the UTS purchased,
or who may have been misled by UTC, the SC has imposed upon UTMC an obligation to provide an investor
with an opportunity to reconsider his or her purchase. This is known as the ‘cooling-off’ right, which must be
disclosed in the prospectus of UTS.

The cooling-off right, to be exercised within six business days, gives a first time investor the right to a refund
of his or her application money without deduction of any sales charge.

The Guidelines on Unit Trust Funds state that the refund for every unit held by the investor, pursuant to the
exercise of his or her cooling-off right, shall be the sum of:

• the NAV per unit on the day the units were first purchased; and

• the sales charge per unit originally imposed on the day the units were purchased.

The cooling-off right is only accorded to a first time investor other than those listed below:

• A corporation or institution;

• A staff of the UTMC; and

• UTC

UTC should be aware of UTMC policy in applying the cooling-off right.

Example of UTMC policy:

An investor’s application money relating to an application for units in UTS is banked by UTMC on Monday
(Day 1). The investor wishes to use his or her cooling-off right. Assuming business days are Monday to
Friday (and there are no public holidays), the last day for receipt by UTMC of the investor’s request to apply
the cooling-off right will be the following Monday (Day 6).

Where an application for units relates to an amount transferred from an EPF Account (see Section 3.8), the
cooling-off right applies from the day the application for units in UTS is received and accepted by UTMC,
subject to approval from EPF.

UTC should note that UTMC may apply policies that differ to those stated.

❙ SECTION 3.3 REPURCHASE OF UNITS IN UTS

Although investment in UTS is generally for investors with a medium to long-term investment horizon, a
unitholder has the right to withdraw from UTS at any time. UTMC are obliged to repurchase an investor’s
units at the prevailing price once it has received a proper request. It is important that UTC is aware of all the
requirements of UTMC, otherwise a client’s repurchase request and payment may be delayed.

The repurchase process itself is, however, reasonably simple and is depicted (generically) in the following
diagram.

3-6
REPURCHASE OF UNITS IN UTS

Registered Fund
Investor UTMC Trustee Bank
UTC Manager

Decides
Advises on
to Sell or
Structure
Restructure
and type of
Investment
Unit Trust
Portfolio

Redemption
Notices &
Processes
Certificate
Transaction
Sent to
UTMC

Reviews
Portfolio of
Trustee
Updates Investments
Client
Unitholder
Records
Register
Updated

Receives Funds Trustee

Funds from Drawn and Investment
Sales of Delivered to Records
Units Client Updated

Updates Trustee Completed

Unit Prices Client Required
& Portfolio Records Market
Reports Updated Transactions

Many of the comments made in section 3.2 relating to the purchase of units in UTS also apply to the
repurchase process, so they will not be repeated in this section. However, the following comments should
be noted:

3-7
REPURCHASE NOTICE DOCUMENT

Most UTMC have a repurchase request form, which is to be properly completed by a unitholder before a
request to sell his or her units can be processed. The form of request to the UTMC to repurchase units
may also be printed on the back of the UTS certificate (where one has been issued to the unitholder). The
unitholder must also complete a payment instruction, i.e. an instruction either to credit the bank account of
the unitholder or to forward a cheque for the proceeds to him or her. Some UTMC may allow for payment
to be made by telegraphic transfer.

PAYOUT PERIOD AND UTS LIQUIDITY

The Guidelines on Unit Trust Funds require that UTMC pay the repurchase proceeds to the unitholder ‘as
soon as possible’ and within 10 calendar days of receiving the repurchase request.

To be able to meet this requirement, UTMC must make financial arrangements so that payment can be made
within this period. In part, this can include maintaining a sufficient level of cash or liquid assets within UTS.
UTMC can then cancel units repurchased from unitholders and utilise the cash held in the UTS (following
payment by the trustee for the cancelled units) to meet its obligations to unitholders.

But what happens if liquidity in a UTS is insufficient, and the trustee believes it is not in the best interest of
unitholders to sell UTS investments to raise further cash to pay for repurchases? This situation may occur
where the investments cannot be fairly valued - perhaps because the market on which the investments
are listed is temporarily closed. Clearly it would be unfair to try to determine the NAV of a unit in such
circumstances and, consequently, the value of the units cancelled by UTMC cannot be determined.

The Guidelines on Unit Trust Funds, therefore, allow the trustee to suspend (for up to 21 days) the sale
and repurchase of units in UTS where the interests of the unitholders (or potential unitholders) would be
otherwise materially affected. After 21 days, the consent of unitholders to extend the suspension date and
the repurchase of units must be obtained by calling a meeting of unitholders.

In all cases of suspension of the sale and repurchase of units in UTS, the trustee must advise the SC
of the suspension and give its reasons for doing so. When the suspension is lifted, the SC must also be
advised.

The effect of suspension is that transactions in that UTS cease. You should note that a suspension of the
sales and repurchase of units in a UTS is, fortunately, a very rare event, but that it is done to protect investors
in UTS.

SWITCH

A unitholder may request that the proceeds from the disposal of his or her units be reinvested in another UTS
offered by the same UTMC. This transaction is called a ‘switch’, and may be broken down into a repurchase
of units in one UTS and a sale to that investor of units in another UTS. The processes are largely the same
as those described in section 3.2 and in this section, except that the payment for units repurchased by UTMC
is automatically processed as the application amount for units in the second UTS.

You should be familiar with UTMC procedures in relation to a switch.

Often a switch will be in an investor’s best interest as UTMC may reduce or waive the fee on application
for units. A switch can be useful in varying a client’s portfolio as a result of changing market conditions or
personal circumstances. However, UTC must be aware that although switching fees may be waived, sales
charges may be incurred, e.g. when switching from a no-load to a loaded fund.

3-8
❙ SECTION 3.4 REPORTING TO UNITHOLDERS
Keeping investors informed is a vital part of quality customer service. An investor in UTS will receive a
number of statements and reports during the life of his or her investment. (Note that each UTMC will have
its own reporting processes, so your client may not receive all the reports described below or may receive
combined reports. In particular, the frequency at which some reports are issued by UTMC may vary.)

3.4.1 ON ACQUISITION OF UNITS IN A UTS

An investor in UTS will generally receive from UTMC:

• confirmation that the investor’s application amount has been received.

• confirmation of the number of units acquired in the UTS, and the NAV of a unit on the date of allotment
of units
• confirmation on the rate of initial service charge imposed both in percentage form and actual value
as well as the net amount invested net of service charge
• a certificate for the number of units issued may be provided but this practice is becoming less common
and a statement is issued instead. In some cases - usually where the unit price is fixed at RM1.00
- in place of a certificate or a statement, an entry is made to a passbook issued in the name of the
investor.

3.4.2 DURING THE PERIOD IN WHICH UNITS IN UTS ARE HELD

At regular intervals (say, quarterly, half-yearly or annually), UTMC will commonly issue to all unitholders a
statement showing not only the number of units held but the valuation at the date of the statement. This is
particularly common where no certificates of units held are issued to investors by UTMC. Such statements
are usually accompanied by a report or update on the performance of the UTS.

The Guidelines on Unit Trust Funds require each UTS to publish at least two reports for each financial
year - an interim report and an annual report. Each unitholder is to be sent a copy of each report within two
months after the end of the financial period. These reports provide comprehensive information about the
performance of a UTS.

UTC are strongly encouraged to familiarise themselves with the reports.

The opportunity to discuss the reports and answer related questions is an excellent way to provide superior
customer service. These reports help your client to monitor the progress of his/her investments and discover
whether the investments continue to meet his/her objectives.

3-9
ANNUAL REPORT

The major contents of an annual report of UTS include:

• Key Performance Data

This section summarises the highlights of the UTS. Also required to be disclosed is the average annual
return to investors over one, three and five years, and since launch. The SC also encourages disclosure of
relevant benchmark indices to allow investors to properly compare the performance of UTS.

• Manager’s Report

This report would state among others:

• the UTS’s investment objectives and policies

• the investment strategy and asset allocation during the period and details of any significant
changes
• an economic review, including stock market review, outlook and proposed investment strategy.

• Trustee’s Report

The trustee must state whether, in its opinion, the UTMC has managed the UTS in accordance with:

• the limitations imposed on the investment powers under the deed

• the other provisions of the deed
• the SC’s Guidelines on Unit Trust Funds
• the law, particularly the Securities Commission Act.

The trustee must also advise of any shortcomings it has found in the unit pricing and transaction processes
of the UTMC, and the steps taken to ensure the shortcomings are corrected.

• Financial Statements of UTS and Auditor’s Report

The financial statements should give a true and fair view of the UTS and should be prepared in accordance
with generally accepted accounting principles, statutory and legal requirements, and the deed. Note that an
exposure draft of accounting standards applicable to financial statements of UTS has been published.

INTERIM REPORT

The interim report of UTS should, as a minimum, include:

• the Manager’s Report

• the Trustee’s Report, and
• financial statements.

The interim financial statements need not be audited but, if not, should be endorsed by the directors. The
auditor’s report would normally accompany the audited interim financial statements but, if not, a statement
of whether or not the financial statements were qualified by the auditor should be provided.

3-10
3.4.3 ON DISPOSAL OF UNITS

An investor in UTS will generally receive from UTMC:

• confirmation of receipt by UTMC of a proper request (and, if applicable, correctly endorsed unit
certificate) that it repurchased from the unitholder a specified number of units, all units, or units to a
specific value
• confirmation of the number of units disposed of by the unitholder, the NAV of a unit on the date of
repurchase of the units, and the total amount payable net of fee to the investor by the UTMC
• confirmation of the rate of exit fee imposed both in percentage form and actual value as well as the
total amount repurchased
• confirmation of the current balance (if any) of units held following the disposal
• if the UTMC issues certificates for units held, a new certificate (balance certificate) for the remaining
units
• in some cases, a passbook entry reflecting the disposal of the investor’s interest in UTS.

❙ SECTION 3.5 INCOME DISTRIBUTIONS

With effect from 1 January 2001, the term ‘distribution’ rather than ‘dividend’ is required to be used in relation
to payments of income to unitholders. When discussing a unit trust with a client, UTC should not refer to a
‘dividend’ payable by UTS but rather to a ‘distribution’.

3.5.1 DISTRIBUTABLE INCOME OF A UTS

UTMC will determine, with the trustee’s approval, the total amount of income of UTS to be distributed to
unitholders. There is no obligation for the directors of UTMC to declare a distribution, although the investment
objectives of UTS, unitholders’ expectations, competitor UTS distribution rates, and bank deposit rates all
affect the decision.

The amount available for distribution from UTS may include only realised income or gains, i.e.

• dividend income received

• interest income received
• other income received
• realised capital gains from the sale of investments,

and after deducting expenses and taxation.

The SC requires that the amount of income actually paid to unitholders (or, at the request of a unitholder,
reinvested in additional units) for a period or financial year must be prudent and, in addition to including only
realised amounts, should reflect the objectives of the UTS. UTS with an income objective should generally
make income distributions at a level greater than those from UTS with a capital growth objective. The trustee
is required to include, within the annual report of UTS, a statement verifying that the income distribution
reflects the investment objectives of the UTS, and

• total returns (i.e. income and capital growth) earned by the UTS during the period
• UTS income for that period or year
• that sufficient cash flow exists with which to make the payment, and
• the stability and sustainability of the distribution.

3-11
UTMC must not dispose of investments of UTS for the sole purpose of realising capital gains for distribution
to unitholders in UTS. Disclosure in the financial statements of the source of distributions from the UTS is
also required.

The objective of these requirements is to ensure that investors are not misled by apparently high ‘income’
distributions that may be sourced from realised capital gains, and to provide better disclosure to unitholders
and prospective investors as to the possible level of income distributions in future years.

UTC has the responsibility to advise clients that a UTS with a capital growth objective does not normally
pay out a high level of income distribution. Then - with the advice of UTC - clients can better structure an
investment portfolio of UTS likely to produce the desired level of income untainted by amounts of capital gain
paid out at the same time. An investor using distributions of capital gains to meet normal living expenses
may be unaware that his or her investment capital is being eroded.

3.5.2 ‘BUYING’ A DISTRIBUTION

The unit day method (or similar time-apportionment methods) of determining unitholder distribution
entitlements is often used where the unit price of the UTS remains fixed at RM1.00. The date of purchase
or sale of a unit by a unitholder is, therefore, accurately and equitably reflected in his or her distribution
entitlement.

However, where the distribution entitlements for an accounting period are made according to the number
of units held on the ex distribution date, it is possible for an investor to become entitled to the full amount
of a distribution (sen per unit) by acquiring units immediately prior to that date. In other words, the period of
ownership prior to the ex distribution date is irrelevant. UTS that operate in this way determine an investor’s
distribution entitlements in exactly the same manner as dividends in a company are determined. It is possible,
therefore, to ‘buy’ a distribution entitlement for the full period by acquiring units just before the ex distribution
date.

UTC may attempt to use the forthcoming entitlement to a distribution from UTS to encourage investors to
buy units immediately. Is this appropriate? The client may appear satisfied having received a distribution
entitlement for six months or more, despite being invested in the UTS for perhaps only a few days. However,
the decision to buy immediately prior to the ex distribution date has reduced the investor’s capital, since
the UTS prices will fall on the following day by the amount of the distribution. The investor has, in effect,
turned his or her capital into income and is no better off. (Indeed, if an additional tax liability arises on that
distribution, the unitholder may be worse off!)

UTC who use this technique to encourage acquisition of units in UTS close to the ex distribution date may
not be acting in the best interests of the client.

3-12
Example of a Distribution Warrant:

TRUSTEE COMPANY BHD

TRUSTEE OF XYZ GROWTH FUND
DISTRIBUTION WARRANT

Warrant No No of Units Year ended Distribution No Payment Date

123456 8,000.00 31 July 200X 54 5 September 200X

TAX NON
TAXABLE NON DISTRIBUTION NET
ALLOWABLE
INCOME MALAYSIAN FOREIGN TAXABLE EQUALISATION PAYABLE
EXPENSES
40.00 11.20 - 25.00 302.50 22.54 328.84

¿ ¡ ¬ √ ƒ ≈ ∆

We hereby certify that Malaysian Income Tax deducted as above has been or will be accounted for by us to the Director-
General of Inland Revenue Malaysia. Please retain this voucher for submission to the Tax Authorities

┏ ┓
Unitholder name Yours faithfully,
Address Trustee Company Bhd
Account no. Trustee of XYZ Growth Fund
┗ ┛

¿ TAXABLE INCOME
The amount of income received that is taxable

¡ TAX – MALAYSIAN
Amount of Malaysian tax payable on the taxable income

¬ TAX – FOREIGN
Amount of Foreign tax already deducted at country of source

√ NON-ALLOWABLE EXPENSES
These are the Total expenses less Tax Allowable expenses, where:

Total expenses include management fee, trustee fee, audit fee, tax advisory fee, bank charges,
printing cost, custodial charges, incidental and miscellaneous fee, etc. as stipulated in the
prospectus;

Tax allowable expenses include expenses wholly and exclusively incurred in the production of
gross income that are allowable as deductions under section 33(1) of the Income Tax Act. In
addition, section 63B of the Act provides for tax deduction in respect of managers’ remuneration,
expenses on maintenance of the register of unitholders, share registration expenses, secretarial,
audit and accounting fees, telephone charges, printing and stationery costs and postages based
on a formula subject to a minimum 10% and maximum of 25% of the expenses.

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ƒ NON-TAXABLE
Non-taxable income

≈ DISTRIBUTION EQUALISATION
It is a portion of money set aside from investments to equalise unitholders’ distribution income.
When there are many new investors, the distribution amount may reduce. This is unfair to earlier
investors; so to ensure a more equitable income distribution, a portion of the investment is set
aside to ensure a flat rate of distribution income irrespective of which point of time a unitholder
comes in.

Undistributed income
Distribution Equalisation =
Net Asset Value of Fund

Example:
Undistributed Income = RM100,000
Net Asset Value = RM15,000,000

RM100,000
Distribution Equalisation =
RM15,000,000

= 0.67 sen/ unit

Thus for every unit sold, 0.67 sen will be set aside to equalise the earlier unitholders’ distribution
income. This portion of money will be regarded as income of the fund for distribution purpose.

∆ NET PAYABLE
The net amount received by the unitholder as distribution.

3.5.3 TAXATION OF THE DISTRIBUTION

Generally, the unitholder includes in his or her income tax return, with all other sources of taxable income,
the taxable income amount (as shown on the distribution warrant) of the distribution paid (or reinvested),
and will receive a tax credit (also shown on the distribution warrant) to be offset against total tax payable
for the year on total taxable income. If a tax refund is due, the amount of the UTS tax credit can (in whole
or part) be claimed back from the Inland Revenue.

A unitholder who receives a distribution would complete Form B (Return of Income by Individual) and include
with Form B the Original Malaysian Tax Voucher to claim a tax credit.

Note that taxation requirements may change from year to year, and UTMC may use forms that differ from
one another.

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Example:

Using the example of a Distribution Warrant shown above, a unitholder would (assuming the distribution
was for Year of Assessment 2000) complete Form B as follows:

Item Amount Form B

Taxable Income RM40.00 Page 3 Item 20 ‘Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000’ under the heading Dividen Kasar*
Malaysian Tax RM11.20 Page 3 Item 20 ‘Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000’ under the heading Cukai Yang Dipotong
Net Payable RM328.84 Page 3 Item 20 ‘Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000’ under the heading Dividen Bersih Seperti Di Baucar
Payment Date Page 3 Item 20 ‘Penyata Dividen Malaysia Yang Diterima Dalam Tahun
2000’ under the heading Tarikh Dividen Dibayar

* the total amount of taxable income received for Year of Assessment 2000 is to be entered under Part
B Item 5 ‘Dividen (Kasar)’ on page 2 of the Form B.

Note: The above format is extracted from Form B for the Year of Assessment 2000. It may not be applicable
for future years of assessment.

❙ SECTION 3.6 ACCOUNT MAINTENANCE

The flowcharts showing the processes by which units in UTS are purchased and repurchased include
reference to the Register of Unitholders maintained by UTMC for each UTS. The Register contains a large
amount of personal data relating to each investor.

Clients may from time to time request that the personal data in the Register be updated for:

• a change of address
• issue of a new IC number
• a change of name
• new bank account details
• a change of distribution reinvestment instructions, etc.

UTC should be aware of UTMC requirements (e.g. Are certified copies of documents required? In the case
of a jointholding of units, are all unitholders’ signatures required?) in relation to the notification of changes
to the Register, as they will be giving poor service to clients if they are not aware of these requirements
when asked. Indeed, account maintenance is part and parcel of UTMC procedures and should be included
in the Prospectus.

Other changes that affect a unitholder’s investment in UTS include the consequences of the unitholder’s
death; a desire to transfer units to another person such as a spouse, son or daughter; or the registration of
a mortgage or lien against the unitholding as security for a unitholder’s loan.

3-15
The process of transferring a holding to a third party or to the deceased’s next of kin can be complex and,
again, UTC should be aware of the exact requirements of UTMC. UTC who offer quality client service are
aware of these requirements, and will know to whom within the UTMC to direct any queries. It is simply not
appropriate to ignore a client’s request for assistance. UTC need to be aware of all aspects of UTS he or
she sells. ‘Knowing your product’ is as much about the administrative requirements of UTMC as being able
to describe the investment performance and outlook of UTS; and it is certainly one way of differentiating
your services from those of competitor UTC!

❙ SECTION 3.7 CLIENT QUERIES AND

COMPLAINTS
The success of any industry or business is best measured by the feedback received from customers. UTMC
and UTC need constantly to be in touch with their clients to ensure that they are providing value in the
products that they sell.

The major areas of complaint in the unit trust industry can be summarised as follows:

• delays in the issue of unit certificates or statements confirming investment in UTS

• delays in receipt of distribution payments
• dissatisfaction with the investment performance of some UTS
• general discontent with the ‘after sales service’ provided by some UTC
• dishonest UTC or UTC who use unsubstantiated performance figures to ‘hard sell’ UTS.

These areas of complaint need to be kept in mind when servicing clients. If UTC and UTMC are able to
improve the level of client service, the entire unit trust industry will benefit.

All salespeople face queries from their customers - some of which are clearly beyond the salesperson’s
control. It is, however, very important that all queries are quickly handled. UTC must thoroughly know the
UTS they sell to respond confidently and positively to questions, comments or complaints that investors may
be expected to raise. UTC should immediately update themselves on new UTS and procedures introduced
by UTMC. UTC must also be aware of new regulations and directions issued by the SC and the FIMM.

It is sometimes difficult to assess when an investor’s query becomes a ‘complaint’. UTMC will normally be
able to provide guidance to UTC.

However, the best person to initially handle a complaint is you, i.e. UTC. However, sometimes your client
may not be satisfied with your explanation. If this happens, you must know what to do next. UTMC do have
complaint-handling policies, which identify the person(s) to whom the complaint can be referred.

If the customer is still not satisfied after following this process, a complaint can be directed to the FIMM and
the SC.

UTC should be aware that the FIMM takes a serious view of all customer complaints. A disciplinary committee
has been established to investigate any such complaints and disciplinary action will be taken against any
UTC who breach the FIMM Code of Ethics.

In summary, complaints are a part of life and UTC must be prepared to handle a complaint in a manner that
tells the client they care and that the client is important.

3-16
3.7.1 PROVIDING QUALITY SERVICE

For the benefit of UTMC and UTC alike, listed below are some suggestions to improve the quality of service
to investors in UTS:

• Make sure the investors understand what they are investing in

• Make application forms and other documents easy to read and use

• Inform the investor about the processes involved in the purchase and repurchase of units and how
long these might take

• Provide ‘information’ to the client as well as ‘sell’ material

• Be responsive to client requests and queries

• Establish an investor hotline and provide it with qualified and knowledgeable staff, who are able to
handle a wide range of queries and are empowered to make decisions

• Ensure that the total transaction time, from start to finish, is reasonable

• Provide clear and precise reporting

• Simplify the handling of applications and repurchases - include some payment options for the client

• Ensure that all those involved in servicing the client are well informed and are aware of the extent of
their responsibilities.

❙ SECTION 3.8 EPF TRANSFERS

We have seen, in Chapter 1, the significance to the unit trust industry and UTC of the flow of savings from
the EPF to approved UTS managed by UTMC.

The transfer of eligible amounts represents a potentially large source of business. UTC should ensure that
they are fully aware of the administrative processes involved before advising potential clients on the EPF
Members’ Investment Scheme.

A member’s transfer from his or her EPF Account to a UTS represents an application for units in the UTS. A
disposal of units acquired with EPF-source application money is a repurchase with a return of the proceeds
to the EPF. As such, it is appropriate to examine here some procedural differences between applications
and repurchases derived from EPF-source money and ‘normal’ applications and repurchases.

As you are aware, EPF contributions made by an employee and by his or her employer on behalf of the
employee are paid into the employee’s EPF account. Each account comprises three sub-accounts:

• Account 1 comprises savings for retirement at age 55. Sixty per cent of contributions are credited to
this Account

• Account 2 comprises savings that can be withdrawn for the purchase of a house, mortgage repayments
relating to a housing loan, education, and/or pre-retirement withdrawal at age 50. Thirty per cent of
contributions are credited to Account 2

• Account 3 comprises the remaining ten per cent of contributions that can be withdrawn to meet medical
expenses.

3-17
However, Account 3 no longer exists with effective 1 January 2007. All existing savings previously accumulated
in Account 3 are merged into Account 2 and the types of withdrawal permitted as well as monthly contributions
credited for each accounts are subsequently re-shuffled as follows:

• Account 1 comprises savings for retirement at age 55. Seventy per cent of contributions are credited
to this Account
• Account 2 comprises savings that can be withdrawn for the purchase of a house, mortgage repayments
relating to a housing loan, education, pre-retirement withdrawal at age 50 and/ or medical expenses.
Thirty per cent of contributions are credited to Account 2.

Since 1996, a member has, subject to certain conditions, become entitled to make transfers from his or her
Account 1 balance to an approved UTS.

On 1 January 2002, an optional scheme called the Monthly Withdrawal Payment Scheme and open to all
EPF members was implemented, which necessitates the creation of Account 4. The scheme is designed
to provide monthly payments to members over a 20-year period from age 55 to 75. Initially, members can
transfer not more than 50 per cent of their savings in Account 1 to Account 4. Subsequently, Account 4 will
also grow with up to 50 per cent of the monthly EPF contributions from Account 1. Once members have
chosen this scheme, they will not be allowed to opt out of it.

3.8.1 CONDITIONS FOR WITHDRAWAL FROM EPF TO APPROVED UTS

The EPF will process a request to transfer an amount from a member’s Account 1 to approved UTS if:

• the balance in Account 1 is not less than the amount of Basic Savings as prescribed by the EPF. Such
amount changes according to the age of EPF members as follows:

Amount of Basic Savings Required for Account 1

Age (Year) Basic Savings (RM) Age (Year) Basic Savings (RM)
18 1,000 37 34,000
19 2,000 38 37,000
20 3,000 39 41,000
21 4,000 40 44,000
22 5,000 41 48,000
23 7,000 42 51,000
24 8,000 43 55,000
25 9,000 44 59,000
26 11,000 45 64,000
27 12,000 46 68,000
28 14,000 47 73,000
29 16,000 48 78,000
30 18,000 49 84,000
31 20,000 50 90,000
32 22,000 51 96,000
33 24,000 52 102,000
34 26,000 53 109,000
35 29,000 54 116,000
36 32,000 55 120,000

Source: “Panduan kepada Ahli: Kelayakan Pelaburan di bawah Skim Pengeluaran Pelaburan Ahli”,
Kumpulan Wang Simpanan Pekerja (Jan 2008).

3-18
• the member is less than 55 years old
• an account in the approved UTS has been opened into which the transfer can be processed
• no transfer has been made in the previous three months from the EPF Members’ Investment
Scheme
• the amount eligible for transfer is not less than RM1,000, and
• the amount to be transferred is not more than 20% of the excess savings in Account 1 after deducting
the amount of Basic Savings as prescribed by the EPF (subject to a minimum of RM1,000).

Example:

Savings in Basic Calculation:

EPF EPF Member’s
Age Account1 Savings (Savings in Account1
Member Eligibility
(RM) (RM) - Basic Savings) x 20%
Member is not eligible
to apply.
Reason: Savings in
A 22 4,000 5,000 -
Account 1 is less than
the stipulated amount of
Basic Savings.
Member is not eligible
to apply.
(RM8,000 – RM5,000) x 20%
B 22 8,000 5,000 Reason: Total eligible
= RM600
withdrawal amount is
less than RM1,000.
Member is eligible
to apply. Member can
(RM100,000 – RM64,000) x 20% withdraw up to RM7,200
C 45 100,000 64,000
= RM7,200 for investment purpose
(subject to a minimum of
RM1,000).

3-19
3.8.2 COMPLETING THE TRANSFER FROM EPF TO UTS

A client wishing to transfer an amount from his or her Account 1 balance will need to provide the following:

• the completed EPF application form [Form KWSP 9N(AHL)]

• one certified true copy of the client’s identity card (IC) photocopied on A4-sized paper, with both the
front and reverse of the IC photocopied on the same face of the paper
• the client’s right and left thumbprints affixed on the above photocopy.

The client then completes an application form from a UTMC for the selected UTS.

ll documents are then submitted to the UTMC, which will arrange for the application amount to be collected
from the EPF. Units are ‘reserved’ on that day for the investor by UTMC at the same price that an investor
making an application with payment would pay, and are allotted when the EPF makes the transfer of the
application amount to UTMC. This may take some time - especially if the application to the EPF is incomplete
or contains incorrect information.

3.8.3 REPURCHASING UNITS PURCHASED WITH EPF-SOURCE APPLICATION AMOUNTS

An investor holding units in UTS acquired with EPF-source application money is able to sell his or her units
at any time and in the normal manner, without the completion of the EPF Form KWSP 9F(3). The repurchase
proceeds must be paid by UTMC direct to the EPF to be re-credited to the member’s Account 1. Proceeds
from the disposal of units cannot be repaid to the investor.

Switches between UTMC are not allowed, and must be processed as a redemption from the existing UTS,
followed by an application to the new UTMC according to procedures described earlier. The redemption
proceeds must be credited to the client’s EPF Account 1 before the fresh application can be made.

Any distributions accruing to unitholders from EPF-source application money are automatically reinvested
– i.e. distributions cannot be paid out but must be credited to the client’s EPF investment account with the
UTMC.

An investor who wishes to invest in a single UTS with both EPF-source application money and with non-EPF
savings must, therefore, make two applications and have two distinct holdings in that UTS.

3-20
❙ SECTION 3.9 FINANCING THE PURCHASE
OF UNITS
The benefits and risks of acquiring units with borrowed funds are discussed in Chapter 1.

In this section, we look at the additional steps UTC must complete prior to a client’s purchase of units in
UTS, where the units are acquired with borrowed funds. You will see that the process reflects the safeguards
introduced by the SC to raise investor awareness of the additional risks faced by investors who wish to
finance an investment in UTS. The process also highlights the potential opportunities to abuse the trust of
investors, where UTC are motivated by the additional commission that may be earned from the purchase
of units using funds borrowed by the investor.

The process is outlined in the following flowchart.

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FINANCING A UNIT TRUST PURCHASE

Investor UTC UTMC Trustee Financier

Advises on
Understands
Structure
Unit Trust
and Type of
Investments
Unit Trust

Risk
Risk
Disclosure
Disclosure
Statement
Explained
Signed

Financing
Application
Required;
Processed
Completes
& Credit
Application
Assessed
for Financing

Credit
Completes
Approved
Application
& Cheque
Form
Drawn

Processes
Application
& Banks
Cheque

Trustee
Sales Updates
Client
Commission Unitholder
Records
Received Register
Updated

Issues
Files Unit
Certification
Trust
& Sends to
Certificate
Financier

3-22
The major additional steps in the purchase process to be noted in relation to the financing of purchases of
units in UTS are as follows:

• Before an application form is submitted to a UTMC for the purchase of units in UTS, an application for
loan finance needs to be made. The lender will assess the creditworthiness of the applicant - looking
at his or her ability to service the debt, and also at the quality of the security (collateral) being offered
(i.e. the units in UTS). The lender will also assess, according to its own credit policy and relevant
regulations, the amount that can be lent against units in that UTS.

• Once approval has been given, most lenders will insist that the payment is made directly to the UTMC,
rather than to the investor. This is to ensure that the loan is used for the purpose stated in the loan
application. The borrower will need to sign the loan contract, which will state the interest rate and the
repayment terms.

• Once the application for units has been processed by the UTMC, the lender will be sent the unit
certificate (or confirmation that the interests of the lender have been protected). A certificate will be
held in safe custody by the lender and will form part of the security for the loan. The investor will also
receive a statement from the UTMC indicating the number and total cost of the units purchased in
the UTS.

• If, over the life of the loan, the loan-to-valuation ratio falls below the level prescribed in the loan
document (e.g. in periods of falling investment markets), the lender will generally require a margin
call in the form of a cash payment to the lender (or request that ‘top-up’ collateral be provided). This
ensures that the lender has adequate security in the loan transaction.

• When the units in the UTS are repurchased, the proceeds are usually paid by the UTMC directly to
the lender. After repayment of the outstanding loan amount, the net proceeds are forwarded by the
lender to the investor.

The SC’s requirements in relation to financing the acquisition of units in UTS are covered in several of its
Guidelines.

The Guidelines state that UTMC must ensure that UTC do not, directly or indirectly, encourage the sale of
units through loans. In the past, many UTMC pre-arranged loan and unit purchase packages (‘loan plans’).
However, the Guidelines now require that all loan plan sales materials must be disassociated from the sale
of UTS. The sale of units in a UTS and the financing of that acquisition are, therefore, to be viewed as two
totally separate transactions. Accordingly, promotional materials containing projections of returns based
on the loan scheme are not allowed. This is to ensure that investors are not misled by attractive projected
returns, which could, at times, be exaggerated by over-enthusiastic UTC.

UTMC must also ensure that, in communicating information on loan financing for units, UTC provide full
and frank disclosure and do not omit any material fact, so that an investor can make an informed decision
before borrowing. UTC should only provide factual information and, subsequent to that, explain clearly the
risks of leveraging to the prospective investor. UTC should, to the best of their ability, ensure that the investor
understands the risks before investing.

UTC are required to fully explain to an investor the risks involved in leveraging his or her investment. In this
connection, UTC are required to obtain from the client a signed copy of the Unit Trust Loan Financing Risk
Disclosure Statement (see Appendix 1) to confirm that the risk involved in borrowing to finance the acquisition
of units in a UTS has been explained and that the client understands the contents of that Statement.

3-23
UTC are required to attach the original Risk Disclosure Statement signed by the investor to the application
for units, after which it is to be filed by UTMC for record and inspection purposes, and to forward a copy to
the investor.

The Risk Disclosure Statement clearly outlines the main risks involved in loan financing:

• The higher the margin of financing, the greater the potential losses as well as the potential gains.

• The servicing of loan repayments may become more onerous if interest rates rise. (Note that this does
not apply where the loan is at a fixed interest rate for a specified term.)

• Margin calls (or requests to ‘top up’ collateral against a loan) may be requested in addition to normal
repayments. Failure to make these payments may cause the units in UTS acquired with borrowed
funds to be sold to repay all or part of the loan.

• Returns on UTS are not guaranteed, and may vary from year to year. The timing of a disposal of units
in the UTS (perhaps to repay the loan) may result in a loss, even if the investment performance was
favourable prior to that date.

The Risk Disclosure Statement encourages borrowers to ask the lender for further information, if he or she
is unsure about any aspect of the risks associated with the loan.

The Risk Disclosure Statement also serves to protect the interests of UTMC and UTC in the event of any
dispute, should an investor’s returns fall below expectation caused by circumstances beyond the control of
UTMC, or should the investor face difficulty in servicing the loan.

The Guidelines on Unit Trust Funds also state that the margin of finance for loans should not exceed 67%
of the application amount (UTMC are responsible for ensuring the margin is not breached). This means that
an investor can only obtain a loan of up to twice the value of his initial deposit or investment in UTS. For
example, an initial investment of RM10,000 will entitle an investor to borrow up to a further RM20,000 for
investment in UTS (i.e. the borrowing represents 66.67% of the total cost of units acquired).

PART B

One of the major objectives of this book, and in the registration of UTC, is to improve the efficiency and
professionalism of the unit trust industry.

For example, it may be tempting for UTC to ‘take the easy way out’, by making outrageous promises of
investment returns in an attempt to encourage investors to purchase units in UTS. In the long run, such
activities do significant harm to the industry, since such promises are not likely to be met.

The basis of all modern marketing is not just selling, but about identifying customer needs and servicing
those needs. It usually does not involve creation of the need.

Therefore, the aim of UTC must be to always have satisfied clients, i.e. clients who were sold a product that
met or surpassed their expectations.

In the following sections, we will look at some important aspects of the marketing of UTS.

3-24
❙ SECTION 3.10 BASIC PRINCIPLES OF
MARKETING UTS
The dramatic growth in investment in UTS in Malaysia implies that there are opportunities for professional
marketing management by UTMC, IUTA, CUTA and UTC. It means that UTS should not just be ‘sold’. The
long-term winners in the unit trust industry will be those who establish an image, identity and loyalty for their
particular UTS or family of UTS.

UTS are developed, packaged and marketed by many UTMC and IUTA that are linked to service institutions,
such as stock brokerage firms, banks and finance companies. It is envisaged that more participants will
enter the industry, in line with deregulation and increased business prospects of UTMC. Competition is likely
to become even greater.

Unit trusts, therefore, require a disciplined and professional marketing approach. During the time a UTS
is conceptualised, designed, approved, promoted, distributed, serviced and finally repurchased from the
investor, it is the long-term needs of the investor that must constantly be considered.

The same discipline required in the marketing of packaged goods and services have to also be applied to
marketing of UTS. The needs of both customers and distribution channels must be considered. However,
there are numerous differences in emphasis when marketing UTS as opposed to other financial products.
Among the unique considerations in marketing UTS are:

• multiple and alternative distribution channels are available - some UTMC market directly to investors
while others secure sales of UTS through their own network of UTC or through IUTA and CUTA

• regulatory and compliance requirements have a significant impact on communications material -

including prospectus contents, advertising, direct response, sales promotion kits, and public relations
activities

• the varying degree of sophistication and product knowledge of the various distribution channels, and
of the investors who purchase UTS

• pricing and compensation scenarios (e.g. sales charges and management fees, and commissions
and other incentives to distributors).

There are a number of reasons why marketing of UTS sometimes fail to produce sales and business volume,
for example:

PRODUCT AWARENESS

Many potential investors are unaware of how UTS can help them increase their net worth. Others may be
fearful because they do not understand the product.

Both the UTMC and UTC have an important role in helping more Malaysians reap the benefits of
investing.

‘NOT FOR ME’

Some may not consider themselves as potential investors because UTC are unable to identity their needs,
and thus the potential clients regard the UTS as inappropriate to their investment objectives or style.

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PERFORMANCE

Some UTS have not performed well in relation to their peers and/or their benchmark.

RISK ELEMENTS

Some fear losing their capital by investing in UTS, which they may consider to be ‘just like shares’ compared
to safe havens such as savings accounts and fixed deposits.

These and other objections, such as potential clients’ previous bad experience through mis-selling by
UTC, represent a considerable challenge for UTMC, IUTA, CUTA and UTC in increasing the ownership (or
penetration) of UTS amongst Malaysian investors.

❙ SECTION 3.11 INVESTMENT ALTERNATIVES

TO UTS
As Malaysians generally become more educated and attuned to matters relating to their financial affairs,
they are looking for better and more sophisticated investment tools that produce returns above simple bank
deposit rates.

Currently, the majority of Malaysia’s financial assets are tied to the banking system, which attracts savings
and fixed deposits. In other countries, a greater proportion of financial assets are held in higher yielding
instruments (such as UTS and pension schemes), which offer significant exposure to growth assets, such as
shares and property, and to bonds. This trend is becoming more evident here, as Malaysian investors seek
higher returns on their capital and appreciate that this can only be achieved with an associated increase in
risks.

In marketing UTS, therefore, it is important to be aware of other investment opportunities that exist for the
Malaysian investor. The major alternatives are summarised below, together with a commentary on how
investment in UTS might be compared.

3.11.1 CASH AND FIXED DEPOSITS

Cash and fixed deposits with banks and other financial institutions generally offer a safe, but relatively
unattractive, rate of long-term return. Most people need to have access to a bank account and some maintain
a relatively high portion of their assets in bank deposits. The range of deposit products available is quite
extensive, from simple overnight deposits at cash rates to more long-term deposits, e.g. a two-year fixed
deposit.

Whilst deposits with a financial institution can be considered almost risk-free, there can be a risk of
default.

However, the major problem with cash and fixed deposits is their unsuitability for medium to long-term
investment. Because of their lower risk, they usually offer lower relative returns. Over short periods of time,
this may not necessarily be the case, but over the longer term, it has been demonstrated in most world
markets that assets such as equities, property and bonds can provide better real investment returns.

Nevertheless, UTMC have started to develop UTS that appeal to the risk-averse investor who wishes a high
degree of capital security with regular income payments.

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3.11.2 DIRECT SHARE INVESTMENTS

Owning and trading shares directly has been extremely popular with Malaysian investors in the mid 1990s.
In fact, transactions carried out by small to medium investors (i.e. retail rather than institutional investors)
have been the major driver of Bursa Malaysia during the bull run, accounting for a large percentage of
turnover in the market.

Holding a portfolio of shares can easily be misconceived by small investors, who may believe that they can
make their fortune overnight.

A problem arises when the small investor has to choose which counters to purchase. Given the large number
of individual counters on Bursa Malaysia, where does the small investor start? He or she does not have
enough funds to hold every counter, so must put money into only one or two counters and hope that the
selection performs well.

It requires sound financial knowledge and time in order to gain profitably from this type of direct investment.
It takes years of intensive learning to become an investment analyst, and the small investor has limited
opportunity to study and understand the investment markets. The return from investing directly in shares is
usually only attractive if the investor is able to hold shares for the longer term, and invests only in the shares
of fundamentally sound companies. The problem is selecting those companies.

Holding a limited number of share investments does not provide the benefit of diversification offered by
UTS. The direct share investor has ‘all his or her eggs in one basket’ and is, therefore, exposed to the risk
of losing all his or her capital.

So, for an investor to really benefit through direct share investment, he/she needs a sizeable sum of money
to diversify into 30-40 different stocks, knowledge to know which stocks to choose, and time to constantly
acquire and apply the knowledge.

Unit trust fund managers, on the other hand, have the relevant knowledge and expertise to select appropriate
stocks from various sectors to diversify the risks. In addition, there are usually full-time research assistants
with the UTMC to facilitate this process. With the pool of funds collected from investors, there is greater
room for diversification and application of the skills of the fund managers.

3.11.3 DIRECT INVESTMENT IN PROPERTY

Once again, many investors in Malaysia have enjoyed the benefits of making a direct investment in property
(e.g. an apartment bought for investment purposes). Many have also experienced the downturns in the
property market over the years, and so understand the cyclical nature of the market.

Whilst property can be a good long-term ‘store-house’ of wealth, it is generally difficult for the small investor
to gain exposure to it, given that large amounts of capital are required or must be borrowed before an
investment property can be purchased. In addition, the property market can be extremely illiquid at times,
so realising the gain (or loss) can be difficult. Furthermore, there is always the risk of non-paying tenants,
property damage, wear and tear, etc. There is also the fact that property cannot be sold in parts - you cannot
sell only part of the house.

UTS that are listed on Bursa Malaysia with an exposure to real property can be a viable alternative for the
small investor. With a small outlay, he or she can obtain exposure to the property market without many of
the problems and risks - instead relying on the skills of professional fund managers, experienced in the
management and development of real property.

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3.11.4 INTERNATIONAL INVESTMENTS

By focusing only on the Malaysian stockmarket, investors are missing out on 99% of investment opportunities
in world stock markets.

Whilst international investment can provide a suitable haven in times of volatility within the local markets,
there are some considerations to be kept in mind:

• Tax and other regulations affect the investment of funds overseas and act as a barrier, particularly to
small investors.
• The costs of managing and accounting for the currency exposure of an international investment can
potentially eliminate the returns from investing overseas.
• Where do you start to begin reviewing the 99% of stock market opportunities based overseas? The
need for information is even greater with international investments.

While the opportunity to invest internationally through UTS is currently limited, the Malaysian Capital Market
Masterplan envisages enhanced opportunity through specialist international UTS to be offered by UTMC.

3.11.5 FINANCIAL DERIVATIVE PRODUCTS

Another developing avenue for investment in Malaysia is the derivative markets. Derivatives can provide an
avenue to earn potentially very high returns (or losses) without large capital outlays.

The problem is that the small investor is not really equipped to analyse derivative products. He or she needs
to have a sound knowledge and understanding of the products before he or she invests.

Again, it is likely that in the next few years, UTMC will offer UTS specialising in derivative investments.
Currently, UTS may use derivatives only to protect portfolios from expected loss.

3.11.6 SUMMARY OF INVESTMENT ALTERNATIVES TO UTS

The following table provides a summary of the investment alternatives discussed above, and compares
them to investment in UTS. (Note that the analysis is meant for the purpose of general comparison only.
See also Appendix 2.)

Investment Potential Term of Capital Investment

Liquidity
Type Return Investment Required Risk
lower
high (normally
UTS moderate medium to long small (diversification
within 10 days)
benefits apply)
high (depending
Direct share moderate to moderate to
medium to long* medium to large on market
investments high high
conditions)
Direct investment moderate to moderate to
long large low
in property high high
Financial
derivative high short medium to large medium very high
products
Cash and fixed low (penalties
low varies large very low
deposits may apply)
high (currency
International moderate to
medium to long* large high fluctuations also
investments high
apply)**
* excludes speculative investment
** risk may vary depending on country and currency

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❙ SECTION 3.12 UNIT TRUSTS AS AN
INVESTMENT
UTS, in general, bridge the gap between low risk investments, such as bank deposits with low returns, and
the much greater risk of investing directly. UTS can provide an investment with more moderate risk and
rewards. They provide an ideal avenue for small investors (and high net worth individuals) to gain exposure
to a wide range of investment opportunities at a reasonable cost.

Investment through UTS is one of the best medium to long-term investment decisions that smaller investors
can make with a view to accumulating capital and beating inflation.

3.12.1 ADVANTAGES OF INVESTING IN UTS

In Chapter 1, we reviewed the key advantages that UTS offer. In this section, we will examine these in
further detail.

DIVERSIFICATION

Investors in UTS can obtain much wider diversification with their capital because the portfolios of UTS
are generally invested in a wide range of securities (20-100 counters in the case of an equity UTS). If an
investor invested all of his or her capital in a single counter, he or she could lose all if the company went
into liquidation. An equity UTS spreads the risk of loss of investors’ capital by holding a portfolio of counters.
Such a portfolio is expected to behave in a less volatile manner than a portfolio of only one or two counters.
In simple terms, it means risk is reduced.

The investment of some UTS may also be diversified across asset classes. In addition to shares, a UTS may
invest in fixed income securities, property and cash. These investments will provide an element of stability
in a declining stock market, and may provide some liquidity when meeting the repurchases of unitholders
in UTS.

Small investors would find it difficult to achieve comparable diversification within their investment portfolio as
their capital is limited. Additionally, they may not have access to the up-to-date information required to make
informed investment decisions regarding diversification. An investment in UTS would give them automatic
diversification with only a small amount of capital.

To understand how a diversified investment could help an investor, a simple illustration is provided below:

Non-diversified portfolio of investor

Price Value of
Counter No of shares
(RM) Investment (RM)
X 2,000 5.00 10,000
If price moves 20% lower to RM4.00 8,000
Investment loss is (2,000)

The investor has invested all his money in a single counter. As the price falls, he or she suffers a significant
loss.

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Assume the investor instead invests RM10,000 in three counters.

Diversified portfolio of investor

Price Value of Investment
Counter No of shares
(RM) (RM)
X 1,000 5.00 5,000
Y 1,000 3.00 3,000
Z 1,000 2.00 2,000
Total Investment 10,000

If the price of X drops to RM 4.00, while Y and Z rise 20%, the investor’s portfolio will be:

Value of Investment
Counter No of shares Price (RM)
(RM)
X 1,000 4.00 4,000
Y 1,000 3.60 3,600
Z 1,000 2.40 2,400
Total Investment 10,000

With the same capital outlay, the investor now has a portfolio comprising three counters. The drop in the
price of X has been compensated by the rise in the prices of Y and Z, which results in the investor retaining
the value of his capital despite a 20% drop in the price of one counter representing half of the portfolio. This
illustrates the benefits of diversification.

Even if the prices of Y and Z had remained unchanged, the portfolio would be worth $9,000 - a fall of 10%
compared to the 20% fall in the value of the non-diversified portfolio. The benefit of diversification is a
reduction in overall losses.

PROFESSIONAL FUND MANAGEMENT

For small investors, UTS are one of the few avenues of investment where they can obtain professional
management of their assets at a reasonable price.

When investing directly into listed counters, small investors may not be well serviced by stockbrokers. In
fact, stockbrokers usually cannot afford to spend a great deal of time with the small investor.

With UTS, all customers benefit equally with respect to investment advice since one unit is equal to another.
The fund managers generally have years of experience in handling investments and focus on investing the
UTS for the benefit of all investors, irrespective of the number of units a unitholder has.

Fund managers have access to a wide range of resources and information including specialised research
and market analysis, which is required for effective investment management in today’s markets. The portfolio
management process of UTMC also involves an Investment Committee, which sets and monitors investment
policies and strategies for a UTS, while the fund manager provides the research, analysis of asset allocation
and investment recommendations. Small investors investing directly cannot generally match this level of
expertise.

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LIQUIDITY

Basically, liquidity is a measure of how long it takes for an investor to sell his or her investment. In some
cases, an investor can be left holding shares or property that cannot be sold, sometimes at any price.

With UTS, UTMC are obliged to repurchase an investor’s units when asked by the investor to do so. This
liquidity is a very important benefit that investment in UTS offers over other forms of investment.

The procedure for repurchase of units is straightforward. An investor simply needs to fill in a repurchase
form and submit it to UTMC. Units will then be repurchased by UTMC at the appropriate unit price, and the
proceeds paid to the investor - normally within 10 days of receiving the request.

EASE OF PURCHASE

One major advantage of investing in UTS is that investors can easily buy units. An investor interested in
buying units in UTS need only call the UTMC, IUTA or UTC to obtain a prospectus and all the information
he or she needs to make the investment decision.

MEETING INVESTORS’ LONGER TERM NEEDS

Generally, the longer an investor is prepared to commit his or her money to an investment, the higher will
be the potential returns. An investment in many UTS can be used to provide for longer-term needs.

From the various types of UTS available, an investment in UTS (or in a portfolio of UTS) could be selected
to meet most of the longer-term savings objectives of investors, including:

• for home purchase or an overseas holiday

• to meet children’s future education costs

• to build up a retirement fund to complement EPF, and/or the proceeds of maturing life assurance
policies, for a more comfortable retirement for the investor.

A substantial sum of capital may also be built up through regular savings plans offered by most UTMC.

DOLLAR COST AVERAGING

Investment in UTS is one avenue whereby investors can potentially benefit from applying the concept of
dollar cost averaging.

The concept refers to the systematic and regular investment of a fixed amount of money, irrespective of the
price level of the investment at the time the investment is made. This can reduce the average cost of the
investments acquired to below the average price of those investments during the period.

The rationale for investing in this way is that it is difficult, if not impossible, to invest at the bottom of the
market, and most investors (particularly small investors) are likely to be better off investing on a regular basis
throughout all stages of a market cycle rather than investing all their capital at one time.

By using the concept, it is said that investors can turn fluctuating prices to their advantage; especially if prices
are moving down, they can purchase more units and reduce the average cost of their entire investment
portfolio. By buying more units when prices are low and fewer when they are high, investors give themselves
an advantage over other investors who try to time their investment decision - and get it wrong!

3-31
Take the example of unitholder A and unitholder B who both invest the same amount of money over a fixed
period. Unitholder A consistently buys a fixed number of units, irrespective of the unit price. This means
the investment amount varies according to the unit price. On the other hand, unitholder B applies the dollar
cost averaging concept and invests a fixed ringgit amount each period, i.e. the number of units each period
varies according to the unit price.

The results under different market scenarios are shown below.

In a falling market:

Unitholder A Unitholder B
Unit Buys the same no. of units Dollar Cost Averaging
price Units Cost Units Cost
Bought RM Bought RM
10.00 1,000 10,000 600 6,000
8.00 1,000 8,000 750 6,000
6.00 1,000 6,000 1,000 6,000
4.00 1,000 4,000 1,500 6,000
2.00 1,000 2,000 3,000 6,000
5,000 30,000 6,850 30,000

Average unit cost for unitholder A: RM6.00 (RM30,000 ÷ 5,000 units)

Average unit cost for unitholder B: RM4.38 (RM30,000 ÷ 6,850 units)

With the same capital available for investment of RM30,000, unitholder B, who adopts the dollar cost averaging
principle, has 1,850 more units than unitholder A, who keeps buying the same amount of units when the
price drops. Over the period, the average unit cost for unitholder B is only RM4.38, while the average unit
cost for unitholder A is RM6.00. If the price of units recovers, this will provide better returns for unitholder
B over unitholder A.

In a rising market:

Unitholder A Unitholder B
Unit Buys the same no. of units Dollar Cost Averaging
price Units Cost Units Cost
Bought RM Bought RM
2.00 1,000 2,000 3,000 6,000
4.00 1,000 4,000 1,500 6,000
6.00 1,000 6,000 1,000 6,000
8.00 1,000 8,000 750 6,000
10.00 1,000 10,000 600 6,000
5,000 30,000 6,850 30,000

Average unit cost for unitholder A: RM6.00

Average unit cost for unitholder B: RM4.38

You can see that over the period of rising prices, unitholder B retains his or her average unit cost
advantage.

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In a fluctuating market:

Unitholder A Unitholder B
Unit Buys the same no. of units Dollar Cost Averaging
price Units Bought Cost Units Bought Cost
RM RM
10.00 1,000 10,000 600 6,000
6.00 1,000 6,000 1,000 6,000
8.00 1,000 8,000 750 6,000
6.00 1,000 6,000 1,000 6,000
2.00 1,000 2,000 3,000 6,000
5,000 32,000 6,350 30,000

Average unit cost for unitholder A: RM6.00

Average unit cost for unitholder B: RM4.72

In a fluctuating market, the benefit of the dollar cost averaging concept is even more significant. In the above
illustration, with the same investment capital of RM30,000, unitholder B managed to buy 6,350 units, while
unitholder A had only 5,000 units. The average unit cost for unitholder B is RM4.72 and the average unit
cost for unitholder A is RM6.00 The average unit cost for unitholder B in a fluctuating market remains lower
than the average unit cost of unitholder A in a rising or in a declining market.

The popular dollar cost averaging concept helps (but does not guarantee) an investor obtain favourable
long-term investment results where the trend in unit prices is upwards. (Note that both investors in the first
and last examples have lost money over the period of investment!) As the stock market and unit prices
fluctuate, a systematic investment programme in a UTS will tend to enhance performance during periods
of declining or rising prices. Investors, however, must remember that dollar cost averaging should be used
over long periods in order to maximise its benefits.

Given that most investors in a UTS invest for the long term, the concept of dollar cost averaging works well
- although there are no guarantees of investment performance! Its real value lies in a commitment to regular
investment, irrespective of market fluctuations. It avoids the need to decide to invest when the market appears
to be too high, or to be hitting new lows. Investors buy more units at market lows when fear is greatest. As
the market recovers, such purchases will prove timely.

3.12.2 RISKS OF INVESTING IN UTS

We face risks every day - for example, whilst driving to work, or of catching a serious illness - and we become
familiar with and accept these risks as part of normal life. Yet the risk of an investment falling in value - even
for a short time - somehow assumes a level of anxiety way out of line with the ‘normal’ risks we face!

A dictionary definition would suggest that risk is ‘the probability or chance of injury, loss, damage or harm’.
For an investor, risk is the chance that the actual return will be less than he or she expected to receive. Risk
is, therefore, directly linked to an investor’s objectives. To meet an investor’s objectives, some degree of
risk must be taken - if high returns are required, high risks will need to be taken. It is not possible to achieve
high returns without taking on a high level of risk. If the level of risk required to achieve an objective makes
an investor uncomfortable, then he or she must reduce the level of expected returns accordingly.

3-33
A long-term investor with limited capital is unlikely to meet his or her objective of financing a child’s education
- or deriving an amount upon which to retire - by investing in a fixed income or cash UTS. Ironically, the
traditionally low-risk fixed income or cash investment would now become a ‘risky’ investment, as it may not
help the investor meet his or her retirement/child education objectives.

Risk can also be defined in terms of the variability or fluctuation in total return from an investment. So an
investment that is volatile in price or value - such as listed shares - is regarded as a higher risk investment
than one, such as a fixed deposit, that does not vary in price or value.

However, an investment that is ‘risky’ to one investor may be much less risky to another. For example, an
investor who can hold units in a volatile equity UTS for the long term can ride out any short-term fluctuations
in values in the expectation that, over the long term, he or she is likely to come out ahead. An investor who
can hold units in the same equity UTS for only a few months (before requiring the funds to meet another
commitment) is taking a much higher risk. This investor may be better advised to purchase a much less
volatile fixed income or cash UTS.

You can see that ‘risk’ is not only a complex concept but a personal one! UTC must be aware of a client’s
objectives, investment time horizon and attitudes toward risk before considering an investment in UTS and
before application is made to a particular UTS. The ability of a client to handle risk is a function of such
factors as:

• age
• health
• marital status and family
• time horizon
• liquidity requirement
• current income
• financial commitments
• other investments and savings
• knowledge and understanding of investments
• attitude toward risk, etc.

There are likely to be fewer dissatisfied investors if both clients and UTC are aware of, and take into account,
risk when considering investment decisions. Understanding risk is vital!

There are several risks in investing in unit trusts and investment risk is clearly one of the most important.

INVESTMENT RISK

As with all forms of investment, there is investment risk associated with investing in UTS. For equity UTS,
the movement of share prices in the stock market is reflected in the NAV of the UTS. As these vary, so prices
of units in the UTS can go down as well as up. Similarly, REIT, as owners of real property, are affected by
the property cycle.

Of course, share and property prices (both individually and collectively) reflect a host of local and international
economic, political and other factors, including investor sentiment.

Ownership of investments through a UTS does not, and cannot, reduce the underlying volatility in values of
those investments. However, the benefit of diversification across a greater number of individual investments
reduces the effect of that volatility for investors with limited capital to invest.

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OTHER RISKS

Investors in UTS face other types of risk:

• There is a small risk that a UTMC will go out of business, although the effect on unitholders should
be minimised as UTS investments and other assets are held by the trustee of the UTS. Nevertheless,
there could be some disruption to the normal smooth running of the UTS. There is less risk that the
trustee will fail, and even then, UTS assets are separated from those of the trustee company itself.
There is a much greater risk that the senior management of UTMC will change, and it is certainly
true that good investment personnel are in short supply. Hence, past performance of UTS cannot be
totally relied upon as a guide to future performance and losses may occur

• UTS may, in extreme circumstances, be unable to meet the demands of unitholders who wish to sell
units - for example, where investment markets are in turmoil and closed. In this situation, the liquidity
buffer of UTS may be used up, and there is no possibility of selling securities from the portfolio of UTS
investments. Where this situation arises, a suspension of the sale and repurchase of units would be
called by the trustee of the UTS until market conditions improved. UTMC are required to maintain
reasonable liquidity in UTS and, in normal circumstances, there should be no interruption to payments
when units are repurchased

• There is a risk of changes in legislation (for example, to taxation law) that could adversely affect
investors

• There may be changes to fees of the UTS, or to its investment policy, but the SC and the trustee of the
UTS will ensure that unitholders are not adversely affected. If necessary, a meeting of unitholders of that
UTS will be called at which all the issues can be discussed and a vote taken. Even then, unitholders
are generally given time to perhaps sell units in the UTS before any changes are implemented

• As we have noted, investors who finance an investment in UTS take on additional risks.

While the risks described do actually exist, they should not generally be of great concern to investors in
UTS or to UTC. It is the risk associated with investment and the mismatch of expected returns and client
objectives that is most problematic. For this reason, it is worthwhile restating here the risk warnings required
to be included in prospectuses, advertisements and promotional materials:

• Past performance of a UTS is not a guarantee or an indication of future performance

• Past distributions are not guaranteed and may not be repeated
• Unit prices and distributions, if any, may go down as well as up.

An understanding and appreciation of these risks by UTC and their clients will help reduce considerably the
number of complaints received.

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❙ SECTION 3.13 SUMMARY
In this Chapter, we have increased our understanding of the major business processes involved in an
investor’s purchase and disposal of units in UTS. Units in UTS may be purchased through various distribution
channels, using cash, EPF Members’ Investment Scheme, or borrowed application money. Repurchase
processes may, in part, also reflect the source of the original application money. We have also seen how
UTMC determine unitholders’ distribution entitlements.

We have learned that handling client queries and complaints is an important aspect of providing quality
client service, and that UTC are often able to minimise complaints by avoiding unethical practices and by
the prompt handling of queries. We noted that UTC should see their role as providing quality service well
beyond the point at which the application form is lodged with UTMC, since a client’s expectations from
investment in UTS are met only when his or her investment objectives are reached. By providing quality
service to clients, UTMC, IUTA, CUTA and UTC can all benefit - in part by enhancing the image of the unit
trust industry as a whole.

The advantages of investing in UTS rather than directly in various markets are likely to be well known to
UTC, but must be continually promoted to potential investors. Existing investors in UTS, too, may need to
be reassured that the UTS they selected remains appropriate to their needs and why. Of course, there are
risks of investing in UTS - particularly if loan finance is used to add to an investment. UTC must protect
themselves and their clients by ensuring that the client understands and acknowledges the risks of investing
with borrowed money. We noted the detailed procedures required to be adopted by UTC and UTMC where
UTS are purchased with borrowed money.

We have also looked at some of the differences between marketing UTS and other products, and identified
that the real value in investing in UTS is in the satisfaction of client needs. In satisfying client needs, UTC
must have a proper appreciation of risk since risk is closely linked to investors’ needs and objectives.

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SELF-TEST QUESTIONS ON CHAPTER 3
1. Describe clearly the basic steps taken by UTMC when a unit trust application form is received? What
is the purpose of the ‘cooling-off’ right? What happens when an investor exercises this right?

2. What do you understand by the term ‘repurchase’?

3. Why would a trustee suspend the sale and repurchase of units in a UTS? Do you think a suspension
is in the best interests of unitholders? Why?

4. Why is it important to keep investors in a UTS informed? List several ways in which UTMC will keep
an investor up-to-date with his or her investment.

5. How is the amount available for distribution by a UTS determined by the directors of UTMC? What is
meant by ‘buying’ a distribution? Is it appropriate that UTC recommend such a practice?

6. What is a ‘switch’? Can a unitholder who sells units in a UTS, which were acquired as a result of a
transfer of EPF funds, ‘switch’ into another UTS with another UTMC?

7. What is a ‘Risk Disclosure Statement’? When is one required? Why is it necessary to have an investor
sign this Statement before investing in a UTS?

8. What do you understand to be the difference between marketing and selling of units in UTS?

9. Outline the major advantages and risks of investment in UTS.

10. Explain clearly why ‘dollar cost averaging’ could be a better method of acquiring units in UTS for many
investors.

3-37
APPENDIX 1:
SC’S UNIT TRUST LOAN FINANCING RISK
DISCLOSURE STATEMENT
Investing in a unit trust fund with borrowed money is riskier than investing with your own savings.

You should assess if loan financing is suitable for you in light of your objectives, attitude to risk and financial
circumstances. You should be aware of the risks, which would include the following:

1. The higher the margin of the finance (that is, the amount of money you borrow for every Ringgit of
your own money that you put in as a deposit of down payment), the greater the potential for losses
as well as gains.

2. You should assess whether you have the ability to service the repayments on the proposed loan. If
interest rates rise, your total repayment amount will also increase.

3. If unit prices fall beyond a certain level, you may be asked to provide additional acceptable collateral
or pay additional amounts on top of your normal instalments. If you fail to comply within the time
prescribed, your units may be sold to settle your loan.

4. Returns on unit trusts are not guaranteed and may not be earned evenly over time. This means that
there may be some years where returns are high and other years where losses are experienced
instead. Whether you eventually realise a gain or loss may be affected by the timing of the sale of your
units. The value of units may fall just when you want your money back, even though the investment
may have done well in the past.

This brief statement cannot disclose all the risks and other aspects of loan financing. You should, therefore,
carefully study the terms and conditions before you decide to take the loan. If you are in doubt in respect
of any aspect of this Risk Disclosure Statement, or the terms of the loan financing, you should consult the
institution offering the loan.

ACKNOWLEDGEMENT OF RECEIPT OF RISK DISCLOSURE STATEMENT

I acknowledge that I have received a copy of this Unit Trust Loan Financing Risk Disclosure Statement and
understand its contents.

Signature:

Full Name: ______________________________________________

Date: ______________________________________________

3-38
APPENDIX 2:
SIX WAYS TO TURN SAVINGS INTO INVESTMENTS
SAVINGS ACCOUNTS FIXED DEPOSITS
PROS PROS

☺ Easy to open and maintain. ☺ Higher interest rate than savings account.

☺ Minimum requirements. ☺ Money cannot be spent on impulse purchases.

Very reasonable. CONS

☺ Flexible access to cash. ☹ Interest may at times be outpaced by inflation.

CONS ☹ Withdrawal less flexible.

☹ Ease of cash withdrawal can disrupt your

savings programme.

☹ Relatively low interest rate.

PROPERTY LIFE INSURANCE

PROS
☺ A good “forced-savings” plan.
☺ A good hedge against inflation.
☺ Can bring good returns in “boom” economy.
CONS
☹ As a starting point for savings, it is difficult;
high “start-up” down payment, and you must
qualify for a bank loan.
☹ Long-term, inflexible mortgage repayment
scheme.
☹ Not readily converted to cash.
PROS
☺ A useful saving-cum-protection vehicle.
☺ As many policies have a penalty for premature
break, it acts as a mechanism to promote
saving.
☺ Proven as an effective “forced savings” plan.
CONS
☹ Relatively lower returns compared with other
long-term investment vehicles.
☹ Lack of flexibility.

UNIT TRUSTS SHARE MARKET

PROS PROS

☺ The perfect investment vehicle for regular

savers.
☺ More exciting than operating a current account.

☺ Starting amounts are not as small as for

savings accounts, but are reasonable.
☺ Investments are easy to build up on a regular
basis.
☺ Benefit derived from dollar-cost averaging.
☺ Unit trusts give a well-balanced investment
portfolio that you do not need to manage
yourself.
☺ You can sell your units when the price is right
at any time.
☺ Can bring spectacular returns when timing is
right.
CONS
☹ You need a lump sum to get into the share
market.
☹ Not for the regular saver investing a couple of
hundred ringgit per month.
☹ You need vast amounts of market information,
time and luck in order to manage your
investments successfully.

CONS
☹ Affected by ups and downs of share market
or other markets that the funds invested in.

* From Wise Moves to Retirement, SBB Mutual Bhd

3-39
CHAPTER 4

INDUSTRY CODE OF ETHICS AND STANDARDS OF

PROFESSIONAL CONDUCT
LEARNING OBJECTIVES

At the end of this Chapter, you should:

• be aware of the need for a high standards of ethics and conduct amongst UTC in the unit trust
industry

• understand the need for compliance within your organisation and the importance of compliance and
procedures manuals

• be supportive of the role of your Compliance Officer

• understand your obligations under the codes of ethics and standards of conduct of both the SC and
the FIMM

• appreciate how adherence to these codes of ethics and standards of conduct upholds the ultimate
protection of the investor.

❙ SECTION 4.1 OVERVIEW

In Chapter 2, we looked at how the unit trust industry is regulated by the SC. In this Chapter, we will
look at several other constraints on the activities of UTC - what UTC can and cannot do. Knowledge and
understanding of these constraints will be of benefit to both the UTC and client, as well as being a condition
for continuing registration as UTC.

Compliance involves ensuring that the many and varied obligations that affect the unit trust industry, and
those who work within it, are met. This Chapter introduces the subject of compliance, briefly describes the
compliance function within an organisation, and explains why compliance and the Compliance Officer are
important in the role of a UTC.

We include an extract of the FIMM’S Code of Ethics and Standards of Professional Conduct for the Unit
Trust Industry (Appendix 1), which sets out the code of conduct for Ordinary Members, IUTA and UTC. Also
included is an extract from the SC's Guidelines on Marketing and Distribution of Unit Trusts (Appendix 2),
namely the Code of Ethics and Standards of Professional Conduct, which sets out the minimum standards
of conduct for UTC. These, together with the UTMC/IUTA’s internal code of conduct, those sections of
its compliance manual relating to the distribution of unit trusts, its procedures manuals and other internal
practices, will provide a series of 'rules' within which UTC must work.

We also examine some of the ethical requirements applicable to UTC. A proper appreciation of ethics is
important because not every situation faced by UTC will be, or can be, covered by regulations or rules. This
Chapter, therefore, provides a brief overview of the issue of ethics.

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❙ SECTION 4.2 BASIC PRINCIPLES
The unit trust industry is important to the Malaysian economy. The industry serves to mobilise the savings of
the average, small investor by funnelling these savings into areas where capital is required. Major problems
in the unit trust industry will have implications on Malaysian capital flows, as well as on the hard-earned
money of individual investors.

In all investment-related industries, investors need to have confidence in the products that they are purchasing.
The unit trust industry is particularly vulnerable to the situation where investors can be encouraged to enter
into an investment with the promise of huge returns, only to be disappointed with the results. Thus, it is
essential that all parties involved in the sales and service areas act in an ethical and honest manner.

Recognising the importance of moral and ethical behaviour, the SC has produced its Guidelines on the
Marketing and Distribution of Unit Trusts. Schedule B of the SC’s Guidelines, the Code of Ethics and Standards
of Professional Conduct, is a pre-emptive mechanism to standardise the actions and behaviours of UTC
according to best practices. More recently, the FIMM has developed its own Code of Ethics and Standards
of Professional Conduct for the Unit Trust Industry. Part C covers the code of conduct of UTC.

A number of sources, therefore, determine the behaviour of UTC and their obligations to clients:

• the applicable laws and regulations (refer Chapter 2)

• the SC's Code of Ethics and Standards of Professional Conduct

• the FIMM Code of Ethics And Standards of Professional Conduct for the Unit Trust Industry

• the UTMC’s and IUTA’s internal procedures and compliance manuals.

While we cannot cover in detail the UTMC's and IUTA’s requirements of their UTC, we can introduce you
to the concept of 'compliance', which is the means by which a UTMC or IUTA ensures that UTC meet its
requirements and that of others.

❙ SECTION 4.3 WHAT IS 'COMPLIANCE'?

Compliance is an important aspect of the proper management and activities of UTMC and IUTA, and
incorporates the activities of UTC. It is the discipline of ensuring that the laws, regulations, codes of conduct,
internal procedures and rules within which the organisation, its officers and UTC operate are complied
with.

Compliance is a relatively new term, although the need to work within the 'rules' is not. Fortunately, few
businesses in the past had aimed to openly flout the laws and regulations that applied to them. So why has
'compliance' suddenly assumed a greater prominence?

Compliance, as a management practice, has in recent years become better recognised within financial
services organisations, as regulators (including the SC) have promoted its value in achieving their objective
of protecting investors in the capital markets. As the unit trust industry in Malaysia is an integral part of the
capital markets and is oriented to generally less sophisticated investors, the SC has encouraged (in part
through a requirement under its Guidelines on Unit Trust Funds) the formalisation of the compliance function
within a UTMC. However, any reputable financial services organisation will have its compliance department
and compliance officers, so UTC can expect to become more familiar with compliance and its obligations.

4-2
Compliance is now achieving the high profile it deserves: the age of compliance has arrived - and will not
go away!

But what exactly is 'compliance'?

Compliance is often linked to another positive business practice, that of risk management. Most businesses
and individuals take out insurance cover to protect themselves from specific events, such as the risk of fire
or the consequences of death. If you think of compliance in similar terms, it is a form of control or 'insurance'
against the risks and consequences of breaching the law or other internal and external obligations.

Some regard compliance as akin to quality control or best practice management. A car manufacturer will
aim to achieve a steady production of cars (i.e. its output) with ideally no defects and at a reasonable cost
through the introduction of quality control disciplines. The ‘output’ in the unit trust industry is ensuring that
all the obligations of the business are met, thus removing the potentially severe consequence of failing to
comply with those obligations (which include legal and regulatory requirements).

UTC may feel that compliance is not their responsibility. Nothing could be further from the truth! Compliance
is the responsibility of everyone in the organisation. UTC may feel that others, particularly those working as
lawyers and compliance officers in the compliance department, have more knowledge of the legal obligations
imposed upon UTMC, IUTA or UTC. Nevertheless, as you will learn, UTC have obligations to each client
and these must be complied with. Therefore, every UTC is part of the compliance function, ensuring that
the obligations to each client are met.

To ensure that their obligations to each client are met, UTC must work closely with the compliance department
of their organisation. The compliance department will provide UTC with some tools, such as checklists,
and effective and relevant training courses that will assist UTC in meeting their obligations to every client.
However, it is not the role of the compliance department to comply for UTC; only UTC can comply with their
obligations to clients. Hence, an understanding of the obligations of UTC to their clients, and to UTMC or
IUTA, is paramount.

4.3.1 HOW DO UTC BENEFIT FROM COMPLIANCE?

Some UTC may regard compliance as a nuisance, but this view is misguided.

UTC benefit in many ways from compliance, including:

• a reduction in client complaints and the costs of restitution (note: 'costs' include time in resolving
complaints and putting things right)

• a reduced risk of litigation by clients (with all its associated penalties and costs)

• an enhanced reputation - attracting clients and increasing business should become easier if potential
and existing clients can see that UTC operate within the 'rules', which will help reduce any fear or
unease a client may have in dealing with UTC and their organisation

• the opportunity for UTC to update their knowledge of legal and other obligations relevant to their
activities, further enhancing their reputation in the eyes of existing and potential clients

• the assurance of a continuing career in the fast-growing unit trust industry!

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❙ SECTION 4.4 WHAT DO WE MEAN BY 'ETHICS'?
Like compliance, the term 'ethics' has achieved increasing prominence within the financial services industry
over recent years. One main reason is that government regulators are devolving some of their regulatory
responsibilities to industry participants, a principle or process known as 'self-regulation'. As capital markets
mature, it is common for government involvement in regulation to be reduced and this is increasingly the
case in Malaysia where the SC has, over a period of time, looked towards industry bodies to provide self-
regulation.

Some areas of self-regulation covered by industry bodies are the following:

• introduction of business rules to prevent fraudulent and manipulative practices

• maintenance of standards of conduct and financial integrity among their members

• introduction of industry guidelines, by-laws and best practices

• investigation and enforcement of compliance by their members with relevant laws, regulations and rules

• imposition of appropriate sanctions for non-compliance.

'Ethics' represent a system of moral principles by which the actions of, in this context, UTC may be judged
good or bad, or right or wrong. In essence it is, like compliance, a best practice concept.

Ethics are usually a matter of personal responsibility, integrity and conscience. In the absence of some
other person to check their every action, UTC themselves must 'police' their own actions. It would be
impracticable for the multiple actions of every UTC to be checked; UTC would simply cease to function in
a mass of bureaucratic systems. Ethics, as expressed through a standard of conduct and a code of ethical
principles such as those produced by the FIMM and the SC, guide UTC to function in a busy world without
contravening laws and regulations.

❙
SECTION 4.5 FIMM CODE OF ETHICS AND
STANDARDS OF PROFESSIONAL CONDUCT FOR
THE UNIT TRUST INDUSTRY
4.5.1 INTRODUCTION

In 2001, the FIMM developed its Code of Ethics and Standards of Professional Conduct for the Unit Trust
Industry (the 'Code').

The Code sets out the general principles and minimum standards of good practice to be observed by any
person registered with the FIMM. It is intended to guide the conduct of business affairs of the registrants “in
the best interests of unitholders and the unit trust industry.” The FIMM also intends that the Code “encourage
and foster … conduct, ethics and standards of practice that will best serve, maintain further and protect the
interests of unitholders and the unit trust industry.”

The FIMM emphasises that the Code represents minimum standards and encourages the observation and
adoption of higher standards by all the organisations and UTC registered with it.

The Code augments the SC's Code of Ethics and Standards of Professional Conduct. While there is obviously
an overlap between the SC’s Code of Ethics and Standards of Professional Conduct and the Code, UTC
need to be familiar with both Codes.

The Code is in Appendix 1, while an extract of the SC’s Code of Ethics and Standards of Professional
Conduct is in Appendix 2. Both should be read now.

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4.5.2 THE FIMM CODE

The FIMM Code covers “any person registered with the FIMM.”

It is divided into three parts:

Part A
Code of Conduct for Ordinary Members of FIMM - an Ordinary Member of the FIMM is a corporation that is
a unit trust manager actively engaged in the unit trust industry (a UTMC). All UTMC incorporated in Malaysia
are Ordinary Members.

Part B
Code of Conduct for organisations registered as Institutional Unit Trust Agents (IUTA) under the FIMM's
Guidelines for Registration of Institutional Advisers for the Marketing and Distribution of Unit Trusts.

Part C
Code of Conduct for persons registered to deal in unit trusts as Unit Trust Consultants (UTC).

UTC need to comply with the minimum requirements set out in Part C. The UTMC or IUTA, to which UTC
belong, is required to meet the minimum standards set out in either Part A (UTMC) or Part B (IUTA). UTC
should nevertheless be familiar with their UTMC’s or IUTA’s obligations, so that they can appreciate the
importance of many of the internal rules imposed upon UTC by their UTMC or IUTA.

While there are some obvious similarities, there are also different requirements under Part A and Part B
reflecting the different business activities of a UTMC and an IUTA. You will be expected to be familiar with
the contents of each part of the Code.

The parts are divided into two sections:

• a Code of Ethics, and

• Standards of Professional Conduct.

4.5.3 THE UTMC AND IUTA CODE OF CONDUCT- PART A AND PART B OF THE CODE

We will now look briefly at the key elements of the Code as it affects UTMC (Part A) and IUTA (Part B) before
looking in greater detail at Part C, which more directly relates to UTC. In this section, we will emphasise
those elements of Part A and Part B that relate to the day-to-day role of officers within UTMC and IUTA. You
will need to refer to Part A and Part B of the Code in Appendix 1 as you read this section.

1. CODE OF ETHICS

PROFESSIONALISM

UTMC and IUTA are required to ensure that their officers have thorough knowledge in all areas and
aspects of the unit trust industry in which they participate and that officers act in compliance with
sound business practices.

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 INTEGRITY

UTMC and IUTA are required to ensure that, at all times, officers act with “all honesty and full integrity”
and “with the best interest of investors and clients in mind”. This means that UTMC and IUTA must
ensure that each client's interests are placed ahead of the interest of themselves and their officers.

CONFIDENTIALITY

UTMC and IUTA must ensure that personal information relating to an investor or client is not disclosed
to others without the prior approval of the investor or client (unless disclosure is required by law).

DIGNITY

An officer of a UTMC or an IUTA must not make complaints or negative statements, or act in a way
that may damage the reputation of others in the industry. UTMC and IUTA must ensure that their
officers comply with this requirement.

CONFLICT OF INTEREST

An officer of a UTMC must avoid any transaction in which he or she faces a conflict of interest whether
real, potential or perceived. Officers, who become inadvertently or otherwise involved in such a
transaction, are required to declare the conflict situation to the Trustee, Senior Compliance Officer
or Board of Directors and withdraw from the transaction. (Note that, in the first instance, you should
discuss any concerns you have with your supervisor or compliance department.)

A conflict of interest may arise in relation to the personal dealings or investments of an officer of a
UTMC. As such, UTMC are required to operate a supervisory and internal control system to monitor
the personal dealings and investments of each officer. This is to avoid any suspicion that personal
dealings or investments are improper or based on 'internal information'. The UTMC or IUTA will advise
their officers of their requirements and obligations. You should note that 'insider dealing' as defined
under the Securities Industry Act, 1983 is a serious offence and severe penalties (including hefty fines
and/or imprisonment) can be imposed.

Another aspect of conflict of interest occurs when officers receive benefits or gifts from clients or
others, which may render them obligated to those clients or other parties, thereby placing the UTMC
or IUTA in a compromising position.

Officers should be aware of their UTMC’s or IUTA’s specific rules. Token gifts received from clients
may usually be accepted. Again, if in doubt, you should refer to your supervisor or compliance
department.

2. STANDARDS OF PROFESSIONAL CONDUCT

COMPLIANCE WITH LAWS

UTMC and IUTA must ensure that their UTC and officers act in compliance with all laws, regulations,
guidelines, etc, issued by the SC, the FIMM and other relevant authorities.

UTMC and IUTA will provide UTC and officers with details of their requirements to ensure that the
activities of UTC and officers are compliant with the laws and other obligations (including the Code)
within which they must operate.

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 BREACH OF LAWS

A breach of Part A or Part B of the Code by officers and UTC may be dealt with by the respective
UTMC’s or IUTA’s internal disciplinary proceedings. However, depending upon its nature, the breach
may also invoke the FIMM’s disciplinary proceedings (see section 4.6). A breach of the Code may also
represent a breach of the law, in which case the UTMC or IUTA is required to advise the SC.

4.5.4 THE UTC CODE OF CONDUCT

An appreciation of the Codes of Conduct for UTMC and IUTA (outlined in section 4.5.3) should help your
understanding of the obligations of UTC under Part C of the Code. You should refer to Part C of Appendix
1 whilst studying this section.

UTC are also subjected to the SC's Code of Ethics and Standards of Professional Conduct (Appendix 2), in
addition to Part C of the Code. The SC’s Code of Ethics and Standards of Professional Conduct and Part
C of the Code overlap, so we will consider them together.

1. CODE OF ETHICS

HONESTY, DIGNITY AND INTEGRITY

UTC are required to conduct their business activities with honesty, dignity and integrity, and market
and distribute unit trusts in a professional and ethical manner that will bring credit upon themselves,
fellow UTC and the unit trust industry. They should encourage other UTC to act in a similar manner.

A high standard of personal ethical behaviour is required, and UTC should not engage in any activity
that may bring discredit to the industry. Misrepresentation of the qualifications of UTC, the products of
the UTMC being marketed, or the characteristics and past investment performance of those products,
is a breach of the SC’s Code of Ethics and Standards of Professional Conduct and the Code.

Note that omission of a material fact (such that the client is misled about the product) represents
dishonest conduct.

FAIR DEALING

UTC are required to transact business with a client on terms that are fair and reasonable to the client,
including disclosure of:

• the risks of the transaction

• any conflicts of interest of the UTC, and
• any other relevant information necessary to make the transaction fair to the client.

In summary, 'fair dealing' is treating the client in the same manner as UTC would themselves want to
be treated and avoiding aggressive and offensive sales practices.

GOOD FAITH

UTC should act with good faith towards clients. Clients should be treated respectfully and be given
full disclosure of all the information relevant to the investment decision under consideration.

COMPETENCE

UTC should acquire the appropriate knowledge and skills in relation to their business activities, and
should ensure that their skills are maintained and improved in order to maintain proficiency. UTC
should encourage other UTC to achieve the same.

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 CONFIDENTIALITY

Client information should be protected and kept confidential. Such information, collected from the
client by UTC, reflects the client's personal trust and confidence in UTC. It should never be used for
the personal gain of the UTC, or for the gain of another. Disclosure of personal information should not
be made without prior written consent of the client (unless in response to legal process or to resolve
a dispute between the UTC and client).

PROFESSIONALISM

UTC are to act in a manner that brings credit to their profession, and are required to behave with
dignity and courtesy to clients, fellow UTC and other industry practitioners.

ACTING WITH DUE CARE, SKILL AND DILIGENCE

The Code requires UTC:

• to ensure that the proposed UTS meets the needs of the client and is within his or her financial
capacity

• to provide the client with sufficient information to assist him or her in making a balanced and
informed investment decision

• to provide information only within their level of competence and to seek or recommend specialist
advice where appropriate

• to make efforts to improve the amount and clarity of the information given so as to avoid confusion
or misunderstanding

• to explain clearly the differences between UTS when comparing UTS with different
characteristics.

Finally, the Code requires that UTC do not omit material facts or make exaggerated or misleading
claims or forecasts in relation to a UTS transaction or investment.

PROMPT, EFFICIENT AND CONTINUOUS SERVICE

UTC must provide a high level of continuous service to clients by answering queries promptly and
efficiently. UTC should be able to answer a client's queries on the performance or management of his
or her investment in units. Advice on handling customer queries is given in Chapter 3.

2. STANDARDS OF PROFESSIONAL CONDUCT

UTC must meet the following standards of conduct:

COMPLIANCE WITH LAWS

UTC should maintain knowledge of and comply with all the laws, regulations and rules governing
their business activities and the unit trust industry. From time to time, UTC may have to deal with the
SC, the FIMM or other regulatory authorities. UTC should deal with such authorities in an open and
co-operative manner and disclose such information to them as is reasonable and appropriate.

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USE OF AUTHORISATION CARD

When initiating contact with a prospective client, UTC must advise the client that they are registered
to market and distribute UTS and show a valid FIMM Authorisation Card. UTC may not use any other
card for this purpose.

UTC should ensure that the FIMM Authorisation Card issued is valid and renewed before expiry.

APPROPRIATE DESIGNATION OR TITLE

UTC can only use the title 'Unit Trust Consultant' (or any other appropriate designation permitted by
the Members or title conferred by an accreditation body or authority). Only this title, together with the
UTC Number, should be used on a business card. Other titles are not allowed.

MARKETING AND DISTRIBUTION WITH PROSPECTUS

UTC must market and distribute UTS only by using the prospectus of the UTS. The law prohibits
marketing or distribution without a prospectus.

ADEQUATE EXPLANATION OF THE NATURE AND CHARACTERISTICS OF A UTS

When explaining UTS to a client, UTC must describe clearly the major features, including:

• the investment objectives

• all the fees involved and their breakdown
• the prices of units and how these are worked out
• the risks of investing in that UTS and in unit trusts generally
• the minimum investment in the UTS
• any special tax implications of investing.

UTC must also explain any unique features and/or restrictions of the UTS.

UTC should ensure that the client understands the commitment he or she is making, including those
risks relevant to the purchase of units through a loan facility (i.e. UTC must comply with the SC's
requirements relating to loan financing in the sale of units).

UTC should also draw the client's attention to the long-term nature of most investments in UTS, and
the risks of withdrawal from the UTS earlier than envisaged.

ADVERTISEMENTS AND PROMOTIONAL MATERIALS

UTC must only use advertisements and promotional materials that have been approved by a UTMC
and/or an IUTA. Such materials will have been subjected to a compliance process that should ensure
that they meet the law and the SC's Guidelines on Unit Trust Advertisements and Promotional
Materials.

UTC may not make any statement, publish information or advertise in any way that could be misleading,
false or deceptive.

APPOINTMENT OF QUALIFIED PERSONS

UTC can only be appointed by a UTMC or an IUTA, and only after meeting all the registration
requirements as prescribed by the SC and the FIMM.

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 DUTY TO SUPERVISE AND MONITOR

Conduct of UTC is subject to the proper supervision of and monitoring by the respective UTMC or
IUTA to which the UTC belongs. UTMC and IUTA will not accept or condone any conduct that violates
the Code.

KEEPING ABREAST WITH THE UNIT TRUST INDUSTRY

UTC must ensure that they keep up-to-date with developments within the unit trust industry.

DISCIPLINARY PROCEEDINGS

UTC should be aware that if they breach the Code, they will be subjected to disciplinary proceedings.
This is to encourage the maintenance of high standards of professional conduct amongst UTC.

❙ SECTION 4.6 FIMM DISCIPLINARY

PROCEEDINGS
The FIMM's disciplinary proceedings apply to UTMC and IUTA. A complaint against an employee or agent or
a UTC is regarded as a complaint against the UTMC or IUTA. Complaints against UTC are normally handled
in the first instance by the UTMC or IUTA but may be referred to the FIMM for disciplinary proceedings by
the aggrieved person.

A complaint to be dealt with by the FIMM must be in writing, and may be made by any person, another FIMM
member, or the public.

Complaints may relate to any breach of the Articles of Association of the FIMM, the Code, any Guidelines
issued by the SC, and/or the laws relating to the unit trust industry.

A complaint may be referred by the FIMM’s Executive Director to the FIMM Council. The Council may within
14 business days refer the complaint to an appointed Investigating Committee to ascertain if the complaint
is valid or has any substance. The Investigating Committee comprises five members:

• an independent Council Member

• a Compliance Officer from among its members
• a CEO of a UTMC
• a representative from the Trustee of the UTMC against whom the complaint is raised
• a representative of FIMM.

Once the Investigating Committee is appointed, the FIMM’s Executive Director will give the UTMC or IUTA
(against whom the complaint is raised) a written notice of the complaint, setting out the general nature of
the allegation(s) made against it, and:

• provide the UTMC or IUTA a copy of the written complaint

• notify the UTMC or IUTA of the formation of the Investigating Committee
• notify the UTMC or IUTA of the inquiry to be held into the complaint
• request the UTMC or IUTA to submit a written explanation of or defence to the complaint made against
it within seven business days from the date of receipt of the notice issued by the FIMM’s Executive
Director.

4-10
Upon expiry of the period given to the UTMC or IUTA above, the Investigating Committee holds an inquiry
into the complaint, at which the complainant and the UTMC or IUTA (and their employees and agents) may
attend and speak. The complaint may then be

• dismissed as being without merit

• dismissed with a letter of caution recommending remedial action or
• referred to the Council if the Investigating Committee is of the view that the complaint has substance or
merit together with a written report of the Investigating Committee's findings and recommendations.

Following the receipt of the Investigating Committee's report that the complaint has substance or merit,
the Council must within 14 business days appoint a Disciplinary Committee to administer an appropriate
punishment. The Disciplinary Committee comprises five members:

• an independent Council Member

• an Authorised Representative of the UTMC or IUTA
• a Council member from the Association of Trust Companies, Malaysia
• a Vice-President from FIMM
• a representative from FIMM.

Once the Disciplinary Committee is appointed, the FIMM’s Executive Director will write to all parties concerned
and:

• enclose a copy of the minutes of the inquiry and the findings and recommendation of the Investigating
Committee
• inform them of the appointment of the Disciplinary Committee
• request the UTMC or IUTA complained against to notify the FIMM’s Executive Director in writing within
14 business days on whether it intends to appeal against the findings of the Investigative Committee,
failing which, the Disciplinary Committee will proceed to consider the punishment to be meted out.

The Disciplinary Committee may:

• privately censure the UTMC or IUTA

• publicly censure the UTMC or IUTA
• suspend membership of the UTMC in the FIMM for up to one year
• terminate membership of the UTMC in the FIMM.

Where a UTMC is involved, the Disciplinary Committee may also recommend to the SC the suspension or
termination of membership in the FIMM and the SC may decide on the method of punishment.

After the punishment has been decided upon, the FIMM’s Executive Director will inform the UTMC or IUTA
concerned in writing of the decision, specifying the period of suspension of membership or when termination
of its membership will take effect, as the case may be.

The UTMC or IUTA concerned may appeal against the findings of the Investigating Committee and/or the
decision of the Disciplinary Committee in writing within 14 days of the receipt of notice of the decision. An
Appeal Committee will then be formed comprising five members:

• an independent Council Member

• an Authorised Representative from among members
• a Chairman from the Association of Trust Companies, Malaysia
• a President from the FIMM
• a representative from the FIMM.

4-11
The Appeal Committee may:

• allow the appeal against the decision of the Investigating Committee and determine that the complaint
was without merit, or
• with regard to the decision of the Investigating Committee, dismiss the complaint with a letter of caution
to the UTMC or IUTA , recommending remedial action, or
• reduce or enhance the punishment meted out by the Disciplinary Committee, or
• uphold the decision appealed against.

A flowchart of the structure of proceedings is provided as Appendix 3.

❙ SECTION 4.7 SUMMARY

The FIMM’s and the SC’s codes of ethics and standards of professional conduct provide a clear understanding
of the qualitative aspects required to market unit trusts. In summary:

• all persons are to act with due diligence, skill and care
• adequate explanations of the products and the relevant risks need to be given
• a high level of competency is expected
• prompt and efficient service is to be provided
• all information relating to clients are to be kept strictly confidential
• all persons are to act with honesty and integrity.

An appreciation of ethics, and an understanding of the need for compliance, will help UTC to apply these
codes of conduct in upholding the best business practices of the unit trust industry.

The FIMM’s and the SC’s codes of ethics and standards of professional conduct are required reading for
everyone involved in the unit trust industry. UTC should take the time to read and understand the contents of
each code. In practising the codes and upholding a high standard, all those involved in the unit trust industry
will benefit. In particular, investors will be satisfied with the quality and service of UTS products, which will
stimulate further growth in the industry.

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SELF-TEST QUESTIONS ON CHAPTER 4
1. List the sources of the various 'rules' that govern the behaviour of UTC.

2. What do you understand by the term 'compliance'?

3. What do you understand by the term 'ethics'? Why is it important, given the existence of regulations
and rules?

4. How can UTC benefit from a strong compliance function within their organisation?

5. What designation or title can UTC use?

6. Why is it important to disclose the risks associated with an investment in a UTS in terms the client
can understand?

7. When should an FIMM Authorisation Card be presented to a client?

8. Can UTC update the promotional material issued by UTMC or IUTA? Give reasons.

9. List five ways UTC can 'keep abreast' of developments in the unit trust industry.

10. Explain briefly the FIMM's disciplinary process.

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APPENDIX 1:
FIMM CODE OF ETHICS AND STANDARDS OF
PROFESSIONAL CONDUCT FOR THE UNIT TRUST
INDUSTRY

1. INTRODUCTION

The unit trust industry is centrally premised on the concepts of trust and faith. It is important for an
industry, which deals with the public’s money to be operated and administered with the highest degree
of ethics and professionalism.

This Code of Ethics and Standards of Professional Conduct (“Code”) sets out the general principles
and minimum standards of good practices to be observed by any person registered with the Federation
of Investment Managers Malaysia.This Code is intended to guide the conduct of business affairs in
the best interests of unitholders and the unit trust industry and to encourage and foster among its
registrants conduct, ethics and standards of practice that will best serve, maintain further and protect
the interests of unitholders and the unit trust industry. Any person may observe or adopt higher
standards, if they so desire.

The Code is as set out below and shall come into force on the 1 day of September 2001. The Code
can be amended from time to time by the Council pursuant to Article 63(g) of the Articles of Association
of the Federation of Investment Managers Malaysia.

1A COMPOSITION

The Code consists of the following three parts:-

(a) Part A - Code of conduct for any person registered as an Ordinary Member in the Register
of Members of the Federation of Investment Managers Malaysia.

(b) Part B - Code of conduct for any person registered as an institutional agent under
the Guidelines for Registration of Institutional Advisers for the Marketing and
Distribution of Unit Trust Funds (“IUTAs”); and

(c) Part C - Code of conduct for any person registered to deal in unit trusts under the
Registration of Unit Trust Consultants (“UTC”)

with each part comprising of the Code of Ethics and Standards of Professional Conduct.

1B DEFINITIONS

In the Code, unless the context otherwise requires, the following words and expressions when used
shall have the meanings set against them: -

"the Council" means the Council of FIMM for the time being constituted.

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"Code" means this Code of Ethics and Standards of Professional Conduct for the Unit Trust Industry
which has been drawn up by the Council and approved by the Securities Commission.

"FIMM" means The Federation of Investment Managers Malaysia [Company No. 272577-P]
incorporated as a Company limited by Guarantee under the Companies Act 1965.

“Guidelines" means the Guidelines on Unit Trust Funds issued by the Securities Commission.

"Investment Committee" means the Committee appointed by any Ordinary Member in accordance
with the Guidelines.

"investors" or "clients" means the existing or prospective investor(s) of any fund which is being
managed by an Ordinary Member and includes any other person who has appointed the Ordinary
Member to act for that person in its professional capacity or to whom the Ordinary Member owes a
fiduciary duty.

“IUTAs” means Institutional Unit Trust Advisers approved by the Securities Commission and registered
with FIMM to market and distribute unit trust funds and “IUTA” shall mean any one of them.

"Members" means any person registered in the Register of Members of FIMM and includes an
Ordinary Member, Associate Member and Honorary Member.

“officers” in relation to a corporation includes any directors, secretary or employee of such corporation
and shall include any Investment Committee member of any Member.

"Ordinary Members" means those persons registered as an Ordinary Member in the Register of
FIMM as Ordinary Members.

"person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated
association, company, corporation, entity or governmental.

"related" of any particular person shall mean any other person directly or indirectly controlling,
controlled by or under direct or indirect common control with such person. For purposes of this
definition, a person shall be deemed to be in "control" if such person possesses, directly or indirectly,
the power to direct or cause the direction of the management or policies of the person in question,
whether through the ownership of voting securities, by contract or otherwise.

"relevant authorities" means governmental and/or statutory departments, agencies or bodies having
jurisdiction over matters relating to unit trusts, FIMM or its Members and “relevant authority” shall
mean any one of them.

“the Act” means the Securities Commission Act 1993.

“Trustee” means the Trustee of a unit trust fund.

"UTC" means the Unit Trust Consultants who are registered with and authorized by FIMM to market
and/or distribute unit trusts and “UTC” shall mean any one of them.

References in this Code to any laws, ordinance, guidelines, regulation or other enactment shall include
any statutory modification, extension, reenactment or replacement thereof.

References in this Code to words importing the masculine gender only shall include the feminine and
neuter genders and vice versa and references to words in the singular number only shall include the
plural number and vice versa.

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PART A

Code of Conduct for any Organization Registered as an Ordinary Member in the

Register of Members of FIMM

CODE OF ETHICS

2. The part of the Code is applicable to all Ordinary Members of FIMM.

A. PROFESSIONALISM

i. Ordinary Members shall conduct their business in a professional manner ensuring that
they themselves and officers are thoroughly knowledgeable in all areas and aspects of
the unit trust industry in which they participate and that they are acting in compliance
with sound business practices.

ii. Ordinary Members shall show respect for other participants in the industry by engaging
in fair and equitable competitive practices.

iii. Ordinary Members shall not make any statement that they are supported by any person.
However it is acceptable for an Ordinary Member to issue a statement of fact to specify
that it is a subsidiary of another entity or that it has been assessed or rated to be of
a certain standard by any reputable agency or person recognized or accredited by
FIMM.

B. INTEGRITY

i. Ordinary Members shall always act in a manner which recognizes that integrity and
responsibility are essential to win and maintain the confidence of the investing public in
all aspects of the unit trust industry.

ii. Ordinary Members shall at all times act to safeguard the integrity and credibility of the
unit trust industry and refrain from any act or omission which may damage the integrity
of the unit trust industry or bring the industry into disrepute.

iii. In dealing with investors and clients, Ordinary Members and their officers shall at all times
act with all honesty and full integrity and shall ensure that all transactions are made with
the best interest of investors and clients in mind. Integrity demands honesty which must
not be subordinated to personal gain and advantage.

iv. Ordinary Members and their officers shall not give the impression that they are
representing the views or opinions of the FIMM or any other group unless that they have
been authorized to do so.

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C. CONFIDENTIALITY

i. Ordinary Members shall respect and preserve the confidentiality of their investors and
clients.

ii. Ordinary Members shall and shall ensure that their officers do not disclose to any person
any personal or financial information relating to the investors or clients save and except
where such disclosure has been expressly authorized in writing by such investors or
clients or where such disclosure is required to be made to any relevant authority pursuant
to any relevant law or legal process.

iii. Ordinary Members shall establish appropriate controls within their respective work
environments to prevent any unauthorized disclosure of confidential information.

D. CONSISTENCY

To avoid public confusion and uncertainty, Ordinary Members should approach significant
issues or matters which affect the unit trust industry consistently and avoid adopting significantly
different practices or approaches in respect thereof.

E. DIGNITY

i. Ordinary Members shall uphold the dignity of and maintain the highest respect for the
unit trust industry. Ordinary Members shall and shall ensure that their officers refrain from
making complaints or making negative statements, or allow any action to be interpreted
in any way to cause hurt to the reputation of others in the industry.

ii. Ordinary Members shall and shall ensure that their officers do not publicly complain
against or negatively criticize other Members, the FIMM, the Securities Commission
and any other relevant authority. Ordinary Members shall not make any defamatory,
derogatory or disparaging statements against the unit trust funds, officers or practices
of other Members.

iii. Complaints and criticism shall instead be channeled to the Securities Commission, FIMM
and/or any other relevant authority in a professional manner.

F. CONFLICT OF INTEREST

i. Disclose Conflict Of Interest

Ordinary Members must and shall ensure that their officers avoid transactions in which they
face a conflict of interest whether real, potential or perceived. In the event any Ordinary
Members or their officers are involved inadvertently or otherwise in any transaction in
which they face a conflict of interest, whether real, potential or perceived, they should
immediately declare the circumstances of the conflict to the Trustee and their senior
compliance officer and their Board of Directors and withdraw from such transaction.

ii. Personal Dealings and Investments

To allay any suspicion that personal dealings or investments of the officers of Ordinary
Members may be improper or that such dealings or investments may have been made
on the basis of information obtained, relating to the investment of the unit trust funds by
such persons in the course of official business giving such persons an unfair advantage
("internal information"), Ordinary Members should have in place their own supervisory
and internal control system to monitor such personal dealings and investments.

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 In particular, Ordinary Members shall request their officers who possess or may reasonably
be expected to possess internal information:-

(a) not to use internal information whether for their own or any other parties benefit;

(b) to disclose all personal dealings and investments to be made or made by them
whether directly or indirectly, where the Ordinary Member has reason to suspect
or believe that such persons have been improperly using internal information;

(c) to inform in writing to the management before personal dealing and investment
transactions are entered into; and

(d) to take note of the relevant laws prohibiting insider trading such as the Securities
Industry Act 1983 and the severe penalties imposed for breach of such laws (which
include hefty fines and/or imprisonment) and acknowledge in writing that they have
been given a copy of this Code and that they have taken note of the same.

iii. Benefits and Gifts

Ordinary Members shall and shall ensure that their officers do not accept any benefits,
rebates, commissions or gifts of significant value, loans, fees, rewards, shares, securities
of any kind, offices, employment, contract of services and favour from any parties which
are intended or will tend to render them obligated to such parties and thereby place them
and/or the unit trust funds they are managing in a compromising manner.

Token gifts however may be accepted or offered during festive seasons or when
recreational events are organized by the Ordinary Members, if the acceptance or offer
of such gifts does not put the recipient in a compromising position.

iv. Guide as to what constitutes conflict situations

As a general guide, a transaction in which there can be a conflict of interest includes, but
is not limited to, a transaction in which:-

(a) the interests of investors or clients may be prejudiced by the relationship of

the Ordinary Members or their officers with the other party or parties to the
transaction;

(b) the interests of investors or clients compete with the interests of the Ordinary
Members or their officers; or

(c) the other party or parties to the transaction is a related party or their officers have
a financial interest.

G. FAIR AND EQUITABLE TREATMENT

Ordinary Members shall ensure that all transactions entered into with third parties are on an
arm's length basis and on terms which are the best available for investors or clients. Ordinary
Members should also ensure that the Guidelines relating to rebates and soft commissions are
strictly adhered to.

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STANDARDS OF PROFESSIONAL CONDUCT

3. Ordinary Members must observe the following standards of conduct:-

A. COMPLIANCE WITH LAWS

i. Ordinary Members shall and shall ensure that their officers act in compliance and
conformity (with the letter and in the spirit) with the Act, all laws, guidelines, orders,
directives and policies (including this Code) issued, drawn up or imposed by any relevant
authority including, but not limited to the Securities Commission and FIMM.

ii. Ordinary Members shall establish and maintain written policies and procedures for the
effective control and conduct of its business and the activities of their officers to ensure
compliance with the Act, the Code and all other relevant laws.

B. CO-OPERATION WITH GOVERNMENTAL BODIES

Ordinary Members shall co-operate with the relevant authorities to achieve the objectives of
FIMM in the conduct of their own business.

C. COMPLIANCE WITH ARTICLES OF ASSOCIATION

Ordinary Members shall be bound by FIMM’s Articles of Association and shall comply with all
the directions and rulings on ethics and standards issued by the FIMM from time to time.

D. ADVERTISEMENTS AND PROMOTIONAL MATERIALS

i. In addition to rules relating to advertising and promotional materials contained in the

Guidelines, Ordinary Members when advertising or promoting their unit trust funds should
not be deceptive, ambiguous or make false or misleading statements. The principle of
honesty and greatest accuracy must underlie all promotional statements.

ii. A promotional statement should be clearly distinguishable as a statement issued with the
intent of promoting the investment, service or firm to which it relates. Published information
in advertisements and promotional materials must be substantiated.

iii. To avoid misleading advertisements and promotional materials on performance of unit

trust funds only performance data, which has been awarded or issued by a reputable
agency or person approved or accredited by FIMM may be published in an advertisement.
The performance data used must be current and should only be used in advertisements
if awarded or issued within the last twelve calendar months.

iv. The publication of performance data must be in accordance with criteria prescribed in
the advertising and promotional materials contained in the Guidelines. Personal opinions
shall be clearly identified as such.

v. Before the views or activities of parties other than the issuer of the promotional statement
are used, referred to or quoted in a promotional statement in a manner which implies
support for the product being promoted, the permission of those concerned must first be
obtained, if necessary. This includes a reference in promotional statement to a sponsor
or an affiliated person.

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E. APPOINTMENT OF QUALIFIED PERSONS

In marketing and distributing unit trust funds, Ordinary Members shall only engage person(s)
who:-

• possess the qualifications prescribed by the Securities Commission; and

• have been duly registered with and authorized by FIMM for the purpose of dealing in unit
trust funds.

F. DUTY TO SUPERVISE AND MONITOR

Ordinary Members shall properly supervise and monitor the conduct and practices of the UTC
who represent them and they shall take all reasonable steps to ensure that such UTC does not
violate any provisions of the Code. In the event that any such UTC is found to be in breach of
this Code, Ordinary Members should take appropriate action against the relevant UTC which
commensurate with the degree of breach of the Code. In addition, if the breach is one which
contravenes any applicable law, the Ordinary Member should make a report of such breach to
the Securities Commission and or any other relevant authority.

G. REPORTS AND INFORMATION

i. Ordinary Members shall supply and deliver to FIMM upon request with copies of:

(a) all audited accounts and reports to investors and clients of all unit trusts funds of
which they are the manager;

(b) all audited accounts of the Member;

(c) any deed by or pursuant to which the member is appointed the manager of a unit
trust fund; and

(d) any prospectus or supplementary prospectus issued by them or in respect of the

unit trust fund of which they are the manager of the unit trust fund.

ii. Ordinary Members shall also provide FIMM such information which may be reasonably
requested for from time to time provided that: -

(a) the provision of such information will not cause the Ordinary Member to breach its
duty of confidence towards its investors or clients without the written authorization
of its investors or clients;

(b) the information requested for is not sensitive in the nature of the ordinary business
of the Ordinary Member; and

(c) the provision of such information will not cause any commercial disadvantage to
the Ordinary Member.

H. REFERENCE TO FIMM LOGO AND MEMBERSHIP

Ordinary Members may disclose membership with FIMM and display or use FIMM’s logo in
all materials such as prospectus, accounts, unitholders’ reports or other communication and
advertising. FIMM’s logo must not be used without a statement of affiliation to FIMM. If Ordinary
Members wish to use FIMM’s logo for other purposes, prior approval must be obtained from
FIMM.

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I. BREACH OF LAWS

In the event that the officers are found to be in breach of this Code, Ordinary Members should
take appropriate disciplinary action against its officers which commensurate with the degree
of breach of the Code. In addition if the breach is one which contravenes any applicable law,
the Ordinary Member should make a report of such breach to the Securities Commission and
or any other relevant authority.

J. DISCIPLINARY PROCEEDINGS

Adherence to the Code is mandatory for all Ordinary Members and their officers and its provisions
will be strictly enforced by FIMM. The By-Laws Relating To The Procedure For Disciplinary
Proceedings is as set out in FIMM’s Guidelines Manual. In order to maintain high standards of
professional conduct, Ordinary Members or their officers who have breached provisions of the
Code shall be subject to the appropriate disciplinary proceedings.

(The remainder of this page is intentionally left blank)

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PART B

Code of Conduct Forany Organization Registered as an Institutional Unit Trust

Advisers under the Guidelines for Registration of Institutional Advisers for the
Marketing and Distribution of Unit Trust Funds (“IUTAs”)

CODE OF ETHICS

4. This part of the Code is applicable to IUTAs and to a limited extent, Ordinary Members.

A. PROFESSIONALISM

i. IUTAs shall conduct their business in a professional manner ensuring that they themselves
and their officers are thoroughly knowledgeable in all areas and aspects of the unit trust
industry in which they participate and that they are acting in compliance with sound
business practices.

ii. IUTAs shall show respect for other participants in the industry by engaging in fair and
equitable competitive practices.

iii. IUTAs shall not misrepresent their authority as representatives of the unit trust
management company or as fund managers of the unit trust funds whose funds they
market and distribute.

B. INTEGRITY

i. IUTAs shall always act in a manner which recognizes that integrity and responsibility are
essential to win and maintain confidence of the investing public in all aspects of the unit
trust industry.

ii. IUTAs shall at all times act to safeguard the integrity and credibility of the unit trust industry
and refrain from any act or omission which may damage the integrity of the unit trust
industry or bring the industry into disrepute.

iii. IUTAs and their officers shall not give the impression that they are representing the views
or opinions of the FIMM or any other group unless that they have been authorized to do
so.

C. CONFIDENTIALITY

i. IUTAs shall respect and preserve the confidentiality of their investors and clients whom
they may be acting on behalf of.

ii. IUTAs shall respect and preserve the confidentiality of the arrangement or agreement
contractually entered with the different unit trust management companies. However in
the event where any relevant authority requests the arrangement to be disclosed, the
parties may do so.

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 iii. IUTAs shall and shall ensure that their officers do not disclose to any person any personal
or financial information relating to the investors or clients save and except where such
disclosure has been expressly authorised in writing by such investors and clients or
where such disclosure is required to be made to any relevant authority pursuant to any
relevant law or legal process.

iv. IUTAs shall establish appropriate controls within their respective work environments to
prevent any unauthorized disclosure of confidential information.

D. FIDUCIARY DUTIES

IUTAs who take custody of all or any part of an investor’s assets for investment purposes, shall
do so with the degree of care required of a fiduciary.

E. OBJECTIVITY

i. IUTAs shall take necessary steps to ensure that UTC acting on their behalf exercise
reasonable and prudent professional judgement in providing professional services.

ii. IUTAs shall be objective in providing advice to investors and clients on the unit trust
funds. Objectivity requires honesty and impartiality. IUTAs shall not denigrate any unit
trust funds directly or by implications.

iii. IUTAs shall ensure that adequate information is provided to the investors or clients to
enable such investor or client to make informed decisions before investing in the unit
trust fund of their choice.

F. DIGNITY

i. IUTAs shall uphold the dignity of and maintain the highest respect for the unit trust industry.
IUTAs shall and shall ensure that their officers refrain from making complaints or making
negative statements, or allow any action to be interpreted in any way to cause hurt to
the reputation of others in the industry.

ii. IUTAs shall and shall ensure that their officers do not publicly complain against or criticize
other Members, the FIMM, the Securities Commission, other IUTAs and any other relevant
authority. IUTAs shall not make any defamatory, derogatory or disparaging statements
against the unit trust funds, officers or practices of other Members or other IUTAs.

iii. Complaints and criticism shall instead be channeled to the Securities Commission, FIMM and/or
any other relevant authority.

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STANDARDS OF PROFESSIONAL CONDUCT

5. IUTAs must observe the following standards of conduct:-

A. COMPLIANCE WITH LAWS

i. IUTAs shall and shall ensure that their UTC act in compliance and conformity (by the
letter and in the spirit) with the Act, all laws, guidelines, orders, directives and policies
(including this Code) issued, drawn up or imposed by any relevant authority including,
but not limited to, the Securities Commission and FIMM.

ii. IUTAs shall establish and maintain written policies and procedures for the effective
control and conduct of its business and the activities of their UTC and officers to ensure
compliance with the Act and the relevant laws. In addition IUTAs are responsible to
ensure that their UTC and other officers who are involved in the unit trust operation are
also aware of the compliance with the Act and other relevant laws.

iii. IUTAs shall obtain and at all times maintain all authorization, licenses and registrations
necessary for the purposes of marketing and distribution of unit trusts.

iv. IUTAs must ensure that:-

(a) their IUTA status; and

(b) the registered status of the UTC acting on their behalf

are valid at all times and renewed before they expire.

B. FAIR AND EQUITABLE TREATMENT

IUTAs who are unit trust management companies should ensure that fair and equitable
commissions are paid to UTC who market and distribute third party unit trust funds for the
IUTAs.

C. DEALING WITH UNIT TRUST MANAGEMENT COMPANIES

i. Written communication

All communication between IUTAs and the unit trust management company relating to the
marketing and distribution of unit trust funds must be in writing or properly documented
so as to avoid any confusion or conflict.

ii. Benefit and gifts

IUTAs shall not accept any benefits or gifts of significant value, fees and rewards from any
unit trust management company that are intended or will tend to render them obligated to
such unit trust management company and not in the interest of the investors or clients.

iii. Rebates and Price Discount

IUTAs shall not give any rebates or any form of price discount to the investors or clients
in respect of the sales of the unit trust funds, unless prior consent has been obtained
from the relevant unit trust management company or the terms for the rebate have been
stipulated in the agreement relating to the IUTAs appointment by the relevant unit trust
management company.

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D. ADVERTISEMENTS AND PROMOTIONAL MATERIALS

i. IUTAs must only use advertisement and/or promotional materials in accordance with the
requirements of the existing Guidelines. Where the name of any unit trust management
company or any unit trust fund is specified in any advertisement and/or promotional
material, the IUTAs must inform in writing in advance, the relevant unit trust management
companies of such specification.

ii. IUTAs shall ensure that a copy of the latest prospectus of the unit trust funds of which
they are marketing or distributing be made available to their investors or clients.

iii. IUTAs shall not make any forecasts or representations in relation to any unit trust funds
other than those set out in the latest prospectus and materials supplied by the unit trust
management companies.

E. APPOINTMENT OF QUALIFIED PERSONS

In marketing and distributing unit trust funds, IUTAs shall only engage person(s) who:-

• possess the qualifications prescribed by the Securities Commission; and

• have been duly registered with and authorized by FIMM

for the purpose of dealing in unit trust funds.

F. DUTY TO SUPERVISE AND MONITOR

IUTAs shall properly supervise and monitor the conduct and practices of the UTC who represent
them and they shall take all reasonable steps to ensure that such UTC does not violate any
provisions of the Code. In the event that any such UTC is found to be in breach of this Code,
IUTAs should take appropriate action against the relevant UTC which commensurate with the
degree of breach of the Code. In addition if the breach is one which contravenes any applicable
law, the IUTA should make a report of such breach to the Securities Commission and or any
other relevant authority.

G. IUTAS WHO ARE NOT ASSOCIATE MEMBERS

With regard to IUTAs who are not Associate Members of FIMM but who have obtained their
registration as IUTAs by virtue of the fact that they are related to Ordinary Members, such
Ordinary Members shall:-

i. be responsible for and shall ensure that such IUTAs comply strictly with the Act, the
laws, guidelines, orders, directives and policies (including this Code) issued, drawn up or
imposed by any relevant authority including, without limitation, the Securities Commission
and FIMM; and

ii. ensure that the IUTAs are kept abreast with the development and progress of the unit
trust industry.

H. BREACH OF LAWS

In the event that the officers of IUTAs are found to be in breach of this Code, IUTAs should take
appropriate disciplinary action which commensurate with the degree of breach of the Code. In
addition, if the breach is one which contravenes any applicable law, the IUTA should make a
report of such breach to the Securities Commission and or any other relevant authority.

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I. DISCIPLINARY PROCEEDINGS

Adherence to the Code is mandatory for all IUTAs and their officers and its provisions will be
strictly enforced by FIMM. The By-Laws Relating To The Procedure For Disciplinary Proceedings
are as set out in FIMM’s Guidelines Manual. In order to maintain high standards of professional
conduct, IUTAs or their officers who have breached provisions in the Code shall be subject to
the appropriate disciplinary proceedings.

(The remainder of this page is intentionally left blank)

4-26
PART C

Code Of Conduct For Any Person Registered To Deal In Unit Trusts under the
Registration of Unit Trust Consultants (“UTC”).

CODE OF ETHICS

6. in addition to the rules relating to Guidelines For Marketing and Distribution of Unit Trust issued by
the Securities Commission, this part of the Code shall be applicable to all UTC.

A. HONESTY, DIGNITY AND INTEGRITY

A UTC should at all times act with honesty, dignity and integrity. He should conduct himself and
should encourage others to market and distribute units in a professional and ethical manner
that will bring credit to himself, his fellow UTC and the industry. A UTC shall maintain a high
standard of personal ethical behaviour, present himself professionally in appearance and not
engage in activity that may bring discredit to the industry.

In particular, the UTC must not misrepresent or recklessly represent: -

i. his qualifications or that of the management company he represents;

ii. the products and/or its characteristics offered by the management company he represents;
and

iii. the past investment performances of the unit trust fund he is marketing.

Conduct which is dishonest would include any omission of a material fact. A material fact includes
a fact, which if made known to a client, will cause that client to appreciate that the unit trust
fund is materially different from what was represented to him.

B. FAIR DEALING

i. If a UTC enters into a business transaction with a client, the transaction shall be on terms
which are fair and reasonable to the client and the UTC shall disclose to such client or
potential client the risks of the transaction, any conflicts of interest or potential conflicts
interest of the UTC, the fees and charges levied on the investment made or which may
be made and other relevant information, if any, necessary to make the transaction fair
to the client.

ii. Fair dealing requires impartiality, intellectual honesty, and disclosure of conflicts of
interest. It involves a subordination of one’s own feelings, prejudices, and desires so as
to achieve a proper balance of conflicting interests. Fair dealing is treating others in the
same fashion that you would want to be treated.

iii. Aggressive and offensive sales practices should be avoided.

C. GOOD FAITH

A UTC should always act in good faith and with the best of intentions. The investor is to be treated
with respect and should be given full disclosure of all information pertinent to his investment
decision.

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D. COMPETENCE

A UTC shall provide services to clients competently and maintain the necessary knowledge
and skill to continue do so in the areas in which he/she is engaged.

A UTC should act with proficiency and strive to maintain and improve his competency and that
of his fellow UTC.

E. CONFIDENTIALITY

i. A client, by seeking the services of a UTC, is creating a relationship of personal trust and
confidence with the UTC. In order to provide the services effectively and to protect the
client’s privacy, the UTC shall take every precaution to protect, safe-guard and preserve
the confidentiality of the client’s information communicated to him in the course of
marketing and distributing unit trust funds. He must not in any way use such information
for his personal or any other person’s gain.

ii. A UTC shall not disclose any of his clients or prospective clients information which can
reasonably be said to be confidential without the specific consent in writing of the client
unless in response to proper legal process, to defend against charges of wrongdoing by
the UTC or in connection with a civil dispute between the UTC and client.

F. PROFESSIONALISM

A UTC’s conduct in the course of dealing in unit trusts shall bring credit to the profession.
Because of the importance of the professional services rendered by UTCs, they are to behave
with dignity and courtesy to all those persons whom they come into contact with in the course
of rendering their service, including but not limited to their clients, fellow UTC, the relevant
authorities and other persons in the unit trust industry.

G. ACTING WITH DUE CARE, SKILL AND DILIGENCE

A UTC should conduct all his dealings with every care, skill and diligence. In this regard, the
UTC must-

i. ensure as far as possible that the unit trust fund proposed is suitable to the needs and not
beyond the resources of the prospective investor as disclosed to him by the prospective
investor;

ii. take all reasonable steps to give the prospective investor information in a comprehensive,
full and fair manner to assist him in making balanced and informed decisions;

iii. provide information only on those matters in which he is competent to deal with and seek
or recommend other specialist advice where appropriate;

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 iv. when conveying information to a prospective investor, bear in mind the overall context in
which the statements are made and the investor himself as different persons may require
differing levels of detail and explanation. Efforts should be made to improve the amount
and clarity of the information given. Brief or overly technical explanations may tend to
create confusion and misunderstanding;

v. in making comparisons with other unit trust schemes, make clear the different
characteristics of each scheme; and

vi not omit any material facts, nor make exaggerated, unwarranted, misleading statements
or claims, or forecasts or future events.

H. PROMPT, EFFICIENT AND CONTINUOUS SERVICE

A UTC should endeavour to provide his client with prompt, efficient and continuous service.
In particular, he should always be ready to answer any queries his client may have on the
performance or management of his units.

STANDARDS OF PROFESSIONAL CONDUCT

7. The UTC must observe the following standards of conduct:-

A. COMPLIANCE WITH LAWS

A UTC should maintain knowledge of, and comply with, the Act, all laws and rules governing
the unit trust industry, including Part C of this Code. Further the UTC should deal with the
relevant authority in an open and cooperative manner, and should disclose such information
as is reasonable and appropriate.

B. USE OF AUTHORIZATION CARD

A UTC must, on contact with a prospective investor or client, disclose that he is a person
registered to market and distribute unit trust funds and thereafter produce his Authorization
Card issued by FIMM to identify himself. The use of other cards (not issued by the FIMM) is
strictly prohibited.

A UTC must ensure that the Authorization Card is valid and renewed before it expires.

C. APPROPRIATE DESIGNATION OR TITLE

i. UTC should only use “Unit Trust Consultant” or any other appropriate designation
permitted by the Members or title accredited by an accreditation body or authority.

ii. Ordinary Members and IUTAs must ensure that their UTC do not mislead the investors
or unitholders by using inappropriate designation or title.

iii. UTC when printing their names on their business cards shall use appropriate titles and
their UTC Number to identify their registration with FIMM.

iv. Some of the designations or titles that are not appropriate to be used are “Investment
Advisor”, “Investment Consultant”, and “Financial Advisor”. This list is not exhaustive.

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D. MARKETING AND DISTRIBUTION WITH PROSPECTUS

In the course of marketing and/or distributing unit trust funds, the UTC must provide their client
with the prospectus or such other relevant disclosure document relating to the relevant unit trust
funds as may be prescribed by law. The marketing or distribution of units without the prospectus
is strictly prohibited by law.

E. ADEQUATE EXPLANATION OF THE NATURE AND CHARACTERISTICS OF UNIT

TRUST FUNDS

A UTC should adequately explain the nature and characteristics of the funds for which he is
recommending. Towards this end, he must:-

i. make clear all the essential attributes of the fund, including:-

(a) the investment objectives of the fund;
(b) the fees chargeable(including a breakdown of the fees involved);
(c) the prices of units and how the units are priced;
(d) the risks of investing in the particular funds and in unit trusts, generally;
(e) the minimum allowable purchases in the fund; and
(f) the special tax implications of the scheme (if any);

ii. ensure as far as possible that the prospective investor understands what he is committing
himself to;

iii. draw attention to any unique features and/or restrictions applicable to the fund;

iv. if loan financing is to be used, draw attention to the risks of purchasing units via loan
facilities (as contained in the unit trust loan financing risk disclosure statement); and

v. draw attention to the long term nature of the scheme and the risks of early withdrawal
from the scheme.

F. ADVERTISEMENTS AND PROMOTIONAL MATERIALS

i. A UTC must only use advertisements and/or promotional materials that have been
approved by the unit trust management companies and IUTAs and in accordance with
the Guidelines when marketing and distributing unit trust funds.

ii. A UTC should not make any statement, publish any information or engage in any
advertisement that may be construed as misleading, false or deceptive.

G. KEEPING ABREAST WITH THE UNIT TRUST INDUSTRY

All UTC should ensure that they possess the necessary skills and expertise to provide prompt,
efficient and competent service to their clients and in that regard shall keep abreast with the
development and progress of the unit trust industry.

H. DISCIPLINARY PROCEEDINGS

In order to maintain high standards of professional conduct, UTC who have breached provisions
of the Code shall be subject to appropriate disciplinary proceedings.

Adherence to the Code is mandatory for all UTC and its provisions will be strictly enforced by
FIMM. The By-Laws Relating To The Procedure For Disciplinary Proceedings is as set out in
FIMM’s Guidelines Manual.

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APPENDIX 2:
SC’S GUIDELINES ON MARKETING AND
DISTRIBUTION OF UNIT TRUSTS
CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT

OBJECTIVES

1. The unit trust industry is centrally premised on the concepts of trust and faith. It is imperative that an
industry which deals with the public's savings be operated and administered with the highest degree
of ethics and professionalism.

2. Registered persons must therefore possess a sense of responsibility, integrity and professionalism
in marketing and distributing units.

3. To promote and maintain the highest of ethical and professional standards, the SC has set out this
Code of Ethics and Standards of Professional Conduct to guide and aid registered persons in the
marketing and distribution of units.

4. The Code of Ethics and Standards of Professional Conduct form the minimum standards of conduct
expected of registered persons and are intended to be a guide to ascertaining whether a registered
person is acting in a manner which continues to satisfy the Minimum Standards for Registration of
Persons Dealing in Unit Trusts.

5. The Code of Ethics and Standards of Professional Conduct are intended to support management
companies in their efforts to uphold proper standards and do not in any way restrict the companies
from formulating more comprehensive sets of rules in maintaining ethical and professional standards
if they so desire.

CODE OF ETHICS

Registered persons are to be guided in their conduct by the general principles as follows:

(A) HONESTY, DIGNITY AND INTEGRITY

A registered person should at all times strive to act with honesty, dignity and integrity. He should
conduct himself and should encourage others to market and distribute units in a professional and
ethical manner that will reflect credit on him, fellow registered persons and the industry.

In particular, the registered person must not misrepresent or recklessly represent :

(i) his qualifications or that of the management company he represents;

(ii) the products and/or its characteristics offered by the management company he represents;
and

(iii) the past investment performances of the unit trust scheme he is marketing.

Conduct which is dishonest would include any omission of a material fact. A material fact may be
defined as one which would cause the customer to appreciate that the scheme is different from that
actually represented to him.

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(B) FAIR DEALING

A registered person should at all times deal in a fair and equitable manner. Aggressive and offensive
sales practices should be avoided.

(C) GOOD FAITH

A registered person should always deal with good faith and with the best of intentions. The investor
is to be treated with respect and should be given full disclosure of all information pertinent to his
investment decision.

STANDARDS OF PROFESSIONAL CONDUCT

Registered persons must observe the following standards of conduct:

(A) COMPLIANCE WITH RULES AND REGULATIONS

A registered person should maintain knowledge of, and comply with, all applicable laws, rules and
regulations governing the unit trust industry, including this Code Of Ethics and Standards Of Professional
Conduct. Further, the registered person should deal with the regulatory authorities in an open and
co-operative manner, and should disclose such information as is reasonable and appropriate.

(B) USE OF AUTHORISATION CARD

A registered person must, on contact with a prospective investor, disclose that he is a person registered
to market and distribute units and thereafter produce his Authorisation Card issued by the Federation
of Investment Managers Malaysia (FIMM) to identify himself. The use of other cards (not issued by
the FIMM) is strictly prohibited.

(C) MARKETING AND DISTRIBUTION WITH PROSPECTUS

A registered person must market and/or distribute units with the prospectus of the unit trust fund.
Marketing or distribution of units without a prospectus is prohibited by the Securities Commission Act
1993 (the Act).

(D) ACTING WITH DUE CARE, SKILL AND DILIGENCE

A registered person should conduct all his dealings with every care, skill and diligence. In this regard,
the registered person must:

(i) ensure as far as possible that the unit trust scheme proposed is suitable to the needs and not
beyond the resources of the prospective investor;

(ii) take all reasonable steps to give the prospective investor information in a comprehensible, full
and fair manner to assist him in making a balanced and informed decision;

(iii) provide information only on those matters in which he is competent to deal with and seek or
recommend other specialist advice where appropriate;

(iv) when conveying information to a prospective investor, bear in mind the overall context in which
the statements are made and the investor himself, as different persons may require differing
levels of detail and explanation. Efforts should be made to improve the amount and clarity
of the information given; brief or overly technical explanations tend to create confusion and
misunderstanding;

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 (v) when making comparisons with other funds, make clear the different characteristics of each
fund; and

(vi) not omit a material fact, or make exaggerated, unwarranted, misleading statements or claims,
or forecasts of future events.

(E) ADEQUATE EXPLANATION OF THE NATURE AND CHARACTERISTICS OF THE UNIT TRUST
SCHEME

A registered person should adequately explain the nature and characteristics of the scheme for which
he is recommending. Towards this end, he must:

(i) make clear all the essential attributes of the fund, including :

• the investment objectives of the fund;

• the fees chargeable (including a breakdown of the fees involved);

• the prices of units and how the prices are calculated;

• the risks of investing in the particular fund, and in unit trusts, generally;

• the minimum allowable purchases in the fund; and

• the special tax implications of the fund (if any);

(ii) ensure as far as possible that the prospective investor understands what he is committing
himself to; and

(iii) draw attention to any unique features and/or restrictions applicable to the fund;

• if loan financing is to be used, draw attention to the risks of purchasing units via loan
facilities (as contained in the unit trust loan financing disclosure statement); and

• draw attention to the long-term nature of the fund and the risks of early withdrawal from
the fund.

(F) USE OF ADVERTISEMENTS AND PROMOTIONAL MATERIALS

A registered person must only use advertisements and/or promotional materials that comply with the
requirements of the Guidelines on Unit Trust Advertisements and Promotional Materials.

(G) CONFIDENTIALITY OF COMMUNICATIONS AND TRANSACTIONS

A registered person should take every precaution to protect and preserve the confidentiality of investor
information communicated to him in the course of marketing and distributing units. He must not in any
way use such information for personal or another person's gain.

(H) COMPETENCY

A registered person should act with proficiency and strive to maintain and improve his competency
and that of fellow registered persons.

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(I) PROMPT EFFICIENT AND CONTINUOUS SERVICE

A registered person should endeavour to provide his investor with prompt, efficient and continuous
service. In particular, he should always be ready to answer any queries his investor may have on the
performance or management of his units.

(The remainder of this page is intentionally left blank)

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APPENDIX 3:
FIMM FLOWCHART SHOWING STRUCTURE FOR
DISCIPLINARY PROCEEDINGS

START OF PROCEEDINGS

Complaint is received by Executive Director

Executive Director informs Council of complaint

Council appoints *Investigating Committee

Executive Director gives written notice to the Member

of the complaint and requests the Member to submit
written reply

Investigating Committee sets date for the Inquiry

Executive Director informs Member and Complainant

of the date of Inquiry

* Investigating Committee consists of five members:

One Independent Council Member, One Compliance Officer from Members
One CEO from the Ordinary Members, One representative from the Trustee
One representative of FIMM

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 At the Inquiry

If Member If Member &

If Complainant
absent at Complainant
absent at Inquiry
Inquiry present

Investigating
Committee
dismisses complaint

If complaint is not Investigating Committee conducts the

dismissed Inquiry

Investigating Committee submits the

findings to the Council

Dismisses
Dismisses allegation with a
Refers the matter
allegation as letter of caution
to the Council
being without merit recommending
remedial action

Council appoints
*Disciplinary
Committee

* Disciplinary Committee consist of five members:

One Independent Council Member, One Authorised Representative of the Ordinary Member
One Council Member of Association of Trust Companies Malaysia
One Vice-President and One representative from the FIMM

4-36
 Executive Director
informs appointment
of Disciplinary
Committee

To the Member To the Complainant

Executive Director
writes to Member
to ask him to
show cause why
disciplinary action
should not be taken
against him

Disciplinary
Committee
meets alone

Private censure
Public censure
which should be an
publishable by Suspension Termination
unpublished
written reproach
written reproach

Executive Director notifies the

Member of the decision

Member does not accept the Disciplinary

Member accepts the Committee’s decision and wishes to
Disciplinary Committee’s appeal on the findings of the Investigating
decision Committee and/or the punishment by the
Disciplinary Committee

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 Member chooses to appeal and informs Council

Council appoints *Appeal Committee

Appeal Committee deliberates on the appeal and decides

Executive Director informs Member of the Appeal Committee’s

decisions

END OF PROCEEDINGS

* Appeal Committee consists of five members

One Independent Council Member ,One Authorised Representative of the Members
One Chairman of Association Trust Companies Malaysia
One President and One representative from the FIMM

Note: At the hearing of the various Inquiries, the normal rules relating to Internal Inquiries will be applied.

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CHAPTER 5

❙ PERSONAL FINANCIAL PLANNING

LEARNING OBJECTIVES

At the end of this Chapter, you should

• understand what is meant by the term 'personal financial planning' and how it differs from investment
'selling'

• appreciate the role of a financial planner, and the skills required of a competent financial planner

• recognise the main types of client while accepting that each client has different investment objectives,
expectations and needs

• be able to describe the six key steps in personal financial planning

• be aware of some of the more specialised aspects of personal financial planning - personal taxation,
investment planning, risk and insurance protection and estate planning.

❙ SECTION 5.1 OVERVIEW

In certain parts of the world, the role of the financial planner has become highly significant. Many people
appoint a financial planner, in the same way that they have an accountant, a tax adviser, a stockbroker or a
lawyer. Personal financial planning is quickly becoming a field of practice in its own right.

Financial planning is defined under Section 2 of the Securities Industry Act 1983 under the general definition
of ‘Investment Adviser’. An investment adviser is someone who “carries on a business of analysing the
financial circumstances of another person and provides a plan to meet that other person’s financial needs and
objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto”.

Financial planning is simply the process of meeting your life goals within a certain time frame through the
proper management of your present and future finances. These goals may include buying a house, savings
for children’s education, savings for a comfortable retirement lifestyle, etc. The financial planner will take a
“big picture” view of your financial position and recommends actions that you need to take to achieve your
life goals. Such advice may include budgeting, higher rate of savings, tax planning, wealth creation and
preservation, realignment of your investments, risk management and retirement planning.

The unit trust industry in Malaysia is rapidly evolving to a stage where agents undertake to understand the
financial position and investment objectives of a client and analyse the best unit trust investment suitable
for the client. This investment analysis complements the development of the financial planning industry.
In other countries, too, the unit trust industry has played a major role in the development of the financial
planning industry.

In this Chapter, we will introduce the role of the financial planner. The discussion is not meant to be exhaustive,
but should serve as a broad overview of what is meant by the term ‘personal financial planning’.

5-1
 To be called/designated a Financial Planner, UTC are advised to pass certain professional financial
planning courses like the Certified Financial Planner (CFP) or the Chartered Financial Consultant
(ChFC) and be a member of the respective bodies before applying to the Securities Commission
for a licence to practise as a financial planner.

❙ SECTION 5.2 WHAT IS ‘PERSONAL

FINANCIAL PLANNING’?
Personal financial planning is a broad concept that has a client’s financial needs and objectives at its core.
Personal financial planning is an integrated process whereby a client is assisted with his or her

• Cash Management
• Risk Management and Insurance Planning
• Investment Planning
• Tax Planning
• Retirement and Estate Planning.

Most individuals need to plan. An effective personal financial plan will help

• protect a client's assets from the effects of inflation

• ensure an adequate income, when it is needed
• provide a roadmap of a client's objectives for the medium and long term
• improve or maintain present - as well as future - lifestyle
• give 'peace of mind' with regard to the client's financial situation.

It is necessary to appreciate several features of personal financial planning to gain a full understanding of
the concept. Personal financial planning

• is a process. Personal financial planning is not simply a product. It is the result of listening, consultation
and interactive financial assessment

• is comprehensive. All aspects of a client’s needs and requirements need to be fully explored and
explained

• seeks maximum utility. Utility is the economist’s term for usefulness. This means that a personal
financial plan seeks to produce concrete and tangible results that provide client satisfaction

• recognises the individual. There probably should be no two identical financial plans as no two clients
are exactly the same. Each of us has a different set of personal circumstances, investment objectives,
a different risk appetite, and so on

• acknowledges the cycles of life. A personal financial plan is not a static document and needs to be
updated on a regular basis. A client’s needs, objectives and views change over time, so the plan
should be updated and the investment portfolio (developed as part of the plan) assessed to ensure
that it continues to meet the client’s needs and requirements.

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❙ SECTION 5.3 AREAS IN FINANCIAL
PLANNING
CASH MANAGEMENT

Cash management or budgeting is very important as it allows the individual to analyse his total income
against his expenditure, identify his essential and non-essential expenditure and the amount he can set
aside for savings. If he wishes to save more, he can reduce his non-essential expenditure or defer less
important expenditure.

RISK MANAGEMENT AND INSURANCE PLANNING

Risk Management and Insurance Planning is the process of identifying the source and extent of an individual’s
risk of financial, physical and personal loss, and developing strategies to manage exposure to risk and
minimise the probability and amount of potential loss.

INVESTMENT PLANNING

Investment planning is the process of determining how to invest current assets and future savings based
on an individual’s short and long-term financial goals, current financial situation and risk tolerance. A good
investment plan identifies financial goals and assigns a Ringgit figure and time frame to those goals. After the
goals, Ringgit amount and time frame have been selected, appropriate financial instruments are purchased
to meet those goals. Most investment plans in Malaysia are commonly made for retirement, children’s
education and wealth accumulation.

TAX PLANNING

Income tax planning may be defined as the development and implementation of appropriate strategies to
reduce, affect the timing of, or shift either current or future income tax liabilities. Recommended strategies
are based not only on the tax consequences themselves, but also in light of the individual’s overall financial
goals.

RETIREMENT AND ESTATE PLANNING

Retirement planning is essentially having a plan where the last phase of an individual’s life, i.e. upon
retiring, is taken care of by his savings, investments and passive income. Simply stated, estate planning
is a method for determining how to distribute the individual’s assets during his life and at death. It is the
process of developing and implementing a master plan that facilitates the distribution of assets after death
and according to the individual’s wishes.

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❙ SECTION 5.4 STEPS IN FINANCIAL PLANNING
The common approach in financial planning involves six key steps:

1. UNDERSTANDING THE CLIENT

Conducting a cash flow analysis, risk profiling, knowing the client’s goals, etc.

2. DATA GATHERING
Collecting information from client regarding his tax status, income sources, expenditure, existing
insurance protection and investments, existing estate plans, etc.

3. ANALYSING DATA
Determining the financial standing of the client, net worth, cash flow, etc. to see if the client could meet
financial goals or not. Surplus or shortfalls may be addressed with the information provided.

4. PREPARING THE PLAN

Formulating strategies to meet financial goals based on the information acquired.

5. IMPLEMENTING THE PLAN

Carrying out the plan based on what has been agreed upon by the client.

6. REVIEWING THE PLAN

Reviewing the client’s financial plan on a regular basis (usually every six months) to see if the client’s
financial standing, income and clients’ lifestyle / commitments or risk profile has changed, or if the
portfolio’s performance is on track to meet the client’s financial goals. The review process would also
determine if necessary action has to be taken to readjust the client’s financial plan.

❙ SECTION 5.5 SKILLS REQUIRED OF A

FINANCIAL PLANNER
It should be clear that several different skills, including technical skills, are required to be a personal financial
planner.

Less obvious though are the people skills. A high level of interpersonal skills is vital if the client is to feel
comfortable in providing the financial planner with full details of personal data and financial information.
Some clients will feel very uncomfortable in providing these details - indeed, some will refuse to provide it.
But it is not reasonable to expect a client to ask a financial planner to produce a plan that suits the client’s
circumstances and objectives without full and frank disclosure of all the information needed to produce it.

A client should feel at ease in providing information and one of the skills required of a financial planner is
listening. Both during the data gathering stage and in receiving feedback from a client on suggestions or in
annual reviews of the plan, the financial planner must listen for ‘clues’ as to the client’s thoughts and fears.
A planner must understand the need to empathise with a client whose portfolio performance is perhaps less
than expected due to unforeseen market movements.

An understanding of body language can be useful since many clients may say one thing but, through body
language, mean the opposite!

5-4
We have previously discussed the issue of ethics. A high standard of ethics and professionalism must be
adhered to by a financial planner. Simply, this is where the client’s interests are put ahead of the interests of
the planner. The result is that the client builds up a relationship of ‘trust’ with the planner – and ‘trust’ is the
most valuable “ingredient” in this long-term relationship between the financial planner and the client.

❙ SECTION 5.6 PERSONAL FINANCIAL

PLANNING AND THE UTC
Of the five areas in Financial Planning, the area most relevant to the UTC is Investment Planning. Thus, we
shall focus a little more on this area.

5.6.1 THE UTC’S ROLE IN INVESTMENT PLANNING

As a UTC, you must acquire analytical skills and experience in financial matters that make you especially
qualified to provide objective investment advice. You can help reduce your clients’ confusion and concern
about investment decisions by performing the following functions:

• putting investment planning in perspective by educating your clients that investment decisions are
preceded and based on investment strategies that are established to meet the financial goals within
a certain time frame

• educating your clients regarding the risk, liquidity, tax and management characteristics of the
investments to help clients manage their investment risk and undertake the appropriate strategies
necessary to achieve stated financial goals

• advising clients on the use of credit risks and the costs involved, investment decisions related to
corporate benefit plans, and investment strategies such as dollar-cost averaging

• discussing and recommending investment classes or specific investments.

5.6.2 SPECIFIC ACTIVITIES OF THE UTC IN INVESTMENT PLANNING

The specific activities you undertake in investment planning depend on many factors, including the structure
of your professional practice and your client’s goals and the nature and complexity of their financial situation.
In a comprehensive investment planning engagement, you should:

• determine the client's financial objectives and their order of importance

• analyse the client's financial position and cash flow. Suggest changes to improve the client's cash
position and analyse priorities, if necessary

• determine the client's priorities for the allocation of financial resources among stated non-investment
objectives, such as the amount of emergency funds and the acquisition of additional insurance

• calculate the remaining assets that will be available to meet investment goals

• gather and analyse the data necessary for developing the client's investment profile, including
indications about the client's general disposition toward risks

• determine the risk and return characteristics of the client's current investments

5-5
• state financial assumptions

• determine the adequacy of the client's resources for achieving stated investment goals and analyse
the appropriateness of the client's current investment strategies. If resources are insufficient, consider
revising the allocation of resources, changing goals, or using investments with higher risks and yields
that are acceptable by the client

• provide the agreed-on level of investment planning service

• provide the agreed-on level of implementation service

• provide any agreed-on investment monitoring services

• provide any agreed-on ongoing services and update the plan as necessary

• document the investment planning procedures, the client's decisions, and your continuing
responsibilities.

5.6.3 PERSONAL FINANCIAL PLANNING IS NOT INVESTMENT ‘SELLING’

It is vital to recognise that personal financial planning is quite different from investment ‘selling’. While ‘selling’
is often associated with a ‘one-off’ act, personal financial planning encompasses a comprehensive approach
to advice delivered on an ongoing basis to a client. A ‘sale’ of a financial product is often the culmination
of a properly drawn-up and carefully considered personal financial plan. However, it is not the reason for
drawing up a personal financial plan.

Personal financial planning involves an understanding of a client’s financial affairs, goals and personal
objectives. It requires the application of technical, communication and other interpersonal skills. These skills
are then used to write the personal financial plan to the client, and to implement the agreed plan - perhaps
in part by the purchase of appropriate UTS and other financial products.

It is important to appreciate that personal financial planning generally involves a relationship with other
professionals appointed by a client. A financial planner cannot be an expert in all the technical aspects
necessary to produce an appropriate personal financial plan. A financial planner must interact with other
professional advisers with whom the client currently has a relationship. For example, a client may have
appointed an accountant, a taxation adviser, stockbroker and lawyer. Liaison with all these professionals
would be an important part of ensuring that the client’s personal financial plan can be completed.

❙ SECTION 5.7 CLIENT TYPES

Clients have differing financial objectives and capacities to save. However, there are certain similarities
amongst clients and these usually relate to what stage a client is at in the life cycle.

There are, generally, four main stages in the life cycle of a client.

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STAGE ONE: APPROXIMATELY AGE 21 - 30 YEARS

At this early stage of life, a client may be single or newly married. His or her income level may be sufficient
to meet living expenses, and as such, there is little opportunity for saving. Thoughts of retirement are, of
course, a long way into the future. There may be no significant financial responsibilities (for example, family
members to support).

From an investment perspective, if the client has purchased a home, he or she can perhaps begin to build a
small nest egg by investing into growth-oriented UTS. Perhaps some additional risk can be taken by investing
in more specialised and aggressive UTS. The client may be able to tolerate higher volatility in investment
returns over the short-term, as the focus will be on returns over long periods.

STAGE TWO: APPROXIMATELY AGE 31 - 44 YEARS

Commonly, such clients are married with young children and have purchased a home. Tertiary education
expenses may be several years away and retirement is still a long way off. The client’s current financial
responsibilities can be protected through appropriate levels of life insurance cover, and readily accessible
savings.

Depending on the level of financial commitments, there may now be a greater opportunity to save and
invest. A client can consider investing for long-term capital growth using growth or balanced UTS. If there
are more significant savings available, the client can consider investing in some higher-risk UTS to maximise
returns over the long-term. EPF balances may now be sufficient to be transferred to UTS that meet these
objectives.

STAGE THREE: APPROXIMATELY AGE 45 - 60 YEARS

A client in his / her mid 40s may now be more financially secure and has reached a career peak. He or she
may have a high savings capacity to invest for retirement. Tertiary education expenses for children may be
imminent.

When the client is approaching age 55 and above and while insurance protection is still very important,
there may be a requirement to change the investment asset mix. Perhaps more conservative UTS should
be considered, such as income as well as balanced funds. Such UTS could produce lower growth but with
reduced risk, and the total portfolio can provide the client with financial independence upon retirement.

STAGE FOUR: APPROXIMATELY AGE 61 YEARS AND ABOVE

A client’s children have grown up and have finished their education and house mortgages are fully paid.
Perhaps the client has now retired, so his or her earnings may have significantly decreased and a priority will
be to maintain income that can be generated out of capital. If not, with decreased financial responsibilities,
it may be an appropriate opportunity to prudently increase the capital base prior to retirement. An objective
must also be to attempt to maintain the purchasing power of the capital, whilst at the same time reducing the
risk of loss. The client must consider contingencies, such as medical needs, in setting his or her investment
portfolio. Perhaps a combination of income and balanced UTS will prove most appropriate. Aggressive
UTS, which may produce high returns but with considerable volatility and perhaps significant losses, are
not suitable for retirees.

Of course, the four stages are generalised and as we have said, every client is different. It is nevertheless
useful for prospective UTC to see how a ‘typical’ client’s life cycle can link with an investment portfolio
involving UTS to achieve a client’s objectives.

5-7
❙ SECTION 5.8 DIFFERENCE BETWEEN A
FINANCIAL PLANNER AND UTC
EXAMPLE 1

‘A’ introduces himself as a unit trust agent to his client and does a needs analysis. After asking questions on
the latter’s financial capability, understanding his investment goals and risk appetite, ‘A’ then recommends
a unit trust product. During the whole meeting, he maintains himself as a unit trust agent to his client. He
only needs a UTC licence.

EXAMPLE 2

‘A’, a unit trust agent introduces himself as a financial planner and does a needs analysis with his client
and, after asking questions on the latter’s financial capability, understanding his investment goals and risk
appetite, recommends a unit trust product. ‘A’ is a financial planner and needs an IA licence simply because
he calls himself a financial planner. Of course, he also needs a UTC licence. Because the financial planner
in the above scenario uses the financial planning skill sets to talk about investments, he is doing single-
purpose financial planning as against comprehensive financial planning. Comprehensive financial planning
would cover cash management, insurance planning, wealth creation, enhancement and preservation, tax
planning, business succession, trusts and wills.

❙ SECTION 5.9 REMUNERATION OF A

FINANCIAL PLANNER
In overseas markets, but less commonly in Malaysia, clients are charged an advisory fee by the financial
planner. In markets such as the United Kingdom and Australia, a significant proportion of sales of UTS is
through the ‘independent financial adviser’ (planner) distribution channel. Independent financial advisers
are professional individuals or franchisees who specialise in advising clients on where to invest their funds
in order to achieve their desired investment outcomes, usually following completion of a financial plan.

Advisory fees can either be based on time spent in developing a plan, or on the size of the portfolio of the
client. If they are related to time, then obviously the longer the amount of time spent in advising a client,
the higher the charge. Similarly, a larger portfolio will attract a higher fee than a smaller one where the fee
basis is based on the amount of funds under review. In the United States, some investment advisers levy
their fees on the basis of the performance of the investment products used in a plan.

Personal financial planning can be a profitable business, especially if the financial planner can earn fee
income from the client, in addition to the commission-based remuneration received from UTMC and other
product manufacturers.

In Malaysia, it is more common for financial planners to be remunerated by way of commission payments
from product manufacturers in the same way as UTC. The disadvantage of this method is that the reward
to the financial planner is transaction-driven, since a payment is received only following completion of an
investment transaction. Commission payments are, therefore, very much based on sales of investments
or other financial products, and some argue that this is inappropriate when advising clients on setting
and achieving financial goals. A client may question whether the purchase of a particular investment was
motivated by the commission payment likely to accrue to the financial planner, rather than perform objective
and independent assessment to ensure the particular investment satisfies the client’s goals.

5-8
A service-based reward to a financial planner reduces the need to ‘sell’ financial products and emphasises
the ongoing and advisory nature of the service provided. Some regard a service-based reward as more
‘independent’ and ‘professional’.

Helping clients meet their investment goals is one of the most satisfying accomplishments that a UTC can
achieve. The UTC would definitely benefit from the growth of assets that they manage as well as enjoy repeat
sales, increased size of business and obtain good referrals from satisfied clients. Remember, client’s wealth,
their children’s future and retirement, are all dependent on a competent and professional UTC.

❙ SECTION 5.10 SUMMARY

We have seen that personal financial planning is a complex process involving a number of key steps, and
in which recommending UTS may form only a relatively small, although important, part.

Above all, personal financial planning is client-focused, and the successful financial planner must gain the
trust of his or her client to be able to produce and implement a personal financial plan that is to achieve the
client’s goals and objectives.

A financial planner is a generalist (in the same way as a family doctor). The financial planner must be aware
that specialist technical knowledge and input is required in devising an appropriate financial plan, and must
also learn to work alongside, and with the cooperation of, a client’s other professional advisers.

The changes occurring in Malaysia indicate an exciting time ahead for the financial planning industry. UTMC
and UTC are well placed to benefit from this.

5-9
SELF-TEST QUESTIONS ON CHAPTER 5
1. Define the term ‘personal financial planning’. Explain clearly the difference between personal financial
planning and investment ‘selling’.

2. List and describe the four main stages in the life cycle of a client. Is it reasonable to classify each
client into one of these categories?

3. List the six key steps in designing a personal financial plan.

4. Detail the four main functions performed by the UTC in his/her role in Investment Planning

5. What are the five main areas in financial planning? Give a brief description of each.

6. What skills do UTC need to be financial planners?

7. Discuss some of the ways a Financial Planner receives remuneration.

8. Why is investment planning more applicable to UTC than the other areas in financial planning? Provide
some of the specific activities of the UTC in investment planning.

5-10
APPENDIX 1:
EFFECT OF INFLATION, TAXATION AND COSTS ON
INVESTMENT RETURNS
The impact of inflation, tax and investment costs on investment returns needs to be carefully considered
when making investment decisions. Many investors ignore the impact of inflation, tax and investment costs,
only to find that their investment returns and wealth are much less than they envisaged.

Most believe they understand inflation, yet many investors let themselves become a victim of its insidious
impact on investment returns and wealth. Inflation, to most people, simply means price increases. But to
the investor, it has far wider ramifications.

Investors need to preserve the purchasing power of their original investments, and be earning a rate of
return from those investments that beats the inflation rate. In periods of high inflation, the purchasing power
of financial assets decreases. RM100,000 today simply cannot buy what it did ten years ago. The reason:
inflation. By the same token, an investor, who thinks he or she needs to save a particular sum for the future,
needs to think clearly whether that amount will be adequate in terms of prices and costs in, say, 15 years’
time.

The second factor that reduces returns to investors is taxation. Again, it is no secret that all income is
assessed for tax, yet many overlook the taxation implications of the investments they choose. In Malaysia,
there are different tax treatments for different types of investments. However, when planning to accumulate
a specified amount of capital in the future, the current and future tax implications must be considered.

Tax acts as an erosion of the returns achieved from investment and its impact needs to be clearly
recognised.

1. MEASURING THE IMPACT OF TAXATION AND INFLATION ON INCOME RETURNS

The table illustrates the combined effect of taxes and inflation on investment income.

Assume that the various rates of tax shown in column 1 are applied to investment income received by an
investor, and that the average annual inflation rate is 5%. For the range of investment income returns shown
in column 2, the effective return after taking into account tax and inflation is shown in column 5.

1 2 3 4 5
Tax Actual Return Inflation* Return
rate* investment after tax after tax and
return inflation
% % pa % pa % pa % pa
5.0 4.5 -0.5
10 10.0 9.0 5 +4.0
15.0 13.5 +8.5
5.0 4.0 -1.0
20 10.0 8.0 5 +3.0
15.0 12.0 +7.0
5.0 3.5 -1.5
30 10.0 7.0 5 +2.0
15.0 10.5 +5.5

* Note: These rates are assumed for illustrative purposes. Refer to actual rates of income tax for a particular
year of assessment and to current forecasts of inflation. The table ignores the effect of inflation on the
investor’s capital from which the income return is derived.

5-11
The impact of both tax and inflation on income returns is significant, especially at higher tax rates. A 10% pa
nominal rate of income return to an investor with a 10% tax rate reduces to an effective return of only 4% pa,
after taking into account tax and inflation - a significant difference. At a marginal rate of 30%, the effective
return falls to a negligible 2% pa. Clearly, inflation and tax have significant implications for investors, UTC
and financial planners.

The table of effective rates of return highlights the desirability of designing an investment portfolio that
includes investments that are expected to produce capital growth over and above the rate of inflation. If a
client’s portfolio can be structured to minimise the effects of both taxation and inflation, then the client should
be in a much better position to protect existing capital and to build real wealth over time.

2. THE IMPACT OF INFLATION ON INVESTMENT OBJECTIVES

All long-term investment portfolios should, as far as possible, be constructed with the objective of keeping
pace with inflation, and to provide for capital growth to increase the real value of the portfolio.

But how much will be required to meet a particular financial objective in, say, 15 years’ time?

The table highlights the way in which inflation needs to be considered when making investment decisions. It
shows the amount required to be accumulated at the end of a period to maintain the real value of RM100,000
under different inflation expectations.

Inflation Rate
End of Year
2% pa 3.5% pa 5% pa
RM RM RM

5 110,408 118,768 127,628

10 121,899 141,059 162,889
15 134,586 167,534 207,892
20 148,594 198,978 265,329
25 164,060 236,324 338,635

For example, assuming that there is an inflation rate of 5% pa for 20 years, the purchase cost of an apartment
currently valued at RM100,000 will be RM265,329 (assuming that apartment prices change at the same
rate as general inflation). For an investor with an investment portfolio currently valued at RM100,000 to be
able to purchase the apartment in 20 years’ time, the purchasing power of the portfolio will need to grow at
a rate of at least 5% pa (ignoring taxes). Even if the portfolio returns 5% pa over the period, the investor is
no better off. To increase wealth, the investor requires an investment return in excess of the inflation rate.

3. RULE OF 72

There is a simple rule that can be used in determining and measuring the impact of inflation and the result
of the compounding of investment returns - the ‘rule of 72’.

The ‘rule of 72’ helps us to provide a client with an estimate of, for example:

• the loss in real value of a given amount of funds with a particular inflation rate
• how long it will take to double a given sum of money invested at a given rate of return.

5-12
The formula is:
72
given rate of inflation or return

Example:

A client has RM150,000 and wants an indication of how long it would take to halve its real value with an
assumed inflation rate of 3½% pa.

72
= 20.6 years (20 years 7 months)
3.5

Example:

A client has RM100,000 and wants to know how long it would take to double his or her money at an assumed
investment return of 7½% pa.

72
= 9.6 years (9 years 7 months)
7.5

The following tables (compiled using the Rule of 72) demonstrate the effects of inflation on the real value of
money, and how long it will take to double the value of an investment.

3.1 HOW LONG WILL IT TAKE TO HALVE THE REAL VALUE OF MONEY?

Assumed inflation rate No of years to halve

% pa real value

2.0 36.0
2.5 28.8
3.0 24.0
3.5 20.6
4.0 18.0
4.5 16.0
5.0 14.4

Clearly, the higher the inflation rate, the more quickly the real value of money is halved.

3.2 HOW LONG WILL IT TAKE TO DOUBLE THE VALUE OF AN INVESTMENT?

Assumed rate of return No of years to double

(% pa) a given Sum

5.0 14.4
6.0 12.0
7.0 10.3
8.0 9.0
9.0 8.0
10.0 7.2

5-13
4. THE EFFECT OF CHARGES ON INVESTMENT RETURNS

Assume that an investor has RM100,000 for investment in UTS, and that the investor is able to invest for
a period of 20 years.

The investor is offered a choice of three UTS that will meet his or her requirements in terms of risk and
return. Each UTS has a different fee structure:

• UTS 1 has an initial entry cost of 8% with an MER of 2% pa

• UTS 2 has an initial entry cost of 5% with an MER of 2% pa

• UTS 3 has no initial entry cost with an MER of 1% pa.

Assuming similar prospective investment returns, which UTS should be chosen?

The impact on the investment returns over the period due to the differences in charges is quite striking:

UTS 1 UTS 2 UTS 3

Investment 100,000 100,000 100,000
Less Initial Entry Cost 8,000 5,000 -
‘Working money’ 92,000 95,000 100,000

Value end of Year RM RM RM

1 99,360 103,075 109,000
5 135,178 142,847 153,863
10 198,621 214,793 236,736
15 291,839 322,975 364,248
20 428,808 485,644 560,441

Between UTS 1 and UTS 3, there is a RM131,633 difference in the final amount of capital accumulated over
the 20-year period, reflecting the additional fees payable to UTMC of UTS 1 over that period - an effective
saving to the unitholder of UTS 3.

In the above example, it is easy to see which UTS an investor is likely to choose. In practice, the decision
is not always as simple. For example, the table assumes that all three UTS will generate exactly the same
return.

UTMC investing in the same share market will often produce different returns depending on many different
factors, including investment styles. Studies overseas have shown, too, that it is not always the case that
the higher the fees, the better the performance - in fact, the opposite may apply!

One thing is clear though - that for every 1% pa more in fees and charges, there is an additional 1% pa.
investment return that is required to produce the same return to the investor. Over time, and taking into
consideration the compounding effect of charges on returns, there can be a significant impact on investment
performance. It is, therefore, important for a financial planner to ensure that allowance is made for the costs
of investing when estimating investment returns.

Together with the impact of inflation and tax, investment costs are another drain on investment returns sought
by clients to achieve financial goals.

5-14
CHAPTER 6

❙ OPERATIONS OF SYARIAH-BASED UTS

LEARNING OBJECTIVES

At the end of this Chapter, you should:

• understand the significance of Islamic finance in Malaysia’s Capital Market Masterplan

• know the key milestones in the development of the Islamic capital market in Malaysia

• know what a Syariah-based UTS is and how it differs from a conventional UTS

• understand the regulatory framework, the relationship between parties and other elements in relation
to Syariah-based UTS, including the Syariah Committee/ Syariah Adviser

• be aware of how the Syariah status of securities traded on Bursa Malaysia are determined by the
Syariah Advisory Council of the Securities Commission.

❙ SECTION 6.1 OVERVIEW

The emergence of Islamic finance in Malaysia was catapulted by the establishment of Bank Islam Malaysia
Bhd in 1983. Since then, the development and growth of Islamic finance in the country has been very
encouraging, with double-digit growth each year. Together with the growing awareness and demand for
Islamic financial products, this has created a flourishing Islamic capital market, where the market activities
are confined to activities that are in compliance with Syariah requirements.

At present, the Islamic financial market operates side-by-side with the conventional financial market and
provides investors with alternative investment avenues that are Syariah-compliant.

❙ SECTION 6.2 CAPITAL MARKET MASTERPLAN

The Islamic capital market in Malaysia plays a significant role and functions as a segment within the broader
capital market industry for issuers and investors. It also complements the other components of the Islamic
financial system, i.e. Islamic banking, takaful (Islamic insurance) and the money market sector. To further
strengthen and chart the development and growth of the Islamic capital market, the SC has focused efforts
on two fronts, namely to establish the supporting infrastructure and widen the Islamic capital market product
range.

One of the most developed segments of the domestic Islamic capital market is the equity market. The
number of securities classified as Syariah-compliant has increased from 544 in 1999 to 857 as at 20 October
2005. This development has provided a platform for the growth of Islamic fund management as well as the
stockbroking industry in Malaysia.

6-1
The SC has also encouraged market players to create new and innovative Islamic bond structures to spur
the development of the Islamic bond market and eventually create a wider investment base for investors.
The Malaysian government as well as large corporations in the country have issued numerous medium to
long-term Islamic bonds.

The steady growth and positive development of the Islamic capital market in this country will add to the
breadth and diversity of the overall capital market industry. In addition, it will also support and provide a
major contribution to the overall growth of the financial services industry in Malaysia.

Similar to the conventional market, continuous development efforts must adopt a comprehensive and multi-
pronged approach to enhance the international competitive position of Malaysia’s Islamic capital market.
To further develop the Islamic capital market, several strategic initiatives have been identified and need to
be undertaken, namely:

• Facilitating the development of a wide range of innovative and competitive products and services
related to the Islamic capital market
• Creating a viable market for the effective mobilisation of Islamic funds
• Ensuring that there are appropriate and comprehensive accounting, tax and regulatory frameworks
for the Islamic capital market
• Enhancing the value recognition of the Malaysian Islamic capital market internationally
• Increasing the pool of Islamic capital market expertise.

In 2001, the Capital Market Masterplan was introduced to chart and plan the growth of the Malaysian
capital market as a whole. In the Masterplan, a section is allocated to the development of the Islamic capital
market. Several recommendations have been stipulated to achieve the above objectives and specific areas
have been identified and explained in greater details in regard to the strategic initiatives. A summary of the
recommendations are:

No Recommendation Details

Efforts to introduce more competitive and innovative Islamic financial

1 Recommendation 65
products and services will be actively pursued.

Efforts to introduce and promote a wider range of Islamic collective

2 Recommendation 66
investment schemes will be facilitated.

Investment restrictions on the takaful industry should be further

3 Recommendation 67 liberalised to facilitate greater mobilisation of takaful funds into the
Islamic capital market.

Efforts to mobilise untapped Islamic assets through securitisation

4 Recommendation 68
should be pursued.

Efforts to increase the pool of Islamic capital market expertise through

5 Recommendation 69
training and education will be enhanced.

A single Syariah Advisory Council should be established for the

6 Recommendation 70
Islamic financial sector.

A facilitative tax and legal framework should be established for the

7 Recommendation 71
Islamic capital market.

Efforts to develop an appropriate financial reporting framework for the

8 Recommendation 72 Islamic capital market in collaboration with the Malaysian Accounting
Standard Board (MASB) will be pursued.

6-2
No Recommendation Details

Increased efforts to enhance the awareness of Malaysia’s Islamic

9 Recommendation 73 capital market at the domestic and international levels will be
pursued.

Strategic alliances between Malaysia and other Islamic capital

10 Recommendation 74
markets should be established.

The government and government-related entities should consider

11 Recommendation 75
issuing Islamic debt securities in the global market.

The listing of Malaysian Islamic equity funds in international markets

12 Recommendation 76
should be pursued.

Incentives to encourage the entry of foreign intermediaries and

13 Recommendation 77 professionals with expertise in Islamic capital market-related
businesses should be provided.

❙ SECTION 6.3 DEVELOPMENT AND KEY MILESTONES

OF THE ISLAMIC CAPITAL MARKET IN MALAYSIA
Year Milestone

1990 The first Islamic bond was issued by Shell MDS Sdn Bhd.

1993 The first Syariah-based unit trust fund, Arab-Malaysian Tabung Ittikal, was introduced
and launched by AmInvestment Services Bhd (previously known as Arab-Malaysian Unit
Trust Bhd).

1994 The establishment of the first full-fledged Syariah-based stockbroking firm by BIMB
Holdings, i.e. BIMB Securities Sdn Bhd.

1995 The Islamic Capital Market Unit was established by the SC.

1996 The Syariah Advisory Council (SAC) was established by the SC. The members of the
SAC comprised individuals from different backgrounds, such as Muftis, Islamic scholars,
academicians and Islamic finance experts. The SAC advises the SC on all matters
related to Islamic capital market activities to ensure Syariah-compliance.

Rashid Hussain Bhd launched the first Islamic equity index, which comprised Syariah-
compliant securities listed on Bursa Malaysia.

1997 The SC introduced an official list of Syariah-compliant securities that are traded on Bursa
Malaysia. These Syariah-compliant securities are reviewed and identified by the SAC
and re-classified accordingly twice a year. An updated list is announced by the SC on the
last Friday in the months of April and October each year.

Khazanah Nasional Berhad launched the Khazanah Murabahah Bond, a zero coupon
bond, which is based on the Syariah contracts of Murabaha and Bai Al Dayn.

6-3
 Year Milestone

1999 The second Syariah equity index was introduced by Bursa Malaysia, known as the Kuala
Lumpur Syariah Index (KLSI). The composition of the KLSI comprises Syariah-compliant
securities listed on the Main Board. The KLSI provides a benchmark for the performance
of these Syariah-compliant securities.

2000 The SC imposed the requirement for issuers of Islamic bonds to appoint independent
Syariah Advisers. This requirement is stipulated in the Guidelines on the Offering of
Private Debt Securities.

The first Islamic bond fund was introduced by RHB Unit Trust Management Berhad.

2001 The Capital Market Masterplan (CMM) was launched by the Minister of Finance. The
CMM stipulates strategic initiatives to further develop the capital market industry, one of
which is to establish Malaysia as an international Islamic capital market centre.

2002 The first global corporate bond was issued by Kumpulan Guthrie Bhd and it was listed
on the Labuan International Financial Exchange.

The first sovereign Islamic bond, Sukuk Ijarah, was launched by the Malaysian
government. Malaysia was the first country in the world to issue a global sovereign
Islamic bond.

All Syariah Advisers / individuals of Syariah-based unit trusts are required to register
with the SC.

The first Syariah index fund was launched by MBf Unit Trust Management Bhd.

2004 The “Guidelines on the Offering of Islamic Securities (IS Guidelines)” were issued by
the SC. This framework aims to facilitate the development of a more innovative and
sophisticated Islamic capital market in the country.

The first domestic corporate Islamic bond was issued by Ingress Corporation Bhd.

The World Bank’s private arm, i.e. International Finance Corporation, issued the first
Ringgit-denominated Islamic bond.

❙ SECTION 6.4 WHAT IS A SYARIAH-BASED

UTS?
Generally, a UTS is a collective investment scheme, which pools the savings of investors with similar
objectives in a special fund managed by professional fund managers. The pooled monies in the UTS will then
be invested in a diversified portfolio of securities and other assets in accordance with the UTS investment
objectives and as permitted under the SC’s guidelines and regulations.

6-4
A Syariah-based UTS is quite similar to the above definition, EXCEPT that all the above activities must
comply with Syariah requirements. The main differences between a conventional UTS and a Syariah-based
UTS exist in the following areas:

• Objectives of the fund

• Investment strategy
• Operations and management of the fund
• Documentation
• Investment avenues and activities
• Accounts and reporting.

The objective of a particular type of fund is normally to maximise returns that are usually composed of both
capital and income growth. Achieving this objective would depend on, among others, the fund size, period
of investment, investment strategy as well as the type of instruments that are invested in, and the ability to
manage risk. Accordingly, the objective of a particular Syariah-based UTS is to achieve both capital and
income growth within the scope of Syariah. Hence, the investment strategy would also need to be aligned
with the objective of a Syariah-based fund.

As for the operations and management of a Syariah-based UTS, UTMC are to ensure that the excess funds,
such as liquid assets and cash, are placed/invested in Syariah-based instruments. At the end of the day, the
compliance manager/officer has to ensure that all daily operations comply with all the requirements of the
SC as well as Syariah. To assist the compliance manager/officer in ensuring that funds are managed and
administered in accordance with Syariah requirements, UTMC offering Syariah-based UTS are required by
the SC’s Guidelines on Unit Trusts to appoint a Syariah Committee / Syariah Adviser. The main function of the
Syariah Committee/ Syariah Adviser is to supervise and provide necessary advice to ensure that the Syariah-
based UTS offered to the public is managed and administered in accordance with Syariah requirements.

Syariah Committees / Syariah Advisers are registered with the SC and renewable every three years, subject
to the SC’s approval. As at October 2005, there are 26 individuals and four institutions eligible and registered
as Syariah Committee or Syariah Adviser. The complete list is available on the SC’s website (www.sc.com.
my).

In terms of accounting and reporting, similar to conventional funds, UTMC are required to publish and
distribute half-yearly / interim reports as well as annual reports of the fund. The additional information that
appears in these two reports for the Syariah-based UTS is the Syariah Committee / Syariah Adviser’s report.
This report would confirm that the Syariah-based fund is administered and managed in accordance with
Syariah requirements. An example of a Syariah Adviser’s report is enclosed as Appendix 1.

Syariah-based fund’s deed and prospectus must be drafted in accordance with Syariah requirements.
Terminologies used in conventional deed and prospectus which are not in line with Syariah such as interest-
based instruments and interest income must be avoided. These words could project and imply different
connotations to the readers and would eventually create a negative image of the Syariah-based fund.

6-5
❙ SECTION 6.5 THE REGULATORY FRAMEWORK
SECURITIES LAWS & REGULATIONS

ü Securities Commission Act 1993 (Act 498)

ü Securities Industry Act 1983
ü Securities Commission Guidelines on Unit Trust Funds
ü Futures Industry Act 1993

empower

SYARIAH
SECURITIES
ADVISORY
COMMISSION
COUNCIL

regulates

TRUSTEE
Independent of each other UTMC
ü Act on behalf of the
(unless approved by the ü To administer the operations of
Unitholders
Securities Commission) the Syariah-based UTS
ü Custodian of assets

executes executes issues

DEED
(An agreement between the UTMC, Trustee and SYARIAH
Unitholders) COMMITTEE/
SYARIAH
• To regulate the duties and responsibilities of the ADVISER
UTMC and Trustee with regard to the operations
of the Syariah-based UTS ü Must be
• To be registered and lodged with the Securities registered and
Commission approved by
• Set out obligations of the Trustee and UTMC the Securities
• Establishes the UTS Commission
• Defines the rights of the Unitholders ü To ensure all the
activities of the
Syariah-based
PROSPECTUS UTS comply
with Syariah
• To be registered and lodged with the Securities requirements
Commission
• Contains information on the Syariah-based UTS
as required by the law and Deed

UNITHOLDERS

• Invest on the basis of the Prospectus

• Rights and liabilities are defined in the Deed and
Prospectus

6-6
❙ SECTION 6.6 RELATIONSHIP BETWEEN PARTIES IN
A SYARIAH-BASED UTS
Generally, the relationships between parties in a Syariah-based UTS are based on certain Syariah contracts.
These Syariah contracts reflect the type of obligation and responsibilities of the parties. Four Syariah contracts
are applied in a Syariah-based UTS, which are elaborated in the following table:

Parties Syariah Contracts

Among Musyarakah contract exists between the investors (Unitholders) to deal with
Unitholders specified investments, with the view that the profit derived would be shared among
them according to capital contribution or any other agreed profit-sharing ratio.

UTMC and Trustee As there is no direct relationship (and due responsibility) between both parties,
therefore no contract exists between them. However, both are agents of the
Unitholders.

Unitholders and 1. Wakalah (agency)

UTMC The UTMC is acting for and on behalf of Unitholders to invest and manage
the UTS.

2. Bai
Contract of sale and purchase executed between the unitholders and the
UTMC, which is usually on cash payment basis.

3. Wadiah Yad-Dhamanah (guaranteed custody)

• Prior to the creation of units
• The owners of the units are the Unitholders; the custodian is the
UTMC.
• The contract will take place when the UTMC receives payment for the
investment.

Unitholders and 1. Wakalah (agency)

Trustee Where the trustee is acting for and on behalf of Unitholders to be the
custodian of the trust funds and to safeguard the interests of unitholders.

2. Wadiah Yad-Dhamanah (After the units are created)

• The owners of the units are the Unitholders, the custodian is the trustee
and the units are all the assets of the fund in the form of monies and
other forms of investments.
• The contract exists once the Unitholders purchase the units and the
depositing of investments by the UTMC with the trustee.

6-7
❙ SECTION 6.7 INVESTMENT PORTFOLIO
A Syariah-based UTS can only invest in instruments that comply with Syariah requirements, subject to
approval from the Syariah Advisory Council of the SC and/or the Syariah Committee / Syariah Adviser and
in accordance with the fund’s objectives. These instruments are as follows:

• Syariah-compliant securities traded on Bursa Malaysia and/or any other market considered as an
eligible market
• Syariah-based units / shares of other collective investment schemes
• Warrants and options issued by companies classified as Syariah-compliant
• Government Investment Issues
• Islamic Accepted Bills
• Bank Negara Negotiable Notes
• Islamic Commercial Papers
• Negotiable Islamic Debt Certificates (NIDC)
• Islamic Negotiable Instruments of Deposits (INID)
• Cagamas Mudharabah Bonds and Notes
• Islamic Securities and Corporate Islamic Bonds
• Syariah-based deposit instruments
• Islamic money market products
• Syariah-compliant foreign securities
• Futures contracts that are in compliance with Syariah requirements, e.g. Crude Palm Oil (CPO) and
Crude Palm Kernel Oil (CPKO)
• Any other investment instruments as approved by the Syariah Advisory Council of the SC and/or the
Syariah Committee/ Syariah Adviser.

Any excess cash and / or liquid assets are to be kept / invested in Syariah-based instruments, i.e. Islamic
current account or investment account.

As far as the equity market is concerned, as at 20 October 2005, Syariah-compliant securities accounted for
84.77%, or 857 Syariah-compliant securities, from the total 1,011 securities listed on Bursa Malaysia. The
following diagram compares the percentage of Syariah-compliant securities against total listed securities
and the breakdown by sectors.

6-8
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6-9
❙ SECTION 6.8 POTENTIAL RISKS
All types of investments carry some degree of risk, which can be reduced through diversification of one’s
investment portfolio. A UTS facilitates the diversification process as it provides investors with an avenue to
pool their savings for purchasing a diversified portfolio of investments.

The role of an investment manager in a Syariah-based UTS is to select assets that would minimise the risk
as much as possible while working to achieve the fund’s objective. There are different types of risks that
can affect an investment and, similar to the conventional fund, these risks would have an impact regardless
whether it is a Syariah-based fund or otherwise. These risks are:

• returns are not guaranteed

• manager’s / management risk
• financing / loan/borrowing risk
• risk of non-compliance
• currency risk
• country risk
• market risk
• liquidity risk
• credit / default risk
• inflation risk
• interest rate risk1

In addition to the above, a Syariah-based UTS is also exposed to “Syariah non-compliance risk” or “Syariah
specific risk”. This type of risk specifically occurs when a Syariah-compliant security is reclassified as
a Syariah-non compliant security. This reclassification normally occurs when a company undertakes a
corporate restructuring, such as a merger or acquisition; when there are changes in the nature of business
or diversifications; or when a substantial composition of the income generated is derived from Syariah-non
compliant activities.

This reclassification of the status may affect the performance of the fund as the fund manager has to
“cleanse” and/or “purify” the fund by disposing all such investments that have been reclassified as Syariah-
non compliant securities. In the process of “cleansing” and/or “purifying”, the fund may make a lower return
or a loss. This would eventually affect the total NAV of a Syariah-based UTS.

1
The general interest rate of the country may affect the value of an investment even if the fund does not invest in interest bearing
instruments. It is a general economic indicator that will have an impact on the management of any UTS regardless of whether it is
a Syariah-based UTS or otherwise

6-10
❙ SECTION 6.9 APPOINTMENT OF THE
SYARIAH COMMITTEE / SYARIAH ADVISER
Where a fund is expressed to be managed and administered in accordance with specific principles (i.e.
Syariah principles), a Syariah Committee / Syariah Adviser must be appointed.

The Syariah Committee Members / Adviser must:

• (where a Syariah Committee is appointed), consist of at least three members who are individuals
• be independent of the management company
• be registered with the SC.

6.9.1 MEMBERS OF THE SYARIAH COMMITTEE

(1) Members of the Syariah Committee must:

(a) be of good repute and character
(b) possess the necessary qualifications, expertise and experience, particularly in fiqh muamalah
and Islamic jurisprudence.

(2) In particular, members of the Syariah Committee must not have been involved in any unethical and/or
inappropriate practices. Among others, a member could be subject to a disqualification in any of the
following events:
(a) A petition under bankruptcy laws filed against him or he has been declared a bankrupt
(b) A criminal proceeding in which he was convicted for fraud, dishonesty or any other offence
punishable with imprisonment of one year or more, anywhere in the world
(c) Any inquiry / investigation carried out by any governmental / statutory authority or body against
him, in which an adverse finding was found
(d) Any unethical practices and activities which would render him unfit to be a member of the
Syariah Committee.

(3) Where a Syariah Adviser is appointed, the company must have in its employment, a minimum of one
full-time officer designated to be responsible for Syariah matters relating to the fund and who meets
the eligibility criteria under subclause 6.05(1) stipulated in the Guidelines of Unit Trust Funds. In
addition, the company should not have breached any securities or banking laws since the date of its
incorporation or have a winding-up order passed against it.

(4) The appointment of a member of the Syariah Committee / Syariah Adviser must be approved by the
SC. The application must also be accompanied by a resolution of the management company’s Board
of Directors, including details of dissenting opinions (if any).

(a) The management company must assess the abilities of the candidate / company to carry out the
duties and responsibilities required of a member of the Syariah Committee / Syariah Adviser.
(b) In the case of the establishment of a new management company, it is the responsibility of
the holding company and/or promoter and its Board of Directors to assess the abilities of the
candidate / company.

(5) The management company should notify the SC of any resignation of a member of the Syariah
Committee / Syariah Adviser, other than under sub-clause 6.05(6) of the above Guidelines, within
two weeks of the resignation.

6-11
(6) Where a member of the Syariah Committee / designated officer of the Syariah Adviser becomes
subject to any disqualification or becomes otherwise unfit to hold office, the management company
should ensure that the member vacates the position immediately. The management company must
inform the SC of the disqualification and vacation of the post forthwith.

(7) A member of the Syariah Committee / designated officer of the Syariah Adviser should not hold
office as a member of the investment committee of funds managed and administered by the same
management company.

6.9.2 ROLES, POWERS AND DUTIES OF THE SYARIAH COMMITTEE / SYARIAH ADVISER

(1) The role of the Syariah Committee / Syariah Adviser is to ensure that the fund is managed and
administered in accordance with Syariah principles.

(2) The Syariah Committee / Syariah Adviser should provide expertise and guidance in all matters relating
to Syariah principles, including on the fund’s deed and prospectus, its structure and investment process,
and other operational and administrative matters.

(3) Where there is any ambiguity or uncertainty as to an investment, instrument, system, procedure and/or
process, the Syariah Committee / Syariah Adviser must consult the SC.

(4) The Syariah Committee / Syariah Adviser should act with due care, skill and diligence in carrying out
its duties and responsibilities.

(5) The Syariah Committee / Syariah Adviser is responsible for scrutinising the fund’s compliance report as
provided by the compliance officer, and investment transaction reports provided by, or duly approved
by, the trustee to ensure that the fund’s investments are in line with Syariah principles.

(6) The Syariah Committee / Syariah Adviser must prepare a report to be included in the fund’s interim
and annual reports certifying whether the fund has been managed and administered in accordance
with Syariah principles for the period concerned.

In a nutshell, the Syariah Committee / Syariah Adviser is responsible for checking the following items to
ensure that the management of the Syariah-based UTS complies with Syariah requirements:

• UTF reports, transactions, cash placements, etc. on a monthly basis

• annual and interim reports
• deed, one time only (during the formation of the Syariah-based UTS) or any subsequent supplemental
deed
• prospectus, on yearly basis or when there is a need to publish any supplemental prospectus
• promotional materials.

6-12
❙ SECTION 6.10 SYARIAH COMPLIANCE REVIEW
In classifying the Syariah status of securities traded on Bursa Malaysia and/or any other market considered
as an eligible market, the Syariah Advisory Council of the SC receives input and support from the SC. The
Commission gathers information on the companies from various sources, such as company annual financial
reports, company responses to survey forms and through inquiries made to the respective company’s
management. The SC, through its Syariah Advisory Council, continuously monitors the activities of all
companies listed on Bursa Malaysia to determine their status from the Syariah perspective.

The SC publishes on a six-monthly basis, i.e. on the last Friday in the months of April and October each
year, a booklet on “List of Syariah-compliant Securities by the Syariah Advisory Council of the Securities
Commission”. The book highlights the following areas:

• Newly-classified Syariah-compliant securities

• Newly-classified Syariah-non compliant securities
• The benchmark applied in determining the Syariah status for mixed contribution of income in a particular
company
• Disposal treatment of:
(a) Syariah-compliant securities subsequently considered Syariah-non compliant
(b) Syariah-non compliant securities (investment)
• Syariah status on new securities resulting from corporate restructuring
• List of all Syariah-compliant securities segregated into sectors (main board, second board and
MESDAQ) and category (consumer, industrial, etc.).

The Syariah Advisory Council of the SC applies a standard criterion in focusing on the activities of the
companies listed on Bursa Malaysia. As such, subject to certain conditions, companies whose activities are
not contrary to Syariah principles will be classified as compliant securities. On the other hand, companies
will be classified as non-compliant securities if they are involved in the following core activities:

• Financial services based on riba (interest)

• Gambling
• Manufacture or sale of non-halal products or related products
• Conventional insurance
• Entertainment activities that are non-permissible according to the Syariah
• Manufacture or sale of tobacco-based products or related products
• Stockbroking or share trading in Syariah-non compliant securities
• Other activities deemed non-permissible according to the Syariah.

The Syariah Advisory Council of the SC also takes into account the level of contribution of interest income
received by the company from conventional fixed deposits or other interest-bearing financial instruments.
In addition, dividends received from investments in Syariah-non compliant securities are also considered in
the analysis carried out by the Syariah Advisory Council of the SC.

For companies with activities comprising both permissible and non-permissible elements, the Syariah Advisory
Council of the SC considers two additional criteria:

(1) The public perception or image of the company must be good

(2) The core activities of the company are important and considered maslahah (“benefit” in general) to the
Muslim ummah (nation) and the country, and the non-permissible element is very small and involves
matters such as umum balwa (common plight and difficult to avoid), uruf (custom) and the rights of
the non-Muslim community, which are accepted by Islam.

6-13
To determine the tolerable level of mixed contributions from permissible and non-permissible activities towards
turnover and profit before tax of a company, the Syariah Advisory Council of the SC has established several
benchmarks based on ijtihad (reasoning from the source of Syariah by qualified Syariah scholars). If the
contributions from non-permissible activities exceed the benchmark, the securities of the company will be
classified as Syariah-non compliant.

Compliant securities include ordinary shares, warrants and transferable subscription rights (TSR). This
means that warrants and TSR are classified as compliant securities from the Syariah perspective, provided
the underlying shares are also compliant. On the other hand, loan stocks and bonds are non-compliant
securities unless they are issued based on Syariah principles.

❙ SECTION 6.11 PROCEDURES FOR DISPOSAL OF

SYARIAH-NON COMPLIANT SECURITIES
As a guide to investors, the Syariah Advisory Council of the SC advises investors on the timing for the
disposal of securities that have been classified as Syariah-non compliant.

6.11.1 “COMPLIANT SECURITIES” WHICH ARE SUBSEQUENTLY CONSIDERED “NON-COMPLIANT”

This refers to those securities earlier classified as compliant securities but due to certain reasons, such as
changes in the companies’ operations, are subsequently considered non-compliant. In this regard, if the
value of the securities held exceeds the original investment cost, investors who hold such non-compliant
securities must liquidate them.

Any capital gains arising from the disposal of the non-compliant securities made at the time of the
announcement can be kept by the investors. However, any excess capital gains derived from the disposal
after the announcement day at a market price that is higher than the closing price on the announcement
day should be channelled to charitable bodies.

On the other hand, investors are allowed to hold their investments in the non-compliant securities if the
market price of the said securities is below the original investment cost. It is also permissible for investors
to keep the dividends received during the holding period until such time when the total amount of dividends
received and the market value of the non-compliant securities held equal the original investment cost. At
this stage, they are advised to dispose of their holding.

In addition, during the holding period, investors are allowed to subscribe to:

(1) any issue of new securities by a company whose non-compliant securities are held by investors, for
example, rights issues, bonus issues, special issues and warrants [excluding securities whose nature
is non-compliant, e.g. irredeemable convertible unsecured loan stock (ICULS)]; and

(2) securities of other companies offered by the company whose non-compliant securities are held by
the investors;

on condition that they expedite the disposal of the non-compliant securities. For securities of other companies
[as stated in (2) above], they must be Syariah-compliant securities.

6-14
6.11.2 NON-COMPLIANT SECURITIES

The Syariah Advisory Council of the SC advises investors who invest based on Syariah principles to dispose
of any non-compliant securities that they currently hold, within a month of knowing the status of the securities.
Any gain made in the form of capital gain or dividend received during or after the disposal of the securities has
to be channelled to charitable bodies. The investor has a right to retain only the original investment cost.

*Note: Original investment cost may include brokerage cost or other related transaction cost.

❙ SECTION 6.12 SUMMARY

Islamic finance in Malaysia began to develop with the establishment of Bank Islam Malaysia Berhad. Its
growth is also attributable to the growing awareness and demand for Islamic financial products. Today, the
Islamic financial market operates side-by-side with the conventional financial market, providing investors
with Syariah-compliant investment avenues. The continued development of the Islamic capital market is a
key thrust in the Capital Market Masterplan.

A Syariah-based UTS is similar to a conventional UTS in its investment objective, except that its portfolio
of securities and other assets must comply with Syariah requirements. A regulatory framework is in place
to monitor Syariah-based UTSs, which must appoint a Syariah Committee / Syariah Adviser approved by
the SC.

The Syariah Advisory Council of the SC undertakes the classification of the Syariah status of securities traded
on Bursa Malaysia and/or any other markets considered as eligible markets according to certain criteria. It
publishes a booklet on the list of compliant securities on a six-monthly basis.

6-15
SELF-TEST QUESTIONS ON CHAPTER 6

1. List the differences between a conventional UTS and a Syariah-based UTS.

2. What are the composition and function of the Syariah Committee?

3. How are Syariah-based UTSs operated and managed?

4. Describe the four types of Syariah contracts that are used in Syariah-based funds.

5. Name some of the investment instruments that comply with Syariah requirements.

6. Briefly explain the term ‘Syariah specific risk’ or ‘Syariah non-compliance risk’.

7. In managing Syariah-based funds, what are the documents or items that would have to comply with
Syariah requirements?

8. What are some of the companies’ activities that will result in its securities being classified as ‘Syariah
non-compliant’ by the Syariah Advisory Council?

9. What criteria does the Syariah Advisory Council use to classify securities of companies that undertake
activities comprising both permissible and non-permissible elements?

10. When was the first Syariah-based UTS introduced in Malaysia and what was its name?

6-16
APPENDIX 1:
SYARIAH ADVISER’S REPORT

To the Unitholders of ______________________________ (Name of fund)

We, _______________________________ (Name of Syariah Adviser), have acted as the Syariah Adviser
of __________________________________ (Name of fund). Our responsibility is to ensure that the
procedures and processes employed by ______________________________________ (Name of Unit
Trust Company) and that the provisions of the Deed dated _________________ (Date) are in accordance
with Syariah principles.

In our opinion, ______________________________________ (Name of Unit Trust Company) has managed

and administered __________________________________ (Name of fund) in accordance with Syariah
principles and complied with applicable guidelines, rulings or decisions issued by the Securities Commission
pertaining to Syariah matters for the period ended ________________ (Date).

For ___________________________ (Name of Syariah Adviser)

(Name of the Designated Person Responsible for the Fund)

(Designation)

Kuala Lumpur
Date:

6-17
CHAPTER 7

GLOSSARY
ACTIVE PORTFOLIO MANAGEMENT
The management of funds where the investment manager chooses to buy and sell investments actively
based on changes in the potential returns. Opposite of Passive Portfolio Management.

ANNUAL MANAGEMENT FEE

A fee, calculated and accrued daily, based on the Gross Net Asset Value of the Fund paid by the trustee
from the assets of a UTS to the UTMC for ongoing management of the UTS. The Gross Net Asset Value
takes into account fees earned by (but not paid to) the UTMC up to the previous day. Annual management
fees reduce the income of a UTS [see also Net Asset Value (NAV)].

ANNUAL GROWTH RATE

Total return for a UTS over a year, or over a number of years, and averaged out to give an annual figure
(usually as an annual compound rate of return).

APPLICATION FORM
Document accompanying a prospectus (or sometimes incorporated within a prospectus) of a UTS, which
is completed by an investor prior to being forwarded to the UTMC with the investor’s application money.
The application form, which contains the personal and other data necessary to record the investor as a
unitholder in the register of unitholders of the UTS, is signed by the investor evidencing agreement to be
bound by the terms of the deed.

APPLICATION MONEY
The amount that an investor wishes to invest in units in a UTS. After dividing the application money by the
selling price of a unit in the UTS, an allotment of the number of units to which the investor has become entitled
can be made by the UTMC and an entry to this effect made in the register of unitholders of the UTS.

ASSET ALLOCATION
The practice of spreading a portfolio of investments across a range of investment assets (i.e. asset classes),
e.g. cash, bonds (or fixed income securities), equities and real property, to reduce the level of risk to match
the risk tolerance of the investor.

ASSET CLASS
A group of securities or other investment assets, e.g. equities, real property, cash or even artworks and
antiques.

ASSETS OF A UTS
Investments, amounts receivable (e.g. debtors for securities sold, amounts due from a UTMC for unit
creations), dividends receivable, accrued income and cash.

AUDIT
An examination of the records and operations of a UTS by an independent person (an auditor) to assess
compliance with accounting and regulatory requirements (including those contained within the deed of the
UTS).

AUDITOR
Independent person or an approved audit firm appointed by the trustee of a UTS to complete an audit of the
UTS and to report its findings to unitholders.

7-1
AUTHORISATION CARD
Identification document held by a UTC. Evidence that the holder has met, and continues to meet, his or her
obligations as set out by securities laws, the SC and FIMM, and is authorised to distribute units in a UTS.

AUTHORISED INVESTMENT
An investment of a UTS that meets the restrictions on investment imposed under the terms of the deed. A
trustee will refuse to settle the purchase of an investment that is not an authorised investment.

AUTOMATIC REINVESTMENT
Distributions from a UTS may, at the election of the unitholder, be automatically reinvested in additional units
in the UTS by the UTMC. The UTMC may reduce the initial service charge payable by an investor on the
units acquired as a result of making such an election.

BAI DAYN
Buying and selling in the secondary market of debt certificates, securities, trade documents and papers that
conform to the Syariah. The trade documents are issued by debtors to creditors as evidence of indebtedness.
Only documents evidencing real debts arising from bona fide merchant transactions can be traded.

BEAR
A bear market is one where the general trend of the stock market keeps on falling and there are more sellers
than buyers and hence the prices of investments are falling. Opposite of Bull.

BLUE CHIPS
A generic description given to large and well-capitalised companies whose shares are listed on a stock
exchange.

BOND
Debt security issued as evidence of a loan by the bondholder to the bond issuer. A bond issuer may be a
government, government authority or corporation. The bondholder is entitled to repayment of the amount
of the loan at some future time plus interest payable during the period of the loan.

BULL
A bull market is one where the general trend of the stock market is rising rapidly and there are more buyers
than sellers and hence the prices of investments are rising. Opposite of Bear.

CANCELLATION OF UNITS
A cancellation (or liquidation) of units represents a decrease in the number of units in circulation of a UTS. A
unit is cancelled by the trustee at the request of the UTMC and the trustee pays an amount from the assets
of the UTS to the UTMC. The amount payable reflects the NAV of a unit, thereby maintaining the NAV of all
units in circulation following the act of cancellation.

CASH
Money market instruments (i.e. loans) repayable at short notice, e.g. bankers acceptances, call deposits
(or equivalent Islamic products for Syariah-based UTS). In a UTS, notes and coins do not generally form
part of the assets of the UTS.

CERTIFICATE
After the purchase of units in a UTS, a unitholder may receive a certificate (or scrip). This is evidence of
ownership. The certificate will show the number of units the unitholder holds in the UTS and will be signed by
the trustee and the UTMC. Now commonly replaced by statements of units held in a UTS printed on request.
Units of a UTS for which certificates are not issued are sometimes referred to as non-certificated units.

CHARGES

7-2
Various fees and costs are paid by unitholders in a UTS as a result of buying and holding units. These include
initial service charges, annual management fees and exit fees.

CLOSED-END FUND
A UTS (or other collective investment vehicle) that does not offer a regular opportunity to attract investors
through the issue of new interests in the UTS. An existing investor in a closed-end fund is usually required
to sell his or her interests through a secondary market. Commonly associated with a UTS that invests in
illiquid assets such as real property. The number of units in circulation of a closed-end fund is fixed at launch
and sold over a short period. Opposite of Open-End Fund.

CLOSED TRUST
A UTS that has a limited number of units available. After those units are sold (which may take several years),
the UTS is ‘closed’ and only units repurchased by a UTMC can be sold on to new investors.

COLLECTIVE INVESTMENT
A generic term for pooled investment products, such as a UTS, where a professional fund manager manages
the investments on behalf of the investors, who are entitled to a share of the total return generated in
proportion to the amount each contributed (usually measured in the form of units).

COMMISSION
Amount payable by a UTMC to UTC for selling units in a UTS to clients and calculated as a percentage
of the application amount (known as initial commission); or for continuing to provide service to clients who
remain as unitholders in the UTS and calculated as a percentage of the value of the unitholder’s units paid
at regular intervals (known as a trail commission).

COMPLIANCE
A series of procedures and practices designed to ensure that both external laws and regulations applicable
to an entity (such as a UTMC, trustee, UTS) and its internal rules are complied with.

COMPLIANCE MANUAL
A UTMC must maintain a Compliance Manual setting out how the UTMC will ensure compliance with its
obligations.

COMPLIANCE UNIT
Group of individuals (headed by a Senior Compliance Officer reporting to the Board of Directors of a
UTMC) responsible for compliance by a UTMC with all the obligations imposed by the deed, securities laws,
Guidelines, Compliance Manual, etc.

COOLING-OFF RIGHT
The requirement imposed by the SC on a UTMC to offer a unitholder in a UTS the opportunity to reconsider,
in not fewer than six business days of the date of purchase, his or her purchase of units in the UTS and
receive a refund as per the Guidelines on Unit Trust Funds.

COVENANTS
Conditions under the deed of a UTS pledged by the parties, particularly the UTMC and trustee, either to
each other or to the unitholders, e.g. a UTMC is required to repurchase the units of a unitholder on request
of the unitholder.

CREATION OF UNITS
A creation of units represents an increase in the number of units in circulation of a UTS. A unit is created in
exchange for cash payable by the UTMC to the trustee for the account of the UTS. The amount payable reflects
the NAV of a unit, thereby maintaining the NAV of all units in circulation following the act of creation.

CUM DISTRIBUTION

7-3
The selling price of a unit in a UTS is cum distribution when it includes an entitlement to the next declared
distribution. Opposite of Ex Distribution.

CUSTODIAN
Usually the trustee (or a trustee-appointed bank or other financial institution responsible to the trustee), who
has custody or safekeeping of securities and other assets of a UTS. Term is sometimes used interchangeably
with ‘trustee’. A custodian has, however, fewer fiduciary responsibilities than a trustee.

DEALINGS
The term used to describe the purchase and sale of units in a UTS by an investor through the UTMC of the
UTS. Most unit trusts can be dealt daily, i.e. each business day.

DEED
The legal document executed between the trustee of a UTS and the UTMC, which lays down the framework
within which all the parties, including the unitholders, must operate. It specifies in detail how the UTS is to
operate and be managed and how fees are to be charged. The investor agrees to be a party to the deed by
completing and signing an application form for units in the UTS

DERIVATIVES
A financial instrument with characteristics and value that are dependent on the underlying investment products
- e.g. commodity, bond, equity or currency. Examples include futures and options.

DISTRIBUTIONS
Payments made to unitholders out of the accounting income of a UTS. Distributions are paid with an income
tax credit reflecting tax payable on the income of the UTS. A unitholder can offset the credit against his or
her tax liability or, if no tax liability exists, can reclaim the tax paid. A tax voucher issued to each unitholder
by the UTMC contains the required information. At the investor’s request, the distribution can be paid or
reinvested in additional units in the UTS (see Automatic Reinvestment).

DISTRIBUTION DATE
The date when a distribution is paid to (or reinvested on behalf of) a unitholder in a UTS. This date is usually
several weeks after the distribution has been announced. Most UTS pay distributions once a year.

DISTRIBUTION WARRANT
Document provided to a unitholder who is entitled to a distribution from a UTS. Sets out the unitholder’s
details, the number of units, the income entitlement, details of each part of the total distribution, and the
amount paid or reinvested in additional units in the UTS.

DIVERSIFICATION
A UTS will spread its assets among a number of investments (or asset classes) in order to reduce portfolio
risk. Thus, the impact of losses incurred on some investments is expected to be offset by gains on those
increasing in value. One of the major benefits of investment in a UTS.

DOLLAR COST AVERAGING

An investment strategy whereby an investor invests the same amount of application money each period in
a UTS, such that when unit selling prices are high fewer units are bought, and when unit selling prices are
low more units are bought. By investing in such a way, the investor avoids placing all his or her funds in the
market at either the top or the bottom of the market cycle, thereby reducing risk.

EXIT FEE
A fee charged by a UTMC to an investor in a UTS who sells his or her units in the UTS. Also called a
redemption fee, repurchase charge or back-end load. The amount payable is usually a percentage of the
NAV per unit from the sale of units, which is deducted from the proceeds prior to payment to the investor.

7-4
EQUALISATION
The part (in ringgit) of a creation or cancellation of units in a UTS by a UTMC, which is represented by the
accumulated net income of the UTS in the accounting period to the date of the creation or cancellation
(and which is included within the NAV of a unit on that date). The total of such equalisation amounts over
an accounting period is added to the accumulated income of the UTS and may be returned to unitholders
as a (non-taxable) refund of capital as part of the next distribution. The objective of separately accounting
for equalisation on creation and cancellation of units in a UTS is to ensure that the distribution of income
returned to unitholders (sen per unit) is not diluted (reduced) by increases or decreases in the number of
units in circulation during the accounting period to which the distribution relates.

EQUITY TRUST
A UTS that predominantly invests in equities or shares. There are various types of equity trust classified
according to the category of equities in which each invests, e.g. growth, income, international, small cap,
etc.

EX DISTRIBUTION
Unit selling price of a UTS is quoted ‘ex distribution’ following the last day (record date) on which entitlement
to a declared distribution of a UTS is available to investors. An investor buying units during the ex distribution
period (which ends on the payment date) is not entitled to the distribution subsequently paid. An investor
whose units are repurchased during that period is, however, entitled to receive that distribution.

FIDUCIARY RESPONSIBILITIES
Obligations to act in the best interests of another person or persons. A fiduciary must, for example, avoid
any conflict of interest situation and should not make a ‘secret’ profit from his or her position. A UTMC and
trustee of a UTS have fiduciary responsibilities to the holders of units in a UTS.

FORWARD PRICING
Method by which the price of units in a UTS (calculated from NAV determined at a specific valuation point)
is applied by the UTMC to an investor’s application money to calculate the number of units allotted or to
determine the proceeds from the investor’s sale of units. Under forward pricing, the price applied to an
application for units or a repurchase of units is that determined at the next valuation point following receipt
of the application form or repurchase request. Forward pricing is the SC’s preferred method for applying
unit prices to dealings in units. Opposite of Historic Pricing.

FORWARD RATE AGREEMENT

A contract for the loan at some future time of a sum of money at an agreed rate of interest for a specified
period. A hedge instrument used by a UTS to protect against future movements in interest rates.

FUND MANAGER
An organisation or individual (or group of individuals) responsible for the investment management of the
assets of a UTS. A UTMC may internalise its funds management by appointing its own staff to act as fund
manager, utilise the services of a fund manager within another part of the corporate group of which it forms
part, or appoint an external fund manager operating independently of the UTMC.

FUTURES
Financial contracts (or derivatives) that give the holder the obligation to buy or sell a certain commodity or
financial instrument at a fixed price at a specified date in the future. A UTS may invest in futures contracts
(within strict guidelines imposed by the SC) for hedging purposes only.

GEARING
A method of acquiring units in a UTS with borrowed money. The lender usually takes security for the loan
against the units acquired. The borrower (i.e. the investor) expects to earn a total return from the units
acquired that is in excess of the cost of borrowing. Gearing considerably increases the investor’s risk.

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GROWTH FUND
A UTS which expects to pay a very low annual distribution (if any) and concentrates on investing with a view
to increasing the price of the units by focusing on growth assets such as shares and real property.

GUIDELINES
Document that provides UTMC with the SC’s interpretation of securities laws. Also a method by which the
SC communicates its other requirements of UTMC. The FIMM adopts this term to communicate its rules
and requirements of members (see Practice Note).

HEDGING
Term used to describe investment transactions taken by a UTMC to protect an existing portfolio of a UTS
against adverse fluctuations in the prices of those investments. Fund managers can choose between various
methods including futures, options and forward rate agreements.

HISTORIC PRICING
Method by which the price of units in a UTS (calculated from NAV determined at a specific valuation point)
is applied by the UTMC to an investor’s application money to calculate the number of units allotted or to
determine the proceeds from the investor’s sale of units. Under historic pricing, the price applied to an
application for units or a repurchase of units is that determined at the last (most recent) valuation point prior
to receipt of the application form or repurchase request. Historic pricing is not the SC’s preferred method
for applying unit prices to dealings in units and can only be used when variations to NAV are within SC-
determined limits. Opposite of Forward Pricing.

IJARAH
A sale or purchase of the use of another person’s property. The ownership of the property remains with the
lessor while the lessee only owns the right of the use of the property.

INCOME ENTITLEMENT
Amount of income of a UTS for an accounting period from which the directors of the UTMC of the UTS
decide (with the approval of the trustee) the amount of the distribution that is to be payable to, and divided
equitably amongst, unitholders in the UTS. The income entitlement of each unitholder in a UTS is determined
in accordance with the deed. Most commonly, a distribution amount (in sen per unit) is applied to the number
of units each unitholder holds on the record date. Alternatively, a unitholder’s income entitlement may be
determined on a unit day entitlement basis. Other methodologies of determining a unitholder’s income
entitlement may be described within a deed of a UTS. The difference between the amount of income of a
UTS and the distribution to unitholders is carried forward to future years.

INCOME OF A UTS
Amount of dividends, interest, rents, realised net capital gains, etc derived from the assets of a UTS, less
expenses included within the Management Expense Ratio and taxation, and plus equalisation that is available
for distribution to unitholders in a UTS.

INCOME FUND
A UTS whose main aim is to produce income rather than capital growth for unitholders. The UTS would invest
in assets, such as shares that pay a high dividend and fixed income investments. Income funds expect to
pay a high level of regular distributions to investors.

INDEX FUND
A passively managed UTS that attempts to capture the returns of a stock exchange index comprising shares
(or bonds) by holding shares (or bonds) in the same composition as that of the index. This allows the total
return of the UTS to closely track the performance (total return) of the index.

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INITIAL OFFER PRICE
This is normally associated with the launch of a UTS. When a UTMC decides to launch a UTS, it normally
sets aside about three weeks as the initial offer or selling period. During this period, it will sell units at a
fixed price, usually at an initial offer price of RM1.00 per unit. Following the close of the initial offer period,
the selling price of units may fluctuate in line with the NAV of the UTS.

INITIAL SERVICE CHARGE

A sales charge or entry fee levied by a UTMC on the initial purchase of a UTS. The charge is sometimes
called a ‘load’, ‘front end load’, sales or entry charge. The charge can be expressed either as a fixed amount
or calculated as a percentage of the NAV of a unit.

INSIDER TRADING
The practice of buying or selling securities as a result of knowledge acquired by the purchaser or seller
(usually as a result of the purchaser’s or seller’s privileged position as someone working within or inside an
organisation) that is not yet available to public investors.

INSTITUTIONAL INVESTOR
An organisation (such as a UTMC, insurance company, pension or provident fund, or a fund manager who
invests on behalf of such investors) that invests either its own assets or the assets of others (which are
usually held on trust).

INVESTMENT
An asset held purely for the purpose of generating income and/or capital growth.

INVESTMENT COMMITTEE
Group of individuals (minimum of three) whose role is to formulate, implement and monitor investment
management policies of a UTS in accordance with the objectives of the UTS and in compliance with the
deed, securities laws, Guidelines, regulations and internal rules, and to ensure that the investments are
properly managed. A UTS must appoint an Investment Committee of which at least one-third of the members
must be independent of the UTMC.

LIABILITIES OF A UTS
Amounts payable (e.g. creditors for securities purchased, amounts due to the UTMC for cancellations of
units, taxation), accrued expenses (e.g. UTMC and trustee fees, audit fees).

LIQUIDITY
The amount of a UTS’ assets that is not invested. Liquidity is also referred to as ‘cash’ or ‘cash available
for investment’.

LUMP SUM INVESTMENT

A one-off receipt of application money for investment into a UTS (see Regular Savings Plan).

MANAGEMENT EXPENSE RATIO (MER)

The sum of the expenses charged to, or paid by, a UTS during an accounting period (excluding certain costs
such as brokerage on acquisitions and disposals of investments, and taxation), divided by the average NAV
of the UTS during that period. Usually expressed as a percentage. The MER is a summary of the ongoing
expenses incurred by a UTS, which act as a drag on the investment performance of the UTS. Calculated by
the UTMC, usually each year in arrears, and disclosed to investors in a prospectus for the UTS.

MANAGER’S STOCK
Units in a UTS held by a UTMC. The manager’s stock of units may originate from a previous creation of units
not yet sold, or from repurchases of units awaiting sale or cancellation. Sales of units to investors reduce
the manager’s stock. Excess manager’s stock may be cancelled. Whilst owning units, a UTMC is entitled to
all the benefits of a unitholder, including holding gains and losses as unit prices fluctuate. The SC imposes
limits on the quantum of manager’s stock at any point.

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MASTER PROSPECTUS
A single prospectus containing an invitation to investors to acquire units in more than one UTS.

MONEY MARKET FUND

A UTS in which assets are held entirely as cash (i.e. money market instruments with a maturity of less than
12 months). Objective of the UTS is to offer investors access to higher rates of interest usually available in the
institutional money market compared to those obtainable from retail banks and similar financial institutions.
Also known as a ‘cash management trust’ or ‘money fund’.

MUDHARABAH
An agreement between a provider of funds who provides 100% capital for the financing and an entrepreneur
who manages the business applying his expertise. Profit is to be shared between them according to an
agreed ratio, while loss is to be borne solely by the provider of the capital.

MUSHARAKAH
An agreement between two or more parties whereby all parties contribute capital either in the form of cash or
kind to form a company to carry on commercial activities. The profit is shared based on equity participation
or as agreed between the parties; loss is shared according to equity participation.

MUTUAL FUND
A collective investment vehicle commonly found in the United States. Similar to a UTS but usually structured
as an open-end investment company.

NET ASSET VALUE (NAV)

The value of the underlying investments held in the portfolio of a UTS (based on quoted last sale or mid-
market prices), together with other assets, less liabilities. When divided by the number of units in circulation,
the result is the NAV of the UTS per unit (quoted in ringgit). It is the starting point in the determination of
unit selling and repurchase prices.

OFFSHORE FUND
A collective investment vehicle operated outside the jurisdiction of the Malaysian authorities.

OPEN-END FUND
A UTS (or other collective investment vehicle) that offers regular (often daily) opportunities to invest through
the issue of interests in the fund. An investor is normally required to apply on the basis of a prospectus,
which must meet regulatory requirements, issued by the promoter of the fund. An investor is able to sell
back his or her interests in the fund to or through the promoter and hence, the fund invests predominantly
in assets that are traded on secondary markets or which are otherwise readily liquid. The number of units
in circulation of an open-end fund is not fixed. Opposite of Closed-End Fund.

OPTION
A financial contract (or derivative) that gives the holder the right but not the obligation to buy (i.e. receive) or
sell (i.e. deliver) a certain commodity or financial instrument at a fixed price at a specified date in the future.
An amount paid for an option that is not exercised is lost. Exchange Traded Options are options over listed
equities, which are usually bought and sold on an exchange prior to the expiry date to close an existing position
(rather than be exercised). A UTS may invest in options (within strict guidelines imposed by the SC).

PASSIVE PORTFOLIO MANAGEMENT

The management of funds where the investment manager buys and sells investments comprising an index
without regard to their potential, and with a view to achieving total returns equal to that of an index. Generally,
the investment manager makes no judgement on the merits or otherwise of individual investments held in
the portfolio. Opposite to active portfolio management.

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PORTFOLIO
A holding of various investments structured in such a way as to meet the owner’s (for example, a UTS)
investment objectives, e.g. by asset class or by investment sector within an asset class.

PORTFOLIO TURNOVER RATIO

The result derived from adding total purchases of investments to total sales of investments in a UTS for a
period and dividing by two, and further dividing the quotient by the average value of the UTS for that period.
A Portfolio Turnover Ratio of one means that 100% of the portfolio of the UTS has been turned over or ‘sold’
that period. A measure designed to indicate the relative degree to which a UTS is aggressively managed
or traded.

PRACTICE NOTE
Document issued by the SC clarifying and/or amending its previously issued Guidelines.

PROPERTY TRUST
A UTS that invests in real property. Various types of property trust exist, usually classified (especially
overseas) according to the categories of property in which each invests (eg. commercial, retail). However,
many do invest more generally, i.e. in several categories. A property trust is usually listed, since the illiquidity
and non-divisibility of real property makes it otherwise difficult for unitholders to sell units to the UTMC prior
to cancellation with the trustee and the release of UTS assets. In the United States, referred to as a Real
Estate Investment Trust (REIT).

PROSPECTUS
The legal document (lodged and approved by the SC) that describes the investment objectives, risks,
investment limitations, policies, services and fees of a UTS. It must be made available to all investors who
wish to invest in UTS and must comply with the securities laws and the SC’s Guidelines prior to issue. Issued
by a UTMC whose directors take sole responsibility for its content. Has a life of no more than 12 months
from the date of issue.

REAL PROPERTY
Land and buildings held by a property trust for the benefit of unitholders. Returns generally include rent (net
of expenses) and capital appreciation as the value of the land and buildings grows or as development of
the land and buildings occurs.

REGULAR SAVINGS PLAN

A periodical payment (usually monthly or per pay period) of application money for investment into a UTS.
Usually payments are made by direct debit, standing order, or by payroll deduction to the UTMC for investment
on the applicant’s behalf (see Lump Sum Investment).

REPURCHASE PRICE
The unit price at which a UTMC buys back units in a UTS from a unitholder who wishes to sell his or her
units. Sometimes referred to as the ‘bid price’ or ‘buying price’.

RETAIL INVESTORS
Individuals who invest their savings either directly in the financial markets, or indirectly through collective
investments such as a UTS. Retail investors are the major target market for most UTMC. The major
advantages of indirect investment are the ability to spread risk across a range of investments or asset classes
and the professional management of those investments at a reasonable cost, given the smaller investment
amounts contributed by retail investors.

RIBA
In lending, it is the extra payment imposed by the lender or promised by the borrower over and above the
loan. In trading, it is mostly the difference in weight in the exchange of gold of different measures of purity,
e.g. 10gm of 750 gold with the 8gm of 835 gold; or the difference in time between payment and delivery in
foreign currency exchange, e.g. payment of RM10,000 at 10.00am and delivery of USD3,800 at 3.00pm on
the same date.

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RISK
The volatility of an investment, or the probability that the investment will lose value. A UTS investing in bonds
(where the regular interest receipts and capital return at maturity are more predictable) is likely to be less
volatile than a UTS investing in equities (where the dividends and ultimate value on disposal are considerably
less predictable). The probability of an investor losing all or part of his or her investment when investing in
an equity UTS is therefore likely to be greater than when investing in a bond UTS. By contrast, a fixed term
deposit with a major bank is an investment with no capital volatility and low repayment risk, and therefore
is an investment with negligible risk.

RISK TOLERANCE
The ability of an investor to accept the risk of loss, either temporarily or permanently (i.e. total loss), of his
or her investment capital. The risk tolerance of an investor depends on a number of factors, including the
period of time for which the investment can be retained before disposal.

SELF-REGULATION
A system used in regulating capital markets where the government regulator (e.g. the SC) delegates some
of its duties and powers (e.g. to discipline) in relation to a section of the capital market to an organisation
(e.g. an industry body), which is permitted to regulate itself (at least partly).

SELLING PRICE
The price at which units in a UTS are sold to the public by the UTMC. It should be the NAV per unit of the
UTS and sometimes referred to as the ‘offer price’ or ‘sell price’.

SPLIT
Division of a single unit of a UTS into several units, the total value of which is exactly equal to the value of
the unit prior to the split. A unit valued at RM2 would become two units of RM1 each following a 2 for 1 split.
The objective of a split is to make the selling price of a unit more attractive to potential investors; a lower
selling price following the split means an investor would be allotted a greater number of units in the UTS
for a given amount of application money. A split does not increase or decrease the NAV of the UTS or the
value of unitholders’ interests in the UTS.

SUPPLEMENTARY PROSPECTUS
Addition to a current prospectus required by law to be issued by the directors of a UTMC to ensure that the
original prospectus continues to be compliant with the law. Changes during the life of a prospectus may
have the effect of making the prospectus misleading to potential investors and therefore non-compliant with
the law. A supplementary prospectus must accompany the original prospectus but cannot extend the life of
the original prospectus.

SUSPENSION
A period of time during which the trustee, with approval of the SC, determines that it is not in the interests of
investors to allow investments of a UTS to be sold, e.g. where those investments cannot be liquidated or sold
at an appropriate price or on adequate terms, and therefore unit prices cannot be calculated. No creations,
cancellations, sales or repurchases of units are allowed during such a period. Suspensions are rare but could
occur, for example, during periods when stock markets in which a UTS invests are temporarily closed.

SYARIAH
Fiqh or Islamic Law comprising the whole body of rulings pertaining to human conduct derived from the
rulings’ respective particular evidences. The respective particular evidences are the sources of the Syariah,
the primary sources being the Quran, Sunnah, ijma and qiyas, and the secondary sources being the method
of reasoning applied by Muslim jurists in their ijtihad (personal reasoning).

SYARIAH COMMITTEE
Group of individuals (minimum of three) who ensure that a UTS is managed and administered in accordance
with Syariah principles. A UTS managed in accordance with Syariah principles must appoint a Syariah
Committee. These individuals must be approved by the SC before they can be appointed.

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SUKUK (ISLAMIC BOND)
Plural of sok, it is being used in the singular to refer to a document or certificate evidencing an undivided
pro-rate ownership of an underlying asset. It is a capital market financial instrument traded in the secondary
market.

SWITCH
A repurchase of units in a UTS by a UTMC at the request of a unitholder and the immediate reinvestment of
the repurchase proceeds as application money into a different UTS managed by the same UTMC. Depending
on the type of funds, a UTMC may reduce or increase the initial service charge in relation to an application
that is part of a switch.

TAKAFUL
An Islamic insurance protection plan based on Syariah principles. A person becomes a participant by
undertaking a contract of tabarru’ and paying a participative contribution (tabarru’) to a common takaful
fund, whereby he allows his contributions to be used to help other participants whenever they suffer defined
losses. The commercial contracts of Mudharabah and Wakalah are incorporated into tabarru’ contracts to
increase the size of the takaful fund.

TIED-AGENT
A tied-agent is a UTC who distributes units in one or more UTS managed by a single UTMC, and who is paid
commission by the UTMC. The tied agent is obligated to the UTMC (the tied-agent’s principal).

TOTAL RETURN
The return accruing to a unitholder in a UTS from distribution entitlements (if any) plus or minus the difference
between the price per unit paid for units (selling price) and the price obtainable on selling units (repurchase
price) during the period of ownership. As a better indicator of investment performance of a UTS (e.g. for
comparison with a benchmark), it is common to exclude any entry fee paid by an investor by taking the buy
price on both the date of purchase and the date of sale.

TRANSACTION COST FACTOR

An amount added to the NAV of a unit in a UTS to prevent dilution of the interests of the existing unitholders in
the UTS. Incoming investors will otherwise benefit from the brokerage and other transaction costs previously
incurred by a UTS (and therefore by existing unitholders) in acquiring the portfolio of investments forming
part of the NAV of the UTS. Sometimes referred to as an ‘expense allowance’.

TRUSTEE
An organisation (such as a subsidiary of a bank or other financial institution) approved by the SC to act on
behalf of unitholders in a UTS. The role of the trustee is to ensure that the UTMC adheres to the conditions
laid down in the deed (and securities laws and regulations) and to protect unitholders’ interests. The trustee
holds the assets of a UTS in its own name or under its control through a custodian.

UNIT
A single interest in a UTS. Each unit in a UTS is equivalent to any other unit (especially in value) and has
the same rights and entitlements, e.g. to vote and to share in the income and capital of the UTS. In many
respects, but not all, similar to a share in a limited liability company.

UNIT DAY
Period of ownership by a unitholder of a single unit in a UTS. 100 units held for 10 days represents 1000
unit days.

UNIT DAY ENTITLEMENT

Method of determining distribution entitlements of unitholders of some UTS (particularly one with an income
objective). Each unitholder in the UTS receives a distribution for an accounting period reflecting not only the
number of units held but also the number of days during the accounting period for which those units were
owned. Alternative to distribution entitlement based on the number of units held on a record date.

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UNITHOLDER
Investor in a UTS and owner of interests in the UTS. The number of units held represents the extent of
an investor’s interest in the UTS. In some, but not all respects, similar to a shareholder of a limited liability
company.

UNITS IN CIRCULATION
The total number of units in a UTS at a point in time. The SC approves the maximum number of units in a
UTS that a UTMC may have in circulation. As the number of units issued to investors in the UTS approaches
the maximum, the UTMC may apply to the SC for an increase in the maximum. Method by which the SC
monitors the growth of the industry and, more significantly, UTMC with a view to protecting investors from
the effects of unbridled expansion beyond the capacity and capabilities of a UTMC.

UNIT TRUST
Type of collective investment vehicle established under a deed. The preferred structure of investors,
particularly retail investors, in Malaysia for the benefits of pooled investment.

UNLISTED TRUST
A UTS, the units of which are not listed on a recognised market. An investor may buy units in an unlisted
UTS through a UTC or directly from the UTMC or IUTA. The UTMC sells units in a UTS to, and repurchases
units from, investors as principal.

VALUATION
The market or assessed value of an investment held by a UTS used to determine the NAV of the UTS.
The market value of an investment is usually obtained from an external pricing service that obtains actual
prices at which trades have been transacted on a market such as Bursa Malaysia. The assessed value of
an investment is a ‘fair’ value as determined by a skilled valuation specialist such as a real estate valuer,
fixed interest dealer or, less commonly, by the auditor of a UTS.

VALUATION POINT
The point in time at which the NAV of a UTS is determined by reference to market prices and from which
the selling price and repurchase price of a UTS are calculated.

WADIAH YAD DHAMANAH

Goods or deposits that have been deposited with another person, who is not the owner, for safekeeping. As
wadiah is a trust, the depository becomes the guarantor and therefore guarantees repayment of the whole
amount of the deposits, or any part thereof, outstanding in the account of depositors when demanded. The
depositors are not entitled to any of the profits but the depository may provide returns to the depositors as
a token of appreciation.

WAKALAH
A contract of appointment as an agent where a person appoints another as his agent to act on his behalf

YIELD
The current yield of a UTS is the amount of the most recent distribution for an accounting period of 12
months generated by the UTS (in sen per unit) divided by the selling price of a unit in the UTS. It is usually
quoted gross (i.e. before the investor is subject to income tax on the distribution). The distribution amount
used in the calculation is after all fees included in the MER have been deducted from the gross income of
the UTS (see also Total Return).

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