Government gazette gives teeth to new Unit Trust Code

By Dinali Goonewardene

A Government gazette was passed recently giving teeth to a Unit Trust Code with retrospective effect from 12 September. The rules have been formulated by the Securities and Exchange Commission (SEC) under the SEC Act of 1987 and the code is applicable to unit trusts including exchange traded funds.

The new 2011 Code rescinds the previous version which was gazetted in 2004.

The 2011 code directs that unit trusts must be managed by a managing company according to the explanatory memorandum of the managing company and directives issued by the SEC from time to time. The managing company may be required to maintain a minimum net capital and shall obtain prior approval where units of such unit trusts are proposed to be listed.



Whenever the total investment made by the managing company, exceeds any limit permitted by the provisions of this code or trust deed or the directives issued by the commission, the managing company shall immediately inform the commission of such excess amount together with the reasons and inform of the steps that will be taken to reduce such investment to the limits as specified. However, this excludes any breach of limits due to market fluctuations.

Unless permitted by the commission, a managing company shall not make investments in commodities, futures and options, investments in real estate, other than investment in real estate investment companies or companies that have real estate investment activities and investments for the purpose of gaining management control of a company in which the unit trust has purchased share capital.

Investment in unlisted securities or foreign securities and investment in any asset, which involves the assumption of unlimited liability, are also not permitted. Leverage by borrowing against securities or buying on margin except in relation to securities with fixed and determinable future maturity date and the percentage of such leverage will be determined with the approval of the commission and stated in the trust deed provided that the maximum gearing a unit trust may have  outstanding, does not exceed 15 per cent of the deposited property or such other percentage as the commission may from time to time determine; and other investments that may be designated by the commission as not to be undertaken by a managing company.

Issue and redemption prices shall be calculated daily on the basis of the unit trust’s net asset value and divided by the number of units outstanding. Such prices may be adjusted by fees and charges made to the managing company. Where the commission permits the unit trust to purchase securities, which are not listed on a licensed stock exchange, the valuation of such securities shall be determined on a regular basis by the managing company.

An issue price which a managing company quotes or publishes, shall be the maximum price payable on purchase of units inclusive of any front end fees and the redemption price shall be the minimum net price after exit fees if any, receivable upon redemption of units. There shall be no further charges to be paid by the unit holder, apart from stamp duty or other taxes.

The latest available offer and redemption prices of a unit trust shall be published, in at least one leading Sri Lankan daily newspaper or on the web site of the managing company. If the net asset value of a unit trust is published it may be stated that this price excludes the front-end fee or exit fee if any.

The managing company shall be responsible for keeping the unit trust’s accounts and preparing and publishing the unit trust’s reports. Not less than two reports shall be published in respect of each financial year. The trustee shall, appoint an auditor for the unit trust with the approval of the commission. The commission may however withdraw its approval at any time. Any person who contravenes the provisions of this code or any directives issued by the commission, shall unless exempted be guilty of an offence under the Securities and Exchange Commission of Sri Lanka Act, No. 36 of 1987.