Strengthening the Regulatory Framework for Unit Trusts: Measures To Enhance Protection For Unit Trust Investors

Kuala Lumpur, 31 January 1997

Recognising the importance of having unit trusts to promote savings and contribute to the development of the capital markets, the Deputy Prime Minister and Minister of Finance announced several measures to spur the growth of the industry in June 1995. To streamline the regulatory environment for unit trusts, the Government had declared that a single regulatory authority would be responsible for the industry. Thus, consequent to amendments made to the Companies Act 1965 in relation to unit trust schemes, and the subsequent coming-into-force of the Securities Commission (Unit Trust Scheme) Regulations 1996 on 30 August 1996, the Securities Commission ("SC") is now the central regulatory authority for the unit trust industry in Malaysia.

Several changes have been made and are being proposed for the unit trust regulatory framework, in line with the SC's move towards disclosure-based regulation. Key in such a disclosure-based regime is the preparation of adequate and relevant information, as well as the proper dissemination of such information to investors. Therefore, to enhance the protection afforded to unit trust investors, the SC is pleased to announce the following measures to strengthen the regulatory framework for unit trusts:-

  1. Greater emphasis is to be placed on the content quality of unit trust prospectuses, in particular on the need for enhanced disclosures;
  2. The streamlining of the regulation of advertisements and promotional materials for unit trust products; and
  3. The establishment of a regulatory framework for the marketing and distribution of unit trust products.

I. Emphasis on Quality of Prospectuses
The recently-issued Securities Commission (Unit Trust Scheme) Regulations 1996 incorporate enhanced disclosure standards which would ensure higher quality of information disclosed in unit trust prospectuses. In particular, Regulation 9 stipulates that a unit trust prospectus "shall contain all such information as investors and their advisers would reasonably require, and reasonably expect to find, in the prospectus or for the purpose of making an informed assessment of [the unit trust scheme]". Further, Regulation 10 makes it incumbent on management companies to ensure that the prospectus is appropriately updated by requiring the issue of a supplementary prospectus should (among others) a new matter arise or should there be a significant change in a matter disclosed in the earlier prospectus.
The regulations seek to provide sufficient protection to investors by way of establishing demanding standards of relevant disclosure. The structure and content of current prospectuses have changed compared with prospectuses issued before the regulations were released - the insertion of new requirements for a section on key data and other specified information, and the exclusion of certain statutory information which was mandatory previously, have made the prospectus more "user-friendly" now than it was before. It is now up to the investors to take advantage of the improved prospectuses to evaluate for themselves the suitability of a particular unit trust investment.

II.Regulation of Advertisements and Promotional Materials for Unit Trust Products
The Securities Commission (Unit Trust Scheme) Regulations 1996 require that the advertisements and promotional materials for unit trust products must first be cleared by the SC before release. In this regard, the SC has issued guidelines ("Guidelines on Unit Trust Advertisements and Promotional Materials" contained in the Notice to Unit Trust Management Companies SC/UT-7/96) to govern the process. The guidelines detail the requirements that need to be complied with before any advertisement and/or promotional material is approved. Once approved, advertisements and promotional materials must carry a clearance code given by the SC and this code, which begins with the letters "SC/PM", must be prominently featured in the advertisement and/or promotional material.
The aim of the regulations and guidelines is to ensure that unit trust advertisements and promotional materials are as honest, fair, balanced and accurate as possible, so that investors may make informed investment decisions and not be misled or deceived into investing in an unsuitable scheme. Investors are therefore advised to check on the veracity of promotional materials before relying on their representations.

III. Establishment of Regulatory Framework for the Marketing and Distribution of Unit Trust Products
The regulatory framework for the marketing and distribution of unit trust products, which seeks to ensure the appropriate dissemination of information, has been put in place following wide-ranging consultations with the industry, in particular the Federation of Malaysian Unit Trust Managers ("FMUTM"), and other relevant regulatory authorities.

The framework is aimed at ensuring that persons involved in the marketing and distribution of unit trust products are suitably qualified and observe proper sales practices. Through guidelines released and a requirement for registration, the SC hopes to enhance the integrity and professionalism of unit trust marketing persons, promote the ethical and responsible distribution of unit trust products, and increase the understanding and knowledge of marketing persons in unit trusts and other pertinent issues.

Further, in a bid to encourage front-line regulation in the industry, the implementation and administration of these guidelines will be undertaken by an industry body, the FMUTM. The SC has approved a grant of RM1 million to assist the FMUTM in the initial stages of the exercise, after which the FMUTM is expected to attain self-sufficiency in carrying out its duties.

In summary, the new regulatory framework for the marketing and distribution of unit trust products will involve the following:-

  • The issue of a set of guidelines (viz., "Guidelines on Marketing and Distribution of Unit Trusts" contained in the Notice to Unit Trust Management Companies SC/UT-8/97) effective 31 January 1997. The Guidelines will be effective for all persons who market and/or distribute unit trust products, i.e. persons who "deal in unit trusts";
  • All persons wishing to market and distribute unit trust products will need to be registered with the FMUTM. The FMUTM will provide a registration number and authorisation to the person concerned to enable that person to market and distribute unit trust products. Registration with the FMUTM is renewable yearly on payment of a fee and fulfillment of relevant continuing requirements; and
  • The FMUTM will have certain duties and responsibilities in implementing and administering the marketing guidelines, including the task of looking into minor complaints against registered persons (however, overall responsibility for discipline and other matters will rest with the SC).

The Marketing Guidelines
The Guidelines on Marketing and Distribution of Unit Trusts consist of three parts:-

  1. Minimum Standards for Registration of Persons Dealing in Unit Trusts;
  2. Code of Ethics and Standards of Professional Conduct; and
  3. Agency Structure and Size.

Minimum Standards for Registration
The Minimum Standards lay down the requirements to be fulfilled by a person before he can be registered with the FMUTM to market and distribute unit trust products, including age (minimum twenty-one (21) years of age), educational background (minimum Grade 3 Sijil Pelajaran Malaysia (SPM), or equivalent) and personal and financial background (of good character and good repute). Of particular importance is the requirement of passing the Pre-Registration Examination. This pre-requisite would go towards ensuring that the person concerned is conversant with the product that he is marketing, including its characteristics and the risks and returns inherent in an investment.

Code of Ethics and Standards of Professional Conduct
The Code of Ethics and Standards of Professional Conduct form the minimum standards of conduct expected of registered persons and will be a guide to ascertaining whether a registered person acts in a manner which continues to satisfy the Minimum Standards for Registration. The Code and Standards are intended to support unit trust management companies in their efforts to uphold proper standards, but do not restrict the companies from formulating more comprehensive rules to maintain and promote ethical and professional conduct should they so desire.

Agency Structure and Size
The Agency Structure and Size seeks to regulate the number of tiers that a management company may have in its agency force and the number of 'downlines' (subordinates) a supervisor may have to ensure there is proper control and accountability of agents to their superiors.

Implementation of Regulatory Framework
Implementation of the regulatory framework for the marketing and distribution of unit trust products will be effected in two stages. The first stage is effective on 31 January 1997. The first stage will see the release of the Guidelines on Marketing and Distribution of Unit Trusts and all marketing persons requiring provisional registration with the FMUTM before being permitted to market or distribute unit trust products. Provisional registration will allow registered persons to market unit trust products pending the Pre-Registration Examinations to be conducted by the FMUTM. The FMUTM will conduct the Pre-Registration Examinations gradually, with the first examination expected in the second half of 1997.

The full registration regime will take effect on 1 July 1998. Full registration will require compliance with all provisions of the Guidelines, including the Pre-Registration Examination requirement. In other words, after the said date, all persons (including those with provisional registration) will need to pass the Pre-Registration Examinations before being fully registered with the FMUTM. From 1 July 1998 onwards, only those with full registration will be authorised to market or distribute unit trust products.

The above measures have been instituted to strengthen the framework for the regulation of unit trusts in the country, to ensure better protection for investors.

The SC hopes that the general investing public will know their rights when approached by persons marketing and distributing unit trust products. Investors should always ensure that the marketing person is properly registered with the FMUTM and should ask for proof of identification in the form of Authorisation Card issued by the FMUTM. In addition, investors should read and understand the contents of the prospectus of the fund being offered, and only give credence to advertisements and promotional materials that have been endorsed by the SC, evidenced by the display of a SC clearance code reference. The SC wishes to remind investors that there are no guarantees for success in unit trust investing, and, as such, there is no substitute for informed decision-making in considering whether or not to invest in a unit trust fund.


Issued by the Corporate Affairs Unit. For further information, please contact Izelan Basar (03-2507511), Nafizah Omar (03-2507550) or Karen De Cruz (03-2597164).
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