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More protection for UITF investors

(Article published in the Jan 16, 2008 issue of Manila Standard Today)  

In its last meeting for 2007, the Monetary Board on 27 December issued Resolution No. 1499 that amended the rules applicable to Unit Investment Trust Funds (UITFs).  Altogether, the amendments align our bank collective investment regulatory regime with best practice now followed internationally; they give UTIF investors more protection in terms of fuller disclosures, more focused marketing, express limitations on permissible expenses of the funds, and, most important, client suitability tests.

 Upon effectivity of Circular No. 593, issued last January 8, the Declaration of Trust constituting the plan and the Participating Trust Agreement which the client signs must contain additional provisions.  For instance, the product or brand name by which a UITF plan is to be known must state what kind of fund it is.  Like the name of a corporation which must contain some general indication of its line of activity, the title of a UITF must state whether the fund is, for example, a money market fund, a bond fund, an equity fund, or a balance of fund and equity fund.  Right at the very beginning, the client is given an idea of where trustee bank intends to place his or her money.

 Furthermore, the plan rules must state both the general risks as well as the risks specific to the fund.  Thus, all money market funds must state the possibility that the debts that will be their assets face the risk of not being collected at all, or, if collected, and on time.  If that money market fund is to be invested in commercial papers issued by private enterprises, the plan of such fund must, in addition, state that promissory notes and other debt instruments of private enterprises issuing them are more exposed to the likelihood of default than treasury bills and notes of the Philippine government. By fiction of law, the government is said to be capable of paying its debts all the time.  A sample risk disclosure statement is annexed to the circular.



 The client is further empowered to verify for himself whether or not he, at contribution, is paying the right amount and at  withdrawal, being paid the correct value for his units. The previous rule simply requires the contribution or redemption to be based on “prevailing market value of the underlying assets of the fund.”  What is “prevailing” is often difficult to ascertain. For instance, the prices of the underlying assets of a stock market fund, however, fluctuate during the trading day and hence there is a possibility that a client may be charged the value when the stocks are high and paid the value when the stocks are low, both within the same day.  In effect, the clients takes the word of the trustee bank without ability to check.

 Henceforth, admissions and redemptions to a fund are to be based on only one time, i.e. the end of day Net Asset Value Per Unit of such fund computed after the cut-off time for fund participation and redemption for that reference day.  The valuation, of course, is to follow existing mark-to-market rules of the BSP on investments in securities. 

 Finally, the participating trust agreement in a clear and prominent statement adjacent to where a client is required to sign must state that (a) the fund is a trust product and not a deposit account or an obligation of, or guaranteed, or insured by the trustee bank; (b) its is not insured or governed by the Philippine Deposit Insurance Corporation (PDIC); (c) by the very nature of what an “investment” is,  yields are not guaranteed; (d) losses and income arising from market fluctuations and price volatility of the securities held by the fund, even if invested in government securities, are for the account of the client/participant; (e) there is a distinct possibility that the units of participation of the investor, when redeemed, will be worth more or be worth less than his/her initial investment/contributions;  (f) historical performance of the fund, when presented, is purely for reference purposes and is not a guarantee of similar future result; and (g) the trustee is not liable for losses of the fund unless upon willful default, bad faith or gross negligence.

 These caveats are, of course, not new; they are standard fare to trust practitioners.  However, under the previous regulations,  most were required to be stated only in the marketing materials.  Under the new rules, they are to be stated in the basic contractual documents and repeated to the investor in the investment disclosures which the regulations require to be available to him on a quarterly basis.

The BSP obviously wants to investor to invest in a UITF with his eyes very wide open and the risks staring him in the face. In fact, marketing materials are required to contain an advisory that the investor must read the complete details of the fund in the Plan rules, make his/her own risk assessment, and when necessary, he/she must seek independent/professional opinion, before making an investment.

 But, by far the most significant portion of Circular No. 593 is the insistence that the trustee bank do for every client, prior to admitting the client’s funds a client suitability assessment profile.  Imposing on the trust industry a similar obligation that securities regulation imposes on brokers and dealers of securities, trust banks operating UITFs must conduct with the client a suitability assessment exercise to profile the risk-return orientation and suitability of the client to the specific investment characteristics of the fund.

 The exercise is intended to guide the client in choosing investment outlets that are best suited to his objectives, risk tolerance, preferences and experience.  At the minimum, the trustee must  (a) obtain client information through a Client Suitability Assessment (CSA) Form that elicits the client’s, at the very least, personal or institutional data, investment objectives, investment horizon, investment experience, and risk tolerance; (b) classify the client according to his financial sophistication and (c) communicate the CSA results to the subject client.

 The end result of the process should be a shared conclusion on the part of client, and, more specially, the trustee bank that based on relevant information about the client, the investment profile of the client matches the investment parameters of the fund.  Only when both client and trustee bank are convinced of the fit may the trustee bank accept the initial contribution of a client in a UITF.

 The trustee bank is also required to adopt a notice mechanism whereby clients are advised and/or reminded of the explicit requirement to notify the trustee or its UITF marketing personnel of any change in their characteristics, preferences or circumstances to enable the trustee to update client’s profile at least every three (3) years.  Presumably, on the basis of such updated profile, the client would be advised, by the trustee, whether to hold his units, or increase his participation, shift to other funds, or even dispose of them, if the fund no longer suits the client.

 This gesture of caring is what in “UITF” makes the “T” more dominant than the “F”.  The bank operating a UITF is first and foremost a trustee of its clients and not just a fee-based keeper of their collective money nor a executor, on commission, of their instructions.