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CIS 7.10 The manager and the trustee

Duties of the manager and trustee under the general law

CIS 7.10.1R
  1. (1)

    The duties of the manager and the trustee imposed on them by the rules in this sourcebook and by the trust deed are in addition to, and not in derogation from, the duties which are otherwise imposed on them by law.

  2. (2)

    The manager and the trustee are required to fulfil those other duties by this rule (CIS 7.10.1 R) as well as by the general law.

  3. (3)

    The manager and the trustee have, as a result of this rule (CIS 7.10.1 R), all the powers conferred on them by the general law.

  4. (4)

    Paragraphs (1), (2) and (3) apply only in so far as the duties imposed or powers conferred by the general law are not qualified or restricted by the rules in this sourcebook and by the trust deed.

Dealings in scheme property

CIS 7.10.2R
  1. (1)

    The manager may give instructions as to the acquisition or disposal of property for the account of the AUT. The authority of the trustee to give those instructions is not required except in the case of the acquisition or disposal of immovable property.

  2. (2)

    Where the trustee is of the opinion that a particular acquisition or disposal of property for the account of the AUT by the manager exceeds the powers conferred on the manager by the rules in this sourcebook (and in particular CIS 5 or CIS 5A), the trustee may require the manager to cancel the transaction or make a corresponding acquisition or disposal to secure restoration of the previous situation and to meet any resulting loss or expense.1

  3. (3)

    Where the trustee is of the opinion that:

    1. (a)

      an acquisition of property by the manager necessarily involves documents evidencing title being kept in the custody of a person other than the trustee; and

    2. (b)

      the trustee cannot reasonably be expected to accept the responsibility which would otherwise be placed upon it if it were to permit custody by such a person;

    the manager must (for the account of the AUT) cancel the transaction or make a corresponding disposal if the trustee so requests.

Duties of the manager and trustee: investment and borrowing powers

CIS 7.10.3R
  1. (1)

    The manager must take all reasonable steps and exercise all due diligence to avoid the scheme property being used or invested contrary to any provision in CIS 5 or CIS 5A (Investment and borrowing powers), except to the extent permitted by (6)(c).1

  2. (2)

    The trustee must take all reasonable steps and exercise due diligence to monitor the management of the scheme property sufficiently to ensure that the manager complies with (1).

  3. (3)

    The manager must, immediately upon becoming aware of any breach of any provision in CIS 5 or CIS 5A, take action, at its own expense, to rectify that breach, unless the breach occurred as a result of a circumstance of one of the types described in (5) and (6).1

  4. (4)

    When this paragraph (4) applies, as a result of (5) or (6), the manager must take the steps necessary to ensure a restoration of compliance with CIS 5 or CIS 5A as soon as is reasonably practicable having regard to the interests of the Unitholders and, in any event, within the period specified in (8) or, when applicable, (9).1

  5. (5)

    Paragraph (4) applies:

    1. (a)

      where the scheme property is used or invested at any time contrary to any provision of CIS 5 or CIS 5A (other than a provision excusing a failure to comply on a temporary basis); and 1

    2. (b)

      the reason for the contravention is beyond the control of both the manager and trustee.

  6. (6)
    1. (a)

      Paragraph (4) applies to a transaction ("subsequent transaction") deriving from a right (such as the right to convert stock or subscribe to a rights issue) attributable to an investment ("original investment") of the AUT if:

      1. (i)

        the subsequent transaction, but for this ruleCIS 7.10.3 R, would constitute a breach of CIS 5 or CIS 5A; and1

      2. (ii)

        at the time of the acquisition of the original investment, it was reasonable for the manager, on the assumption that any right attached to the original investment when it was acquired would be exercised, to expect that a breach would not be caused by the subsequent transaction.

    2. (b)

      In this paragraph (6) reference to the exercise of a right includes the taking effect of a right without any action by or on behalf of the trustee or the manager.

    3. (c)

      Nothing in CIS 5 or CIS 5A prevents the manager from entering into a transaction of the type described in (a) provided that it has obtained the prior written consent of the trustee.1

  7. (7)

    Immediately upon the trustee becoming aware of any circumstance described in (5) or any breach resulting from the exercise of, or receipt of a benefit from, a right in the circumstance described in (6), it must take the steps necessary to ensure that the manager complies with (4).

  8. (8)

    The maximum period for restoration of compliance under (4) starts at the date of discovery of the relevant circumstance and lasts, subject to any extension under (9):

    1. (a)

      except where (b), (c) or (d) applies, for six months;

    2. (b)

      where the transaction in question was a transaction in derivatives or a forward transaction under CIS 5A.6 (Futures and options schemes) or CIS 5A.7 (Geared futures and options schemes) or CIS 5, until the close of business five business days later;1

    3. (c)

      where the transaction in question was entered into under CIS 5A.13 (Efficient portfolio management), until the close of business five business days later; and1

    4. (d)

      where the AUT is a property scheme and the property in question is an immovable, for two years.

  9. (9)

    The period specified at (8)(b) and (c) (five business days) is extended:

    1. (a)

      if the transaction involved a delivery of a commodity, from five to 20 business days;

    2. (b)

      if the reason for the contravention in (5) is the inability of the manager to close out a transaction because of a limit in the number or value of transactions imposed by an eligible derivatives market, until five business days after:

      1. (i)

        the inability resulting from any such limit is removed; or

      2. (ii)

        it becomes, to the knowledge of the manager, reasonably practicable and reasonably prudent for the transaction to be closed out in some other way.

Delegation

CIS 7.10.4R
  1. (1)

    The manager may delegate any function to any person, including the trustee, provided that:

    1. (a)

      a mandate in relation to managing investments of the scheme property is not given to:

      1. (i)

        the trustee;

      2. (ii)

        any other person whose interests may conflict with those of the manager or the holders; or

      3. (iii)

        any other person who is not authorised or registered for managing investments and is not subject to prudential supervision (unless there is agreement in place between the FSA and the overseas regulator of the delegate ensuring adequate co-operation);

    2. (b)

      the manager ensures that at all times it may monitor effectively the relevant activities of any person so retained; and

    3. (c)

      the mandate permits the manager to:

      1. (i)

        give further instructions to the person so retained;

      2. (ii)

        withdraw the mandate with immediate effect when this is in the interests of the holders;

    4. (d)

      the mandate does not prevent effective supervision of the manager and must not prevent the manager from acting, or the scheme from being managed, in the best interest of the holders.1

  2. (2)

    The trustee must not delegate:

    1. (a)

      to the manager:

      1. (i)

        any function of oversight in respect of the manager; or

      2. (ii)

        any function of custody or control of the scheme property; or

    2. (b)

      to an associate of the manager, any function in (a)(i).

  3. (3)

    The trustee must not delegate to anyone the function of being a custodian of documents evidencing title to scheme property unless the arrangements with the custodian prevent the custodian from releasing the documents into the possession of a third party without the consent of the trustee.

  4. (4)

    Subject to (2) and (3), the trustee may delegate any function to any person including the manager.

  5. (5)

    Where delegation occurs under (1) the responsibility which the manager had in respect of such delegated services prior to that delegation will remain unaffected.2

  6. (6)

    Where delegation occurs under (4):

    1. (a)

      if the trustee delegates any function to the manager or to an associate of its own or of the manager, the trustee's liability in respect of the function remains unaffected; and

    2. (b)

      in any other case the trustee will not be held responsible by virtue of the rules in CIS for any act or omission of the delegate if it can show:

      1. (i)

        that it was reasonable for a delegate to be employed for the function in question;

      2. (ii)

        that the delegate was and remained competent to undertake the function in question; and

      3. (iii)

        that it had taken reasonable care to ensure that the function in question was undertaken by the agent in a competent manner.2

Delegation and responsibility for regulatory obligations

CIS 7.10.5G
  1. (1)

    SYSC 3.2 contains guidance relating to delegation, including external delegation, and SYSC 3.2.4 G (1) states that a firm cannot contract out of its regulatory obligations, but this does not affect CIS 7.10.4 R(6).

  2. (2)

    SUP 15.8.6 Rrequires an ACD of a UCITS scheme to inform the FSA where one of its duties is delegated to another person.2

Conflict of interests

CIS 7.10.6R
  1. (1)

    The manager and the trustee must respectively take all reasonable steps to ensure that a transaction within any of (a) to (f) is not entered into:

    1. (a)

      the placing of cash forming part of the scheme property or standing to the credit of the distribution account in any current, deposit or loan account with an affected person unless the affected person is an eligible institution or an approved bank and the arms length requirement in (2) is satisfied;1

    2. (b)

      the lending of money by an affected person to, or for the account of, the AUT unless the affected person is an eligible institution or an approved bank, and the arm's length requirement in (2) is satisfied;1

    3. (c)

      the sale of, or dealing in, property to, or with, the trustee for the account of the AUT unless (3) applies and, for the purpose of this paragraph (c), a sale includes any lease or other transaction under which movable or immovable scheme property is made available by the trustee;

    4. (d)

      the vesting of property (other than cash) by an affected person in the trustee against the issue of units in the AUT, unless upon a unitisation or unless (3) applies;

    5. (e)

      the purchase of scheme property by an affected person from the trustee, acting for the account of the AUT, unless either CIS 4.5.4 R or CIS 15.5.4 R (In specie cancellation) or (3) applies. For the purpose of this paragraph (6), a purchase includes any lease or other transaction under which movable or immovable scheme property is made available by the AUT.

    6. (f)

      transactions within CIS 5A.14 (Stock lending) or CIS 5.4 in relation to the AUT unless the arm's length requirement in (2) is satisfied.1

  2. (2)

    The arm's length requirement is that the arrangements are at least as favourable to the AUT as would be those of any comparable arrangement effected on normal commercial terms negotiated at arm's length between the affected person and an independent party.

  3. (3)

    There is no breach of (1)(c), (d) or (e) if (4) (Best execution on exchange) or (5) (Independent valuation) or (6) (Arm's length transaction) applies.

  4. (4)

    There is best execution on-exchange for the purposes of (3) if:

    1. (a)

      the property is an approved security or an approved derivative;

    2. (b)

      the transaction is effected under the rules of the relevant exchange with or through a user who is bound by those rules;

    3. (c)

      there is evidence in writing of the effecting of the transaction and of its terms; and

    4. (d)

      the manager has taken all reasonable steps to effect the transaction or to ensure that it is effected on the terms which are the best available for the AUT.

  5. (5)

    There is independent valuation for the purposes of (3) if:

    1. (a)

      the value of the property is certified in writing for the purpose of the transaction by a person selected or approved by the trustee as:

      1. (i)

        independent of any affected person; and

      2. (ii)

        qualified to value property of the relevant kind; and

    2. (b)

      the trustee is of the opinion that the terms of the transaction are not likely to result in any material prejudice to Unitholders.

  6. (6)

    There is an arm's length transaction for the purposes of (3) if:

    1. (a)

      paragraph (4)(a) is not satisfied; and

    2. (b)

      it is not reasonably practicable to obtain an independent valuation under (5); and

    3. (c)

      the trustee has reliable evidence that the transaction is or will be on terms which satisfy the arm's length requirement in (2).

  7. (7)

    Paragraphs (1)(a) to (f) are subject to any provision in the trust deed forbidding the taking of advantage of all or any of them.