Unit trust

A unit trust is an arrangement under which many investors pool their money with a trustee, who holds and invests it for them under a registered trust deed. Each investor owns units, representing a share of the whole fund, and the value of a unit rises and falls with the value of the fund’s investments. The Capital Market Act 2015 calls the same thing a managed investment scheme, and uses that term throughout.

Papua New Guinea has had unit trusts since the 1990s, but the law governing them was rewritten in 2015. The Capital Market Act, in operation since 15 December 2017, regulates the schemes themselves, the trustees and fund managers who run them, the prospectuses that offer units and the markets on which units may be listed. The Securities Commission Act 2015, overhauled by a 2023 amendment, establishes the Securities Commission of Papua New Guinea as the regulator. Together they replaced the Securities Act 1997.

Who regulates them

The Securities Commission of Papua New Guinea is the primary regulator. It licenses trustees, registers schemes and trust deeds, approves prospectuses, investigates misconduct and can revoke a licence. Other bodies touch unit trusts at the edges: the Bank of Papua New Guinea supervises banks and superannuation funds, PNGX Markets Ltd sets the listing rules for units quoted on the exchange, the Registrar of Companies receives copies of deeds and prospectuses, and the Internal Revenue Commission taxes the trustee.

Registration is compulsory, and the penalty is severe

Section 184 makes it an offence to establish or operate a scheme unless it is approved and registered by the Commission and run by a licensed trustee appointed by its members. Section 187 sets out when registration becomes compulsory: once a scheme has more than 20 members, whenever it is promoted by someone in the business of promoting schemes, or when the Commission groups closely related small schemes together.

Operating an unregistered scheme carries a fine of up to K10 million or ten years’ imprisonment, or both. That penalty level recurs throughout the Act — for unlicensed dealing, for offering units without a prospectus and for insider trading — and is the clearest signal of how the 2015 reforms were meant to be taken.

The trust deed

Section 210 requires the deed to make adequate provision for five things: the price to be paid for an interest in the scheme, the trustee’s powers to invest and deal with scheme property, how members’ complaints are dealt with, winding up, and the specific nature of the scheme.

Three points catch people out. Any right of the trustee to fees or an indemnity, any power to borrow, and any right of members to withdraw must be written into the deed — if they are not in the deed, they do not exist. The Commission may specify further requirements. And the deed is legally enforceable between the members and the trustee, so it is the first document to read in any dispute.

Who may be trustee, and what the trustee owes

Only a corporation holding a capital market licence authorising it to operate a managed investment scheme may be the trustee of a registered scheme. An individual cannot, and neither can an unlicensed company. The licence is granted under Part III, lasts 12 months at a time, and depends on the company, its directors and its chief executive being fit and proper. The same rule applies to an interim trustee.

The custody rules are strict. The trustee must hold all scheme property on trust for the members, clearly identified and separate from its own property, and must bank scheme money into a dedicated trust account no later than the next bank business day after receiving it. Money in that account may be paid only to the person entitled or as the law authorises; it cannot be taken by the trustee’s creditors, and it cannot be held by a fund manager or other outsourced provider. Sections 191, 193 and 194 set these rules and back them with fines of up to K10 million.

The trustee and the fund manager are different roles, and keeping them distinct matters: the trustee holds the assets and owes the duties, while a manager runs the investment strategy under contract. Unit holders may remove a trustee, an interim trustee may be appointed, and the Act deals with what happens to contracts and liabilities when the trustee changes.

Investing, pricing and getting your money out

The most practical distinction in the Act is between a liquid and a non-liquid scheme, because it decides whether you can redeem on demand. A registered scheme is liquid if liquid assets make up at least 80 per cent of the value of the scheme property. Section 257 treats cash at bank, bank-accepted bills, marketable securities and prescribed property as liquid unless the trustee cannot reasonably expect to sell them within the deed’s withdrawal period, and treats any other asset as liquid if it can be realised at market value within that period.

In a liquid scheme, unit holders redeem according to the deed. In a non-liquid scheme, they can only get out through a formal withdrawal offer made by the trustee. Fees must be authorised by the deed; distributions are taxed; and a unit holder’s units pass on death under the deed and the general law of succession.

Offering units to the public

A prospectus is required whenever units are offered to the public. Section 128 forbids anyone from issuing, offering or inviting applications for securities, including units, unless a prospectus has been registered by the Commission and complies with the Act. Application forms must travel with a registered prospectus, and no forms may be circulated for a scheme that has not yet been formed. Breach carries a fine of up to K10 million or ten years’ imprisonment. Only the excluded offers listed in Schedule 6 escape the rule.

Beyond the content requirements, the Act provides for supplementary and replacement prospectuses, restricts advertising of an offer, imposes liability for false or misleading statements with defined defences, allows the Commission to issue a stop order, and restricts cold calling.

Licensing

Anyone who carries on a business in a regulated activity, or holds themselves out as doing so, must hold a capital market licence or be a registered person. The regulated activities are dealing in securities, trading in derivatives, fund management, advising on corporate finance, investment advice and financial planning. Operating without a licence is an offence under section 34, again punishable by a fine of up to K10 million or ten years’ imprisonment, or both.

Licensed firms are subject to continuing obligations: fit and proper directors and chief executives, client money rules, conduct rules for dealers and advisers, and audit and record-keeping requirements. A licence may be revoked or suspended, and licensing decisions may be appealed.

What the Commission can do

The Commission has every power “reasonably necessary or expedient” to carry out its functions (Securities Commission Act 2015, section 38). That includes making rules, guidelines, directives and class orders, setting fees, exempting anyone from any provision of the securities Acts, directing banks to freeze accounts and hand over records, stating a case for the National Court, and making cooperation agreements with foreign regulators. The Capital Market Act adds guideline-making, schedule-amending, exemption, surveillance and systemic-risk powers.

Its enforcement toolkit runs from investigation, examination under oath and search powers, through formal inquiries and administrative penalties, to applications to the National Court. Its decisions can be challenged.

Market misconduct

The Act prohibits market manipulation, false statements about securities, and insider trading — buying or selling securities, or tipping someone else to do so, while holding material information about a listed issuer that is not generally available to the market. Section 307 defines who is an “information insider”, prohibits trading and tipping, and sets a penalty of up to K10 million or ten years’ imprisonment, or both; sections 308 to 315 fill out the key terms and extend the rules to companies and partnerships. Investors may recover losses caused by market misconduct, directors may be personally liable for a company’s securities offences, and some offences may be compounded.

Winding up

A registered scheme is wound up when the deed requires it, when unit holders pass a special resolution directing the trustee to wind it up, when the trustee decides the scheme’s purpose has been accomplished or cannot be accomplished and no members’ meeting is called within 28 days, or when the National Court so orders. The trustee realises the scheme property, pays the debts and distributes the balance under the deed, after which the Commission deregisters the scheme. There are rules for unclaimed money and for reinstating a deregistered scheme.

What the courts have said

Most of the PNG case law on managed funds comes from the long-running litigation over the Pacific Balance Fund. In Nasfund v Pacific Equities (2006) a single judge of the Supreme Court lifted a National Court injunction so far as it stopped unit holders from meeting to vote on removing the fund’s manager: the trust deed, not the court, gave unit holders the right to decide the manager’s future, and a manager who keeps the accounts owes unit holders a positive duty of disclosure. Later decisions in Pacific Equities v Melanesian Trustee Services (2007), ANZ v Melanesian Trustee Services (2019) and Melanesian Trustee Services v Securities Commission (2023) continue that story.

Separately, Oil Search v Tongayu (2021) concerned who lawfully held office as Chairman of the Securities Commission. Anis J held that a National Court stay order had kept the incumbent in office, that a purported appointment of an Acting Chairman was invalid because there was no vacancy, and that section 115 of the Securities Commission Act 2015 is a good-faith immunity rather than a time bar — so the approvals and exemptions granted for Oil Search’s capital raising stood.