The Cayman Islands unit trust continues to be the vehicle of choice for funds aimed at the Japanese market, primarily for tax and regulatory reasons. In the following, I will consider some of the commonly asked questions that clients and professionals alike have in relation to unit trust structures.
The following note is necessarily general in nature and specific legal advice should always be sought on particular transactions.
Does the trustee need to be a Cayman Islands licensed trust company?
In most cases the trustee of a unit trust is not required to be a Cayman Islands licensed trust company. The relatively rare exception is in respect of unit trusts which hold a mutual fund licence and in such cases the trustee must be a trust company licensed under the Bank and Trust Companies law (2007 revision).
Do I need to be concerned about the Retail Mutual Funds (Japan) Regulations (2007 Revision) (“Regulations”) if I am only targeting institutional investors in Japan?
The short answer is no. The regulations apply to retail mutual funds, defined as being mutual funds which are licensed pursuant to section 4(1)(a) of the Mutual funds law whose units have been or are intended to be offered to the public in Japan.
Are there any differences between a sub fund and a series trust?
The term “sub fund” is generally used to refer to a separate portfolio within one unit trust. However, the term, “sub fund” is not a term of art and it is often used interchangeably with the term “series trust””.
In a standard unit trust structure, all the assets of the unit trust are available to satisfy the debts and liabilities of the trustee in its capacity as the trustee of the trust. However, clients generally require the unit trust to contain separate portfolios or sub funds within the unit trust so that an investor subscribing for, say, Class A units will be beneficially entitled only to assets in the portfolio or sub fund referable to the Class A units.
In order to give effect to the concept of sub funds, the trust deed or the declaration of trust will as a matter of contract seek to “ring fence” the liabilities of each of the sub funds by the use of limited recourse language so once the assets of a sub fund are exhausted then the assets of another sub fund cannot be used to discharge the outstanding liabilities. This approach to limiting the liability of each sub fund to the assets of that sub fund is of course only contractually binding on the contracting parties, third parties will rarely agree to be similarly bound. so while the trustee and the unitholders are bound by the terms of the trust, a third party creditor will generally have recourse to all the trust property irrespective of its classification.
The term “series trust” is generally used to describe each separate trust within an “umbrella” unit trust platform.
While a trust is not as a matter of law a separate legal entity, each series trust within the platform is regarded as distinct from the other and once the assets of one series trust are exhausted the assets of the remaining series trust or series trusts cannot generally be used to discharge any outstanding indebtedness unless there is specific agreement to the contrary.
The series trust structure is therefore a straightforward way of segregating the assets and liabilities of different portfolios.
Will the Financial Instruments and Exchange Law of Japan (the “FIEL”) have an impact on the popularity of Cayman Islands unit trusts?
The FIEL took effect on 30 September 2007 as an amendment to the existing securities and Exchange law of Japan and related laws. All marketing and placement activities for units in offshore unit trusts must now be made within the new framework of the FIEL and therefore Japanese counsel should be consulted to ensure compliance with the FIEL.
We understand that the relevant licensing and oversight requirements imposed by the Japanese regulators for units in offshore unit trusts are now more onerous than for interests in offshore limited partnership. It remains to be seen therefore whether this will have any impact on the popularity of Cayman Islands unit trusts with Japanese investors.
Walkers are a Cayman Islands law firm and all issues in relation to the fIEl must be referred to Japanese counsel.
Carol V. Hall
Partner
WALKERS
Suite 1609-1610, Chater House
8 Connaught Road, Central
Hong Kong
Tel: 852 2596 3317 (Direct) / 852 2284 4566 (Main)
Fax: 852 2284 4560