This Bill is a Seanad Bill which has been amended by the Dáil. In accordance, therefore, with Standing Order No. 75 it is deemed to have passed its First, Second and Third Stages in the Seanad and is placed on the Order Paper for Report Stage. On the question that the Bill be received for final consideration, the Minister may explain the purport of the amendments made by the Dáil and this is looked upon as the report of the Dáil amendments to the Seanad. The only matters, therefore, that may be discussed are the amendments made by the Dáil.
Unit Trusts Bill, 1970 [Seanad Bill Amended by Dáil]: Report and Final Stages.
Question proposed: "That the Bill be received for final consideration."
Senators will no doubt remember the thorough going examination which the Unit Trusts Bill, 1970, received in this House last year. Since then, the Bill has had a smooth passage through the Dáil, mainly because of the searching examination it had received in the Seanad. The amendments made in the Dáil make no essential change in the Bill, and many of them are just drafting or consequential changes. I shall give now the reasons for the changes of substance.
A new section 9 has been introduced, the effect of which is to prevent a unit trust scheme from investing in another scheme of collective investment. This is in line with European thinking on the subject as expressed at the Council of Europe. The reason for the rule is that a management company should make its own investment decisions and not depend on the selection of another management company. More importantly, the possibility of losses due to incompetence or dishonesty would be increased by allowing a unit trust scheme to invest in another fund which might not be subject to any form of control. This is borne out by the widely publicised case history of a large international investment fund which invested, not in securities directly, but in other investment funds. The introduction of this provision necessitated consequential changes in the definitions of "securities" in section 1 and of "Irish securities" in section 8 (3) (c) —now section 10 (3) (c). The original definition of "Irish securities" was difficult to understand and I think the Seanad will agree that the revised definition is less complicated.
The effect of two other amendments is to make assurance linked unit trust schemes eligible to register under the Bill. These schemes were completely excluded from the scope of the Bill as a result of amendments introduced by me in this House in response to representations by the insurance companies. They will now be allowed the option of either registering or remaining free from control under the legislation. It is believed that some schemes will see advantage in having the status of "registered unit trust scheme" on the basis that the public would have confidence in any scheme which was authorised by the Minister and subject to regulation by him. It would clearly be undesirable that anyone wishing to register a scheme and have it subject to regulation under the Bill should be prevented from doing so.
The conditions of registration specified in section 3 (1) have been amended to provide that the managing company must have a minimum paid up capital of £25,000 and assets sufficient to meet its liabilities. The purpose of this provision is to ensure that the managing company is financially sound. This is particularly important when a new scheme is being launched. A managing company should have resources to cover the initial cost of getting the scheme into operation. If the company had little capital it would be depending on the subscriptions of the unit holders to launch the scheme and the risk of failure involving the loss of money by subscribers would be great. A provision of this kind is included in the draft rules on investment funds of the Council of Europe.
Another new provision which has its counterpart in the draft rules of the Council of Europe was incorporated in the Bill by amending section 12 —now section 14. The amendment provides that the manager of a unit trust scheme will not be allowed to float loans on behalf of the scheme in order to acquire securities to increase the scheme's portfolio or to advance to participants the price of subscription of units. It also provides that there should be no charges of any kind on the fund. These restrictions are considered necessary to prevent a speculative investment policy by managers.
It was found necessary to amend section 16—now section 18—as a result of the Supreme Court ruling that section 3 (4) of the Committee of Public Accounts of Dáil Éireann (Privilege and Procedure) Act, 1970, is unconstitutional. Under this section of the Bill, provisions adopted from the Companies Act, 1963, include section 168 (3) which was made unconstitutional by the Supreme Court decision.
Finally, on the Report Stage in the Dáil I introduced an amendment arising out of representations from the Irish Life Assurance Company. Some time ago the company had taken over a unit trust originally open to non-policy holders and, as a result, the scheme they now operate includes some unit holders who have not got an assurance policy. As there was a doubt, therefore, as to whether the scheme qualified under section 6 (4)— now section 7 (4)—for exclusion from the scope of the Bill, I considered it necessary to amend the section so as to leave the matter beyond doubt.
I think that I have covered everything of significance in the amendments made in the Dáil and I recommend the Bill, as amended, to the House.
I have little to state regarding the Bill at this stage, except to note that a number of the points which were made on the Report Stage in the Seanad have been accepted and are effectively in the amendments now before the House. I do not welcome some of the amendments made in the Dáil, and my hesitation in welcoming them is enhanced by the reasons given for them. I am thinking in particular of sections 9 and 14, both of which have been taken into this Bill to bring us into line with European thinking on this subject as expressed at the Council of Europe. I should have liked if the House could have been informed, as I sought to be but did not succeed, of these draft rules on investment funds of the Council of Europe. To be fair, I did not check with the Library to see if they are there. If not, they ought to be. In talking about this subject we here ought to know as much as the Minister and his advisers about it.
I do not welcome section 9 because to my knowledge there is nothing in the section, as amended, to prevent a unit trust manager doing in another way what the section seeks to prevent. He cannot invest in another unit trust scheme. There is, however, nothing to prevent him getting the benefit of management skill that he does not think he has by investing in an investment trust company which the section does not prevent.
There are unit trusts in Great Britain which specialise in the business of investing in investment trust funds. Some people are wise enough to know that they do not know everything. There are managers who know all about oil, mining, retail stores, the United States area, Japan and, instead of pretending as general practitioners that they have all this knowledge themselves, they sensibly say we would like to get a percentage of our customers' portfolio into Japan. What better way can we do that than by taking a share in a unit trust which is geared exclusively for Japanese, European or American investment. That is the reason why I do not welcome section 9 as it has been introduced in the Dáil. Neither do I welcome section 14 which we are also told is introduced to bring us into line with European thinking.
Perhaps the Minister in his reply may enlighten those of us who are finding the area a little grey by telling us to what extent and in what manner we have got to conform with European thinking in matters of this kind. I am not saying we should not. I merely wish to know what degree of freedom we have. Perhaps Senator Robinson or some other Senator, who is well informed on this subject, may be able to help us to understand to what extent we are obliged to bring this sort of legislation into conformity with European thinking.
Section 14, as we have it, provides that the manager of a unit trust scheme will not be allowed to float loans on behalf of a scheme in order to acquire securities to increase the scheme's portfolio or to advance the participants the price of subscription of units. It is one of the disadvantages of unit trust scheme that you cannot do this because of their very nature. You cannot make charges on them because you would put yourself into a non-liquid position and you would not be able to repay the unit holders. Irrespective of the prohibition the kind of dealing which from an investment policy point of view might be desirable is not allowed.
Such situations exist. They are not merely academic. They are not entirely hypothetical. They are very real. You could have the situation arising where you have got people who manage funds, who take them on the basis that they are going to be given time to repay the unit holder his unit. These managers are themselves perhaps engaged in banking business and they are prepared to set up arrangements under which they will give the unit holder the cash equivalent of the value of the unit in question as an advance on what is finally to come back to them when the unit can be repaid through realisation of the assets.
That particular facility is not any longer, under the amended section 14, to be available. This is unfortunate. I do not propose to go into anything that should not be entertained here by virtue of the fact that amendments have been made to this Bill in Dáil Éireann. Purely for clarification, I would like to understand the full ambit and extent of the amendments by raising the question as to the full meaning and significance of the definition of a unit trust scheme contained in section 1.
Am I correct in thinking that section 7, as it stands, which prohibits certain purchases and sales of units of unregistered unit trust schemes, prohibits only purchases and sales of units of unit trust schemes as they are defined in the Bill? The section does not go on to prohibit something which is not capable of being registered under the Bill. It does not go on to prohibit purchases and sales of unit trust schemes which are not registerable because they are not public but private. The prohibition is only intended to catch what should be registered where exact units are held by the public.
I am taking advantage of the presence of the Minister here but I can technically justify right to do so. The Minister has been very fair in his whole approach to this Bill. My party welcome many of the amendments which have been adopted in the Dáil. I have some reservations about sections 9 and 14 and should like to know what is the full ambit of section 7 regarding its prohibition. Is it a prohibition which extends to penalise and restrict private trust schemes? I believe it is intended to catch only public unit trust schemes which are not registered.
It might be as well for me to clear up some of the questions raised by Senator Alexis FitzGerald. In regard to sections 9 and 14, the Senator asked if we were obliged to bring our legislation into line with the rules of the Council of Europe. I wish to say that such is not the case. There is no obligation to accept the rules of the Council of Europe as of now. But this is not to be confused with the situation that may develop in future in relation to EEC rules. Both amendments have been introduced arising from a consensus of opinion of European experts and, therefore, seem to be a suitable standard by which to be guided.
I have said in relation to section 9 that the effect of the introduction of this section was to prevent unit trust schemes from investing in other schemes of collective investment. I mentioned that it was in line with European thinking that the reason for the rule was that a management company should make its own investment decisions and not depend on the selection of another management company.
The Senator questioned this in so far as the management company, on the one hand, might not have a regulation preventing them using the expertise of somebody else. On the other hand, I think that the possibility of loss due to incompetence or dishonesty would be increased by allowing a unit scheme to invest in another fund which might not be subject to any form of control. That is the operative thing here.
In my introductory remarks I mentioned that this fear was borne out by the widely-publicised case history of a large international investment fund, known as the "Fund of Funds", and operated by international overseas investors, which invested not in securities directly but in other investment funds. That is going on the advice of the European experts in this regard. This is the reason why this section was introduced in the Dáil.
Section 14, as amended, provides that the manager of a unit trust scheme will not be allowed to float loans on behalf of the scheme in order to acquire a security to increase the scheme's portfolio or to advance to participants the price of subscription of units. In addition it provides that there should be no charges of any kind on the fund. Again, in this regard I am accepting the expert European opinion that this is considered necessary to prevent a speculative investment policy by managers.
In relation to the last question which Senator FitzGerald raised in connection with section 7, it will not catch the private unit trust scheme. He was worried about the effect of this section. I can tell him that his judgment of the effect of this is correct.
Question put and agreed to.
Question: "That the Bill do now pass" put and agreed to.