Unit trust industry plans to tighten rules on investment

The unit trust industry responded to the Morgan Grenfell Asset Management crisis yesterday by issuing proposals which go further than current regulations on the amount of pre-listed equities that unit trusts should be allowed to hold.

The Securities and Investments Board (SIB), which is conducting its own inquiry on whether the current regime is adequate, welcomed the proposals, as did the Treasury.

The Association of Unit Trusts and Investment Funds (Autif) is proposing that pre-listed securities should make up no more than 10 per cent of a unit trust's portfolio, after the discovery that Peter Young, the former fund manager at Morgan Grenfell, had run up large holdings in such securities.

Pre-listed equities are those which are not yet quoted on a stock exchange but are due to be in the future. They are currently subject to no investment limit. Unlisted securities, however, are restricted to no more than 10 per cent of a unit trust's portfolio.

Sheila Nicoll, director of legal and fiscal affairs at Autif, said the proposals were sent to unit trust firms yesterday and they had one week in which to respond but she did not envisage any serious problems from the industry.

By suggesting a voluntary approach to overcome the problem of how much a fund can hold in pre-listed securities, Autif is helping to tackle a difficulty with unit trust rules, which are governed by regulations from Europe, known as Ucits.

While Britain can toughen its stance on unit trust regulation and add to the Ucits directive, it may be reluctant to do so if its European partners do not also change their rules.

"We realise that the Ucits directive makes it difficult for the regulators to change the rules in this area," said Philip Warland, director general of Autif.

"We believe, however, that the Treasury and the SIB will support this self-denying ordinance. It will indicate the determination of the industry to maintain the integrity of the product and should reinforce investors' confidence in unit trusts."

Morgan Grenfell was forced to suspend dealings in three of its top-performing funds last month after problems with valuing unlisted and pre-listed securities. It also discovered that Mr Young had set up a web of Luxembourg holding companies to hide the extent of his investments.