Prakas Provides New Rules and Procedures on Trusts

Three years on from the issuance of the Law on Trusts (dated 2 January 2019), the Non-Banking Financial Services Authority (“NBFSA”) issued Prakas No. 003 F.S.A.PrK on 26 January 2022 on Rules for the Management, Establishment, and Functioning of Trusts (“Prakas”) to set out the rules, conditions, and procedures on the establishment of trusts, their registration, as well as the licensing and approvals granted to trustees. The Prakas clearly defines trust activity, and specifies the rules to qualify as a trustee (both individual trustees and trustee companies), trustees’ obligations and responsibilities as well as the rules on the management of trustees and custodians in the securities sector.

1. Trustee registration

1.1. Legal entities

For an entity to register as a trustee and receive a license/approval, it must have the qualifications detailed in Article 16 of the Prakas. An application for registration must be submitted to the NBFSA, which will turn around a decision on the application within 60 days.

Licenses are valid for an initial period of two years from the issuance date, with unlimited options to renew for three years at a time.

1.2. Individuals

Individuals acting as trustees are divided into two categories: (1) individual trustees, and (2) independent trustees.

An individual trustee is a trustee who operates as a trustee only when it is employed by a trustee company and who would not be able to function as a trustee independently. Unlike individual trustees, an independent trustee is able to function as a trustee independently.

1.2.1. Individual trustees

Individual trustees must comply with the conditions set out in Article 26 of the Prakas. Similar to trustee companies, to register as an individual trustee, an application must be submitted to the NBFSA.

The validity of an individual trustee license/approval is for a period of two years, with unlimited options to renew for three years at a time.

1.2.2. Independent trustees

The difference between individual trustees and independent trustees are in the requirements that must be met, which in this case are found in Articles 23 and 27 of the Prakas. The registration procedure, and validity and renewal period of the independent trustee license/approval is the same as for individual trustees.

1.3. Trustee change of information

Once a trustee is registered with the NBFSA, any change of information, such as address, company details, management structure, shareholders, decrease/increase of registered capital, resignation/appointment of new technical employees, etc, must first be approved by the NBFSA. Failure to do so could result in the NBFSA levying the administrative, civil, and/or criminal sanctions as stated in the Prakas.

2. Trust registration

2.1. Formation of a trust

According to the Prakas, each trust can have more than one trustee; however, in the event that more than one trustee is appointed, the number of trustees must be an odd number.

No later than three months after receiving approval for the trust creation from the NBFSA, the trustee must start the trust registration procedure with the NBFSA. Once the trust is registered, the trustor can begin to transfer funds into the trust account.

During the duration of the trust, the trustee(s) can be changed. However, the NBFSA must be notified of each change of trustee and the new trustee registered with the NBFSA. In the event of a change of trustee, the beneficiary has a 30-day grace period to file a complaint or objection to the change of trustee.

2.2. Trust termination

A trust can be terminated in the event of any of the following:

• The term of the trust has expired, as specified by the trust instrument.
• The trust objective has been fulfilled.
• By the unanimous decision of the trustor(s).
• By a court judgement.
• Another event as determined by the trust instrument.

In the event that the trust is terminated, the trustee must notify the NBFSA at least 30 days prior to the trust termination date and submit a clearance request to the NBFSA before the trust termination. The clearance process must follow the procedures to be set out by the NBFSA.

After the trust has been cleared and terminated, the trustee must:

• Transfer all remaining trust funds based on the conditions determined by the trust.
• If the trust does not clearly specify who is entitled to the proceeds of the trust, transfer all trust funds to any living beneficiaries apportioned equally.

Additional information covered in the Prakas includes qualifications, roles and responsibilities, rules on the management of trustees and custodians in the securities sector, official fees, and sanctions and penalties.