Audit and Accounting Guide: Investment Companies

Chapter 9 Unit Investment Trusts

9.01 A unit investment trust (UIT) is defined by Section 4(2) of the Investment Company Act of 1940 (the 1940 Act) as an investment company organized under a trust indenture, contract of custodianship or agency, or similar instrument. It has no board of directors or trustees, and it issues only redeemable securities, each representing an undivided interest in a unit of specified securities, but does not include a voting trust. Typically, a UIT will make a one-time “public offering” of only a specific, fixed number of units (similar to closed-end funds). Units remain outstanding until a unit holder tenders them to the trustee or sponsor for redemption or until the trust is terminated. The trusts typically have a limited life, ranging from 12 months to 30 years. In the case of a UIT investing in bonds, for example, the termination date may be determined by the maturity date of the bond investments. Trust agreements usually require periodic pro rata distribution to the unit holders of the trust’s entire net investment income and net realized capital gains, if any, and distribution of the proceeds of redemptions, maturities, or sales of securities in the trust, unless the proceeds are used to pay for units to be redeemed. A distinguishing feature of UITs from mutual funds is that the portfolio is intended to be relatively fixed; neither the sponsor nor the trustee has power to manage the portfolio. In general, securities may be sold only for limited ...