An Analysis of the Licensing and Regulation of Collective Investment Scheme in Nigeria

CONTRIBUTED BY AJIBADE FARIDA

INTRODUCTION

In recent years, one of the significant development in the financial sphere is the Collective Investment Scheme; an open-ended investment that has various forms and allows investors to pool funds to invest in select securities, boost returns, and minimize risk.

Under this scheme, Investors consist of individuals, corporations, governments, pension plans, or other entities, and the primary purpose of CIS, is to provide investors with access to a profit-oriented, diversified portfolio of investments to obtain a financial return, save for retirement or achieve other financial goals.

This article discusses what a collective investment scheme is, the types of collective investment schemes, licensing, and the regulation of collective investment schemes.

COLLECTIVE INVESTMENT SCHEME

Section 153 of The Investments and Securities Act (ISA) 2007 attempts to explain what can be regarded as a collective Investment Scheme. It provides that it is:

“a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which: Two or more investors contribute money or other assets to and hold a participatory interest; The investors share the risk and benefit of investment in proportion to their participatory interest in a portfolio of a scheme or on any other basis determined in the deed, but not a collective investment scheme authorized by any other Act”.

Simply put, a Collective Investment Scheme is an investment characterized by the gathering of resources by several investors to be managed by a group of experts regarded as trust managers who invest same in selected assets as they deem profitable. These assets can be a range of investments, inclusive of shares, landed property, and others. The resources need not be invested in one particular stream, as it is the discretionary decision of the trust managers.

TYPES OF COLLECTIVE INVESTMENT SCHEME

In Nigeria, there are various Investment Schemes that match the definition provided in the Investment and Securities Act, but there are 5 generally recognized classifications of Collective Investment Schemes, which are:

  1. Unit Trust Scheme
  2. Venture Capital Funds
  3. Open-ended Investment Companies
  4. Real Estate Investment Schemes
  5. Specialized Funds

UNIT TRUST SCHEME

A Unit Trust Scheme is a scheme where several investors pool funds and receive profit as unit holders. Resources are gathered as a pool and invested on behalf of the investors in diverse investments often regarded as portfolio investments. The Scheme is created and governed by an instrument known as a Trust Deed that spells out the duties, rights, and responsibilities of each part ensuring that the Fund managers hold the resources in trust for the investors who take the position of beneficiaries.

The funds are divided equally by the value of the amount of each unit holder. What this means is that where a scheme is valued at N1.00 and an investor subscribes N100, he becomes a holder of 100 units. When the resources are invested by the trust managers in ventures that are rated as highly profitable, the dividend is distributed in accordance with the unit held.

A unit trust scheme can be open-ended or close-ended. A close-ended unit trust scheme is characterized by a listing in the share market. The prices of the units are determined by the market demand and there is no new issue after the initial public offer. However, in an open-ended scheme, the unit continues to be issued and redeemed even after the initial public offer, and its value is set by the net value of the fund and not market forces.

In an open-ended scheme, investors are afforded the opportunity to resell their units to the fund, buy extra units from the fund and new subscribers that were not part of the initial subscribers can buy units. In a close-ended scheme, however, the new subscribers have to buy units through a stockbroker and subscribers that desire to redeem units have to also do so through a stockbroker, making the units have the features of shares.

VENTURE CAPITAL FUNDS

In this scheme, resources are gathered to fund new businesses and startups with the aim of making profit from the business long term. The funds in this type of scheme have a particular business as a target and not simply a discretionary choice.

Investors known as venture capitalists gather resources and buy into a company known as a venture company, which would give equities in exchange. These resources are used to expand a growing business in hope of returns in the long term. The main distinguishing factor of a venture capital fund is that the profit is mainly long-term with little to no immediate remuneration. This form of scheme also requires close long-term monitoring to protect the interest of the investors.

OPEN-ENDED INVESTMENT COMPANIES

This is a structured investment scheme in which a company manages the funds of investors, investing same in assets depending on the risk preference of each investor. Shares are used rather than units and the company issues unlimited shares available for daily trading at the net value of the shares per time. These funds are effectively managed by Fund managers as opposed to the Trust managers in Unit Trusts.

REAL ESTATE INVESTMENT SCHEMES

This is a Collective Investment Scheme that invests resources in real estate assets. The resources are gathered through an initial public offer and put into proprietary assets and profits are periodically distributed after deductions of requisite fees.

SPECIALIZED FUND

In this form of Collective Investment Scheme, resources that are pooled are invested in a particular industry alone hence the name, specialized fund. The nature of this scheme makes it a highly risky venture, as it can be highly profitable or result in a great loss. This scheme is susceptible to instability as it can be open to high-level fluctuations since it is sector specific.

LICENSING AND REGULATION OF COLLECTIVE INVESTMENT SCHEMES

The Agency responsible for the regulation of Collective Investment Schemes in Nigeria is the Securities and Exchange Commission. The extent of the regulation covers both the Fund managers and the Investment Scheme itself. An investment scheme needs a licensed fund manager to operate. So, the fund manager must first be licensed and subsequently, the Investment Scheme.

The licensing of a fund manager or Investment Scheme company is essential as Unit offers can only be listed as Initial Public Offers by licensed Fund managers. Before these units can be issued, the units must all be registered with the Securities and Exchange Commission. The offer must then be made by an Offer for sale or an Offer for Subscription.

Section 161 of the Investment and Securities Act 2007 provides that it is unlawful for any person, directly or indirectly to deal in units or securities of a scheme (described whether as units, securities or otherwise) unless such units or securities have been duly registered with the Commission.

The Act further provides that “A scheme or any other arrangement may be registered pursuant to this Act by the issuer filing an application with the Commission in accordance with the provisions of this part of this Act and the rules and regulations thereunder”[1]. The Commission is also mandated to establish and maintain a register of units or securities and collective investment schemes[2]. The penalty for the contravention of any of the above is a liability of a fine of not less than N100,000 and a further sum of N5,000 for continuous contravention[3].

The Commission also mandates that an audit be made into the affairs of a Collective Investment Scheme. It provides that “The manager of an authorized scheme shall cause proper books of account to be kept and annual accounts to be prepared which shall give a fair and true view of the affairs of the scheme during each year covered by the accounts and the accounts shall be audited by a person appointed as auditor by the manager of the scheme with the consent of the trustee or custodian for the scheme”[4].

The commission is also empowered to investigate the affairs of a scheme. Section 172 of the Act provides that “the Commission may conduct an investigation into the business of a person whether registered or authorized in pursuance to this Act or not, who is involved in the administration of a collective investment scheme or the soliciting of investment in a collective investment scheme”.

CONCLUSION

The above provisions show the extent to which the SEC has gone through to ensure proper accountability and transparency of the parties involved in CIS, to guarantee their authenticity as the interest of numerous individual investors are involved. The focus should now be placed on the managers and organizers who operate CIS-related platforms in order to regulate them and ensure due process is followed in the handling of customers’ funds.

  1. Section 161(2) of the Investment and Securities Act 2007
  2. Section 161(4) of the Investment and Securities Act 2007
  3. Section 161 (5) of the Investment and Securities Act 2007
  4. Section 169 of the Investment and Securities Act 2007

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