AJIBADE FARIDA

TOPIC: AN ANALYSIS OF THE LICENSING AND REGULATION

OF COLLECTIVE INVESTMENT SCHEME IN NIGERIA
INTRODUCTION

In recent years, one of the significant development in the financial

sphere is the Collective Investment Schemes in its various forms.
It is therefore necessary to define this term.

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 5 are
the generally recognized classification of Collective Investment
Scheme 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 to as portfolio investment. 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, dividend is
distributed in accordance to 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, 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 stock broker,
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 are known as venture Capitalists gather resources and

buy into a company known as the 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 where 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 ESATE 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 Offer
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 shall not be lawful 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
investments schemes2. 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 authorised 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.

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
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 authorised 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 extensive regulations of

Investment Trust Schemes to guarantee their authenticity as the
interest of numerous individual investors are involved.

SNIPPET: The licensing of a fund manager or Investment Scheme

company is essential as Unit offers can only be listed as Initial
Public Offer by licensed Fund managers.

KEYWORDS: Collective Investment Scheme, Fund manager, Unit

trust, Open Investment scheme, Trust Deed.