How To Set Up A Licensed Investment Trust Scheme in Nigeria – All You Need To Know

Flowing from my last article, it is now understood that Investment Companies/Unit trust schemes constitute a type of Collective Investment Scheme which the Investment And Securities Act 2007 defines in its Section 153 as 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 the process acquiring participatory interests in that portfolio which is dedicated to further investments.

In Nigeria today, one of the most common types of Collective Investment Schemes (or a ‘CIS’) is the Open-ended/Close-ended Investment company or Unit Trust scheme which is where a company licensed by the Securities and Exchange Commission (or ‘SEC’) and thus referred to as a Professional Fund Manager, offers participatory interests called Unit trust investments or subscriptions to individual investors in exchange for small monetary sum investments formed into a pool fund used for further investment in stocks, shares and money market instruments on behalf of the Unit Trust subscribers. The fund is under the ISA and SEC rules 2013( along with a 2019 amendment of the SEC rules on Collective Investment Schemes) regarded as a Trust asset and can either be Close-ended or Open-ended.

This article is thus dedicated to those who either looking for a safe investment option, entrepreneurs and startups seeking safer Capital Market funding options, and those seeking to set up their own licensed Investment companies or launch their own Unit Trust Scheme public offers.

As in my previous article,the most important aspects of this article will be itemized in a very basic and reasonably easy to understand Question and Answer format. Happy reading!

Q:- Good day Counsel. As a result of my previous consultation with you on the Collective Investment Scheme thing, i would like to seriously consider investing in a Unit Trust scheme from a licensed Fund Manager. What are my options for the types of Unit Trust subscriptions to choose from?

A :- Good day sto you too.Liked i said previously, a Unit Trust scheme can be Open-ended or Close-ended.

A Unit Trust fund is said to be Close-ended when it comes with no additional issue of new units or the redemption of units. The fund is usually lifted and traded on the Nigerian Stock Exchange (NSE) and its price values are subject to demand and supply. Redeeming (buying back) a Unit under this fund scheme would have to be through a stockbroker.

A Unit Trust fund can also be Open-ended when it can continuously issue and redeem units after its Initial Public Offering (IPO) with its price based on the Net Asset Value (NAV) which is the total asset of the fun minus liabilities as at the date of purchase or redemption.

Q:- Okay. Now i’ve been hearing you mention “units”. What exactly is a Unit in this case?

A :- A unit is a value measurement indicator for a participatory interest in a Unit Trust fund which is usually divided into units of equal monetary value. Hence if a unit is offered by a fund manager at the value of 1 Naira and you invest 100 Naira in the fund, your participatory interest will be measured as 100 units.

Q:- Hmmmm, nice! And will this investment be just between me and the Fund Manager?

A :- No. As a matter of fact, SEC rules demand that every Unit Trust offer and subsequent subscription should have the following parties :

• The Unit Holder/ Subscriber :- That is the investor buying the units;

• The Fund/Asset Manager :- That is the licensed Investment Company that registers,issues and operates the Unit Trust scheme;

• The Trustee :- A trust company in which the Unit Trust fund will be legally transferred for the purpose of management and close monitoring on behalf of the Unit Trust holders/subscribers/Investors;

• The Custodian :- This is a corporate entity dedicated to the safe keeping of assets to prevent misappropriation or mismanagement or even theft. This is who you will be making your monetary investment payments to as an intending Unit Trust holder;

• The Registrar :- This is another corporate entity dedicated to the diligent keeping of records of all Trust holdings and subscribers to a particular fund.

Q :- That sounds good enough for me. Will there any document serving as a legal proof of my investment?

A :- Yes, there will be. That is what is referred to as a Trust deed which is an agreement between the Fund Manager and the Trustee governing the management of a Unit Trust scheme by laying down rights, responsibilities, Investment objectives, policies and all other relevant information of the fund.

Q :- Okay. Open-ended Unit Trust Schemes sound like a better option to me. Are there time limitations on Unit Trust Scheme offers generally?

A :- Yes there are. An Close-ended Unit Trust scheme offer lasts 28 working days, but time extensions can be granted by the SEC under certain conditions.

Q :- Okay. Like i told you the last time Counsel, i fell victim to a Ponzi Investment Scheme fraud by a company owned by Mr. Sharp Sharp. Since then i’ve been meaning to ask as I also would like to go into running an Investment platform myself, how exactly does one get licensing from the SEC to carry on Fund/Portfolio management/Investment management services in Nigeria?

A :- Well, you’ll be needing the following requirements for presentation to the SEC:

• Evidence of payment of a filing/application fee of 50,000.00 Naira;

• evidence of payment of a processing fee of 200,000.00 Naira;

• evidence of payment of a registration fee of 500,000.00Naira;

• evidence of payment of a sponsored individual fee of 50,000.00Naira (These individuals should be at least 3(Three) in number, one of whom must be a designated Compliance officer for the purpose of monitoring compliance with the Investment and Securities Act);

• a duly executed form SEC 3 for the company;

• duly executed forms SEC 2 & 2D for the sponsored individuals;

• duly executed forms SEC 2 &2D for the directors of the company (to be completed in duplicates);

• evidence of payment of the required minimum capital for Investment companies/ Fund Managers which is 150,000,000.00Naira(a Hundred and fifty million Naira);

• a current Fidelity Insurance Bond covering at least 20% of the minimum paid up capital as stipulated by the SEC rules;

• the sponsored individuals earlier mentioned must include the Managing Director of the company as well as the Compliance officer;

• the sponsored individuals are also required to provide the full postal addresses of their immediate previous employers, bankers (with Current account numbers) and nominated referees of the sponsored individuals;

• the sponsored individuals are also required to provide detailed resumes which should include details of activities from Secondary School to date with all gaps in their employment & educational histories explained;

• copies of the credentials of the sponsored individuals including SSCE & NYSC certificates with original copies to be provided for sighting by the SEC;

• evidence from the sponsored individuals showing that they possess the minimum of 4 years post-graduate experience to perform their functions as Fund/portfolio managers under the SEC rules;

• a police clearance report for each sponsored individual. Each sponsored individual is to report at the SEC head office in Abuja or the Lagos Zonal office with two recent passport photos;

• copies of Valid means of identification of the directors and sponsored individuals of the company;

• for the applicant company itself, a company profile should be submitted which should include a brief history of the company, organizational & shareholding structure, the principal officers of the company as well as details of past & current activities;

• the names and addresses of the company’s subsidiaries and associated companies, along with the type of business and percentage holding should be submitted as required information;

• evidence of payments for shares allotted to the company’s shareholders should be submitted as well;

• the company’s operational manual or organizational chart;

• the applicant company’s Business plan;

• a Bank statement of the company’s accounts operated for the past 6 months;

• a copy of the company’s certificate of incorporation;

• a copy of the company’s Memorandum and Articles of Association showing the power to perform the specified functions which should include an objects clause geared towards funds management;

• copies of the company’s CAC forms showing its statement of share capital, returns on share allotments and the particulars of its directors along with the presentation of their original copies for sighting by the SEC;

• the latest audited statement of affairs of the company with the Cash to assets required to be 60% liquid assets and 40% fixed or other assets;

• a notarized sworn undertaking by a director of the applicant company or its Company Secretary to abide by the SEC rules and regulations as well as the Investment and Securities Act;

• other documents considered necessary for registration by the SEC;

• and also considered fundamentally important is a fair knowledge of the rules and regulations of the commission and the Investment and Securities Act as a prerequisite for registration.

Q:- Wow, that was a long list of requirements! But the problem is that i’m lacking in some areas because i don’t really know where to find professionals skilled in fund management for the purpose of nominating. Is there a way i can find such people?

A :- Yes, these individuals are called Capital Market consultants ranging from accountants and stockbrokers to chartered valuers and solicitors. You however need a solicitor more for the purpose of having a very clear understanding of the Investment and Securities Act as well as the SEC rules, hence i suggest that you either hire a licensed Capital Market solicitor or as a relatively more flexible and relatively affordable option for a start-up hire as an Independent or Non-executive director or Company Secretary a non-SEC accredited lawyer whi well versed in the Investment and Securities Act and SEC rules and then any other experienced professional in other related fields such as accounting, business management/administration, valuation, stock brokerage and accounting as your sponsored individuals.

Q:- Do Fund Managers or Portfolio/Fund management companies have a sort of union?

A :- Yes they do. It is called the Fund Managers Association of Nigeria for licensed Fund Managers/Investment companies.

Q:- Alright. And now what are the requirements for making a Unit Trust scheme public offer?

A :- Well, apart from obviously being required to be issued or offered by a licensed Fund Manager, an Unit Trust scheme must :-

• Have all its units registered with the SEC;

• have all its units subject to registration offered by an offer for sale or offer for subscription;

• all units of a Close-ended Unit Trust scheme or Collective Investment Scheme can have its units registered by a shelf registration which is a filing undertaken by Issuers (Fund Managers) intending to access the market in the near future permitting them to disclose certain information in a disclosure document which is updated on a regular basis.

To register a Unit Trust fund/Collective Investment Scheme, the following requirements must be met:-

• The registration statement of a Unit Trust Scheme offer shall be filed by an issuing house;

• the statement shall be accompanied by:
  a). An executed SEC form 6A.
  b). A draft prospectus.
  c). A draft Trust deed.
  d). A draft Custody agreement.
  e). A draft Vending agreement.
  f). A sworn undertaking to file periodic reports and returns to the SEC.
  g). A copy of a Company resolution from the board of the fund manager/Investment Company authorizing the launching of the Unit Trust scheme.
  h). Evidence of payment of SEC fees.
  i). A rating report (where applicable).
  j). Evidence of appointment of a Sharia Adviser (for Sharia compliant funds).
  k). Such other relevant documents as may be required from time to time.
  l). The issuer/fund manager shall make a sworn declaration signed by its Managing Director/Chief Executive Officer or Company Secretary that it has fully disclosed all internal facts in the offer documents.

The Issuing house shall then file at the time of the submission of the registration statement or executed documents –

1). All original letters of consent from the prospective parties to the scheme dated and signed by named persons giving their permission/consent provided that a corporate entity giving consent shall do so through duly authorized persons who shall be a director, Company Secretary or persons acting in those capacities with the seal of that corporate entity.

2). All original letters of consent from the directors of the fund manager and any other individual that is a party to the scheme, dated and signed by the named persons giving consent & duly notarized.

Q:- Alright, i think i now understand how Investment companies work , at least from a layman’s perspective, Thank you so much Counsel. Is there more that i might need to know?

A:- No, not really. Going deeper into the requirements of the ISA and the SEC rules would be too technical and maybe even confusing for you, which is why you need skilled professionals by your side. You’re welcome Sir!

So in conclusion, it is hoped that by virtue of this article you would have understood the basics of setting up and running an Investment Company and who to set it up with along with a skeletal but necessary understanding of the Regulatory framework governing this area of the Capital Market in Nigeria.