Most days, there are attractive ads calling potential investors for collective investments in certain investment funds. These ads are normally from some investment banks or companies and the like. When seeing such ads certain queries arise. What is the meaning of this venture, what are investment funds? Is it safe to join and to give money for investment?
Investment funds, pension funds, unit trusts, trust portfolio … are almost of the same legal nature, and they embody the main characteristics with some differences regarding the details that are tailored for each fund or unit. As a fact, and law sometimes, stock markets and securities boards encourage investment in such funds because they represent acceptable collective investment.
Collective investment, in securities or commodities, is welcomed because it attracts potential investors and, also, tries to mitigate or counter the risks that could happen to certain participants in the market. Collective investment opens new opportunities for small investors to invest in certain prime mega projects in which they cannot afford to invest by themselves because a lot of money is needed for investment. This process achieves a profound effect through educating people to invest in securities and stocks even though they do not have big amounts of money, this is because the door is open for big and small amounts of money from different investors.
It is important to mention that, in collective investment, the interested investor is not involved directly in relation to investment decisions or investment policies because the fund director takes the decision on his behalf. The concerned director, in all cases, takes the necessary decision that suits the fund and such decision is not necessarily always to the satisfaction of all investors who have joined the fund. This should not be taken to mean that the director or the fund will act in jeopardy to the interests of investors simply because the investors’ interest becomes part & parcel of their own interest.
Due to such relationship and other related factors, including the nature and concept of collective investment, the Regulatory Authorities in each country sets standards and rules regarding the licensing requirements and the regulation of those who apply to operate collective investment schemes in whatever form as Investment funds or pension funds or units or otherwise.…. This is a pivotal point because such funds are entrusted to manage and deal with third parties money and assets and therefore, they should be trustworthy and able to meet the fiduciary trust vested on them. The Regulatory Authorities should clearly issue and provide for clear-cut rules governing, inter alia, the legal form of the fund, accountability and legal structure of the collective investment schemes…..
Rules and procedures should be strictly adopted and followed, with particular reference to the segregation and protection of the client assets from the assets of the fund.. Each investor, shall be able at any time to know how much he is holding in his name, and how much he can take in case of profits… etc.
Laws and regulations should clearly provide for disclosure requirements to evaluate the suitability of each collective investment for each investor, and the value of the investor’s interest in the scheme. Regulations should ensure that there is proper basis for asset valuation, pricing and redemption of units in each collective investment scheme.
Directors entrusted to manage collective investments shall maintain a minimum professional standard, experience and relevant know-how in all cases. Good reputation, conduct and close follow-up of the concerned codes of ethics should be of paramount importance. To safeguard the interests of investors and to give them the required shield of protection, the Regulatory Authorities are advised not to allow such type of collective investment unless undertaken by able and capable institutions that are known widely to take such investments. Reference to able institutions should be taken to mean that such institutions are having sufficient paid-capital, reserves and required net worth.
Authorities should make sure that the contracts signed between the funds and the potential investors are clear and free from unnecessary ambiguities that could harm investors because the investors rely on the trust bond that links them with the fund and his director. This trust bond constitutes a cornerstone in the relationship between the parties and should always be maintained.
Collective investment concept, from our view point, should be developed and encouraged because we believe that they are important for the market expansion and growth. This particularly applies to small and new emerging markets such as those in our region. They should be encouraged, provided that this should take place according to strong rules that cater for the protection of investors. This strong policy is applied, everywhere including Europe, Japan and America. It should be known that all applicable or specified information furnished to investors, and other parties, is accurate, true, and complete in every material respect.
Collective investment funds shall issue a statement or an undertaking to specify that they will comply with all laws and orders issued by the authorities. In some jurisdictions the investment funds or unit trusts are required to specify that there is no pending, or to their knowledge, legal action suit or proceedings before any court, tribunal, governmental body or official agency, or any arbitrator that is likely to affect the legality, validity or enforceability of any of their obligations that are related to the concerned transaction.
We strongly believe that the competent authorities in this country, should prepare up-to-date regulations that are necessary to protect investors in all respects, there should be sufficient means to inspect and examine licensed institutions and the investment products they offer to the public. All this, among other things, are required to give water-tight security to all potential investors in collective investments. Take-it-up..
Dr . AbdelGadir Warsama Ghalib
Founder & Principal Legal Counsel
Dr. AbdelGadir Warsama Consultancy
E-mail : awarsama@warsamalc.com
