The Investments and Securities Act (ISA) No. 29 of 2007 (Section 153) defines Collective Investment Scheme 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 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 authorised by any other Act.”
The scheme is one of the resourceful financial intermediation processes developed to encourage savings and investment. The scheme also is a synergistic polling and investment of savings whereby the benefits accruing to individuals are usually greater than what they would have benefited if they had invested individually.
The benefit that can be derived from collective investment schemes cannot be overemphasised if properly harnessed as it would be the needed catalyst that will not only quicken the pace of development of individual participants but the country as a whole.
Following efforts to deepen the nation’s capital market, the Securities and Exchange Commission has been harping on the need for investors to invest in securities through the CIS as a means of diversifying their investment portfolio.
Speaking in one of the fora in Lagos, the Director-General of SEC, Ms. Arunma Oteh said the commission must make sure that it builds capacity at every level, even among the capital market operators.
“We are also encouraging retail investors to focus more on the collective investment scheme. There are a number of funds that are available so that if you invest in those funds then you can depend on the professional experts that manage those collective investment scheme rather than considering investing in the market as a whole. There are also other initiatives like making sure that we have a more diversified stock market.
“We are encouraging a more institutional market with retail participation, principally through Collective Investment Schemes. In view of increased interest in mutual funds, the Commission has intensified its examination and monitoring of fund managers and trustees of such schemes, and recently encouraged the establishment of an industry trade group for mutual fund managers,” he said.
As part of effort to strengthen the weak regulations surrounding investment in Collective Investment Scheme (CIS), the International Organisation of Securities Commissions (IOSCO) had recently published a consultation report on principles for the valuation of investment scheme.
In a statement published on its website, IOSCO explained that the report was setting out principles that could be used to assess the quality of regulation and industry practices concerning the valuation of CIS even as it aimed to treat investors fairly.
This consultation report updates and modernises IOSCO’s Principles for CIS Valuation, originally developed in 1999, to take into account subsequent regulatory, industry and market developments.
“It also clarifies some concepts put forward by IOSCO in its report Principles for the Valuation of Hedge Fund Portfolios, such as the entity responsible for establishing a policy governing valuation and the independence of the valuation duty,” the statement added.
IOSCO, which is the leading forum for securities regulators (including Securities and Exchange Commission, Nigeria) and is recognised as the global standard setter for securities regulation, noted that the implementation of comprehensive policies and procedures for valuation of CIS assets was fundamental principle underpinning that sector.
“It is critical that a CIS properly value all assets in its portfolio, including those instruments for which market quotations are not readily available. CIS valuations are extremely important because if portfolio securities and assets are incorrectly valued, investors may unfairly pay more for their shares or receive less upon redemption, while remaining investors may also be adversely affected,” the organisation said.
The draft principle stipulates that the Responsible Entity (RE) should establish comprehensive, documented policies and procedures to govern the valuation of assets held or employed by a CIS. Also the policies and procedures should identify the methodologies that will be used for valuing each type of asset held or employed by the CIS.
Other requirements are: the valuation policies and procedures should seek to address conflicts of interest; the assets held or employed by CIS should be consistently valued according to the policies and procedures; a CIS should have policies and procedures in place that seek to detect and prevent pricing errors. Pricing errors that result in a material harm to CIS investors should be addressed promptly, and investors fully compensated; the Responsible Entity should provide for the periodic review of the valuation policies and procedures to seek to ensure their continued appropriateness; the Responsible Entity should provide for the periodic review of the valuation policies and procedures to seek to ensure that they are being implemented effectively.
; a third-party should review the CIS’s valuation process at least annually; the Responsible Entity should conduct initial and periodic due diligence on third parties that are appointed to perform valuation services; the Responsible Entity should seek to ensure that arrangements in place for the valuation of the assets in the CIS’s portfolio are disclosed appropriately to investors in the CIS offering documents or otherwise made transparent to investors; the purchase and redemption of CIS interests should not be effected at historic Net Asset Value (NAV); a CIS’s portfolio should be valued on any day that CIS units are purchased or redeemed; and a CIS’s NAV should be available to investors at no cost.