INVESTMENT FUNDS

All types of companies, particularly, investment companies and other financial institutions, worldwide, are very active in promoting their products to potential investors.

Some of the investors seek the advice of professional advisors while others ride the horse in the wrong direction and they show up. It is noticeable in most days, the attractive ads in local and foreign flyers or newspapers calling potential investors for participation in investments in certain investment funds or other investment instruments.
The ads, we are referring to, are normally from banks, investment or retail companies…etc. Whenever a person reads such lucrative ads, immediately, certain queries arise and stick in the mind for certain time. What is the meaning of all this activity and what do we mean by investment funds?
Is it save to join this procession of activities and give my money for investment? What are the differences and or similarities between this particular fund promoted by this company and other funds promoted by other companies?
To begin with, we could generally say that, investment funds, pension funds, unit trusts, trust portfolio, open-ended or closed-ended funds, trust receipts ... are , almost , of the same legal nature and they embody the main characteristics with some differences regarding the details that are particularly tailored for each specific fund or unit.
As a matter of fact, and law sometimes, stock markets & securities exchange authorities encourage investment in such types of funds or units because they generally represent a certain type of collective investment (or sometimes called group investments).
Collective investment or group investment, in securities or commodities, as we mentioned above is welcomed and highly appreciated in most securities markets because this investment attracts potential new investors and, also at the same time, these investments try to mitigate or counter the risk or risks that could happen to certain individual participants in the market.
Investment funds … etc…normally open new opportunities for small investors to invest in prime big projects in which they cannot afford to invest by themselves as individuals because a lot of money is needed for investment in such type of projects.
This process achieves a profound effect through educating people to invest in securities and stocks even though they have no big amounts of money, this is because the door is open for big and small amounts of money.
Generally speaking, individuals or institutions could indulge into the investment business in, securities or commodities, by themselves and directly by buying and selling to and from each other. This individualistic approach is in fact the common practice in securities markets, however, due to the above reasons and other reasons the collective investment approach is welcomed and is given a chance to take part of the cake.
In collective investment schemes, the situation is completely the contrary, because the investor is not involved directly in relation to investment decisions or investment policies because the fund or the unit director takes the decision on his behalf. This investment director, in all cases, takes the necessary decision that suits the fund or the unit and such decision is not necessarily always to the satisfaction of all investors who have joined the investment fund or the unit trust. This point should not be taken to mean that the investment director, of the fund or the unit, will act in jeopardy to the interests of the investors.
Due to such factor, and other related factors, including the special nature of collective investment, the Regulatory Authorities and Systems should set special standards and rules regarding the licensing requirements and the regulation of those who apply or wish to market or operate a collective investment scheme in whatever form they are operating being investment funds or pension funds or societies or otherwise.
This is a pivotal point because such funds are entrusted to manage third parties money and assets and therefore, they should be trustworthy and able to meet the trust vested on them by the investors as well the concerned Regulatory Authorities.
The Regulatory systems should clearly provide for clear-cut rules governing the legal form of the fund or the unit, the necessary accountability and the legal structure of the collective investment schemes.
Rules and procedures should be adopted and followed, with particular reference to the segregation and protection of client assets from the assets of the fund or trust. Each individual investor, within the group, shall be able at any time to know how much he is holding in his name, and how much he can take home in case there are any profits etc.
Laws and executive regulations should clearly provide for disclosure requirements that are necessary to evaluate the suitability of each collective scheme for each particular investor, and the value of the investor’s interest in the scheme.
Regulations should always ensure that there is a proper and disclosed basis for asset valuation, pricing and redemption of units in a collective investment scheme in whatever form it takes.
Directors entrusted to manage all investment funds shall have a minimum professional standard, related experience and know-how should be mandatory in all cases whatsoever. Good reputation and 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 those institutions are always having the sufficient required paid-capital, reserves and net worth.
Regulatory Authorities should, also, make sure that the contracts signed between the funds and potential investors are clear and free from unnecessary ambiguities that could harm investors because, as we have mentioned above, those investors mainly rely on the trust bond that links them with the fund and his director. This trust bond constitutes a corner stone in the relationship between the contracting parties and should always be maintained.
In case, the investment fund or unit trust, holds many portfolios it should be provided that each portfolio is separate and clearly identified from others. The separation should include the accounts, the capital, the policies laid down by the management etc.
Collective investment, from our viewpoint, should be developed and encouraged because we believe that they are always very important for the market expansion and growth. This particularly applies to small and new emerging markets such as those in our region.
We all agree, I believe, collective investment is necessary for our markets at this time, however, this should not be allowed at any cost and only for the sake of allowing them. They should be allowed and encouraged provided that this should take place according to strong rules and regulations that cater for the necessary protection needed for our investors. This strong-hold policy is applied, nowadays, everywhere in Europe, Japan and America.
Primarily, it should always be known that all applicable or specified information that is furnished to investors, and other related parties, is completely accurate, true, and complete in every material respect. No event of default or potential event of default has occurred or could occur as a result of entering or performing the obligations under the concerned transaction.
Investment Funds shall issue a statement or an undertaking to specify that they will comply in all material respects with all applicable laws and orders issued by the competent authorities.
In some jurisdictions the Investment Funds or Unit Trusts are required to specify that there is no pending or, to their knowledge, any legal action, suit, or proceeding at law, or 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 related to the concerned transaction.
We strongly believe that the competent Regulatory Authorities should prepare the required and up-to-date regulations that are necessary to protect the investors dealing with such investment funds and or unit trusts and, in all respects, there should be sufficient means to inspect and examine the licensed institutions and the investment products they offer to the public all through their tenure and at any time.

Dr. AbdelGadir Warsama
LEGAL COUNSEL
Email: awghalib@hotmail.com

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