Collective investment | THE DAILY TRIBUNE | KINGDOM OF BAHRAIN

Collective investment

By DR. ABDELGADIR WARSAMA GHALIB

Most days, there are attractive ads calling potential investors for collective investments in certain investment funds. These ads are normally from 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 details that are tailored for each fund. As de facto and de jure, 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. Collective investment opens new opportunities for small investors to invest in prime mega projects in which they cannot afford to invest by themselves because a lot of money is needed.

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 from different investors. In collective investment, the interested investor is not involved directly in relation to investment decisions or 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 set standards regarding licensing requirements and the regulation of those to operate collective investment schemes. This is a pivotal point because such funds are entrusted to manage third parties money and, 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 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 to know how much he is holding in his name, and how much he can take in case of profits… etc. Laws 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 to 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 professional standard, experience and relevant know-how. 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, Regulatory Authorities are advised not to allow such type of collective investment unless undertaken by able and capable institutions. 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, contracts signed between funds and potential investors are clear and free from ambiguities that could harm investors because the investors rely on the trust bond that links them with the fund. This trust bond constitutes a cornerstone in the relationship between the parties and should be maintained.

Collective investment concept, should be developed and encouraged because we believe that they are important for the market expansion and growth. They should be encouraged according to strong rules that cater for the protection of investors. 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. In some jurisdictions investment funds or unit trusts are required to specify that there is no pending legal suit or proceedings before any court, governmental body, or any arbitrator that is likely to affect the legality, validity or enforceability of any of their.

We believe that the competent authorities, should prepare up-to-date regulations to protect investors in all respects, there should be sufficient means to inspect licensed institutions and the products they offer. All, among other things, are required to give water-tight security to potential investors in collective investments.

(The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Daily Tribune)

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DR. ABDELGADIR WARSAMA GHALIB