The Road to Mutuality
Collective Investment Scheme (“CIS”) Bye-Laws
By Camille Granger-Julien
A Collective Investment Scheme (CIS) is an investment product in which investors contribute toward a pool of investments managed by a professional fund manager on their behalf. A CIS is also commonly referred to as an “investment fund” or a “mutual fund.”
In Trinidad and Tobago, mutual funds are popular, as they relieve investors of the burden of selecting individual stocks and continuously adjusting their portfolios to achieve diversification and returns. It is, therefore, essential that this industry is effectively regulated.
Key Changes toward Mutuality:
Authorisation of Mutual Funds
Under the Bye-Laws, all mutual funds are required to be authorised by the TTSEC before being distributed in Trinidad and Tobago, which ensures that CIS offerings undergo rigorous scrutiny by the Commission to confirm their legitimacy, transparency and accuracy before being offered to the public. Moreover, there is a new requirement that every CIS authorisation application is to be accompanied by documentary evidence of the appointment of the following persons (among others) for TTSEC approval:
· CIS Manager oversees and manages the fund’s assets in accordance with its investment objectives and restrictions as outlined in its constituent documents. Under Bye-Law (22), a CIS Manager must be registered with the TTSEC as a Broker-Dealer or as a Restricted Broker-Dealer conducting business as a CIS Manager. While under the previous legal framework CIS Managers needed regulatory approval, the Bye-Laws has created a new Broker-Dealer category specific to CIS Managers. This enhances regulatory oversight and market integrity, ensuring that the CIS assets are managed in the best interests of investors and in accordance with the objectives of the CIS.
· Responsible Person is accountable for the oversight and governance of the CIS’s operations and compliance with legal and regulatory requirements. The Responsible Person must be authorised by the TTSEC in accordance with Bye-Law (22). Previously, where a CIS was structured as a trust, the trustee supervised all the parties involved in the management and administration of the scheme. Moreover, the duties and responsibilities of the trustee were governed by trust law and the trust documents. With the Bye-Laws, investor confidence is strengthened as registration of the Responsible Person ensures proper oversight and verifies that parties in this role meet regulatory standards.
· Custodian is responsible for maintaining a clear separation of CIS assets, both physically and legally and must be authorised by the TTSEC. Additionally, the Bye-Laws introduces a new requirement that the Custodian must be independent of the CIS Manager and Responsible Person unless the CIS is constituted as a trust, in which case the Responsible Person may act as Custodian with the Commission’s approval. This independence mitigates against conflicts of interest and enables independent oversight to protect investors. The Bye-Laws have also strengthened the requirement for segregation of CIS assets which is fundamental for clarity of asset ownership and protection from seizure by the Custodian’s creditors.
· Other Parties Related to a CIS – The Bye-Laws define and establish the roles, responsibilities and eligibility criteria for other related parties to a CIS such as Registrar, Distributor and Auditors. This framework aligns with international best practice standards within the CIS industry.
Subscriptions and Redemptions
Provisions governing how parties related to a CIS should manage subscriptions and redemptions are included in the Bye-Laws. They entail the development of policies and procedures to ensure that subscriptions and redemptions are executed fairly and without discrimination, with a strong focus on investor protection and equitable treatment. The Bye-Laws clarify when and how investors can buy or sell units-usually based on the daily Net Asset Value (NAV), including provisions for the suspension of sales and redemption to support effective liquidity management.
Outsourcing
In line with IOSCO’s principles and objectives of securities regulation, the Bye-Laws establish criteria for outsourcing any function relating to a CIS. Key requirements include the development of minimum service agreements standards with third parties, due diligence and a specified standard of care in appointing third parties, restrictions on outsourcing key roles and functions and mandatory annual performance assessments on the third-party service providers. As markets and the wider trading landscape have become more complex and competitive, outsourcing has become increasingly necessary to reduce costs and improve efficiency. This cost savings benefits investors and contribute to a more efficient and innovative market.
Disclosure Requirements for Parties related to the CIS
Prior to the issuance of the Bye-Laws there were no requirements for senior officers of a CIS Manager to disclose their interest in investments. Bye-Law (87) addresses this by requiring CIS Managers to establish, implement and maintain policies and procedures for the CIS Manager, its senior officers and investment committee members to disclose all direct and indirect interest or holdings in securities The aim is to provide transparency and accountability, preventing any real or perceived conflicts of interest that could undermine investor trust and market performance.
Effect of Transitional Provision
All CIS deemed to be authorised prior to the coming into effect of the Bye-Laws were permitted to continue their operations and the distribution of units for a period of two years after the Bye-Laws came into force. During this two-year transitional period, the Responsible Person was required to comply with the authorisation requirements outlined in Bye-Law 10. This arrangement provided a grace period to allow existing authorised funds and market participants to adapt to the new provisions before they became fully effective thereby ensuring a smoother implementation and preventing undue disruption to operations or existing investments.
Conclusion
Achieving a balance between investor protection and market efficiency within the CIS industry demands a regulatory framework that supports innovation while ensuring strong safeguards for investors. By introducing the CIS Bye-Laws, the TTSEC has made a significant step forward in fulfilling this objective.
Camille Granger-Julien is an Attorney-at-Law