Friends pooling money to buy a block in Gerehu, a church investing surplus funds, a landowner company holding royalties for its clan: each is a trust in which people share the profits of invested property. Whether the Capital Market Act 2015 requires it to be registered depends on its size and on who set it up.
The prohibition in section 184
A person “shall not establish or operate a unit trust or managed investment scheme” unless (a) the person is a licensed trustee under the Act, appointed by the members or unit holders to act as trustee of the scheme, and (b) the scheme “is approved and registered by the Commission”. A person who contravenes the section “commits an offence and shall be liable to a fine not exceeding K10,000,000.00 or imprisonment for a term not exceeding ten years, or both”.
Both conditions must be met: a corporation holding a capital market licence authorising it to operate a scheme (section 189), and a scheme registered under section 186. A licensed trustee running an unregistered scheme breaks the law just as much as an unlicensed promoter, and “establish” catches the person who sets a scheme up even if someone else runs it.
When registration is compulsory
Section 187(1) says a unit trust scheme or managed investment scheme “shall be registered” under section 186 where any of three things is true.
| Trigger | What it means |
|---|---|
| More than 20 members (s 187(1)(a)) | Size alone makes registration compulsory, whoever set the scheme up. |
| Professional promoter (s 187(1)(b)) | The scheme was promoted by a person, or an associate of a person, who at the time “was in the business of promoting” unit trusts or managed investment schemes. Even a five-member scheme must register if a professional promoter is behind it. |
| Closely related schemes (s 187(1)(c)) | The Commission has made a written determination under s 187(2) that several schemes are closely related, and their combined membership exceeds 20. |
The third trigger stops a promoter splitting one large scheme into several small ones. Under section 187(2) the Commission “may, in writing, determine that a number of unit trusts or managed investment schemes are closely related”, and section 187(3) requires written notice of the determination to the trustee of each scheme. “Associate” takes its meaning from section 3, which covers spouses, employees, partners, related companies and their directors, and anyone acting on another’s instructions.
How members are counted
Section 187(4) gives two counting rules. First, joint holders of an interest count as a single member, so a husband and wife holding units together are one member. Second, the Act looks through trusts: an interest held in trust for a beneficiary is treated as held by the beneficiary where the beneficiary is presently entitled to a share of the trust estate or its income, or is in a position, alone or with others, to control the trustee. A nominee that buys units for twelve relatives who are each entitled to their share therefore adds twelve members to the count, not one. The same counting rules are used in section 271(2) when a small scheme asks to be deregistered.
Who “operates” a scheme
Under section 187(5) a person does not operate a scheme “merely because” he is acting as an agent or employee of another person, or is taking steps to wind the scheme up or remedy a defect that led to its deregistration. The accountant who keeps the books is not the operator; the trustee or promoter who directs the scheme is. Section 187(6) adds a defence for a person who would otherwise contravene section 184 because an interest is held in trust for two or more beneficiaries: it is enough to prove that the person “did not know, and had no reason to suspect, that the interest was held in that way”. The subsection as printed is missing a verb, but its intent is clear: an operator who honestly believed the scheme had 20 members or fewer, because a nominee concealed the people behind it, should not be convicted.
Small schemes
The Act does not expressly say that a scheme falling outside section 187(1) may operate unregistered, but that is its evident design. Section 271(2) allows the trustee of a registered scheme to apply for voluntary deregistration where the scheme has 20 or fewer members (counted under section 187(4)), all of them agree, and section 187(1)(b) or (c) does not apply. A small investment club can therefore register voluntarily and leave the register later if its members choose. The moment it takes its 21st member, or hands its promotion to a professional, registration becomes compulsory.
Read literally, section 184 forbids operating any scheme that is not registered, while section 187 says only some schemes must be registered. The better reading, supported by section 271(2), is that section 184 bites on schemes that section 187 requires to be registered. A promoter who wants certainty should ask the Commission, which can also exempt a scheme under section 274.
What this means for investors
Section 186(2) requires the Commission to keep a record of every registered scheme, and section 198 names the trustee in that record. Anyone offered units in a “fund” or “money scheme” should ask the Commission whether it is registered and the trustee licensed. If not, the promoter faces the section 184 penalty, the Court may wind the scheme up under section 188, and a subscriber may be able to cancel the contract under section 263. See unregistered schemes and spotting a fraudulent scheme.
For a scheme that must register, the next step is described in how a unit trust is registered.
Sources
- Capital Market Act 2015 — ss 3, 184, 186–189, 198, 263, 271(2), 274
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.