ENSURING INVESTOR PROTECTION

FAQs
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FAQs

April 27, 2017

A lot of people may be asking questions such as: “What is a Stock Exchange? What are Collective Investment Schemes” If you have such questions on your mind, you are not alone. Even though these ideas are not new to many Ghanaians, most are not well informed as to what exactly these are.

These frequently asked questions are here to help you understand the basics of the securities market.

  • WHAT IS A STOCK EXCHANGE?
    • A Stock Exchange is an organized market in securities (shares, stocks and bonds). On this market, individuals and companies can buy shares of companies through Licensed Dealing Member (Stockbrokers) of the Stock Exchange and hence become part- owners or shareholder of these companies Similarly, individuals or companies through Stockbrokers can buy stocks and bonds of other companies and the Government, and become lenders to or creditors of these companies or the Government. Any individuals or company who at one time or the other lent money or bought shares through the Stock Exchange can also sell back the relevant shares or stocks through the stock Exchange at any time.

      Since the Stock Exchange is an organized market, it has rules and regulations which govern it. These rules and regulations are designed to protect all market participants, including the individual who puts up some funds to invest.

  • WHAT ARE COLLECTIVE INVESTMENT SCHEMES?
    • Collective investment schemes are pools of funds that are managed on behalf of investors by a professional money manager. The manager uses the money to buy stocks, bonds, or other securities according to specific investment objectives that have been established for the scheme. In return for putting money into these funds, the investor receives shares or units that represent his/her pro-rata share of the pool of fund assets. In return for administering the fund and managing its investment portfolio, the fund manager charges a fee based on the value of the fund’s assets. Collective investment schemes in Ghana take the form of either a Mutual Fund or a Unit Trust. The characteristics of collective investment schemes in Ghana are provided for in the Securities Industry (Amendment) Law 2000, Act 590 and are not necessarily the same as those of other jurisdictions.
      It is worth noting that variations exist in collective investment schemes from jurisdiction to jurisdiction. The definitions in this brochure are based on the current Securities Industry Law of Ghana.

  • WHAT IS A MUTUAL FUND?
    • A mutual fund is a public or external company incorporated solely to hold and manage securities or other financial assets. The company accepts funds from investors and uses those funds to buy a portfolio of securities and other financial assets and employs a professional fund manager to manage the investment. The company issues shares, which represent pro-rata share of the pool of fund assets to investors. A mutual fund in Ghana may either be open-ended or closed-ended.

  • WHAT ARE OPEN-END FUNDS?
    • These are funds, which stand ready to repurchase their shares from the holders in any quantity and whenever the holder should desire. In addition they sell shares in any quantity to prospective investors at whatever time the investors determine. In other words, open-ended funds stand ready to issue new shares or redeem outstanding shares on a continuous basis. The numbers of shares of the fund, therefore, fluctuates as investors purchase or redeem shares. The price of a share in an open-ended fund is determined by the net asset value per share of the fund, where net asset value per share refers to the total value of the assets in the fund’s portfolio, less any fund liabilities, divided by the number of shares outstanding.

  • WHAT ARE CLOSED-END FUNDS?
    • These are funds, which issue a fixed number of shares and do not stand ready to repurchase their shares from their shareholders when they decide to sell them. The Securities Industry (Amendment) Law requires that closed ended funds be listed on an organized exchange in order to provide liquidity to the shareholders. These shares are traded at prices determined by the laws of supply and demand.

  • WHO ARE PARTIES TO A MUTUAL FUND?
    • The main parties involved in the organization and operation of a mutual fund are:
      i) The Mutual Fund Company
      The company established to operate as a mutual fund company.

      ii) The Manager
      The professional fund manager appointed by the Mutual Fund Company to manage the fund’s investments. The manager must be a body corporate licensed by the Securities and Exchange Commission (SEC) as an Investment Advisor.

      iii) The Custodian
      A company appointed by the Mutual Fund Company to keep custody of all the securities owned by the fund. The custodian must either be a bank, an insurance company or a financial institution or a wholly owned subsidiary of any of them approved by the SEC.

  • WHAT RELATIONSHIP SHOULD EXIST AMONG THE PARTIES TO A MUTUAL FUND?
    • The manager and the custodian must be independent of the mutual fund company. Independent means that the mutual fund company should not be a substantial shareholder of the manager or the custodian. A substantial shareholder means a shareholder entitled to exercise or control the exercise of 30% or more of the voting power at general meetings of the company or one who is in a position to control the composition of a majority of the board of directors of a company.

  • WHAT IS A UNIT TRUST?
    • A unit trust is an arrangement whereby investors’ funds are pooled together and used to invest in a portfolio of securities and other financial assets, with the beneficial interest in the assets of the trust divided into units. The funds are managed by a professional manager. A unit trust is constituted by a document known as the trust deed. Under the Securities Industry (Amendment) law, Act 590, unit trusts are open-ended funds and their managers stand ready to issue new units or redeem outstanding units on a continuous basis.

  • WHO ARE PARTIES TO A UNIT TRUST?
    • The parties to a Unit Trust are:
      i) The Manager
      Which is the company that establishes the unit trust. The law requires the company seeking to establish a unit trust to be the manager of the Trust. The manager must be a body corporate licensed by the SEC as an Investment Advisor prior to the establishment of the unit trust.

      ii) The Trustee
      Which is a company appointed by the Manager to take into its custody or under its control the property of the unit trust and hold it in trust for the investors. The trustee must either be a bank, an insurance company or a financial institution or a wholly owned subsidiary of any of them approved by the SEC. The trust deed of the unit trust is made under seal between the manager and the trustee.

  • WHAT RELATIONSHIP SHOULD EXIST AMONG THE PARTIES TO A UNIT TRUST?
    • The manager appoints the trustee but the manager and the trustee must be independent of each other. Independent here means that the manager is not a substantial shareholder of the trustee, and the trustee is not a substantial shareholder of the manager.
      A substantial shareholder means a shareholder entitled to exercise or control the exercise of 30% or more of the voting power at general meetings of the company or one who is in a position to control the composition of a majority of the board of directors of a company.

  • DO WE HAVE COLLECTIVE INVESTMENT SCHEMES IN GHANA?
    • Currently there are 2 unit trust schemes in the country. They are the HFC Unit Trust and the HFC Real Estate Investment Trust (HFC REIT). These 2 schemes were established by the Home Finance Company Limited. The first one, HFC Unit Trust was established by Legislative Instrument L.I. 1516 of 1991 and the second one, HFC REIT approved by the Bank of Ghana acting for the SEC in 1995.

  • WHAT ARE THE COMMON TYPES OF FUNDS?
    • Mutual Funds and Unit Trusts are generally categorized according to their investment objectives and their investment policies. Some mutual funds focus on stocks, others on bonds, money market instruments, or other securities. On the international scene some funds invest primarily in their countries, others invest internationally, and some specialize in specific countries

  • WHAT ARE THE POTENTIAL ADVANTAGES OF INVESTING IN COLLECTIVE INVESTMENT SCHEMES?
    • There are many advantages for investing in Collective Investment Schemes.

      • Diversification
        Investing in a number of different securities helps reduce the risk of investing. When the investor buys a share/unit in a fund, he/she buys an interest in a portfolio of dozens of different securities, giving him/her instant diversification, at least within the type of securities held by the fund. For example, a portfolio made up of shares from various companies is a good example of diversification.
      • Affordability
        With many funds, the investor can begin buying shares/units with a relatively small amount of money (e.g.about¢20,000 for the initial purchase). Some funds allow investors to buy more shares on a regular basis with even smaller monthly installments.
      • Professional Management
        Mutual funds/Unit trusts are managed by professionals who are experienced in investing money and who have the skills and resources to research many different investment opportunities. Investors in these funds, therefore, get access to the professional management of their funds.
      • Liquidity
        Shares of open-end mutual funds can be redeemed at any time at the Net Asset Value Per Share (NAVPS) of the fund.
      • Flexibility
        Many fund management companies administer several different funds. (e.g. money market, fixed-income, growth, balanced and international funds) and allow the investor to switch between funds within their ‘fund family’ at little or no charge. This can enable the investor change the balance of his portfolio as his personal needs or market conditions change.
      • Performance Monitoring
        The Net Asset Value Per Share (NAVPS) or the bid and offer prices of open ended funds are reported in the press and on many internet sites as pertains in other markets, allowing the investor to continually monitor the performance of his/her investment.
  • WHAT RETURNS DOES THE INVESTOR GET FROM INVESTING IN COLLECTIVE INVESTMENT SCHEMES?
    • The mutual fund/unit trust investor earns a return on his investment from:

      1. Any distribution to him/her of the interest, dividends, or capital gains earned by the fund
      2. Any net increase in the Net Asset Value per Share (NAVPS) of his/her fund shares/units.
  • ARE THERE ANY TAX ADVANTAGES FOR INVESTING IN COLLECTIVE INVESTMENT SCHEMES?
    • Under current tax laws, Collective Investment Schemes do not pay taxes on their incomes. Again, investors in these schemes do not pay taxes on incomes received from these schemes.

      These tax incentives have been designed to encourage the pooling of investors’ resources together for investments to develop the economy

  • WHAT ARE THE LICENSING REQUIREMENTS FOR OPERATING A MUTUAL FUND?
    • a. For a mutual fund the first step is the incorporation of a Mutual Fund Company under the Companies Code 1963 (Act 197) as a public limited liability company with the sole aim of holding and managing portfolio of securities and other financial assets.

      b. After the incorporation of the company, an application is made by the company to the Securities and Exchange Commission (SEC) for a license to operate the fund.

      c. The Securities and Exchange Commission requires the following documents to be submitted to it for its review for the issue of a license to operate a mutual fund.

      i. Company Regulation
      ii. Management Agreement
      iii. Custodial Agreement
      iv. Prospectus (offering document)

  • WHAT ARE THE LICENSING REQUIREMENTS FOR OPERATING A UNIT TRUST?
    • For a unit trust, an application is made to the Securities and Exchange Commission (SEC) by a company licensed by the Commission as an investment adviser for a license to establish a unit trust.
      The Securities and Exchange Commission (SEC) requires the following documents to be submitted to it for its review for the issue of a license to operate a unit trust.

      i. Management Agreement
      ii. Trust Deed
      iii. Prospectus (offering document)

  • HOW ARE COLLECTIVE INVESTMENT SCHEMES REGULATED?
    • All securities in Ghana are subject to securities laws that are administered and enforced by the Securities and Exchange Commission (SEC).

      The securities laws regulate collective investment schemes in four basic ways:

      Through Registration Requirements
      Every person who establishes a scheme or manages the investment portfolio of a scheme must be registered (licensed) by the Commission. Those who sell the shares/units are registered as dealers. Those who make investment decisions for collective investment schemes are registered as advisers. The registration requirements enable the Commission to ensure that each operator, dealer, or adviser has the basic qualifications required to act on behalf of investors. Registration is a continuous process, and thus subject to periodic renewal in order to ascertain the continued suitability of registrants.

      Through Prospectus Requirements
      Every scheme that intends to sell securities to the public must first file a prospectus with the Commission and must give a summary disclosure document to each purchaser. The information contained in these documents is intended to allow investors and their financial advisers to make prudent and informed investment decisions. The mutual fund company or the unit trust manager is accountable under the law for the statements made in the prospectus. Once a fund has filed a prospectus it is also obliged to provide investors with financial statements and other important information on a regular basis.

      Through Regulations on Fund Operations and Sales Conduct
      The Securities and Exchange Commission has also established regulations that govern investment and marketing practices, the way in which fund assets must be held and the types of incentives that can be paid to those who manage or sell the funds.

      Many dealers who will sell shares/units of funds will also be members of the Ghana Stock Exchange (GSE) which is the industry’s Self-Regulatory Organization (SRO) and both they and their employees are subject to the rules, by-laws and policies that are established by the GSE.

      Through Surveillance and Monitoring
      The Commission controls and supervises the activities of registrants in collective investment schemes with a view of ensuring that they maintain proper standards of conduct and acceptable practices.
      Licensed operators are obliged to submit financial and operational reports periodically to the Commission. These reports are reviewed alongside set standards and criteria to ensure that licensed operators continue to remain compliant over the period of operation and not only at the time of first application of license/registration or at the time of renewal of their license/registration.

Last modified: August 10, 2017

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