Legal memorandum on proposed investment clubs act

Legal Memorandum on Proposed Investment Clubs Act
Submitted to Investment Clubs Association of Uganda & Competitiveness and Investment Climate (CICS), Secretariat Ministry of Finance Planning and Economic Development (MoFPED)
By Ojijo By Ojijo (The Author, Ojijo, is a public speaker and consultant in financial literacy, collective investment schemes (investment clubs and saccos), and business financial projections; lawyer and guest lecturer in financial services law, law firm management, and ICT law; author of 36 books; Rotarian, Inua Kijana Fellow; Poet Pianist; and owner, www.luopedia.com, www.lawpronto.com, www.allpublicspeakers.com, www.ajuoga.com, www.bankitgroup.com, www.parara.com, and www.achibela.com. Email: ojijo@allpublicspeakers.com Mobile:+256776100059)
Presented to
The National Coordinator,
Competitiveness Secretariat,
Ministry of Finance,
Kampala, Uganda
Memorandum by:
Ojijo Pascal,
Principal Partner,
LawPronto Limited,
Tirupati Mazima Mall,
Kabalagala, Kampala, Uganda

Memorandum on Proposed Investment Clubs Act
By Investment Clubs Association of Uganda (ICAU), (www.icau.co.ug)
Page 2 of 10
Executive Summary
Following a research study commissioned by the Competitiveness Secretariat , Ministry of Finance, on The Status of Investment Clubs in Uganda (report is herein attached), one of the main recommendations, both from country study, and from the practice in Kenya, is the need for an independent legal structure for investment clubs, separate from companies, societies, associations, partnerships, or cooperatives. This memorandum of legal opinion analyses the current law regulating collective investment schemes in Uganda, with specific reference to self managed collective investment schemes, and finds that there is a gap that can only be filled by a sui generis piece of legislation that specifically addresses investment clubs, and that is cognizant of its capitalization; dynamism in membership joining and leaving; taxation proposition; and fund management.
The memorandum proposes that a new act, Investment Clubs Act, be pronounced, to provide for, inter alia, pass through taxation of investment clubs members earnings; limit investment clubs from carrying out fund management activities; provide for capitalization of investment clubs accounts; provide for businesses of engagement; provide for manner of legal registration of investment clubs under business registry; and provide for winding up of investment clubs.
It adopted, the creation of a new statute will ensure quick and legal registration of investment clubs and promote the safety, and growth of members assets within recommended legal and regulatory framework.

Page 3 of 10
Table of Contents
Types of Collective Investment Schemes in Uganda ................................................................... 4
Legal Regime of Collective Investment Schemes in Uganda ..................................................... 5
Legal Regime of Investment Clubs Elsewhere ............................................................................ 5
Introduction ................................................................................................................................. 5
Definition of Investment Clubs .................................................................................................... 6
Membership of Investment Clubs ................................................................................................ 6
Remuneration of Officials ........................................................................................................... 6
Limit of Membership ................................................................................................................... 6
Insurance of Members Savings ................................................................................................... 7
Regulated Activities ..................................................................................................................... 7
Registration as Public Company ................................................................................................. 7
indemnification of Club ............................................................................................................... 7
Reporting and Regulatory Institutions ........................................................................................ 7
Taxation, Auditing & Reporting .................................................................................................. 8
Capitalisation .............................................................................................................................. 8
Winding up of Business ............................................................................................................... 8
Requirement for Professional Advisory Services ........................................................................ 8
Conduct of Business .................................................................................................................... 9
Schedules and Forms .................................................................................................................. 9

Page 4 of 10
Introduction
This memorandum addresses pertinent legal issues around collective investment schemes, and the need for a new legal framework for investment clubs.
This is part of the work of investment clubs association of Uganda, ICAU, which is a membership based body, an idea which was mooted by Dr. Peter Nagtegize, the National Coordinator of the competitiveness secretariat, and supported by the ministry of finance.
ICAU seeks to enhance the capacity of investment clubs, while also lobbying on behalf of investment clubs to have a self sustaining environment for their operations.
Legal Framework for Collective Investment Schemes
Types of Collective Investment Schemes in Uganda
The scope of collective investment schemes (in Uganda) can be divided into two broad categories, that is, professionally managed collective investment schemes, and self managed investment schemes.1
The professionally managed schemes in Uganda include statutory funds and private fund managers:
1. National Social Security Fund (NSSF)
2. UAP Financial Services
3. African Alliance Fund
The government also recently passed the Real Estate Investment Trusts, which a special vehicle for investing in real estate by pooling resources from various investors.
The self managed funds in Uganda include:
Cooperatives-These are membership based, and are of two types, either purely conducting savings and credit activities (SACCOS), or also carrying out other business and investments (Multi Purpose Cooperatives);
Village Savings and Loans Associations (VSLAs)-which offer services similar to SACCOs, but at a micro- village level;
Associations- These are institution based (universities, registered with deans of students and student guilds), or district based, registered with the District Commercial Development Officer (DCDO);
1 See Ojijo. 2012. Invest: Ojijo’s Guide to Financial Instruments and Alternative Investment Products. Allpublicspeakers.com Limited. Kampala, Uganda. ISBN. 978-9966-123-09-1 Pp.308-344

Page 5 of 10
Sole Proprietorships Operating as Trusts: These is the most common way through which investment clubs are registered by DFCU Bank, that is, a business name is registered, and then, a constitution drawn by members, and a few members transact business on behalf of the rest, under the doctrine of trusteeship.
Companies and Partnerships as Collective Investment Schemes:
Legal Regime of Collective Investment Schemes in Uganda
the law in Uganda that provides for and regulates operations of collective investment schemes is the collective investment schemes act (2003).
This law provides for establishment, operations, and cessation of activities of collective investment schemes, and defines the schemes as those licenses by the CMA. Consequently, investment clubs are not included.
Legal Regime of Investment Clubs Elsewhere
Jurisdictions like UK consider Investment Clubs under the extensive and vague definition of alternative funds provided in the Directive and the Act.
In Kenya, the subsisting situation is a case of Shakespearian Rose: If it smells nice, it does not matter its name. They are investment clubs are not legally recognised, but groups can register under partnership act, companies act, cooperatives act or societies act, and then, by whatever registration statute, they are collectively refered to as Chamas, (Swahili word for saving and investment groups) so long as they pool money to invest.
In the United States, the investment clubs are not a legal entity, but rather, individuals register as a partnership, and carry out their savings and investment activities, thus using the name, investment club as a trade feature, rather than a legal nomenclature.
Proposed Legal Framework for Investment Clubs
Introduction

Page 6 of 10
Unlike most legislation, which essentially starts from the idea that the citizen is allowed to do things unless prohibited, with financial services law many activities are prohibited unless there is an exemption or exclusion. The issues that such law must provide for are various, as below enumerated:
Definition of Investment Clubs
The law needs to clearly define an investment club, and this definition needs to take into consideration the three salient features of an investment club:
1. a group of people
2. that meets regularly to learn about investing and
3. and pools money regularly to invest
Consequently, the true definition of an investment club must encompass a group of natural persons, and not artificial or corporate personalities; meeting regularly, in the reasonable definition of the term, meaning, either weekly, or monthly; to learn about investing; and saves and invests regularly.
Membership of Investment Clubs
From above definition, membership to investment clubs ought to be limited to individuals, and not corporate entities. The literal interpretation of the role of investment clubs is to bring together individuals to lean about investing, and pool their money to invest together. Further, the operation of the doctrine of pass through taxation, and the suppression of the apposite double taxation, is meant to avail more resources to the individual investor, and not the institutional investors, which, presumably, are well off, under the legal doctrine of deep pocket theory.
Remuneration of Officials
The proposed law also ought to address the issue of remuneration of officials, in case one or several are employed in full time capacity by the investment club, and or, in case a few, or one, is engaged on a contract basis, and hence, paid an emolument, or indemnified against expenses. The idea is to have the club not incurring such administrative expenses, but rather, using either professionals and paying them consultancy fees, or engaging members on a term basis, so as to remove the expenses of accrual administrative costs and engaging permanent employees.
Limit of Membership
The law also ought to provide for a given limit on the people to constitute a club, since, the idea is for members to participate, learn, and be involved in decision making. A number like 30, or below, is hence, very effective. However, above thirty, and above, then it needs a manager, and then, members cease to actively take charge of their affairs and have to delegate decision making to a committee, or third party, which defeats the essence of an investment club.

Page 7 of 10
Insurance of Members Savings
Whereas other deposit taking institutions are legally obliged to insure their assets under prudential regulations, there is no particular legal obligation for investment companies to insure their assets, and SACCOS and VSLAs do not have to do this also.
The law should provide for mandatory insurance of members assets, so that in case of any loss, theft, or fraud, the members are indemnified.
Regulated Activities
There is already present a scenario where some investment clubs are investing for other investment clubs, and also, some Cooperatives, as investing on behalf of other investment clubs, or saccos. Investing other people’s money is a regulated activity, which required professional certification, and attendant financial backing in case of losses. The law should prohibit investment clubs from participating in this field of fund management. It should be noted that every activity of arranging etc. in return for remuneration, is a regulated activity.
Further, since the capital markets authority requires the registration of the offer and sale of most securities, the investment club must first decide if its membership interests are "securities." Generally, a membership interest is a security if it is an "investment contract." Generally, a membership interest is an investment contract if members invest and expect to make a profit from the entrepreneurial and managerial efforts of others. However, investment clubs have members participating in the process, and hence, there is no investment contract.
Registration as Public Company
The transformation of the club into a public company, that is, offering its shares for members of the public, either for listing purposes, or purely for acquiring more capital, should be done under the current laws regulating the making of a company public.
indemnification of Club
The law should protect the club, and provide for indemnification by officers, members, or advisors who cause financial loss to the club.
Reporting and Regulatory Institutions
For the purposes of business name registration, and filling of audited accounts and annual reports, the investment clubs will be regulated by the registrar of companies. However, since the clubs manage peoples assets, there is need for regulation also by the government agency that seeks to protect investors, the capital markets authority. The details and scope of these two regulatory regimes will be clarified to avoid duplicity.

Page 8 of 10
Taxation, Auditing & Reporting
Investment clubs members should be shielded from double taxation that exists in companies, and hence, the operation of pass through taxation should be applied to the interests, dividends, capital gains, and any other source of income for the investment clubs.
The law should also mandate the regular preparation of financial statements, with specific reference to the cashflow position, and the balance sheet.
However, the law should clearly provide for auditing of all accounts, and reporting of the same. The use of investment clubs accounting softwares, or such other computerised accounting mechanisms, should be encouraged. The investment club should generate any tax liability on its own; instead, any tax liability is passed through to members each year. Further, the income taxes are generally much higher than taxes on qualified dividends.
Capitalisation
Both self managed, and professional investment schemes can either be open ended, or closed, in terms of accepting new capital for investments.
Investment clubs, however, are open ended vehicles, with injection of new capital every month, or at such other regular intervals. The law should provide for mandatory valuation of shares of the club before new injections, and or annual valuation, and purchase of shares at such agreed prices. This will make it possible to identify the net asset value of every clubs shares, and allow for sale of shares amongst members, and or entry and exit of members, without undue procedures.
Winding up of Business
Like other businesses, the members of the investment club may decide to liquidate their operations, take their share equivalents, and move on. This procedure should be provided for in the act, indicating the requirement for notices to the registrar of companies as well as the capital markets authority. Such notice must be signed by at least 2/3 of members.
Requirement for Professional Advisory Services
The proposed law should also provide that the investment club must, at registration point, and during its annual general meeting and reports, indicate the presence of professional advisors including, but not limited to: lawyers, insurers, auditors, accountants, and investment advisors/fund managers/broker- dealers.
These professionals will help the clubs to make informed decisions, and protect the wealth of their members.

Page 9 of 10
Conduct of Business
In order to operate an investment club, the law should provide that the club business must be conducted in a somewhat orderly fashion. In additional to the informal channels of communication, an investment club must set up formal channels of communication to conduct business. Typically, this is done with monthly meetings. A typical meeting agenda will include all the normal activity you would expect in an organization with elected officials. A typical meeting agenda:
 Roll call
 Old business – list of any unfinished business from the previous meeting.
 Summary of votes – Summary of all voted decisions from the previous meeting
 NAV presentation – NAV or the Net Asset Value of the Club will indicate what each club member is worth on paper.
 Available funds – a presentation of Available funds to invest.
 Presentation of current research – each member assigned to present an investment option will present his/her research.
 Vote to hold or invest – A vote to hold cash, sell current assets or invest in one of the investment options
 Investment vote – A final vote on an investment strategy specifying an exact amount to invest and strategy to execute that investment.
 Other business – Typically, other business will include proxy voting needs or other day-to-day business operational needs. This could also include options to change a brokerage house, or discussions of counter party risk.
 Formal close of meeting
Schedules and Forms
The law should provide for forms for:
 Registration of members
 Change of leadership
 Registration of investment club business entity
 Investment club articles of association (by-laws)
 Investment club memorandum of association/statement of objects
Conclusion

Page 10 of 10
In conclusion, it is important to enact this proposed law, to provide for protection of members interests, regulate operations of investment clubs, and allow as many more clubs to be formed, so as to facilitate savings, investing, and stimulate growth of the economy.

Legal memorandum on proposed investment clubs act

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