The Capital Markets (Alternative Investment Funds) Regulations

Section 1. Citation Section These Regulations may be cited as the Capital Markets (Alternative Investment Funds) Regulations.

Section 2. Interpretation Section a memorandum and articles of incorporation for the constitution of an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") as an investment company;

Section 3. Requirements for approval Section 3(1) A person seeking to operate an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") shall apply to the Authority for approval to operate an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") . Section 3(2) No entity or person shall operate or hold itself out as an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") unless it has applied for and obtained approval from the Authority. Section 3(3)(a) a debt fund and debt-linked fund; Section 3(3)(b) an equity and equity-linked investment; Section 3(3)(c...

Section 4. Eligibility criteria Section 4(1)(a) shall conform with the Second Schedule; Section 4(1)(a)(i) shall conform with the Second Schedule; Section 4(1)(a)(ii) shall not include any provision which is unfairly prejudicial to the interests of participants; and Section 4(1)(a)(iii) shall demonstrate its authority or power to carry on the activity of an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") ; Section 4(1)(b) an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") shall not make an invitation to the public to subscribe to its securities; Section 4(1)(c) the directors, trustees or partners of the applicant, or their equivalent, are fit and proper persons as provided under the Act; Section 4(1)(d) advising or managing pools of capital; Section 4(...

Section 5. Furnishing of information Section 5(1) The Authority may require the applicant to furnish further information or clarifications regarding the fund manager or nature of the alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") or fund management activities or any other matter connected therewith to the application for grant of approval. Section 5(2) The Authority may require the applicant or fund manager to appear before the Authority to make representations in respect of the application.

Section 6. Approval to operate a fund Section 6(1) The Authority shall grant approval to operate an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") where the fund manager and the fund fulfil the requirements as specified in these Regulations and any other requirement specified by the Authority. Section 6(2) The approval may be granted with such conditions as may be deemed appropriate by the Authority. Section 6(3) A fund manager may after submitting an application for approval accept commitments from participants but shall not accept any monies until it is granted approval under subregulation (1) of this Regulation. Section 6(4) The approval shall be valid unless its revoked as per these regulations.

Section 7. Conditions for grant of approval Section 7(1)(a) abide by the provisions of the Act and these Regulations; Section 7(1)(b) not carry on any activity other than permitted activities; Section 7(1)(c) immediately inform the Authority in writing, if any information or particulars previously submitted to the Authority are found to be incomplete in any material particular or if there is any material change in the information already submitted. Section 7(2) An alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") which has been approved shall not amend its investment policy statement except with the approval of the Authority and its participants.

Section 8. Procedure where approval is denied Section 8(1) If after considering an application made under Regulation 4 , the Authority is of the opinion that an approval should not be granted, it may reject the application after giving the applicant an opportunity to be heard. Section 8(2) If the Authority, after hearing the applicant, refuses to grant an approval, it shall communicate the decision to the applicant within fourteen (14) days of the decision, stating the grounds for refusal. Section 8(3) Where an application is rejected by the Authority under subregulation (2) , the applicant shall ensure that the fund ceases or does not commence any activities for which a fund is required to be approved in terms of these Regulations: Provided that nothing contained in these Regulations shall affect the liability of the applicant and the fund, where applicable, towards its existing investors under law or agreement. Section 8(4) An applicant aggrieved by the decision of the Authority may appeal against such refusal to the Capital Markets Tribunal within fifteen (15) days of communication of the decision.

Section 9. Withdrawal of approval Section expressly renounces its approval;

Section 10. Cessation Section A fund manager shall cease to operate an approved fund after obtaining a resolution of the unitholders approving cessation of the fund and issuing the Authority a thirty days’ notice in writing and on compliance with any terms and conditions that the Authority may impose to ensure orderly cessation of business.

Section 11. Investment strategy Section for each fund it manages, the fund states its investment strategy, investment purpose and investment methodology in its placement memorandum ("the information document used for the purpose of the private placement of participatory interests in an alternative investment fund") to the investors;

Section 12. Investment in a fund Section the fund may pool funds from any investor wherever resident by way of issue of participatory interests;

Section 13. Placement memorandum Section 13(1) A fund manager may pool capital from investors subject to submitting its placement memorandum ("the information document used for the purpose of the private placement of participatory interests in an alternative investment fund") to the Authority for approval. Section 13(2)(a) all material information about the fund and the fund manager; Section 13(2)(b) background of the key investment team of the fund manager; Section 13(2)(c) targeted investors; Section 13(2)(d) fees and all other expenses proposed to be charged in the duration of the alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") ; Section 13(2)(e) a statement that the directors, trustees or partners are liable for the correctness of the statements contained therein; Section 13(2)(f) conditions or limits on redemption; Section 13(2)(g) disclosure of all related fees and charges; Section 13(2)(h) investment strategy; Section 13(2)(i) risk management framework; Sectio...

Section 14. Tenure Section 14(1) The tenure of the fund shall be as provided in the formation documents. Section 14(2) Extension of the tenure of the fund may be permitted subject to approval of two-thirds of the participants by number and value of their investment in the fund. Section 14(3) In the event there is no approval of an extension by the participants, the fund shall fully liquidate within one year following expiration of the stated tenure or extended duration thereof. Section 14(4) The Authority may extend the duration for liquidating the fund under subregulation (3) upon request by the fund manager.

Section 15. General obligations Section 15(1)(a) develop and review policies and procedures and their implementation on a regular basis or as a result of business developments to ensure their continued appropriateness; Section 15(1)(b) appoint a custodian licensed by the Authority for the safekeeping of the assets of the scheme; Section 15(1)(c) ensure that the fund complies with its duties and obligations under the Act and these Regulations; Section 15(1)(d) address all participants complaints; Section 15(1)(e) provide the Authority with any information it may require. Section 15(2) The fund manager may engage such technical experts as are reasonably required for the purposes of the fund and pay for the same out of the resources of the fund.

Section 16. Audit Section The fund manager shall appoint an auditor in good standing with the Institute of Certified Public Accountants of Kenya and shall cause the books of accounts of the fund to be audited annually by the appointed auditor.

Section 17. Conflict of interest Section 17(1) The fund manager shall act in a fiduciary capacity towards its participants and shall disclose to the participants, all conflicts of interests as and when they arise or seem likely to arise. Section 17(2) The fund manager shall establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business Section 17(3) The fund manager shall avoid conflicts of interest with associated persons, as may be specified by the Authority from time to time.

Section 18. Transparency Section 18(1)(a) financial, risk management, operational, portfolio, and transactional information regarding fund investments on a quarterly basis; Section 18(1)(b) any fees ascribed to the fund manager and any fees charged to the fund or any investee company ("an enterprise, company, special purpose vehicle, limited liability partnership or body corporate in which an alternative investment fund may invest;") by an associate of the fund manager on a quarterly basis; Section 18(1)(c) any inquiries or legal actions by legal or regulatory bodies in Kenya on a quarterly basis; Section 18(1)(d) any material liability arising during the funds duration or tenure shall be disclosed, as and when occurred; Section 18(1)(e) any breach of a provision of the placement memorandum ("the information document used for the purpose of the private placement of participatory interests in an alternative investment fund") or agreement made with a participant ("the holder of a participatory interest;") or any other scheme or incorporation documents, if any, as and when occurred; Section 18(1)(f) change in control ("change in the controlling interest or change in legal form in rela...

Section 19. Valuation Section have a valuation policy, procedures and methodology for valuing assets including discount rates and reference prices where applicable;

Section 20. Maintenance and transfer of record Section 20(1)(a) the assets under management of the fund; Section 20(1)(b) valuation policies and practices; Section 20(1)(c) decisions of the investments committee and investment strategies; Section 20(1)(d) particulars of participants and their contribution; Section 20(1)(e) rationale for investments made. Section 20(2) The records under subregulation (1) shall be maintained for a minimum period of seven years after the winding up of the fund. Section 20(3) The Authority may, in the interest of the investors, issue directions with regard to the transfer of records, documents or securities or disposal of investments relating to the activities as an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") . Section 20(4) The Authority may, in order to protect the interests of the participants, appoint any person to take charge of records, documents, securities and for this purpose, also determine the terms and conditions of such...

Section 21. Submission of report to the Authority Section The Authority may from time to time require the fund manager to submit reports on the activities of the fund.

Section 22. Resignation of fund manager Section 22(1) A fund manager may resign by giving a three months’ notice to the board of directors, partners or trustee of the fund and to the Authority stating the reasons for the resignation. Section 22(2) The board of directors, partners or trustee shall upon receipt of the notice of resignation by the fund manager in subregulation (1) find a replacement within the notice period. Section 22(3) The board of directors, partners or trustee shall enter into agreements with the new fund manager in order to secure the due performance of its duties as fund manager. Section 22(4) In the event a fund manager is not found upon the expiry of the notice, the board of directors, partners, or trustee as the case may be shall call for an extra-ordinary general meeting to pass a resolution to liquidate the fund.

Section 23. Removal and replacement of fund manager Section 23(1)(a) immediately upon the suspension or revocation of its license by the Authority; or Section 23(1)(b) the fund manager goes into liquidation; Section 23(1)(b)(i) the fund manager goes into liquidation; Section 23(1)(b)(ii) the fund manager is placed under administration; Section 23(1)(b)(iii) for good and sufficient reason the trustee, board of directors, partners, is of the opinion, and so states in writing, that a change of fund manager is desirable in the interest of the participants; or Section 23(1)(b)(iv) at an extraordinary resolution of removing the fund manager is passed by three quarters majority in value of the participatory interests in existence (excluding participatory interests held or deemed to be held by the fund manager or by any associate of the fund manager) and the total number of participants. Section 23(2) The fund manager shall on receipt of a notice under subregulation (1) cease to be the fund manager of the fund and the board of directors, partners or trustee shall, by deed, appoint another person eligible under these regulations to be the fund manager of the fund.

Section 24. Winding up of analternative investment fund Section 24(1)(a) where the Authority revokes the approval of the alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") ; Section 24(1)(b) where the fund manager or the trustee or custodian requests for the revocation of the Authority’s approval of the scheme; or Section 24(1)(c) upon the expiration of the tenure of the fund; Section 24(1)(d) if it is the opinion of the fund manager or trustee, as the case may be, that the fund be wound up in the interests of participants; Section 24(1)(e) if seventy five percent of the participants by value of their investment in the fund pass a resolution at a meeting of participants that the fund be wound up; or Section 24(1)(f) if the Authority so directs in the interests of participants. Section 24(2) Upon the occurrence of any of the events specified in this regulation, the fund manager shall proceed to wind up the fund in accordance with regulation 23 on the manner of winding up...

Section 25. Manner of winding up Section 25(1)(a) A fund set up as a trust in accordance with the provision of its formation documents; Section 25(1)(b) A fund set up as a limited liability partnership, in accordance with its formation documents; and Section 25(1)(c) A fund set up as a company shall be wound up in accordance with the provisions of the Companies Act ( Cap. 486 ). Section 25(2) The Authority shall require a final account ("an account of the winding up approved by the board of directors, partners or trustees showing how the fund manager has conducted the affairs of the scheme and how the scheme property has been disposed of;") from the fund manager upon conclusion of the winding up of the fund. Section 25(3) Upon winding up of the fund, the approval by the Authority shall stand revoked.

Section 26. Authority’s right to inspect Section 26(1) The Authority may carry out an inspection on any aspect of the business of the fund either on an ad-hoc basis or on notice. Section 26(2) During an inspection, the fund manager whose fund is being inspected shall be bound to discharge its obligations as provided in these regulations.

Section 27. Obligation on Inspection Section 27(1)(a) the fund manager in respect of whom an inspection has been ordered under regulation 25 ; and Section 27(1)(b) any other associated person who is in possession of relevant information pertaining to the conduct and affairs of the fund, Section 27(2) The Authority shall, for the purposes of inspection, have power to obtain authenticated copies of documents, books, accounts of the fund manager and the fund, from any person having control or custody of such documents, books or accounts.

Section 28. Communication of findingsetc. to the Fund Manager and the fund Section prohibiting a fund manager from launching a new schemes or pooling money from investors for a particular period;

Section 29. Liability for action in case of default Section Any person who contravenes these regulations or such other regulations as may be applicable to the fund may be liable to such sanctions as may be imposed by the Authority under the Act.

Section 30. Liability for loss Section A person who contravenes or fails to comply with any provision of these regulations or such other regulations as may be applicable to the fund, may in addition to sanctions as may be imposed by the Authority be liable for loss or damage suffered as a result of such contravention or failure.

Section 31. Exemptions in special cases Section 31(1) The Authority may exempt any person or class of persons from the operation of all or any of the provisions of these Regulations for a period as may be specified but not exceeding twenty-four months, for furthering innovation in the capital markets in a live environment of the regulatory sandbox in the securities markets. Section 31(2) Any exemption granted by the Authority under subregulation (1) shall be subject to the Applicant satisfying such conditions as may be specified by the Authority including conditions to be complied with on a continuous basis.

Section 32. Offences Section Any person who contravenes the provisions of these regulations shall be liable upon conviction to the penalty specified under section 34A of the Act and general damages where applicable, for any loss occasioned to the other party.

Section 33. Transition Section 33(1) An existing fund falling within the definition of alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") which is not approved by the Authority may continue to operate for a period of one year from commencement of these Regulations or if it has made an application for approval under this Regulation within the said period of one year, till the determination of such application. Section 33(2) Any entity referred to in subregulation (1) which fails to make an application for approval under these Regulations within one year from the commencement of these regulations shall cease to carry on any activity as an alternative investment fund ("a collective investment scheme that privately pools funds from at least two but not more than one hundred investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement:") failure to which, will constitute an offence.