Editor’s note: This is general educational information about how Kenyan collective investment schemes are structured under the rules in force, drawn from the official sources listed at the end. It is not investment advice and does not describe any particular scheme, company or security.
Analysis: what the split buys, and what it does not
The structure is built against one specific hazard, which is the intermediary taking or losing what is not its own. Segregation under regulations 39 and 41, the exclusive-benefit account under regulation 68, and the depository’s separation of client and proprietary accounts all point at the same failure mode. Assets held in trust for participants and recorded in the scheme’s name are not part of the manager’s own estate, so an insolvent manager’s creditors have no obvious route to them. That is a real protection and it is the one the design delivers most reliably.
It delivers less than investors often assume elsewhere. The Investor Compensation Fund established by section 18 of the Capital Markets Act exists to compensate investors who suffer pecuniary loss from the failure of a licensed stockbroker or dealer to meet contractual obligations. A collective investment scheme’s fund manager is neither. Nothing in the Act converts the custody rules into a guarantee of value, and the regulations say nothing about market losses, issuer defaults inside the portfolio or a mandate that simply underperforms. The framework governs where the assets sit, not what they are worth.
The weakest joint is the one the rules themselves concede. Where a single bank is both trustee and custodian, the party monitoring the safekeeping and the party doing the safekeeping are the same balance sheet, and the only remaining check is the Authority’s satisfaction that conflicts are well mitigated. A reader working through a scheme’s documents can test the design cheaply: identify the trustee and custodian and whether they are one entity, confirm both are current licensees, check that the annual accounts disclose trustee and custodian fees as regulations 48 and 68 require, and see whether the trustee’s own annual report addresses valuation and pricing rather than restating the manager’s account of the year.
What the documents say
A saver who buys units in a Kenyan money market fund hands over cash to a fund manager and receives, in return, a claim on a pool of assets. The manager picks what goes into the pool. It does not hold the pool. Kenyan law puts the title and the safekeeping somewhere else on purpose, and the current rulebook, the Capital Markets (Collective Investment Schemes) Regulations, 2023, is unusually explicit about where. Reading those regulations alongside the Capital Markets Act, Chapter 485A, produces a sharper answer than the marketing material usually gives.
Three licensed roles, and the one merger the rules permit
Regulation 12 sets the conditions a scheme must satisfy before the Capital Markets Authority will approve it. The scheme must have a fund manager who is independent of the trustee and the custodian, a trustee where the scheme is constituted as a trust, and a custodian. Each of the three must be a body corporate incorporated in Kenya with its registered office in Kenya, and each must hold its own licence. The directors and key personnel of the fund manager, trustee and custodian must be fit and proper. Regulation 49 states the point from the other direction: the fund manager shall not be related to the trustee or the custodian.
That is where the popular description of the arrangement usually stops, and where it becomes inaccurate. Regulation 12 also provides that a trustee and a custodian may be one entity, provided the entity demonstrates to the Authority that conflicts of interest are well mitigated. So the rulebook enforces a two-way split between the party making investment decisions and the party holding the assets. It does not always enforce a three-way one. An investor reading a scheme’s information memorandum should expect to find the trustee and the custodian named separately, and should not assume they are unconnected until the document says so.
The licences behind those names carry hard numbers. A custodian must be a bank licensed under the Banking Act, or another financial institution that demonstrates capacity and expertise in custodial business, with initial and continuous paid-up capital of at least fifty million shillings and minimum liquid capital of twenty-five million shillings, or eight per cent of its liabilities, maintained throughout the life of the licence. The Seventh Schedule sets the application fee at Ksh. 10,000, the licensing and annual regulatory fee for a custodian or trustee at Ksh. 100,000, and the annual fee for the scheme itself at Ksh. 250,000. Those figures are small next to the sums the schemes handle, which is a reminder that the licence fee is an administrative charge and not a capital buffer.
Following a single instruction through the structure
The mechanics become concrete when a manager decides to buy something. Under regulation 68 the custodian works to a written agreement that obliges it to maintain custody of all the assets of the scheme, to open an account in the name of the collective investment scheme for the exclusive benefit of that scheme, and to transfer, exchange or deliver securities only on proper instructions from the fund manager or trustee. Where title is recorded electronically, the custodian must ensure the scheme’s entitlements are separately identified from those of the fund manager and the trustee in the records of whoever maintains the register of entitlement.
Regulation 39 places a matching duty on the trustee. Scheme assets must be identifiable and segregated from the trustee’s own assets, from the assets of the fund manager and its related entities, and from the assets of other schemes and other clients of the trustee. Regulation 41 forbids the trustee or custodian, or any third party to which custody has been delegated, from reusing entrusted assets for their own account, with narrow exceptions that require the reuse to be for the account and benefit of the scheme and to be collateralised. Regulation 69 requires the custodian to keep books giving a complete record of the assets held and of every transaction carried out for the scheme, and to let the trustee, the fund manager or an authorised agent of the Authority inspect them on the custodian’s premises during business hours.
For listed Kenyan equities the chain runs on into the Central Depository and Settlement Corporation. Custodian banks, alongside stockbrokers and investment banks, act as central depository agents, and the CDSC keeps clients’ securities accounts segregated from participants’ own proprietary accounts. Settlement follows a delivery versus payment design the depository describes as DvP Model 2, in which securities settle trade for trade on a gross basis while cash settles on a net basis through the settlement bank, inside a rolling T+3 cycle. The depository levies 0.08% of equity turnover on transactions and 0.002% of bond turnover, charges that fall on the scheme rather than on the manager.
Oversight that is meant to be adversarial
Regulation 36 makes the trustee responsible for taking reasonable care that the manager runs the scheme in accordance with the scheme documents and the regulations, and for reporting any irregularity or undesirable practice to the manager and, where the manager does nothing, to the Authority. Regulation 44 removes the obvious escape route: a trustee shall not delegate to the fund manager any function of oversight in respect of the fund manager. Regulation 132 requires an annual report by the trustee, and the trustee must file the scheme’s compliance status with the Authority every three months.
Exit is also regulated. A trustee may not retire voluntarily without giving at least six months’ written notice to the Authority, the fund manager and the unit holders, setting out the reasons, and recommending and appointing a replacement within the notice period. If no replacement can be found, the trustee must go to an extraordinary general meeting of unit holders and propose either winding the scheme up or moving the holders to another fund. A trustee who ceases to be licensed, goes into liquidation or has a receiver appointed is removed automatically.
