• Monday, December 11, 2023
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Investor Protection Fund: Why your views matter in rules making


 While the Nigerian Stock Exchange (NSE) focus has been on cleansing, restructuring and making the stock market more accessible, one of its key initiatives this year is to ensure the operation of the Investor Protection Fund (IPF), which has a seed capital of N450 million as of September 2012, when its board of trustees (BoT) was inaugurated with Gamaliel Onosode as chairman.

The step is also in pursuant to Section 197 of the Investment and Securities Act (ISA) 2007, which requires the Securities Exchange to establish an Investor Protection Fund to be administered by a BoT, subject to regulatory supervision.

Part XIV of the Investment and Securities Act 2007 requires the Nigerian Stock Exchange to establish and maintain an investors protection fund to compensate investors with genuine claims of pecuniary loss against dealing member firms resulting from: insolvency, bankruptcy or negligence of a dealing member firm of a securities exchange or capital trade point; and defalcation committed by a dealing member firm or any of its directors, officers, employees or representatives in relation to securities, money or any property entrusted to, or received by the dealing member firm in its course of business as a capital market operator.

The Exchange in compliance with the above statutory requirement established the Investors Protection Fund and constituted a BoT to administer it. The IPF provides investors a statutorily backed solution for reducing losses they might suffer as a result of the bankruptcy, insolvency, negligence or wrong-doing by dealing members. Following the inauguration, Onosode expressed delight at the opportunity to serve as well as ensure transparency.

On June 11, 2013, the BoT of the IPF approved a draft set of rules for the Fund to govern the operations and effective management of the Fund, pursuant to the provisions of the Investments and Securities Act, 2007.

The Rules, which the board invited stakeholders’ participation in enacting, make provision for the following, amongst others: Management of the Fund – this provides for powers of management, payments into and out of the Fund, indemnity of the board members, annual and quarterly reports, reports on particular events, records and public enlightenment; and Compensation of Investors – this provides for verification of claims, payment of compensation, multiple claims, amount of compensation payable, adjusted payments as well as recoveries and subrogation.

Getting stakeholders involved

“The board of the IPF sees your participation as important for the following reasons: To create public awareness and solicit the public’s feedback on the Rules; and to improve the Rules where necessary and thereby have a robust, well-drawn up set of the Rules. We are involving as many stakeholders as possible in this rule-making exercise in order to achieve the aforementioned goals. Please, be assured that we shall strive to take as many of the comments as possible into consideration during the process,” the NSE said in a recent circular.

Considering the importance of this initiative, which provides statutory solution to mitigate market related loses, your views as an investor is very vital.

For instance, part of the rules regarding payments into the Fund states: “There shall be paid into the Fund the following: Contributions from Dealing Member firms; All penalties/fines paid by erring Dealing Member-Firms of the Nigerian Stock Exchange (“The Exchange”) for contravening capital market Rules, Regulations and Market Practices; The interest and profits from time to time accruing from the investment of the Fund; All monies paid to the Fund in accordance with the provisions of the ISA; Asll monies recovered by or on behalf of the board in the exercise of any right of action conferred by the ISA; All monies paid pursuant to any contract of insurance or indemnity entered into by a Dealing Member-firm; Any monies whether in form of grants, donations or subventions received from The Exchange or other institutions and persons; Monies received as income from, or the proceeds of sale of any investments; and Monies borrowed by the Board from The Exchange for the purposes of the Fund.”

Also, in relation to payments out of the Fund, the rules say that there shall from time to time be paid from the Fund: Monies required by the board for the payment of compensation to investors, in accordance with these Rules; Monies required for the arrangement, service or repayment of loans obtained by the board from The Exchange for the purposes of the Fund; Premiums on policies of insurance taken out by the board for the purposes of the Fund; Any expenses of establishing the Fund or incurred by the board in its administration and management including expenses arising from professional services; and Such other monies as may be payable out of the Investors Protection Fund in accordance with the provisions of the ISA.

Payment of compensation

The board may pay compensation where it is satisfied, on the basis of evidence provided by an investor or dealing member or which is available to it from other sources, that: the investor has a claim against a dealing member; the investor has duly applied for settlement of its claim from the dealing member; the investor has duly applied for compensation from the Fund; and the dealing member is unable or likely to be unable to satisfy the claim within a reasonable period.

According to the rules, an application for compensation may be rejected if: it is not promptly made and in any event within the periods stipulated in the ISA; or the investor is responsible for, or has directly or indirectly profited from, events relating to the Firm’s business which gave rise to the Member Firm’s financial difficulties.

Multiple claims – “Where a person claims in a double capacity for himself and as the Personal Representative of a deceased investor, he is to be treated in respect of the representative claim as if he were the deceased investor without prejudice to his own personal claim; Where a person claims for himself and as a trustee, he is to be treated in respect of the latter claim as a different person; Where two or more persons in partnership have a joint beneficial claim, then, the claim is treated as the claim of the partnership, otherwise each of them would be taken to have equal shares in the claim unless the contrary is proved to the satisfaction of the board; Where an agent has a claim for one or more principals, the principal or principals are to be treated as having the claim, to the exclusion of the agent.”

Amount of compensation

The maximum compensation payable to an investor who has suffered a loss shall be an amount that is determined by the board by a written policy from time to time; and where the loss is less than the maximum amount fixed by the board at any given time, the investor may be paid the full amount of the loss, less any amount or value of all monies or other benefits received or receivable by him from a source other than the Fund in reduction of the loss.

Notwithstanding the above, the amount of compensation may be reviewed by the Board from time to time. In determining the maximum amount of compensation payable, the Board shall take into account circumstances prevailing in the capital market.

Adjusted payments

Where the board is satisfied that in principle compensation is payable but considers that immediate payment in full would not be prudent having regard to other applications for compensation, or to any uncertainty as to the amount of the investor’s overall net claim, it may determine to pay an appropriate lesser sum in final settlement or to make a payment on account.