In furtherance of the Securities and Exchange Commission’s (SEC’s) mandate to regulate and develop the Nigerian Capital Market and in particular, its duty to ensure the protection of investors in the Capital Market, the Board of the Commission established a nationwide fund known as the National Investor Protection Fund. Consequently the FMDQ OTC Securities Exchange launched an Investment Protection Fund (IPF) on the 8th of August, 2017, to boost and sustain investors’ confidence in the Nigerian Capital Market. The IPF was established pursuant to Section 197 of the Investment and Securities Act 2007. The section provides that “A securities exchange or capital trade point shall establish and maintain a fund to be known as the investor protection fund.”
A Securities Exchange or Capital Trade Point is obligated to establish and maintain an Investors Protection Fund (IPF), which shall be administered by a Board of Trustees under the supervision of the SEC. Section 199 of the ISA provides that the Board of Trustees of an IPF shall consist of a maximum of 9 members drawn from the dealing member firms, a representative from the securities exchange or capital trade points, a representative from the Central Securities Clearing Systems (CSCS), a representative from the Securities and Exchange Commission (SEC), one person representing the institutional investors, a representative from the Association of Capital Market Registrars, one person with integrity and knowledgeable in capital market matters, one person representing registered shareholders association, one person who shall be a legal practitioner knowledgeable in capital market matters.
OBJECTIVES OF THE FUND
The objectives of the IPF’s are set out in Section 198 of the Investment and Securities Act 2007 (the Act); “The objectives of an investor protection fund shall be to compensate investors who suffer pecuniary loss arising from- (a) the insolvency, bankruptcy or negligence of a dealing member firm of a securities exchange or capital trade point; and (b) 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 or deemed received by the dealing member firm in the course of its business as a capital market operator.”
In order to recover from the fund, one has to be an investor in securities and must have suffered pecuniary loss. Unfortunately the Act has neither defined ‘investor’ or ‘investments’ especially as it relates to the IPF. Considering that the Act was enacted to regulate all aspects of investment and securities business; and the many interpretations to which the term “investor” is open, it is essential that some sort of definition be provided by the Act as to the nature of the investment it seeks to regulate at each material point. For our purposes, however, an investor will refer to a person who has interests in the acquisition or disposition of securities traded on a stock exchange from which earnings or profits are expected. These securities include: shares, stocks, debentures, government bonds, commodity futures, options and other derivatives. A dealing member has been defined as a body corporate which is a member of a recognized securities exchange and is licensed to deal in securities on that exchange. Thus, a dealing member includes any person who makes or offers to make, induces or attempts to induce any person to enter into any agreement for or with a view to acquiring, disposing or subscribing for securities.
Pursuant to Section 198 (a), compensation shall be paid to investors who suffer pecuniary loss arising from the insolvency, bankruptcy and negligence of a dealing member firm of a securities exchange or capital trade point. This particular paragraph was not reflected in the equivalent provision in the repealed ISA 1999. This means that under the former regime such losses arising from insolvency, bankruptcy and negligence were not covered. The present regime reflects the position in the United Kingdom. The spate of corporate collapse in recent times, particularly of financial institutions, shows that the provision of section 198 (a) is necessary. Investors in insolvent member companies of a securities exchange are assured of relief for pecuniary loss suffered from the insolvency.
In addition, compensation is payable for negligence of a dealing member. This would engender due diligence and best practices, and capital market operators who, in an attempt to make quick business, make representations carelessly or recklessly, as they would have no option but to desist from such practices. Furthermore, compensation can be claimed for pecuniary loss arising from defalcation committed by a dealing member firm or any of its directors, officers or employees. Acts of embezzlement and misappropriation of funds are prevalent in the capital market, and providing for compensation upon its occurrence is fitting, more so as it covers the acts of the directors, officers, employees and representatives of the dealing member firm. The acts of these persons in the course of the business of the dealing firm are rightly attributed to the dealing member.
SOURCES OF FUNDS
The Act provides under Section 202(a-f) that the fund shall consist of;
- All monies paid to the Board of Trustees by dealing members of the securities exchange or capital trade point in respect of which an IPF has been established as may be prescribed by the securities exchange or capital trade point from time to time;
- The interest and profits, from time to time, accruing from the investment of an investor protection fund;
- All monies recovered by or on behalf of the Board in the exercise of any right of action conferred by that part of the Act;
- All monies paid by an insurer pursuant to any contract of insurance or indemnity entered into by a dealing member or the Board of Trustees;
- All monies held by any IPF or by whatever name so called, established by a securities exchange or capital trade point prior to the coming into force of the Act; and
- All other monies lawfully paid into an IPF.
It can be gleaned from the above that dealing members of a securities exchange or capital trade point, as well as the securities exchange or capital trade point contribute money to the Fund as may be prescribed. Also, interest and profits realized from investments of the Fund are paid into the account. An instance of monies lawfully paid into an IPF, pursuant to the above, would be found in Rule 203 (4) of the Securities and Exchange Commission Rules and Regulations which requires that all unclaimed returned monies, being surplus monies due to subscribers or purchasers of securities shall after 6 months be transferred by the Registrar into an IPF.
PAYMENTS OUT OF THE FUND
Part 8 of the National Investor Protection Funds Rules and Regulations (the Rules) provides from time to time certain payments shall be made from the IPF. Such payments would include monies required by the Board for the payment of compensation to investors in accordance with the Rules, monies required for the arrangement, service or repayment of loans obtained by the Board, premiums on policies of insurance taken out by the Board for the purposes of the Fund, all expenses incurred by the Board in its administration and management including expenses arising from professional services in establishing the Fund, professional fees and expenses of the auditor to the Fund, expenses of the staff of the Fund, professional fees and expenses of advisers appointed by the Board from time to time to render services to the Board or Fund. It also states that payments of such other monies as are permissible to be paid may be payable out of the IPF in accordance with the provisions of the Act.
It should be noted that payments of compensation out of the fund shall be in monetary form only.
APPLICATION OF THE INVESTORS PROTECTION FUND
Section 212 of the Act provides the situations or instances which the funds of an IPF shall be held and applied for. From the provision of the section, it is clear that the funds will be applied to compensate any person who suffers pecuniary loss from;
- the revocation or cancellation of the registration of a capital market operator pursuant to the provisions of Section 38 of the Act;
- the insolvency, bankruptcy or negligence of a dealing member firm of a securities exchange or capital trade point; and
- any defalcation committed by a member company or any of its directors or employees in relation to any money or other property which, was entrusted or received or deemed received by a member company or any of its directors or employees whether before or after commencement of this Act in the course of or in connection with the business of that company or any other occurrence in respect of which the claim arose.
PROCEDURE TO CLAIM COMPENSATION
Section 212 of the Act provides that persons who have suffered pecuniary loss, in connection with any of the purposes for which the IPF is established shall be entitled to claim compensation from the fund established for the securities exchange or capital trade point to which the defaulting member belongs. Such claims may be determined, from time to time and as the case may be, by a securities exchange, capital trade point, SEC or the Investment and Securities Tribunal. The Board of Trustees may, after such determination, appropriately settle the claims from the fund. An aggrieved investor is required to make a claim for compensation in the first instance to a securities exchange or capital trade point. The claim shall be verified within 30 days by the securities exchange or capital trade point which will also determine the amount or extent, if any, to which the claim shall be allowed. A verified claim shall be paid from the fund to an aggrieved investor within 14 days of such verification by the securities exchange or capital trade point. The statutory periods allowed for verification of claims and payment of verified claims are commendable and, if complied with, are capable of advancing the legitimate interests of investors.
Where the claimant is dissatisfied with the determination made by the securities exchange or capital trade point, the jurisdiction of the Investment and Securities Tribunal (IST) becomes due and unquestionable. Its original jurisdiction in this regard is exclusive. An aggrieved investor may also explore the option of taking his grievance directly to the Administrative Proceedings Committee (APC) of SEC on the failure of the securities exchange or capital trade point to provide suitable redress. Where defalcation is in issue, a claim for compensation shall be made in writing to the Board of Trustees within 6 months after the claimant became aware of the defalcation, and any claim which is not so made becomes barred unless the Commission determines otherwise. It should be noted that no such claim shall lie if prior to the defalcation, the money or other property concerned had ceased to be under the control of the director or directors of the affected dealing firm.
SEC, a securities exchange or capital trade point may publish a notice in any two national daily newspapers circulating in Nigeria calling for claims for compensation from the fund. The notice shall specify the date, not being earlier than one month after the said publication, on which the claims may be made.
AMOUNT OF COMPENSATION PAYABLE
Pursuant to Section 213 (6), the amount payable as compensation to a claimant is subject to any limit that may be determined by the securities exchange or capital trade point and approved by the Commission from time to time. Also, a claimant shall only be entitled to the amount of the actual pecuniary loss which he has suffered (including the reasonable cost of disbursement incidental to the making and proving of his claim) less any amount or value of all monies or other benefits received or receivable by him from any source other than the fund in reduction of the loss.
It is important to emphasize that in determining the amount payable to an aggrieved investor, regard would be had to the limits fixed by the securities exchange or capital trade point and approved by the Commission. Thus, if the amount claimed by the investor is less than the set limit, then he shall recover, in full, his claims against the fund.
SUMMARY AND CONCLUSION
The IPF is only a factor in a larger regulatory scheme to recognize and protect investor interests, while ensuring that the realities of commercial life are not eclipsed. The scheme is a function of a variety of substantive, procedural and institutional aspects of our commercial practice, and this should be borne in mind while determining the rights and obligations of investors.
However, there appears to be some irregularities in the arrangement of the provisions of the Act with regard to the procedure to claiming compensation. A clear example of such can be seen under section 214 of the Act which provides for notice calling for claims against the investor protection fund. In addition, the arrangement of the provisions on claims for defalcation in separate sections is clumsy. It would be tidy if the aspect which is under the provisions on publication of notice of claims is expunged and transferred to Section 213 which deals generally with claims against an IPF.
Finally, it is commendable that the Nigerian government subscribes to the expediency of an investor protection fund, and has also endeavored to statutorily authenticate same. The interest in compensation, however, would be served better by an improved framework than that which is currently in place. Thus, a loss of faith in the capital market would tend to prevail if nothing is done about the limitations in the system as it is now.
George Etomi & Partners (GEP) is a full-fledged law firm providing commercial advisory services to an array of local and international clientele. GEP takes pride in its deep expertise in the Capital and Financial Markets domestically, regionally and globally and advises clients on financial transactions, including leading international and local investors in infrastructure projects across various sectors, investment banks, merchant banks, commercial banks and development financial institutions on financing issues and risk mitigation strategies as it may affect the companies.