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Recently, last week to be precise, the Securities and Exchange Commission (SEC) further threw its weight behind the Investor Protection Fund (IPF) by approving the rules governing it.
The entire market welcomed the development even as the Nigerian Stock Exchange (NSE) says it now enables the Board of Trustees (BoT) of the IPF to carry out the duties for which the Fund was established, “in line with the Investment and Securities Act 2007, and the approved Rules.”
The question now is… what do the rules say? Some interesting extracts from the rules provide more answers to likely questions that emanate from many shareholders. Though, the word remains that the IPF is not a free fund for reckless investors.
Compensation of investors
In respect of claims submitted to the Exchange by persons who allege that they have suffered pecuniary losses as provided under Section 212(1) of the Investment and Securities Act (ISA), the Board shall make payment based on verified claims in accordance with these Rules and the provisions of the ISA.
Payment of compensation
The rule requires the IPF Board to 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 Dealing Member is unable to satisfy the claim within a reasonable period; the investor has exhausted The Exchange’s internal complaint resolution procedure; the investor has duly applied for compensation from the Fund; and the Exchange has verified the claim.
Can your application for compensation be rejected?
An application for compensation may be rejected if: The claim arose from an event described in Section 212(1) of the ISA, which occurred before a time as may be decided by the Board from time to time; or 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.
In determining whether the investor is responsible for, or has directly or indirectly profited from, events relating to the Firm’s business which gave rise to the Dealing Member Firm’s financial difficulties, the Board shall take into account all prevailing circumstances, including but not limited to the following matters: whether there is a decision by a body of competent jurisdiction indicating that the investor is responsible for, or has directly or indirectly profited from events relating to the Dealing Member Firm’s business which gave rise to the Dealing Member Firm’s financial difficulties; whether the investor has admitted that it is either is responsible for, or has directly or indirectly profited from events relating to the Dealing Member Firm’s business which gave rise to the Dealing Member Firm’s financial difficulties; whether there is evidence provided by the Dealing Member Firm or which is available to the Board from other sources that the investor is responsible for, or has directly or indirectly profited from events relating to the Dealing Member Firm’s business which gave rise to the Dealing Member Firm’s financial difficulties; and such other matters similar to the foregoing.
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, with sufficient evidence of supporting documentation to the claim on behalf of the deceased investor, including but not limited to a death certificate, letters of administration, wills, executors authorisation, etc.
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 from 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.
An investor is entitled to no more than one claim for compensation where he has numerous claims against the IPF in respect of the same Dealing Member Firm.
Notwithstanding the above, the amount of compensation may be reviewed by the Board on a biennial basis or as otherwise agreed by the Board as the need arises 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.
The Board may also determine to make a payment on account or to pay a lesser sum where the investor has any prospect of recovery in respect of the claim from any third party or through an application for compensation to any other person or authority.
The Board may determine to reduce the compensation which would otherwise be payable to an investor in circumstances where it is satisfied that the investor is partly to blame for the loss which he has suffered.
Recoveries and subrogation
The Board upon the payment to any investor shall be subrogated to all rights of the investor against the Dealing Member concerned to the extent of such payment; and such subrogation shall include the right on the part of the Board to recover an equivalent amount from the Dealing Member or from the proceeds of the sale of the assets of such Dealing Member. Any amount received by the Board by virtue of this Rule shall be paid into the Fund.
Payments into the Fund
The rules require contribution into IPF from Dealing Members firms which shall comprise of: A mandatory initial payment of N1million prior to the Dealing Members firm’s acquisition of a Dealing Membership License from the Exchange, “provided that the value of this mandatory initial payment may be changed from time to time as determined by the Board, subject to the approval of The Exchange.”
Also, it requires an annual payment of an amount to be determined by the Board from time to time, subject to the approval of the Exchange; and a mandatory annual premium calculated in accordance with the following formulae: (percentage value of each Dealing Members firm’s ratio of customers’ securities and funds to the Dealing Members firm’s assets from the data available from the Dealing Members firm’s disclosures). It is also subject to the approval of the Exchange.
The rules also require periodic payment of an amount as may be determined by the Board from time to time in accordance with Section 208(b) of the Investment and Securities Act (ISA) to be applied towards making up any deficiency in the event that the Fund falls below the minimum amount approved for the Fund.
Among others, the rules also stipulate that an amount from erring Dealing Member firms equal to a percentage of penalties/fines paid by such Dealing Member firms to the Exchange for contravening capital market Rules, Regulations and Market Practices, such percentage shall to be determined by the Exchange from time to time.
Fund to be kept in separate bank account
All monies forming a part of the Fund shall be paid or transferred into such custodial account or separate bank account within the Federal Republic of Nigeria as may be determined by the Board from time to time with the Exchange’s prior approval, pending the investment or application of such monies in accordance with the provisions of the ISA.
Payments out of the Fund
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; and monies required for the arrangement, service or repayment of loans obtained by the Board from The Exchange for the purposes of the Fund.
Other payments out of the Fund include 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; and such other monies as are permissible to be paid may be payable out of the Investor Protection Fund in accordance with the provisions of the ISA.
Payments of compensation out of the Fund shall be in monetary form only
Indemnity
The Board and any of its members, officers or servants shall be indemnified out of the Fund against any liability for anything done or omitted in the discharge of the functions of the Board under these Rules, unless such acts or omissions are in bad faith; and any amount payable by virtue of these Rules are to be treated as management costs for the financial year in which it is paid.
Annual report
The Board shall submit to the Commission and the Exchange an annual report on the activities and administration of the Fund, covering each successive financial year, and made within three (3) months of the end of the year reported on, provided that the timeline for submission of the annual report to the Commission shall not apply to the Fund’s first year of operation.
The annual report shall inter alia include the following: Financial statements prepared in accordance with the requirements of the International Financial Reporting Standards (IFRS), the ISA, the Companies and Allied Matters Act, and the Financial Reporting Council of Nigeria Act, showing the movements in the Fund during the year and a statement of assets and liabilities of the Fund at the end of the year; a statement indicating all payments into the Fund and payments out of the Fund during the year; a statement by the chairman of the Board highlighting the activities of Fund covering the relevant financial year; a report of the Board’s auditors. The Board shall ensure that The Exchange’s auditors are not appointed as the auditors of the Fund.
The Board shall endeavour to ensure that all annual reports of the Fund which have been submitted to the Commission and The Exchange shall be displayed on The Exchange’s website or such other website as the Board may decide.
Quarterly reports
The Board shall also make quarterly reports to Exchange, giving details of the exercise of its powers and functions.
Report on particular events
The Board shall notify the Commission and The Exchange in writing of significant events occurring in the process of administering the Fund.
Records
The Board shall keep records which show and explain the transactions of the Fund and shall: disclose the financial position of the Fund at any time and enable the Board to make reports required by these Rules; maintain such records for a minimum period of seven (7) years.
By: Iheanyi Nwachukwu
