Investors Forum

July 1, 2014

Booby traps in SEC’s Investors Protection Fund (2)

Booby traps in SEC’s Investors Protection Fund (2)

Ms Arunma Oteh, DG, SEC


The objective of the National Investors Protection Fund (NIPF) being proposed by the Securities and Exchange Commission (SEC) is to provide compensation to some class of investors when they suffer loss due to fraud or insolvency of some specified capital market operators.

In addition to some of the weaknesses in the guidelines for the NIPF, which had earlier been identified by Investors Forum, last week, we indicated that some provisions are booby traps, which may frustrate attempts by investors to get compensation from the Fund.

One of such booby trap is contained in Part 11 of the guidelines, which is titled “Adjusted Payment”.  It limits the maximum compensation that an investor can get to N200, 000, and also indicates that an investor might not even get this maximum amount due to reasons stated in Section 37a-c.

As indicated in previous editions on the NIPF, the focus on the guidelines is to call the attention of investors to the NIPF, and prompt them to engage SEC in rigorous debate on every aspect of the guidelines to ensure that the objectives are not frustrated.

In Section 36 and 37, SEC said an investor cannot get more than N200, 000 compensation even if his/her loss is N1 million. Furthermore, you may not even get up to N200, 000 if you cannot prove that you are not party to the loss you suffered.  Both sections read together are full of ambiguities.

How did SEC arrive at the maximum compensation of N200,000?  Is the Commission saying people should not invest more than N200, 000 with capita market operators covered under the NIPF? These are issues investors should take up with the Commission.

In the case of the deposit insurance scheme of the Nigeria Deposit Insurance Corporation (NDIC), the maximum insured deposit (MID) is N500, 000 for deposit money banks, and N200, 000 for PMIs and MFBs. But the compensation does not end there. You still have hope of recovering the rest of your money. When the Corporation liquidates or sells the assets of the closed bank, the proceeds of the sale are used to pay for deposits in excess of the MID.

In the case of SEC, this appears not to be so. Irrespective of what you invest, whether N2 million or more, you would not get more than N200, 000.  Meanwhile section 38 and 39 stipulate that the investors loses to the Board of the NIPF the right to receive dividends from the proceed of sale of assets of such distressed capital market operator, and such proceeds would be paid into the Fund.

In other words, if you lose N2 million, you will be paid N200, 000, and if the NIPF Board receives N2 million from the proceeds of the sale of the assets of the distressed capital market operator, you will not be paid the balance of N1.8 million!!! What an unfair and unjust way to protect investors.  The only reason why anybody would insert such provisions is to scare away investors from approaching the NIPF for compensation, and thus frustrate the objectives and the usefulness of the NIPF to the capital market.