Editor’s note: This is general educational information about how Nigeria’s investor protection fund works when a stockbroking firm fails. It is not legal or investment advice and it does not comment on any current firm. The rules, statutory sections and figures below come from the official documents listed at the end.
When a Nigerian stockbroking firm collapses, its clients do not simply join the queue of ordinary creditors. A separate pool of money exists for them, funded by the brokers themselves, administered by trustees and supervised by the Securities and Exchange Commission. What that pool covers, what it does not, and how long a claim takes are all written down, and the written version is narrower than the phrase “investor protection” suggests.
What the fund is and where the money comes from
The Investors’ Protection Fund of the Nigerian Exchange was established under section 197 of the Investments and Securities Act, 2007, and reconstituted in 2012. Its own rules describe it as a statutory fund to compensate investors who suffer pecuniary loss arising from the revocation or cancellation of a dealing member firm’s registration by the Commission, the insolvency, bankruptcy or negligence of a dealing member firm, or defalcation committed by a firm or any of its directors, officers, employees or representatives in relation to securities, money or property entrusted to or received by the firm in the course of its business. It is administered by a Board of Trustees subject to the regulatory supervision of the Commission.
The funding is levied on the industry. Under the fund’s rules a dealing member firm makes a mandatory initial payment of N1,000,000.00 before acquiring a dealing membership licence, pays a mandatory annual premium calculated from the ratio of customers’ securities and funds to the firm’s own assets and banded by risk factor, and pays on transactions at 1bp or N100.00 per N1 million on both sides, subject to the approval of the Exchange. The fund also receives a share of penalties paid by erring firms, the interest and profits from its own investments, insurance recoveries and money recovered through the rights of action the Act confers on it. As at 24 May 2019 the Exchange put the monetary value of the fund at N1,185,453,851.34, against N689,366,000.00 at the date of its reconstitution.
The claim sequence
The Act sets the order of events, and it does not begin with the fund. Under section 214 of the Investments and Securities Act, 2025, a claim for compensation relating to a defalcation by a licence holder shall first be made to that licence holder where it is not insolvent or bankrupt, and the licence holder shall settle the claim within 14 days or such other period as the Commission may approve. Only where the licence holder fails to settle is the investor entitled to claim against the exchange’s investor protection fund, and where the fund settles, the exchange proceeds against the licence holder to recover what it paid.
Section 215 then puts a clock on the exchange. Where the operator is unable to satisfy the claim, the exchange shall within 90 days verify every claim and determine the amount or extent, if any, to which it is allowed. Subject to any preconditions set by the trustees, a verified claim shall be paid within 14 days of that verification, and interest is payable out of the fund on the compensation amount, less costs and disbursements, at a rate the trustees determine. The Exchange’s own guidance describes payment being made to claimants within thirty days of receipt of their executed indemnity and guarantors’ indemnity documents, and states that a claimant does not pay a fee to make a claim.
Two deadlines are absolute rather than administrative. The Commission or an exchange may publish a notice in two national daily newspapers specifying a date, not earlier than one month after publication, by which claims relating to a named firm may be made. And a claim must be made in writing to the trustees within six years of the defalcation, revocation or cancellation of registration, or the insolvency or bankruptcy of the firm, and a claim not so made is barred unless the Commission’s rules provide otherwise.
What the fund does not do
The compensation is for the actual pecuniary loss suffered, including the reasonable cost of disbursements incidental to making and proving the claim, less any amount or value of money or benefits received or receivable from any source other than the fund. That is a reimbursement standard, not a guarantee of a portfolio’s value. Losses from a share price falling are not defalcation, insolvency or negligence, and nothing in the eligibility list reaches them.
The amount is also capped by decision rather than by statute. Section 215 makes compensation subject to any limit determined by the exchange and approved by the Commission, and the fund’s rules say the maximum payable to an investor shall be an amount determined by the Board from a written policy from time to time, reviewable on a biennial basis. Where the loss is less than that maximum, the investor may be paid the full loss less other recoveries. An investor is entitled to no more than one claim in respect of the same dealing member firm. The trustees may pay a lesser sum where immediate payment in full would not be prudent given other applications, or where the investor has a prospect of recovery from a third party, or where the investor is partly to blame. A claim may be rejected outright where the investor is responsible for, or has directly or indirectly profited from, the events that gave rise to the firm’s financial difficulties.
Analysis: a defined process attached to an undefined number
The most striking feature of this framework is the asymmetry between procedure and quantum. The process is specified to the day: 14 days for the broker, 90 days for verification, 14 days to pay, one month of public notice, six years to claim. The amount a claimant can actually receive is specified nowhere in the statute or the published rules. It is whatever the Board determines from a written policy and the Commission approves. An investor can therefore know exactly how long a claim will take and not know, from these documents, what the ceiling on it is.
The funding design points the same way. Contributions are risk weighted, using the ratio of customer securities and funds held by a firm to that firm’s own assets, so the brokers holding the most client property relative to their own balance sheet pay the most. That is a risk based premium, charging most where the ratio of client property to a firm’s own assets is highest. But a fund of the reported size is a fund built for firm level failures, not for a systemic one. The Act anticipates this directly: where the money available is insufficient to meet ascertained liabilities, the exchange may impose a levy on any or every dealing member firm, transfer from other exchange funds to make up a deficiency, or advance money from its general funds. The backstop is the exchange and its members, not a pre funded balance.
The sequencing carries a practical consequence that is easy to miss. Because a claim must first be made to a licence holder that is not insolvent, a client of a firm that is failing but not yet formally insolvent may spend the first stage of the process chasing a counterparty that cannot pay. The trigger for moving to the fund is the firm’s failure to settle, not the client’s assessment of its condition.
What these documents do not show is outcomes: how many claims have been made, how many verified, what proportion of claimed losses has been paid, or what the current maximum compensation figure is. The fund’s rules require the trustees to publish income, expenditure and a balance sheet within three months of the financial year end and to submit audited accounts to the Commission, so those filings, rather than any summary of the rules, are where the fund’s real coverage would be measured.
