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CAN NEW SEC RULES SAVE THE MARKET?

By NBF News
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Sanusi
The Securities and Exchange Commission (SEC) recently introduced new rules that would guide operators and investors in their assessment of the facilities provided by the capital market.

The rules, in part, according to its Director-General, Ms Arunma Oteh, will also protect investors from market infractions and restore investors' confidence in the market.

Before now, there were rules that guide operations in the Nigerian capital market (NCM). However, it seems they are so relaxed because more operators have devised means and ways of flouting the rules, so regulators became more sophisticated in updating the rules.

The capital market has in recent times come under heavy attacks arising from numerous malpractices that have become a recurrent decimal. This, coupled with the drive by the new Director-General to chart a remarkable course at salvaging the market from fraudsters, informed the new wave of rules brought in by the SEC.

The instability in the market where investment rules are violated called for stringent sanctions against perpetrators. This is because the culprits are becoming esoteric in their actions. The rise and fall of major indicators that has persisted with no serious remedy in sight casts doubts on the efficacy of the new SEC rules to salvage the situation.

Stakeholders believe that , as is in the other climes, rules which aim at instituting and maintaining corporate governance, strengthening the fundamentals that summarise the regulators' functions and making them investor-friendly, transparent, risk free and meeting global standard practices, are reasons that informed the aim of the Commission (SEC) to revisit already existing rules in the market.

However, most of them said that the Commission did not do enough consultation to seek stakeholders' input into the new rules that will give them the necessary bite. Some of the rules announced by the Oteh have affected some sectors of the market.

Immediate priority
The SEC boss had said that the immediate priority of the reform is to restore investor confidence, as well as functioning capital markets which cannot exist or flourish without investors. 'This is because capital markets thrive on investor interest in the investment opportunities that the markets have to offer. We will achieve this by significantly enhancing our dual role of effective regulatory oversight and capital market development.

These two roles reinforce each other as adequate regulatory oversight fosters a well functioning capital market. To restore investor confidence, we must tackle the recent challenges that investors faced resolutely, and painstakingly lay a solid foundation so that what happened in the last two years never happens again. It will take some time and patience but there is no other way. It was therefore, not surprising to see the apex regulatory body come out with new rules and made amendments to some existing ones,' Oteh said.

Justifying the new rules
Speaking on the new rules last week, Oteh said that rule making is one of the regulatory tools employed by the Commission to regulate activities in the capital market, adding that the other tools include registration, monitoring, investigation and enforcement.

'As you are aware, the instruments traded in the market are intangible and this is one of the rationales for regulation. It is also important to note that financial markets do not, for obvious reasons, tend towards equilibrium. As a result, they cannot be left to their own devices. Rule making is therefore, employed by the Commission to ensure transparency and efficiency in the capital market,' she said.

Oteh declared that the Investments and Securities Act of 2007 gave the Commission the power to make rules for the purpose of efficient regulation of the market.

Hence, 23 new rules were being issued while eight amendments were made to existing ones.

'The rules are in furtherance of the implementation of the recommendations of the committee set up in 2008 to review the capital market restructure and process. And in fact, with these new rules, about 95 per cent of the rule based-recommendations of the committee have been implemented,' she said.

The new guidelines cover appointment of directors of market operators, bond issue, validity period of accounts, condition for approval of Initial Public Offering (IPO) and listing by introduction; condition for approval of subsequent public offering, extension of offer period, interest on returned monies, listing of securities after allotment, underwriting of Rights Issue, private placement by public companies, issue and handling of certificates, mergers and acquisitions, procedure of the Administrative Proceeding Committee (APC)

Appointment of Directors
SEC created a new rule ; Rule 15A, which has to do with its approval of all executive directors before market operators appointed them. According to the rule, 'executive directors of market operators shall be approved by the Commission prior to their appointment. A director of a market operator shall have the minimum qualifications as specified in Rule 16.

IPO and listing by Introduction
In this new rule, known as Rule 50, SEC said that a company might be eligible to undertake an IPO of pure equity or convertibles or listing by introduction only if it meets some conditions.

'It (the company) has three year financial track record; has a track record of distributable profits excluding extra-ordinary profits for at least two out of the immediately proceeding three years; it has positive shareholders' funds,' SEC said.

Another new rule has to do with share offering and declaration by the issuer on full disclosure. It states:

'The issuer shall make a sworn declaration that it has fully disclosed all material facts in the offer document and the declaration shall be signed by the Chief Executive Officer, the Company Secretary and Chief Financial Officer'.

Also, another new rule was created regarding condition for approval of subsequent public offering. According to the Commission, subsequent capital raising shall be approved only upon satisfactory account of the utilisation of previous issue proceeds.

The apex regulator of the capital market also added a new rule on extension of offer period. The rule says that 'before an extension is granted, the issuer's latest audited accounts shall remain valid throughout the extension period. The new closing date shall be the reference date for the purpose of computing any penalty for late submission of an allotment proposal,' SEC said.

Interest on Returned Monies
SEC equally created a new rule on the interest on returned monies, saying 'if returned monies are not dispatched in compliance with Rule 64(4), accrued interest shall be paid to the unsuccessful applicants at a re-rate not below CBN Monetary Policy Rate plus five per cent.

Underwriting of Rights Issue
The Commission's new rule on underwriting of Right Issue states that the issue may be underwritten at the discretion of the Issuer subject to the prior consent of its shareholders. 'Shareholders shall pass a special resolution that in the event of an undersubscription, their pre-emptive rights be waived to enable the underwriter take up any unsubscribed shares'.

Share certificate verification
Verification of share certificates is one of the knotty issues that dampen investors' enthusiasm in the market. And apparently to solve the problem, SEC has amended its Rule 200. According to the Commission, a broker shall upon receipt of a share certificate for verification from an investor on whom he has conducted a due diligence in accordance with Rule 100, forward the certificate to the Registrar within 24 hours.

'The Registrar shall within 10 working days from the day of receipt of a share certificate from the broker, verify the signature of the shareholder or determine that the signature of the shareholder requires his bankers' confirmation. The broker shall confirm the verification status of all certificates lodged with the registrar after 10 days,' SEC said.

The Commission added that where the signature of the shareholder requires his bankers' confirmation, the registrar shall return the certificate to the stockbroker while the broker shall contact the shareholder within two working days of the receipt of a need for shareholder's bankers confirmation.

Power to break-up of company
This new rule is aimed at preventing the creation of monopolies that could affect performances of other listed companies. In this regard, where the Commission is determined that a company constitutes a restraint to the competition that creates a monopoly in a particular industry, it shall order the break up of the company.

'Before the Commission makes a determination to order the break-up, it shall: communicate the basis of its observation to the company in writing and the company will be expected to forward their response to the Commission within 30 days of receipt of the letter; review the company's response and where it is found that competition is restrained, senior officers of the company shall be invited to further defend their position and communicate the final decision.'

It would be recalled that the Governor of the Central Bank of Nigeria (CBN), Mr. Sanusi Lamido Sanusi , last year told stockbrokers on the Lagos floor of the Nigerian Stock Exchange (NSE) that everybody , the brokers, the registrars, issuer, underwriters etc should be blamed for the crisis that rocked the nation's stock market in 2008 and 2009.

To aver recurrence of this scenario, Ms Oteh said : 'The requirement to make underwriting of issues the discretion of the issuers has made underwriting of issues in the market no longer mandatory. However, where an issue is underwritten, the underwriting commitment by a single underwriter shall not be more than three times of its shareholders fund for equity offering and not more than four times for fixed income securities.'

Issuers by the new rules are now required to list securities not more than 30 days after allotment clearance (where the issuer had stated in its prospectus that the securities would be listed). Another key amendment relates to a reduction in the cost of issuance as separate rules have been issued for corporate bonds and equity. Before now, the same rules that apply to equity also applied to corporate bonds. The rules now issued are specifically to guide issuance of corporate bonds.

One of the new rules {Rule 90 (2)} was created to prohibit issuers from advertising private placement, be it in electronic or print media, as violation of the rule would lead to suspension of the private placement. Oteh maintained that private placements are not the same as public offers and do not need to be advertised; adding that any capital market operator engaged in an advisory role on a private placement and violates the said rule may also be sanctioned.

She added that rule making was one of the regulatory tools employed by the commission to regulate activities in the Nigerian capital market. The other tools include registration, monitoring, investigation and enforcement. Meanwhile, a new rule was also created that defined money market fund and provides for the procedure for its regulation and registration with the commission. 'This rule is saying that your fund must qualify for money market fund before its approval by SEC,' she said, a development SEC described as an opportunity for investors to take advantage of.

According to Oteh, the Commission is empowered under section 313 of the ISA 2007 to, from time to time, make rules and regulations for the purpose of giving effect to the provisions of the Act. 'It is a well known fact that in financial markets, periodic crisis bring forth regulatory reforms. It was as a result of this that the Commission in September, 2008 constituted some industry wide committees with the objective of repositioning the market for greater efficiency and international competitiveness. One of such committees was the Dotun Sulaiman committee on the review of the capital market structure and processes.

The committee submitted its report in March, 2009 and the implementation of the accepted recommendations has since commenced,' she stated. According to her, the rules being presented are in furtherance of the implementation of the recommendations of that committee 'and in fact with these new rules, about 95 per cent of the rule-based recommendations of the committee have been implemented.'

In addition to the aforementioned rules, some other key provisions in the new rules include: the requirement for approval by the commission of appointment of executive directors of market operators. 'This is to ensure that only fit and proper persons run the affairs of the capital market institutions,' the SEC Director eneral said.

Also, the rule on validity of account submitted to the commission requires that it should not be more than nine months for corporate bodies and not more than 12 months for governments and supra-national bodies. Finally, the new rules require public companies to make additional financial reporting such as quarterly reports, half -year reports and to file annual reports with the commission in accordance with the requirements of section 60-65 of the ISA. The regulators have admitted that their inability to act when expected partly contributed to stock market crisis.

Oteh, who admitted that regulators could not totally be absolved of blame of the price meltdown in the market, said if regulators were up and doing, the crisis would have probably been nipped in the bud before it degenerated to the ugly situation that led to huge losses by investors. However, presenting a 'Roadmap for transforming the Nigerian Capital Markets' to the stakeholders last January, Oteh reiterated the commitment of the Commission to restore investor confidence in the market and bring back its lost glory.

According to her, SEC would significantly enhance its dual role of effective regulatory oversight and capital market development as a way of restoring investors' confidence. She said: 'to restore investor confidence we must tackle the recent challenges that investors faced resolutely, and painstakingly lay a solid foundation so that what happened in the last two years never happens again. It will take some time and patience but there is no other way,' he said.

She said that the crisis in the market resulted principally from weak governance and insufficient capacity, which led to improper behaviours and sharp practices. She therefore, stated that henceforth SEC would implement its zero tolerance policy in a decisive and far reaching manner to eliminate sharp practices, deter malpractice and change behaviours by ensuring that both the institutional and personal costs of any wrongdoing is extremely high.

Speaking on the new rules recently, Oteh said that rule making is one of the regulatory tools employed by the Commission to regulate activities in the capital market, adding that the other tools include registration, monitoring, investigation and enforcement.

'As you are aware, the instruments traded in the market are intangible and this is one of the rationales for regulation. It is also important to note that financial markets do not, for obvious reasons, tend towards equilibrium. As a result, they cannot be left to their own devices. Rule making is therefore, employed by the Commission to ensure transparency and efficiency in the capital market,' she said.

Oteh declared that the Investments and Securities Act of 2007 gave the Commission the power from time to time to makes rules for the purpose of efficient regulation of the market.

On the 23 new rules and eight amendments she said:
'The rules are in furtherance of the implementation of the recommendations of the committee set up in 2008 to review the capital market restructure and process. And in fact with these new rules, about 95 per cent of the rule based-recommendations of the committee have been implemented'.

Stakeholders including investors and stockbrokers have been reacting to the rules. While some hailed the development, others said the rules may create more confusion and worsen the situation of the market.

According to Mr Aminu Dangana, the Managing Director and Chief Executive Officer, Gidauniya Investment and Securities Limited, the principal rules of the SEC is to first of all develop the capital market and then protect investors.

He said that 99.9 per cent of the rules are geared towards developing the Nigerian capital market. 'When you make rules , you do everything to enforce it and be ready that anybody that flouts it will not go scot free. As long as the Commission is going to do that, I think they are in the right direction. The rules are coming at the right time. You make rules when you stumble on problems. There were problems in the market and nobody foresaw those problems. When they occur, you have to sit down, reflect and articulate a position on what to do to protect investors and develop the market. It is coming at the right time,' he said.

To the Chief Executive Officer of Solid-Rock Securities and Investment Limited, Mr O. P Ezeagu, 'the new rules will engender appreciable discipline within the market and among operators, which in turn, would enhance the integrity of the market. The overall impact will be the restoration of investors' confidence both locally and internationally.'

For Mr Chidi Agbapu, Managing Director and Chief Executive Officer of Emerging Capital Limited, if the aim of the new rules is to bring about strengthening corporate governance, make regulators investors-friendly, bring about global standard practices. It is good. If the rules will make the market risk free and bring about transparency which will help to check operators' activities. However, rules should not be made in isolation. You should take stakeholders into consideration.

A former Director-General of SEC, Mr. Wole Adetunji said the introduction of new rules and amendments of some existing ones is good development that is capable of moving the market forward after the stock market crash.

However, he called on the regulator to have the courage to implement the rules. 'Rules have been in existence over the years and new ones are created in line with the dynamics of the market. But the problem, most of the times, is not lack of policies or rules but the will power to implement those rules and make them achieve their objectives. SEC should ensure that the rules are implemented and enforced,' he said.

Adetunji, who is the chairman of Chartwell Securities Limited, commended SEC under the leadership of Oteh for being proactive and urged stakeholders to support the efforts aimed at returning the market to the good days. The Managing Director of Partnership Investment Company Limited, Mr. Victor Ogiemwonyi said the new rules are as a result of current market reforms. He noted that the provisions of the new rules as regards private placement are in the right direction.

However, another broker and former President of Chartered Institute of Stockbrokers (CIS), Mr. Oladipo Aina, said the rules will not achieve the objectives. According to him, SEC did not put so many factors into consideration before coming up with the rules. He said that in the area of verification for instance, the Commission did not specify tag lag and did not consider investors who are outside Nigeria.

'From every indication, the rules were created without proper consultation with bodies such as the CIS, Association of Stockbroking House Owners of Nigeria and Association of Issuing Houses of Nigeria. Besides, most of the rules are theoretical.

For the Commission to succeed, it should always consult with operators who are in the market not some people who are posing as stockbrokers and give wrong advice. Oteh should not allow herself to be misadvised by those who misled her predecessor,' he said. A legal practitioner and shareholders' activist, Mrs. Oludewa Thorpe, commended the rule that allows SEC to approve executive directors for market operators.

'I am delighted about the rule that allows SEC to approve the appointment of EDs for market operator. This presupposes that SEC can get them removed. Knowing that SEC is watching and one could lose the job would be a check on the excesses of market operators,' Thorpe said. Speaking in the same vein, another leading shareholders' activists, Alhaji Gbadebo Olatokunbo, said the rules showed that SEC is alive to its responsibilities.' Action and sanctions shall follow the rules. Therefore, those who are fond of unethical practices should beware,' he said.