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Director General of SEC, Munir Gwarzo

Eromosele Abiodun writes that the Securities and Exchange Commission should not blame the Treasury Single Account for its woes but profligacy and poor accountability over the years

Last week, the Director General of the Securities and Exchange Commission (SEC), Munir Gwarzo expressed worry that what the SEC generates from the capital market cannot cover 50 per cent of its cost.

Addressing members of the House of Representatives Committee on Capital Market in Abuja, Gwarzo also expressed concerns that the Treasury Single Account (TSA) has greatly reduced the capital market regulator’s ability to be flexible.

According him, “What we generate from the market cannot cover more than 50 per cent of our cost, so, more often we have to dip into that fund (funds saved by past SEC administrations) but now with the TSA and other things, that flexibility is being cut off because some of the interest income that we derive from those investment, we don’t enjoy them any longer.”

Gwarzo told the legislators that the SEC is now, “running a very tight budget, given that the market has gone down and given that there are aspirations to move the market up. We have to set aside some amount of money.”

The SEC boss also disclosed that for, “the budget of 2015, we had projection of N6.9 billion as our income but we were only able to make N4.9 billion because of the state of the market. We no longer take our staff on overseas and local training and our earnings are now 30-40 per cent less than we had in the past.”

Gwarzo said the SEC aims to attract more retail investors into the capital market to deepen and develop the market.

“As a country we have only less than two per cent participation of retail investors in our market. Malaysia has nine per cent, South Africa 19 per cent, United States 43 per cent, and United Kingdom 13 per cent. So our market is less patronised by the retail investors. Due to the dominance of foreign investors, anytime they move out of the market, the market goes down. Our effort is to see that in the next five to 10 years we raise the level of involvement of the retail investor to at least five per cent,” he said.

He therefore called on the federal government to intervene in getting investors to list in the capital market.

Wasteful Years

The controversy surrounding the funding of the SEC dates back many years. The problem with the SEC is profligacy and lack of accountability over the years.

For instance, at a public hearing on a new bill to review the provisions of the Investment and Securities Act (ISA) 2007 in relations to the finances of the SEC, it was revealed that the apex regulator of the Nigerian capital market generated a total of N40 billion between 2006 and 2010 but spent all the money only on salaries, wages and other operational expenses. Revealing this profligate tendency at the House Committee on Capital Market public hearing, the House told the meeting that the SEC generated N16 billion in 2006, N13 billion in 2007, and N8 billion in 2008 and N3 billion in 2009 but has spent all the money only on recurrent expenditure.
The House committee led by Honourable Umar Jubril said the government felt no need to fund the SEC because the agency always spend all its revenue generated from commissions made from both primary and second market transactions.

The committee had alleged that the SEC always fail to execute the capital projects expenditure portion of its annual budget, adding that the SEC does not even execute up to 20 per cent of its capital expenditure every year but always spends all its recurrent expenditure 100 per cent.

SEC Faults House Committee

But SEC at the time faulted the House Committee, saying it transfers about 80 per cent of its revenue annually to the federal government. The then Executive Director, Operations of the SEC, Daisy Ekineh, had said it was erroneous to assume that SEC was not accountable to anyone.

She said: “The SEC budget is audited every year and made public. Anyone that has access to the account will have access to everything. I have been part of the budgetary process. I did say the SEC needs a ‘bed’ at the House to show how the SEC always visits the National Assembly.

“Sometimes we come and you drill us and we go back. I am astonished to hear that SEC is not transparent with its budget. The budget performance is submitted to the national assembly and we defend all these documents. Not only that, we submit same to Ministry of Finance and the budget performance too. It’s necessary to clarify all that”, Ekineh stated.

The public hearing to amend the ISA 2007 was intended to provide for greater transparency and accountability in the finances of SEC; and to ensure greater legislative oversight; and for other matters connected therewith.

Senate Committee’s Probe

After the failed effort to get the SEC to account for its revenue failed at the House of Representatives, the battle shifted to the Senate. It was the same story however as the bill was unanimously rejected. Following the rejection of a new Bill that seek to compel the SEC to contribute all its revenue generated annually into the federation account by stakeholders in the capital market, the Senate Committee on Capital Markets, announced its intention to conduct a full scale investigation into developments in the Nigerian Capital Market.

The Senate made their intention known to the former Director General of SEC, Ms Arunma Oteh who was invited to brief it.

The investigation, the Senate said, is expected to cover the activities of the SEC within its mandate as prescribed by the Investment and Securities Act (ISA) 2007; financial records, its activities since the take- over of the Nigerian Stock Exchange (NSE) after the removal of its former Director General, Dr. Ndi Okereke-Onyiuke ; and market transactions it considers require further light.

An official of the SEC had declared that the decision by the Senate to probe developments in the capital market had nothing to do with the SEC alone.

According to him, “Yes they have said that they want to carry out an investigation into activities in the capital market, it has nothing to do with SEC and in any case, they have the right to do what they want to do.”

War Without End

The arguments over who funds the SEC further elicited strong exchanges between legislators, SEC and stakeholders. Shareholders rights groups, who have always been at war with the SEC decried the huge burden of funding SEC on their activities in the capital market. However, registrars and dealing member firms argued that SEC, being a government agency, need to be funded by the government.

Analysts on their part said the request to have SEC’s generated revenue transferred into the federation, means SEC will have to look for ways to levy investors to enable it carry out its functions. This, market watchers said, portend great danger for the market and urged stakeholders to stand their ground with the senate committee.

Stakeholders Reject Bill

Aware of what lies ahead, SEC, the NSE and the Chartered Institute of Stockbrokers (CIS) in their opening presentations to the Committee led by Honourable Umar Jubril rejected the bill stating various reasons.
In her presentation at the public hearing, the former Director General of SEC, Ms. Arunmeh Oteh, thanked the House Committee for the support given to its investor protection mandate.

The SEC boss also thanked the committee for their ‘guidance’ and support in its duties as the apex regulator of the stock market.

Specifically, Oteh submitted that the proposed amendment to the bill will undermine the efforts of the House and others to build a world class market to address the huge funding requirement needed for the real sector and meet the social and economic aspirations of Nigeria.
The bill, she added, is not in line with international best practices and will undermine investor protection.
She said: “Our concerns is heightened by the unprecedented stock market crash from a peak of N13 trillion to a lowest of N4.9 trillion while given your efforts, the SEC and others, the market cap is now at about N8 trillion. We do feel that investor confidence is still fragile and we feel that if investors feel unprotected, we will not be built a virile stock market.”

She added, “Our submission is based on the requirements of International Organisation of Securities Organisation (IOSCO) that sets standards for 183 members worldwide in terms of SEC to abide by world class standards. Compliance with this means how we are perceived by local and international investors. It is investors that provide money for the market.
The IOSCO objectives and Principles in Part A should be independent in exercise of powers and structure. We are signatory to the Principle. Only 36 countries include Nigeria has robust framework to operate. In Africa, it is only Nigeria and South Africa that are so recognised.”

Nigeria, Oteh said, has gone over rigorous assessment issues regarding its IOSCO memorandum of understanding.

Oteh said: “We are undergoing now a review of our level of abidance with IOSCO standards. It is also important for me, Mr. Chairman and the House to bring to your attention what happened in other jurisdictions. We have looked into other comparative economies. The South African Financial Standards Authority (SAFSA), have same arrangement as us. The Malaysian SEC and the Ontario Canada SEC also operate the same system as ours. Even more significant is the USA SEC that goes through appropriation process.

“But the United States is working fast to move away from this model due to the lessons of not moving fast to respond to the current global market crisis. A US Senator has moved for SEC there to move for self-funding in the Dodd-Frank Legislation. The US SEC strongly supports this and is making submissions. There are other examples that even smaller markets are looking into similar models to have.

“We believe that the proposed amendment will adversely affect the operations of the SEC in terms of its responsiveness of dual role of regulation and development of the Nigerian capital market. We humbly submit that your committee and the Senate committee on capital market have gone beyond the call of duty for providing call of duty in market protection,” the SEC boss said.

The SEC accounts, she stressed are audited annually adding that, “We have never failed to make statutory submission in March every year to the Assembly. You have also continued to provide oversight to issues in the market. We are also required to submit budget, three months before year end. And the SEC has never failed in this regard.

“You have always provided us guidance and ask tough questions. I have personally interacted with this noble committee since I took office in January this year. You have carried out your duties with great sense of responsibilities. You have been keen on issues in the market. In view of this, the Sec submits that this committee reconsider the bill and retain the status quo.”

More Support for SEC

On his part, the former Interim Administrator of the NSE, Emmanuel Ikhazoboh, said he was in support of the presentation of the SEC on the matter.

Ikhazoboh added that the NSE is striving to be one of the top three Stock Exchanges in Africa and be the number one in Africa by 2015.

“Some of the issues and regulations that would make it possible for the Exchange to achieve its 2015 objective can only be done by a well-funded and independent regulator. He added that the way the regulators manage the Exchange will reflect in the market itself.

“If the SEC is not independent or perceived to be so, it would affect our global investors. I want to add that we are working hard to ensure that we reduce the cost of operating in our market and, the only way is to find a way to reduce listing, registration cost and get more operators and investors to come in. But this can only be possible if only SEC has independent funding and would not depend on listing fees or operators. We therefore associate with the SEC that the new Bill be revisited properly and that the SEC be given powers of independence, but still regulated by the House Committee,” he said.

CIS Too…

In their presentation, representatives of the CIS had thanked the House for being proactive on how to move the market forward.

They noted that the operators are always miles ahead of the regulator, hence the regulator must have plenty of funds to do a good job.
The CIS stressed that to depend on fees would render SEC handicap, adding that the ones current collected are not sufficient for SEC to do its job.

“Changes are rapid in the market in terms of products among others. So a SEC that goes cap in hand to beg for funds from the government will not be able to do any job. On that basis, we are asking this Committee to rethink this amendment. We support need for a budget by SEC but it is not proper to pass all its internally generated revenue to the Federation account or the treasury.”

Shareholders’ Views

The National Chairman of Progressive Shareholders Association of Nigeria (PSAN), Mr. Boniface Okezie, said the government should take over the funding of SEC and remove the burden from investors who are already over -burdened with tax.

He added that the need for shareholders and stakeholders to fund SEC is telling on the market adding that the process has never been transparent.
“We will never be in support of what SEC is trying to achieve. If we were invited to the public hearing our opinion would be that the SEC should be funded by the government and not the other way round. Have they investigated SEC to known how they have been spending all they have been collecting, we have it on record that the accounts of SEC is not properly managed and this should be looked into.

National Coordinator, Independent Shareholders Association of Nigeria (ISAN), Mr. Sunny Nwosu, said investors and stakeholders should not bear the burden of funding the SEC.

According to him, “In the United States, the funding of SEC passes through legislation and that should be repeated here. We cannot continue to fund an organization that is not transparent. We call on the house committee on capital market to help take the funding of SEC to the government; it is their duty because they are a government agency.”

What is TSA?

TSA is a public accounting system under which all government revenue, receipts and income and collected into one single account, usually maintained by the country’s Central Bank and all payments done through this account as well. The purpose is primarily to ensure accountability of government revenue, enhance transparency and avoid misapplication of public funds. The maintenance of a TSA will help to ensure proper cash management by eliminating idle funds usually left with different commercial banks and in a way enhance reconciliation of revenue collection and payment.

TSA Applicability in Nigeria
In February last year, the Central Bank of Nigeria (CBN) issued a circular directing all deposit money banks to implement the Remita e-Collection Platform. The Remita e-Collection is a technology platform deployed by the Federal Government to support the collection and remittance of all government revenue to a Consolidated Account domiciled with the CBN. This marked the beginning of the full implementation of TSA system in Nigeria.

Though Section 80 (1) of the 1999 Constitution as amended states “All revenues, or other moneys raised or received by the Federation (not being revenues or other moneys payable under this Constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and form one Consolidated
Revenue Fund of the Federation”; successive governments have continued to operate multiple accounts for the collection and spending of government revenue in flagrant disregard to the provision of the constitution which requires that all government revenues be remitted into a single account.

It was not until 2012 that government ran a pilot scheme for a single account using 217 ministries, department and agencies as a test case. The pilot scheme saved the country about N500 billion in frivolous spending. The success of the pilot scheme motivated the government to fully implement TSA, leading to the directives to banks to implement the technology platform that will help accommodate all MDA’s in the TSA scheme.