Strengthening Capital Market Regulation

Acting Director General of SEC, Ms. Mary Uduk d

Goddy Egene writes on the recent initiatives to boost the nation’s capital market that were unveiled by the Director General of the Securities and Exchange Commission, Ms. Mary Uduk

After declining for two consecutive years, most capital market stakeholders and experts were very positive that the market will record positive performance this year. Before the decline of 2018 and 2019, the market had in 2017, recovered from similar depreciation in 2015 and 2016. Hence, there was high optimism among market stakeholders that the Nigerian stock market would recover this year and close higher.

While many factors that would influence the positive performance have been cited, some operators believe one major ingredient necessary for the recovery was a robust and strong regulation by the Securities and Exchange Commission (SEC) and other self-regulatory organisations (SROs).

According to them, when the market is well regulated, more investors would be motivated to invest. It was therefore, not surprising when the Acting Director General of SEC, Ms. Mary Uduk, last week, unveiled the areas the commission will focus on in terms of regulation this year.

According to her, SEC has a mandate to protect investors in the market and thus, must stick to a robust regulatory framework that would ensure increased patronage.
Although the SEC boss has lined up many initiatives in 2020 that are capable of boosting the market performance, she said 2019 was still remarkable year for SEC in spite of the challenges in the economy

“Despite revenue challenges and competing demands, SEC successfully implemented key programmes and projects, achieving significant milestones. The commission is poised to build on the gains of 2019 with a renewed focus on resource optimization and execution of prioritized initiatives in the coming year,” she said.

2019 achievements
Reviewing some of the achievements recorded in 2019, Uduk said SEC and the Nigerian Stock Exchange(NSE) further streamlined the processes for issuance of new securities making the issuance process shorter and more efficient.
She explained that the streamlining was aimed at eliminating duplication of processes between the SEC and the NSE.

“The commission also introduced a checklist review process for the issuance of debt securities which will reduce the time to market of debt securities and encourage more issuances. Time within which approvals given by the commission for debt issues has now reduced from six to two weeks,” she said.
Another area was the conclusion of the comprehensive review of the Rules on Collective Investment Schemes(CIS) to improve the global competitiveness of the CIS industry in Nigeria.

“The review included a reduction of costs, a requirement to benchmark performance and classification of funds to aid comparison and performance evaluation, amongst others. The new CIS Rules, which became operational on December 23, 2019, will enable the immediate marketing and operation of open-ended funds after SEC approval of the CIS, thereby reducing time to market,” she explained.

The SEC boss noted that the reduction of costs was two-fold – offer costs and operational costs (that is total expense ratio) for CIS funds. According to her, offer costs were reviewed downwards from a 3.0 per cent cap to a 1.0 per cent cap and 1.65 per cent cap for open-ended funds and closed-ended funds respectively.

“Operational costs were reviewed downwards from 5.0 per cent to 3.5 per cent (effective immediately) and subsequently three per cent (effective January 1, 2021) to make Nigerian funds globally competitive and attractive. Definitions and other eligibility criteria have been provided in the new CIS Rules to classify funds in terms of their underlying investment/asset class. This will aid comparability of funds and their performance,” she said.

Uduk, disclosed that SEC facilitated collaboration between brokers and fund managers on distribution of mutual funds to retail investors to make CIS funds more accessible to investors. The commission engaged National Pension Commission (PenCom) to eliminate the practice of commission-sharing between capital market operators (CMOs) and pension fund administrators (PFAs).

The SEC DG noted that efforts were made to contribute to policy formulation through several engagements with the Honorable Minister of Finance, Budget and National Planning, as well as with His Excellency, the Vice President of Nigeria, Prof. Yemi Osinbajo.
“The commission contributed to the decision to introduce the Finance Bill through consultations and meetings with the Honorable Minister of Finance, Budget and National Planning to present benefits. The commission facilitated several capital market master plan initiatives and the National Savings Strategy is receiving federal government’s attention through the constitution of a government working group.

One of the major fears of investors is losing their investments. They are also discouraged when they realise that there is no protection for their investments.
Realising this, she said SEC intensified its enforcement efforts last year with numerous positive results.

“The commission’s enforcement efforts during the year yielded some positive results. The commission received 167 complaints and 102 were resolved. SEC
recovered about N100 billion for investors, and four illegal market operator/ Ponzi schemes. Also, four illegal operators’ bank accounts were cautioned/blocked by the SEC Police Unit. Total amount in the blocked accounts was about N1.119 billion. Besides, there are about eight capital market fraud cases being prosecuted. The commission also approved a total of 45 new rules,” she said.

Looking ahead
Uduk, said going into 2020, the commission will take into account initiatives towards boosting the market performance.
“The commission will continue to implement Risk Based Supervision, to ensure our monitoring effort is more efficient. Upgrade of identity management on investor accounts to include Bank Verification Numbers and verifications against the Nigerian Interbank Settlement Systems Limited (NIBSS) BVN validation portal. SEC will also be moving from transition to Deemed Approval Regime for debt securities.

“Following the introduction of the checklist regime and upon confirmation of satisfactory compliance, a deemed approval regime will be adopted for issuances of debt securities by which proposed issuances will be deemed approved upon filing of the transaction documents with a duly completed and executed checklist. This is expected to reduce the time within which approval is given to not more than five working days,” she said.

Also as part of its implementation in 2020, the commission will be driving a harmonised regulatory agenda by working with other regulatory agencies to create clear and specific licensing regimes for different FinTech businesses in Nigeria.

The commission will also seek to operationalise the framework for the regulation of Crypto-currencies, Virtual Financial Assets, ICOs and Crowdfunding. According to Uduk, the commission will complete the Capital Market Master Plan Review started last year.
“We will continue the implementation of the introduction of Capital Market studies into secondary school curriculum. We are presently at the stage of development of Teachers’ guides. Work has also begun on developing a capital market curriculum for Nigerian Universities, developing content for infusion into general studies (GS) courses across the Universities.

“SEC will continue to coordinate the Federal Government Work Group assignment on the National Savings Strategy. The commission will drive CIS as the main entry point for retail investors. We will Integrate CIS distribution framework with the capital market Financial Inclusion strategy.
The commission will partner FMAN to implement the CIS roadmap which was designed by the CIS Roadmap Committee set up to conclude the implementation of the five-year Strategic Master Plan and Roadmap to elevate the level of professionalism and operations in the Nigerian fund management industry,” she added.
Uduk noted that SEC will facilitate the implementation of the Commodities Ecosystem Technical Committee’s recommendations. She harped on renewed focus on non-interest capital market.

Also, market operators should prepare for recapitalisation. According to the SEC DG, recapitalisation should happen for the market to be better.
“If we have say 20 or 50 big firms playing as opposed to what we have now which is 255 the market would be better. We want strong firms, so it’s something that should happen. Well capitalised firms as opposed to the situation we have now. A number of other sectors are recapitalizing. We are asking our CMOs to think about it because sooner than later it would have to happen,” she said.

As with previous years, the commission said it would focus on enforcement programme in 2020 for the protection of investors with particular attention to retail and unsophisticated investors in the Nigerian capital market.

The SEC DG explained that in 2019, the commission witnessed an upsurge in the activities of Ponzi schemes in Nigeria, noting that the commission went after many of the promoters and directors of such schemes, securing a conviction last year and many others are presently being prosecuted.

“We will continue to combat Ponzi schemes this year. We intend to continue leveraging on the Memoranda of Understanding(MoU) that were signed between the commission and key stakeholders like the Nigeria Financial Intelligence Unit (NFIU) and the Economic and Financial Crimes Commission (EFCC) to strengthen our ability to do this.

“The commission will continue to adopt a zero-tolerance policy on unethical practices by in the capital market with a view to promoting a culture of compliance and enhanced reporting. We will adopt a more proactive inspection and market surveillance regime to nip unethical practices and misconduct in the bud. We shall be referring more cases of infractions for hearing before the SEC Administrative Proceedings Committee,” she said.

Uduk said in a bid to foster economic development and deepen the market, a proposed rule is being considered to provide a regulatory framework permitting private companies with the required structure and mechanism in place to raise capital from the public through crowdfunding.
“There is a proposed Rule to enable the commission bring all Nominee Companies under proper regulation and make provision for registration requirements, ownership structure, code of conduct and other matters incidental thereto.
“There will be an amendment in the margin lending rules geared towards mitigating/tackling market abuse practices by dealers or member companies by restricting the excessive use of credit for purchasing or transacting in securities by dealers or member companies,” she added.

Uduk, enthused that going forward into the year, they expect the equities segment to benefit from various government initiatives targeted at improving the country’s business environment as well as efforts to lower interest rate and increase liquidity through increase in loan to deposit ratio. “The debt segment of the capital market is equally expected to benefit from increased sovereign bond issuances coming from the need to finance the high deficit of 2020 budget. Aided by the various commission’s and market’s initiatives to further deepen the market, our outlook on the Nigeria’s capital market for 2020 is therefore generally positive,” she said.