The new sec rules & regulations: Audit committee tenure and other matters

The Securities and Exchange Commission recently announced some amendments to its rules and regulations pursuant to Section 313(6) of the Investments and Securities Act 2007 and deemed to have come into effect on the 12th of May 2014. The new rules and amendments relate to Infrastructure Funds, Foreign Collective Investment Schemes, Rights Issues, Earning Forecast, Tenure of Audit Committee and the SEC Code of Corporate Governance amongst others.

Rule 42(5) has been amended by the creation of sub rule (5) (b) which provides that “Membership of an Audit Committee shall be for a term of three (3) years, subject to good performance” To start with, the original Rule deals with filing of half yearly returns and as such it would have been tidier to introduce this amendment as a new Rule. Be that as it may, there appears to be some ambiguity as to when the 3 year tenure should commence.  A liberal interpretation would be to deem the effective date of the tenured term as the 12th of May 2014. However, if the intent of the amendment is to address the issue of “sit-tight” Audit Committee members as well as the drama associated with the annual election of shareholder members of the Committee, surely tenure should be reckoned from the date of initial appointment into the Audit Committee.

The amendment should have been clearer and unambiguous, such as its intent would have been obvious and not subject to mischievous and parochial interpretation.

More importantly, the amendment appears to conflict with the provisions of Section 359(4) of the Companies and Allied Matters Act (CAMA) which provides that each member of the Audit Committee shall be “subject to re-election annually”. Indeed, Section 30(1) of the SEC Code of Corporate Governance enjoins the Board to ensure that the Audit Committee is constituted in the manner stipulated by Section 359 of CAMA. Can a regulation made pursuant to an Act override the provisions of another Act? Is it intended that Audit Committee members be re-elected every year (as provided by CAMA) subject to a maximum “unbroken” term of 3 years?

Yet another ambiguity is the phrase “subject to good performance”. “Good performance” is undoubtedly relative and very subjective. Who determines “good performance” and relative to what? This amendment is likely to create more problems than the SEC tried to correct.  It would have been more useful if the amendment had provided more definite requirements (beyond “financial literacy”) for audit committee members.  There have also been suggestions that SEC should require public companies to have Audit Committee Charters that would guide the performance of responsibilities required by law.

The amendment further provides that a member shall not be eligible for re-election until the expiration of three (3) years after his previous term. In view of Section 359 (4) of CAMA, there is need for SEC to provide more clarity in this regard. A new sub rule (5) (f) imposes a penalty of not less than ₦100,000.00 and an additional sum of not more than ₦5,000.00 (Five Thousand Naira) for everyday that the breach persists and/or any other punishment that the Commission may deem appropriate.

Rule 40 relating to earnings forecast has been amended to the effect that public companies listed on the Stock Exchange may disclose to the relevant securities exchange their quarterly earnings forecast. By this amendment, it is no longer mandatory for listed companies to disclose their quarterly earnings forecast.  Where a company chooses to disclose, the forecast must be in line with the company’s policy and listing requirements of the relevant securities exchange, disclose the underlying assumptions that formed the bases of the forecast and must be certified by the Chief Executive Officer and Chief Financial Officer or officers or persons performing similar functions in the company.

However, the Commission retains the power to request a public company to disclose its quarterly earnings forecast to the Commission.

SEC has also amended the SEC Code of Corporate Governance for Public Companies by making compliance with the Code by public listed entities mandatory. Non-compliance will attract an initial penalty of ₦500,000.00 and ₦5,000.00 for each day that the breach persists and/or any other punishment that the Commission may deem appropriate.

Given the much touted National Code of Corporate Governance which is expected to be mandatory and a convergence of all industry and sector specific Codes, perhaps SEC should have deferred any amendments to the SEC Code of Corporate Governance and instead take steps towards encouraging compliance with the existing Code on a “comply or explain” basis.

 

ADEYEMI is the Managing Director, DCSL Corporate Services Limited

email: [email protected]

ADEBISi ADEYEMI