Nigeria’s capital market regulation is expected to receive a major boost following the passage into law of the Investments and Securities Bill 2023 (ISB) by the Senate. The bill, which is expected to aid the functioning of the capital market and facilitate the ongoing economic diversification in the country, was passed by the House of Representatives last December. The bill empowers the Securities and Exchange Commission (SEC) to protect investors, adequately regulate the market to reduce systemic risks, maintain a fair, efficient and transparent market as well as provide for more stringent punishment for operators of Ponzi schemes.
Regulatory instruments are changing globally
Globally, financial regulators have made major changes in their regulatory instruments to address some of the obvious gaps that contributed to the global economic disruption in the past. Such global shifts and other current trends in capital markets regulation made it imperative to make major improvements to align Nigeria’s market with international standards.
The bill, which repeals the Investments and Securities Act, No. 29 of 2007 (ISA) and introduces new provisions that empowers the Securities and Exchange Commission (SEC) to collaborate with other regulatory bodies in the financial sector to manage and mitigate systemic risks as it confers new investigative and enforcement powers on the apex regulator, SEC, to effectively regulate the Nigerian capital market.
The bill will generally revitalise the Nigerian capital market as it introduces regulation of new businesses, products and services that will deepen the market while equipping the apex regulator – the SEC — with appropriate powers to protect the market and enforce the provisions of the bill.
The bill also introduces the framework for regulation of new products including financial and commodities derivatives and financial market infrastructures, which are expected to lead to increased activities, and thus deepen the Nigerian capital market.
It also introduces stiffer sanctions in the form of increased fines and jail terms, which are commensurate with the severity of offences and also serve as deterrence to potential future offenders.
For instance, a jail term of not less than 10 years has been provided to address the menace of Ponzi schemes and illegal investment schemes that have caused heartache for thousands of Nigerians who have been victims of such scams. Other offences such as market manipulation, insider trading and false statements in prospectuses, among others, are also subject to severe punishment.
The bill also ensures the diversification of the Nigerian economy away from a mono-product economy through the strengthening of the Nigerian commodities ecosystem, with the trading of warehouse receipts and commodities contracts on the commodities exchanges.
The bill also contains a legal framework for registration and regulation of new types of critical market infrastructures such as central counterparties, which will be responsible for managing the risks emanating from transactions in derivatives and other financial instruments, thereby ensuring the safety and integrity of Nigeria’s markets and boosting investors’ confidence.
Other areas the bill addresses include alternative trading systems, inclusion of National Pensions Commission (PenCom) as part of the board of the SEC, deletion of the provisions on merger control in the Investments and Securities Act and amendment of the criteria of borrowing by sub-nationals and strengthening and enforcement powers of the SEC in line with the requirement of the International Organisation of Securities Commissions.
The ISB is a market-inspired bill because inputs were received from all segments of the Nigerian capital market – SEC, commodities exchanges, the central counterparties, capital market operators and trade associations, Chartered Institute of Stockbrokers, capital market professionals such as legal practitioners as well as shareholders associations.
Senate President Ahmad Lawan while announcing the passage of the bill recently, stated, among other things, that it is expected to protect investors, adequately regulate the market to reduce systemic risks as well as provide for more stringent punishment for operators of Ponzi schemes.
“The bill for an Act to repeal the Investments and Securitas Act 2007 Act No. 29 2007 and enact the Investments and Securities Bill 2023 to service the SEC as the apex regulatory authority for the Nigerian capital market as well as regulation of market to ensure capital formation, to protect investors, maintain fair, efficient and transparent market and reduction of systemic risk and for related matters,” he said.
Also, Babangida Ibrahim, Chairman of the House Committee on Capital Markets and Institutions had recently stated that the ISB is capable of transforming the capital market, encourage the influx of foreign investors as well as boost investors’ confidence, among others.
He said: “The bill seeks to repeal the existing Investments and Securities Act 2007 and to establish a new market infrastructure and wide-ranging system of regulation of investments and securities businesses in Nigeria especially in the areas of derivatives, systematic risk management, financial market infrastructure and Ponzi scheme and platforms.
“Other areas the bill addresses are alternative trading systems, inclusion of National Pensions Commission as part of the board of the Securities and Exchange Commission, deletion of the provisions on merger control in the current Act and amendment of the criteria of borrowing by sub nationals and strengthening and enforcement powers of the Securities and Exchange Commission in line with the requirement of the International Organisation of Securities Commissions (IOSCO).
“We owe a duty to Nigerians and Nigeria to make sure that things work well. In the financial market, we have the money market and the capital market. With the challenges facing the money market, the only option left is the capital market. What we tried to do is to build investors’ confidence and ensure that investors are comfortable.”
Lamido Yuguda, director-general of SEC, while speaking on some highlights of the major innovations and changes in the bill, said it expands the categories of issuers as a key step towards the introduction of innovations and offerings such as crowd-funding as well as the facilitation of “commercial and investment business activities”, subject to the approval of the commission and other controls stipulated in the bill.
“The bill expands the definition of a Collective Investment Scheme to include schemes offered privately to qualified investors. Minor reviews on various Sections of the extant law have been carried to provide greater clarity. Importantly, the bill introduces an express prohibition of Ponzi/pyramid schemes and other illegal investment schemes. The bill also prescribes a jail term of not less than 10 years for promoters of such schemes.”
“This bill contains an entirely new part which regulates commodities exchanges and warehouse receipts. These provisions are essential for developing the entire gamut of the commodities ecosystem,” Yuguda said.
He said a recommendation is made in the bill for the inclusion of the National Pension Commission (PenCom) on the SEC board for increased collaboration between the two agencies, particularly to encourage greater investment of pension funds and in capital market products/instruments.
According to Yuguda, a new part on the management of systemic risk has been introduced, covering the following themes: monitoring, management and mitigation of systemic risk in the Nigerian capital market; arrangements with other regulators relating to information required from entities that are regulated by other regulators; sharing of information between financial sector regulatory authorities or government agencies; and use of a legal entity identifier to provide for proper monitoring of systemic risks.
He said: “Securities Exchanges are now classified into composite exchanges and non-composite exchanges. A composite exchange is one in which all categories of securities and products can be listed and traded. In contrast, a non-composite exchange focuses on a singular type of security or product.
“Furthermore, the duties/responsibilities of Exchanges have been expanded, and the conditions for revocation of registration clearly stated. There are also new provisions on financial market infrastructures such as central counterparties, clearing houses, trade depositories, etc.”