Effective regulatory mechanism for capital markets and indeed financial markets as a whole has since come under focus in today’s investment world.
The need for effective capital market regulation is driven among other reasons by the desire to protect the investing public, instil confidence in the system and ensure financial market and economic stability which are pivotal to economic growth and development.
In Nigeria, the Securities and Exchange Commission (SEC) is mandated to regulate and develop the Capital Market. The SEC’s mission is to develop and regulate capital market that is dynamic, fair, transparent and efficient, which will also contribute to the nation’s economic development.
Two years ago, President Muhammadu Buhari appointed the current executive management team of the Securities and Exchange Commission led by Lamido A. Yuguda as Director General. In the last two (2) years, the Yuguda-led current executive management team of the SEC has no doubt made tremendous strides and achieved a good number of set goals which are expected to improve the Commission’s capability in adapting to changing economic and market conditions and ultimately delivering on its mandate.
In the past two year of the current executive management team, the SEC Nigeria has achieved quite a lot through careful implementation of sound initiatives, which include: introduction of rules on Green Bonds to promote issuance of debt instruments for financing of environmentally friendly projects and to provide the regulatory framework necessary for sustainability finance in Nigeria; and creation of a Fintech and Innovation Division dedicated to products and services rooted in information technology.
The SEC current executive management has also achieved dematerialisation of share certificates; E-Dividend and Direct Cash Settlement; development and implementation of the Roadmap for FinTech in the Nigerian Capital Market; development of the Crowdfunding Regulatory Framework, which could potentially transform Micro, Small and Medium Enterprises (MSMEs) financing in Nigeria; and release of new Rules on Virtual Assets Service Providers (VASPs) to ensure there is no loop-hole for financial crimes like money laundering through digital assets traded in Nigeria’s market.
In regulating the market, the Commission in order to protect investors, market operators and also ensure market integrity undertakes activities such as registration of securities and market intermediaries to ensure that only fit and proper persons / institutions are allowed to operate in the market.
The SEC presently regulates and supervises eight main Exchanges in Nigeria: AFEX Commodity Exchange, FMDQ Securities Exchange, Gezawa Commodity Market & Exchange, Lagos Commodities & Futures Exchange, NASD, Nigerian Exchange Limited (NGX), Nigeria Commodity Exchange (NCX), and Prime Commodity Exchange.
It also undertakes inspection either done “onsite” or “off-site”; surveillance over exchanges and trading systems to forestall breaches of market rules as well as deter and detect manipulations and trading practices which are capable of causing market disruption; and investigation of alleged breaches of the laws and regulations governing the capital market and enforcement of sanctions where appropriate. The Commission’s enforcement actions are also taken against market operators who are found wanting after investigation is carried out; as well as rule-making as developments occur to ensure that the Commission meets up with international best practices.
Here are some of the achievements
Market supervision
The Commission made important strides in monitoring market activities, management of Return monies and confirmation of the quantum of Unclaimed Dividends during the period. Unclaimed dividends: The Commission was able to ascertain the quantum of unclaimed dividends of publicly traded companies that fall within the categories eligible to be borrowed by the Federal Government. This amounted to N56.584billion and $8.153million respectively. This process was carried out in accordance with the provisions of the 2021 Finance Act, which mandates that all unclaimed dividends between the ages of 6 and 12 years be transferred to the Trust Fund established for the purpose of borrowing by the Federal Government to support the 2021 appropriation.
Return Monies: The total amount of N2.3billion in excess of return monies and N11.4 billion in Schemes consideration money, both of which had previously been held in the custody of the Registrars have been transferred into the SEC/CNB NIPF Account. The Commission has developed procedures that must be followed in order for eligible owners of the money to be able to make claims on it.
Investigation
Out of the 250 complaints brought forward into the period, 182 were resolved. 58 complaints in relation to Ponzi schemes were received during the period and 45 were resolved. The Commission was able to recover 10,659,168 units of various companies’ shares. Also, N1.384billion was recovered for investors during the period under review.
Enforcement
Fight against Ponzi Schemes: The Securities and Exchange Commission has over the years implemented many sound initiatives aimed at promoting genuine, wealth-creating platforms while fighting against fraudulent and deceitful investment schemes, including Ponzi Schemes. The proliferation of Ponzi Schemes and the need to relentlessly fight them has been central to our focus on investor protection. Although the Investments and Securities Act empowers the Commission to register capital market operators and to regulate securities businesses in Nigeria, these illicit schemes shy away from regulation to avoid detection.
The menace of Ponzi Schemes continues unabated partly because most of their victims do not heed the Commission’s relentless warnings and advisories delivered through traditional and new-media outlets against such investments. As part of our efforts to curb this menace, the Commission successfully hosted a 2-day stakeholders training webinar on Ponzi Schemes in collaboration with Attorney General Alliance Africa and Punuka Associates to educate stakeholders about these schemes. During the two-year period, the Commission also sealed up the premises of 4 illegal operators. Currently 7 companies are facing criminal prosecution.
Investments and Securities Bill (ISB) Review
The Commission has drafted an amendment to the Investments & Securities Act (ISA) and the Bill is already at an advanced stage. The bill has been presented to the National Assembly and its essence is to enhance the regulatory framework of the Nigerian Capital Market. Furthermore, it would lead to the introduction of new products into the market and greatly enhance the regulatory powers of the Commission.
In addition, the Bill is expected to increase the effectiveness of the Investments and Securities Tribunal (IST). At the international level, it introduces legislation that ensures the Commission’s compliance to the requirements of the IOSCO Enhanced Multilateral Memorandum of Understanding (EMMoU) concerning consultation, cooperation and the exchange of information. These updated laws are necessary to increase cross-border enforcement cooperation and assistance among securities regulators, thereby enabling them to respond to risks and challenges posed by globalisation and advances in technology.
Furthermore, the ISB introduces necessary amendments to financial Markets operations around netting and insolvency with relation to the development of derivatives. It also seeks to strengthen legislation in the commodities sector as more depth and transactions are achieved within the sector. The Commission successfully organised a retreat from January 31, to February 1, 2022 where the Bill was exposed for stakeholders’ comments. Also, the Commission is collaborating with the National Assembly Business Environment Roundtable (NASSBER) to prepare a roadmap towards passage of the Bill within the shortest timeframe.
Capital Market Master Plan (CMMP) Review
The Commission has been implementing the initiatives contained in the Capital Market Masterplan (CMMP) (2015-2025) as a road map towards the development of the capital market in Nigeria. Numerous initiatives to improve the contribution of the capital market to the national economy, market structure, competitiveness, attractiveness, regulation and oversight were embarked upon in the first five years of implementation with remarkable successes in some initiatives and added focus on the implementation of key issues in others. The Commission has successfully completed the review of the CMMP as intended by the CMMP 2015-2025. The review was supported by FSDA and was carried out by PWC Nigeria.
The review of the CMMP was recommended in the Masterplan itself to realign the initiatives/deliverables to prevailing market conditions and keep the document relevant in the dynamic capital market due to issues related to Fintech, sustainability and regional integration. The review is expected to guide further development of the market so that it can attract more funds for economic growth and development. The review is complete and the new Capital Market Master Plan will be launched soon.
Identity Management Committee
One of the major results expected from the implementation of the Capital Market Masterplan was to ensure competitiveness by establishing practices and systems that improve efficiency and attract interest from both foreign and domestic investors. Resolving legacy issues of Identity Management is a crucial driver of improving market participation and solving problems like the Unclaimed Dividends issue. Resolving legacy issues of Identity Management is a crucial driver in improving market participation and solving problems like that of Unclaimed Dividends.
The Commission inaugurated a market-wide Identity Management Committee with a mandate to harmonise the various databases of investors in the Nigerian Capital Market, facilitate data accuracy in the Nigerian Capital Market, mitigate fraud, improve KYC requirements and manage AML/CFT risks, among others.
The inaugural meeting of the Committee was held in July 2021. Following deliberations at the meeting, the Committee established some additional points to enrich its Terms of Reference. The committee is expected to provide results that will help to improve the overall efficiency of the market as the level of market development determines the quality and quantum of local and foreign investors it will attract. The report of the identity management committee is expected to resolve issues that have hindered the growth of the market, hampered investor confidence, and matters that serve as barriers to entry for potential investors. Recommendations of the committee would be expected to include the application of international best practices to the lingering issues while providing unique solutions.
National Savings Strategy (NSS)
A Federal Government Working Group on National Savings Strategy (NSS) was constituted and inaugurated by the Honourable Minister of Finance, Budget and National Planning primarily to advise the Government on the feasibility of implementing the recommendations of the National Savings Strategy Position Paper submitted to the Honourable Minister by the Capital Market Master Plan Implementation Council (CAMMIC). This is a step towards actualizing recommendations for a national savings strategy in the Nigerian Capital Market Master Plan.
The Working Group’s mandate is to advise on feasibility, propose further suggestions to meet the objective of capital accumulation through a Savings Scheme, and develop a framework that articulates an implementation roadmap for the Government. The growth of any economy depends on the level of capital accumulation. Capital accumulation in turn depends primarily on investments and savings. The critical twin issues for driving growth in any developing economy are essentially how to stimulate investments on the one hand and grow savings to finance the needed investments on the other. The Committee’s Report was presented to the Minister of Finance on February 22, 2022 and a workshop will soon be organised to explain the contents of the Report to stakeholders. The outcome of the presentation will determine its adoption.
Secondary market activities
Demutualization: Discussions on Demutualisation of the Nigerian Stock Exchange (NSE) had been ongoing since 2001 although there were no deliberate efforts made in advancing the process until 2011. In 2011, demutualisation was discussed again after having been covered in a paper presented by the NSE titled, The Roles and Expectations of Regulators in the Demutualisation Process. A 21-member technical committee was then inaugurated that year by the Commission and charged with the responsibility of developing a legal framework for the demutualisation process. In 2014 the Commission issued draft Rules on Demutualisation of Exchanges in Nigeria and the final rules on demutualisation were released on April 27, 2015. The Rules provided the regulatory framework under which the demutualisation process would be implemented.
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One major challenge faced by the NSE was the absence of the appropriate legal basis in the CAMA 2004 to support the demutualisation model of the NSE considering that it was a company limited by guaranty. The NSE had a few options but in the end, it settled for having a Demutualisation Bill which was eventually passed into law as the Demutualisation Act of 2018. The Act provided the legal framework for demutualisation of the Exchange and thus addressed the gap in the CAMA. The Demutualisation of the Nigerian Exchange Limited (NGX) was a milestone in the development of the Nigerian capital market. The benefits of the process have been highlighted, including the opportunity for investors to participate as shareholders of the Exchange. Also, the structure of the NGX should improve corporate governance and attract more capital to the market. Technological innovation is also expected as the Exchange attempts to diversify its business mix. The Commission anticipates further deepening of the market in terms of product offering and size which would require increased regulation and oversight towards investor protection.
Fintech: The Commission collaborated with the University of Cambridge’s Centre for Alternative Finance, UK for its staff to undergo & complete a certified course on Fintech & Regulatory Innovation, to enhance the Commission’s capacity in regulating Fintech. It also Collaborated with the World Bank to commission a Fintech Scoping project to guide the Commission on its Fintech policies. Held collaborative engagements with (15) International and local Fintech stakeholders. The Regulatory Incubation Guidelines to operationalize provisional regulation for aspiring Fintech firms were released within the period.
Primary market activities
The Commission has during the review period approved 41 new equities issues valued at N656.9 billion, 37 bonds valued at N776.2 billion, 28 applications for shelf programmes valued at N2.5trillion and 21 Exchange Traded Derivatives Contracts. Also, 6 schemes of Merger and 7 acquisitions, 21 Corporate Restructurings and 3 takeovers were also processed by the SEC in 2 years. The Commission ensured that over N11 billion of untraceable shareholders’ funds arising from Schemes of Arrangement in the custody of Registrars were transferred to the National Investor Protection Fund (NIPF). As part of the process of improving time to market of transactions and fast tracking the review process, the Commission conducted a training for issuing houses to help with improving the quality of applications usually submitted. A new approval stratum was also introduced during the period to improve pace of approvals. The Commission recorded a landmark achievement on the first electronic offering with a combined feature of both book building to Qualified Institutional and Retail Investors. The Commission also granted approval for the first derivatives contract application which has seven (7) and fourteen (14) different contracts from both the NGX and FMDQ Exchanges respectively.
Collective Investment Schemes (CIS): Privately Managed Funds (Discretionary/Non-Discretionary products)
The Collective Investments Schemes (CIS) segment of the capital market is governed by the SEC Rules and Regulations, specifically Rule 95 which provides regulatory guidelines on the Custody and Possession of funds/securities of clients. Although these Rules were applied to fund managers, they excluded some privately managed Discretionary/Non-Discretionary accounts. The CIS sector has grown considerably from about N180 billion in January 2015 to about N1.5trillion in June 2022.
Due to the increase in the size of the CIS funds and the increased sophistication of funds, the Commission mandated that Rule 95 should also apply to all Privately Managed Discretionary/Non-discretionary portfolios to ensure the protection of investor funds. Additionally, Rule 465, which provides guidance on the Contents of Trust Deeds was amended such that the maximum allowable total expenses of a CIS was reduced from 5percent to 3.5percent of Net Asset Value. Furthermore, before 2021, Fund Managers were at liberty to set up and manage their in-house Private Funds and portfolios. Based on the New Rules released in January 2021, they are now required to register all such funds with the SEC before they can operate them. As at May 30, 2022, No Objections have been granted to 58 Fund Managers for 364 different types of products/portfolios valued at N1.05trillion.
CIS custody requirement:
The Commission commenced implementation of 100 percent custody requirement in the Collective Investment Schemes (CIS) sector to protect investors. As a result, all clients’ assets currently managed under discretionary and non-discretionary mandates are to be held under the independent custodial agreements in custodial banks. The Commission commenced implementation of 100 percent custody requirement in the Collective Investment Schemes (CIS) sector to protect investors. As a result, all clients’ assets currently managed under discretionary and non-discretionary mandates are to be held under independent custodial agreements in custodial banks.
With the increased level of regulation in CIS funds, the market is expected to align with international best practices, an indication of the maturity of the segment. The increased regulation would ensure that investors’ funds are protected and irregularities eliminated. Furthermore, the size of some subsectors of CIS funds such as equity, ethical and bond funds may increase due to increasing sophistication and influx of investors. The Commission has also increased the fees it receives from fund managers for supervision of CIS funds.
Other Surveillance Mechanisms –
The Commission has continued to monitor the activities of CMO’s and has made concerted efforts to ensure the exit of weak institutions from the market. The Commission also continued to contribute to financial system stability through continuing risk based supervision of CMO’s that are subsidiaries of Holding Companies. We also continue to collaborate and share information with other agencies in the financial system under the FSRCC.
Anti-Money Laundering/Combating The Financing Of Terrorism (AML/CFT)
Following the GIABA Mutual Evaluation of Nigeria, the Commission had made concerted efforts in the capital market to meet both the GIABA Mutual Evaluation Report(MER) Follow-Up Process and the FATF International Cooperation Review Group (ICRG) requirements in order to try and avoid Nigeria being placed on the FATF public grey list at the Plenary after the grace period expires in October, 2022.
Following the GIABA Mutual Evaluation of Nigeria, the Commission had made concerted efforts in the capital market to meet both the GIABA Mutual Evaluation Report (MER) Follow-Up Process and the FATF International Cooperation Review Group (ICRG) requirements in order to avoid Nigeria being placed on the FATF public grey list at the Plenary after the grace period expires in October, 2022.
The MER concluded that, given the size and characteristics of the Nigerian financial sector, along with the Designated Non-Financial Businesses and Professions (DNFBP), the use of Virtual Asset Service Providers (VASPs) and the Non-Profit Organisation (NPO) sector, the international footprint associated with ML, predicate crimes and TF, and the risks associated with the Free Trade Zones (FTZs), that Nigeria has high inherent risks of ML, TF and PF and that these risks were not well assessed nor understood by Nigeria. The MER also concluded that Nigeria had several important deficiencies in its AML/CFT/CPF system in relation to Technical Compliance, and that its effectiveness controls were insufficient to mitigate its high ML/TF/PF risks. The overall rating results showed a low level of effectiveness. As such, the Commission approved the under listed new Rules and amendments: Rules and Regulations of the Virtual Asset Service providers and amendments of the sector specific regulations to repeal the 2013 SEC AML/CFT Regulations and enactment of the 2022 AML/CFT Regulations.
Amendments of the SEC AML/CFT RBS Framework
These New Rules and Amendments were done in order to address the Mutual Evaluation report deficiencies and broaden the scope of preventive measures available to Virtual Assets Service Providers (VASP). These New Rules and Amendments were done in order to address the MER deficiencies and broaden the scope of preventive measures available to VASPs.
The Commission has also been instrumental in facilitating the conduct of the Second round of the Mutual Evaluation for Nigeria in line with the FATF requirements. The Commission has also ensured that a National Inherent Risk Assessment (NIRA) and Money Laundering, Terrorism Financing and Proliferation Financing (ML/TF/PF) vulnerability assessment of the Capital Market was conducted. The Commission also in collaboration with other agencies and key AML/CFT stakeholders developed the Implementation Roadmap (IR) to ensure Nigeria’s timely exit from the International Cooperation Review Group (ICRG) process.
Regulatory framework
The Commission Continued to enhance its existing regulatory framework guiding the operations of the market by keeping pace with the evolving changes in market practices, especially with the advent of Financial Technology and digital assets.
The Commission issued New Rules on Robo-Advisory Services to guide the regulatory requirements and expectations for providing automated advisory services in the market. Rules on Trade Repositories were also released during the period. Trade repositories or trade reporting facilities are important financial market infrastructures that support the central collection and maintenance of data on financial transactions. In addition, the Commission introduced new Rules on the following; Crowd Funding, Social bonds, Digital Assets Exchange (DAX), Digital Assets Custodians (DACs), Issuance of Digital Assets as Securities, and Requirements for registration of Digital Assets Offering Platforms.
Corporate Governance
The SEC released Guidelines on the Implementation of Sections 60-63 of the Investments and Securities Act (ISA), 2007. The Guidelines were developed to guide directors who will implement relevant internal controls over financial reporting and auditors who will review same and issue a statement on its existence, adequacy and effectiveness or otherwise. The document was released to the market and became effective on March 8, 2021. Public companies are required to report on compliance in annual reports from December 2023 financial year end.
Filing options for Audited and Fourth Quarter Financial Statements
In order to strengthen the disclosure regime in capital market, the Commission in a circular dated January 19, 2022 provided public companies a fast-track option for filing Audited Financial Statements as follows: Option 1: File Annual Audited Financial Statements (AFS) within sixty days after the year-end to qualify for exemption not to file Fourth Quarter Unaudited Financial Statements (Q4 UFS); or Option 2: Comply with the existing requirement to file Fourth Quarter Unaudited Financial Statements (Q4 UFS) within thirty days after the quarter end and Annual Audited Financial Statements (AFS) within ninety (90) days after the year-end.
