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Nigeria’s SEC and the Burden of Regulation

A mild drama over disclosure of corporate deficit and returns ensued early this month between the Securities and Exchange Commission (SEC) and the Senate Joint Committee on Finance, National Planning, Petroleum Upstream, Downstream and Gas. As evidence of accountability, SEC had in a document to the Committee disclosed that it recorded a N9 billion deficit in the last three years. 

The Senate Panel escalated the transparent disclosure into headlines, expressing concerns that the staggering amount might plunge the Commission into bankruptcy. Considering the reputational damage that such a headline may cost the Commission, its soft-spoken Director-General, Dr. Lamido Yuguda, in a statement, quickly disclosed the other side of the story, saying SEC had in the review period remitted N1.5 billion into the Federation Account. In contrast, 25 percent of the Commission’s gross revenue was paid to the Federation Account in June this year. The Commission also assured the Senators that it would return to profitability in the next two years following cost-cutting measures put in place.

This scenario has raised a polemic question on the strategic focus of SEC as the Capital Market Apex Regulator and its funding structure.

Globally, Securities and Exchanges’ Commissions perform similar roles but operate different funding structures. At the basic level, every SEC “protects investors, maintains fair, orderly and efficient markets; and facilitates capital formation”.

The SEC strives to promote a market environment that is worthy of public trust…”. This implies that SEC is not for-profit-making, instead a regulatory Agency that ensures investor protection and custodial of rules of capital formation and its enforcement. But SEC requires adequate funding to enhance its operation as the policeman of the market.  The government funds the United States Securities and Exchange Commission in Washington DC through appropriation processes of Congress.

Fillings in the United States capital market do not require fees, while registrations attract minimal charges. Despite this, the Commission generates funds above what it receives from the government because of prominent participants. However, with its expanded responsibilities of policing the market, coupled with inadequate funding by the government, it is requesting self-funding.

In the United Kingdom, Financial Conduct Authority (FCA) is the equivalent of the Securities and Exchange Commission.

It is an independent public body, accountable to the Treasury but funds its operation through the companies’ fees.

In China, China Securities Regulatory Commission (CSRC), a ministerial-level public institution under the State Council, drives the securities market. In Japan, the Securities and Exchange Surveillance Commission (SESC) regulates the capital market, while in Hong Kong, the Securities Futures Commission (SFC) is self-funding through levies on transactions conducted on the Stock Exchange of Hong Kong (SEHK), the Hong Kong Futures Exchange (HKFE) and other fees charged to market participants. These securities markets do not remit the fund to the government account.

The SEC in Nigeria is a government oversight agency that regulates the capital market, primarily through investor protection and ensures allocative efficiency of the market. The senators’ recent lamentation on the liquidity position of SEC and expectation of higher returns to the government’s treasury is curious. Operations of Nigeria’s SEC are supposed to be subsidized with the government’s grant.

This will reduce SEC’s over-dependent on fees from charges and penalties, make the market more competitive and enhance its regulatory fairness.

The financial obligation to the government has probably pushed the Commission into imposing two-year accumulated penalties on some dealing-member firms recently, running into millions of Naira over their failure to render reports of any client that uses laundered money for investment. 

Meanwhile, the Nigerian Financial Intelligence Unit (NFIU) has directed such reports to be channeled to it rather than any government agency. This has put dealing member firms in a quandary.

Why did the Commission wait two years without serving the “erring” dealing members queries only to penalize them with huge fines? The affected firms are already in panic mode.

Let us sympathize with SEC. The Commission is broke. But it had benefited during the market boom and should creatively manage the burst. Investor apathy is fuelled by the inclement operating environment, characterized by insecurity and macroeconomic vagaries.

Notwithstanding, the capital market in Nigeria remains resilient and a rewarding platform for real investors. In a chat with a respected senior stockbroker last week on the future of the market, he made a poignant summary: “SEC needs to look at how it can make the market buoyant now.

Unfortunately, it seems unbothered. The fundamental problem is investor confidence. There is a high level of apprehension about the market, and some people are still playing games. Government has a fiscal crisis. It will want SEC to fund itself. But the Commission should be concerned with the market stability and the cost of the transaction. As for penalties, the Commission should note that it can charge the operators out of existence.”

It is concentric circles of challenges. The Commission is working hard but fighting many battles. It is desperately chasing liquidity in the market, contending with uncertainties. Many dealing member firms currently suffer financial hemorrhage.

SEC must maintain careful balancing; this is the burden of regulation. SEC’s functions have taken over by the Central Bank of Nigeria (CBN), the sole Administrator of Commodities Exchange.

The Commission is not represented in the CBN’s Monetary Policy Committee (MPC), to explain the implications of every monetary policy on the capital market operations before implementation. By this gap, when Godwin Emefiele sneezes, Yuguda catches a cold and passes it to Oscar Onyema.  It is long overdue for the Ministry of Finance to grant more autonomy to SEC for unfettered discharge of its regulatory functions. The Commission is no longer a department of the apex bank.

Sola Oni,  an Integrated Communications Strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications

Nigeria’s SEC and the Burden of Regulation

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