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SEC’s Appeal – Will the Regulator ever get its mojo back?

At a time when investors need its protection the most, the Securities and Exchange Commission (SEC) seems to have gone AWOL. This week in Street Talking on NEXT, I point out the contradiction in the government's attempt to rescue the market, albeit sincere, which has put investors at extreme risk of losing their investment completely. Until now, only the value of their shares were eroded. But with the Central Bank of Nigeria marshaled rescue, investors are now likely to lose the vote which their ownership entitles them to in determining the future of the companies. To stay relevant, the SEC needs to rediscover its primary mission and stand up for investors.

The Securities and Exchange Commission (SEC) has been in the spotlight a lot this year. It has not all been for glowing reasons. Justly or otherwise, the SEC, like other market regulatory agencies across the globe, has received a good dose of blame for what initially began as an economic problem, but has snowballed into a chorus of indictment over inadequate regulatory oversight. The metaphor ‘asleep at the switch,’ has been used by more than one commentator.

The criticisms have been at two levels, personal and institutional. At the personal level, there have been calls for the sacking and subsequent probe of specific officials, while at the institutional level, demands have been made for a complete overhaul of the regulatory system.

An April editorial in a business daily accused the SEC of ‘abandoning the stock market to systematic and coordinated price manipulations, trading in shares of non-functional companies by unsuspecting investors, and price movements not based on any concrete market fundamentals.’

According to the paper, ‘stocks were grossly over-valued, market and listing rules frequently broken especially by the ‘favorite companies’ of these institutions’ leadership and the regulatory institutions that were supposed to be complementary in their oversight functions were openly antagonistic of each other. The result has been the present collapse of the stock market.’

Typical of the Commission, it did not deem fit to issue a denial to the charges contained in the editorial. In its place, the Nigerian Stock Exchange, which was also fingered in the editorial, responded with a vigorous, even combative, rebuttal. A month later, Musa al-Faki, the Commission’s director-general, citing unconvincing family reasons, tendered his resignation.

Banking purge

The banking sector purge has revealed the degree of crony relationships that existed among regulators, market intermediaries and companies. Misleading financial statements, atrocious corporate governance, artificial price movements and extremely bad management practices in several institutions indicate that these were more than isolated events, which the SEC should have known about. Instead, it either chose to deny having any knowledge of the widespread practice or, being aware of it, felt helpless to intervene.

The occasional punishment of individual stockbrokers for unauthorized client share sales pales in comparison with the magnitude of abuse executed by companies or on their behalf.

Last week, in a belated response, the Commission put up a notice on its website stating that ‘based on its review of transactions of capital market operators including those of the bail-out banks by the Central Bank of Nigeria, the Commission shall from the 9th of November, invite some capital market operators to its Administrative Proceedings Committee hearing, to explain their roles in unwholesome practices in the market. At the end of the hearing, the Commission would impose appropriate sanctions on erring operators found to have engaged in acts that have brought disrepute and erosion of investors’ confidence to the capital market.’ Not a few critics hissed ‘too little, too late.’

Corporate governance

Despite laudable progress made in its latest review of the Nigerian corporate governance code and the proposals of the Dotun Suleiman Committee on the Review of Capital Market Structures and Processes, there remains a hard residue of public skepticism over whether the SEC has the administrative will, expert skills, technical ability and financial resources to rise to its full stature. The regulator has earned an unenviable reputation for plenty bark and little bite.

The delay in appointing a substantive head for the SEC has not helped matters. This is not the time to be playing politics with the office of the chief market regulator. While the competence of the acting director-general is not in doubt, the government’s reluctance in bestowing permanence on the position detracts from the legitimacy of her signet.

Any market rescue or reform agenda for the Nigerian stock market must pay premium attention to the role and authority of the SEC. In particular, the review must examine the SEC’s relationship with the Central Bank.

The task of restoring the Commission to its primary mission of investor protection is being compromised by the very nature of the bailout of banks and the proposed Asset Management Company, which are Central Bank initiatives. The bank bailout plan was conceived to protect depositors and creditors, while the asset repurchase programme is intended to safeguard the balance sheets of financial institutions with overwhelming exposure to margin loans.

Reality stings

The reality is harsh. At a recent meeting with the press, Sanusi Lamido Sanusi, the Central Bank governor, said that, ‘Shareholders need to understand what we are doing and we are merely being charitable when we talk about shareholders. Look, you’ve lost your money.’ The very act of throwing a lifeline to the market has left investors to drown.

This contradiction has slipped in with little notice. The economic and monetary character of the crisis gives precedence to the Central Bank’s redemption effort. In contrast, the SEC’s responsibility for investor protection pushes it and the constituency it represents, to the orphanage. This state of affairs limits the visibility and contribution of the SEC in creating solutions and constitution-making for a new market order, one which it will be responsible for monitoring.

The SEC cannot abdicate its responsibility for restoring investor confidence. It is an irony that the Central Bank has become the lead voice championing corporate governance, relevant and reliable reporting and shareholder communications while the SEC, which has an extensive and proud track record advocating these practices keeps mum. Will the real SEC please stand up?

The original article may be read here on NEXT.

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