Sunday Odeleke: The New SEC And The Actions That Will Benefit The Market

If you have been following the development between the Nigerian Capital Market Regulator, the Securities and Exchange Commission (SEC) and the BGL Group, one of the capital market operators in Nigeria, then you should be happy to see the regulator acting in a manner that can help market integrity and restore investor confidence.

Just like the American counterpart, also called the SEC, which has the mandate to protect investors, maintain fair, orderly and efficient market, and facilitate capital formation, the mission of the Nigerian SEC is to develop and regulate a capital market that is dynamic, fair, transparent and efficient, to contribute to the nation’s economic development. Therefore in the ongoing case of alleged gross market infraction by BGL Plc and its subsidiaries, the regulator must handle the case in manners that would benefit the overall interest of the Nigerian Capital market.  First, a quick review how the capital market regulations have evolved globally would broaden this view.

Globally, capital market regulations are set up to help operators from the problem of illusion of money.  The underlying mandate of all capital market and financial system regulators is to protect investors and depositors from practitioners’ errors, mismanagement, fraud and cheating during the custodianship of third parties assets in whatever forms permissible by law. The complexities of the financial market today however make infractions an unavoidable part of the capital and financial market activities. These complexities, represented by the fungibility of the financial system and significant correlation of assets classes and markets, have made regulators’ approach to dealing with infractions very delicate. A badly handled infraction in the United State of America, the United Kingdom, and even in fragile Europe can take the global financial system to its knee.

The US SEC regularly deals with operators and market participants’ infractions and since the global financial crisis of 2008, the regulator has been more pro-active in its oversight functions than before. In the UK, the Financial Conduct Authority (FCA) regulates the financial services industry with the primary aim to protect consumers, ensure the industry remains stable and promote healthy competition between financial services providers. Recently, the FCA dealt with a combination of banks foreign exchange market infractions and LIBOR fixing infractions without roiling the market.

Likewise in Nigeria, the SEC has contributed in significant ways to the market development through astute scrutiny of deals for compliance with envisaged security of investments and integrity of the market. On many occasions, the SEC has also moved quickly enough to deal with market infraction in the bid to mitigate large scale losses to investors. Over the years, the SEC has performed this role using the institutional process as empowered by the Investment and Securities Act (ISA) 2007, the SEC Board, the Administrative Proceedings Panel (APC) and the Investment and Securities Tribunal (IST) depending on the level of infractions. Significant improvement in capital market regulation through the SEC activities has resulted in timely return filing by quoted institutions, reduction in market infractions committed by operators and the resolution of operator-investor conflicts etc. And in all of the cases, investigations by the SEC and resolutions of the matters are usually conducted privately to prevent any backlash on the market.

However, in relation to BGL Plc and its subsidiaries, it is unclear what the SEC wishes to achieve by dealing with the matter in public and on the pages of newspapers. Since the SEC publicly announced the appointment of an Interim management Team (IMT) to take over the management of the company and its subsidiaries in April, the follow up publications on suspension of the companies and their sponsored individuals from capital market activities and the invitation to APC, it might appear as if the SEC is hell bent on liquidating the company and its subsidiaries to the detriment of the investors’ fund currently stuck in the company in particular and the market in general. For example, by suspending the Company and all its subsidiaries from operating and earning revenue, it makes it difficult to settle all outstanding obligations to clients and investors.  It also makes it difficult, if not impossible, for the company to attract additional capital to improve the solvency of the company and put it in a position to continue as a going concern.

The publicity given to this case, including the one by the IST, appears like a moral war against the company so that the public can expect its potential collapse and brace up for it. But like the experience of Lehman Brothers in the US where investors are more educated and follow up the developments, the Nigerian market will never be ready to take such development without a reverberation. It would spread like wild fire and catch other operators. They would experience a run on them; leading to depressed selling of assets and asset deflation. If not well managed, the same market that the SEC is trying to protect may crash, leaving nothing to protect. This is already happening!

Moreover, the moral warfare has its inverse side. The constant publication of the ongoing issues by the SEC is not good for the market, while the publications of clients’ confidential information in the bid to justify the Commission’s actions and perhaps to steer away sentiments from the company, will pitch the public against the SEC. It is an unnecessary propaganda that is unhealthy for the capital market. The market is currently in a bearish mood due to the combined effect of the lull in domestic economic activities, Greece uncertainties, China crisis and arguably the handling of the BGL and operators’ capitalisation issues; loosing over N600 billion in the last couple of months.

The strategic objective of the SEC should be to ensure market integrity and by extension protect investors, which is the ultimate ‘war’ in this case. The tactical actions to achieving these objectives include the mitigated resolution of BGL case which is one of the several ‘battles’ the SEC faces. And in achieving the overall objective of winning the war (ensuring market integrity), the SEC may need to loose some battles (by yielding grounds) for the greater good. The SEC might have already won the war by showing the market and the investors that it stands ready to investigate and punish any erring capital market operator whose actions and conducts put the market at risk. Every market operator now knows that the SEC is ready to go all out to enforce its rules and to carry out its oversight function without fear or favour. That is in itself is an outstanding achievement. Even the company itself would have learnt from its mistake and will be more than willing to do a better job going forward, provided such a chance is given, since “big brother SEC” is watching. However by insisting on putting an operator down, the SEC is trying to win the small battle at the expense of the bigger war and thereby snatching “defeat” at the jaw of “victory”.

The current issue reminds us of the Nigerian banking crisis of 2009/10 in which many Nigerian banks were alleged to be in grave solvency danger due to the financial and economic meltdown and the subsequent stock market crash in Nigeria. Although the Central Bank of Nigeria (CBN) was able to deal with the major institutions with grave conditions and their owners and management without putting depositors’ money at risk, it achieved this by temporarily bailing out the affected banks while adopting a private sector driven resolution strategy through the use of the Asset Management Corporation of Nigeria (AMCON) to manage the crisis. Despite the resolution, it took time for the market to recover as investors lost significant amount of equity in the banks. Some of the banks are still struggling to get back to optimal levels. The SEC does not appear to have the capacity to achieve same in relation to the issue with BGL and many others that may come after it. Hence, the potential systemic risks that the bankruptcy of a “big” market operator poses to the Nigerian Capital Market should prevent the SEC from taking the moral high ground it is currently taking. The manner in which the Commission is currently handling this matter may not be apt and presents great risk to the Nigerian capital market.

Rather the commission should midwife the process for any market operator that may have liquidity issues to get out of these problems to be able to deliver on its core mandate of investors’ protection and upholding market integrity. In the end, when all ends well, the SEC, like in every other clime, can then turn around and punish all individuals that were culpable at putting investors’ money at risks in the company within the ambience of the Investment and Securities Act (ISA) 2007. The planned administrative proceedings can then take place where punishments including suspensions and fines can be meted out to culprits.

Sunday Odeleke

@OdelekeSA (please, follow on Twitter)

sunddel@yahoo.com

Houston, TX USA.

 Views expressed are solely that of author and does not represent views of www.omojuwa.com nor its associates