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Opinions of Sunday, 26 September 2021

Columnist: Oni, PUNCH

SEC and the burden of regulation

Securities and Exchange Commission (SEC) Securities and Exchange Commission (SEC)

A mild drama over disclosure of corporate deficit and returns ensued early this month between the Securities and Exchange Commission and the Senate Joint Committee on Finance, National Planning, Petroleum Upstream, Downstream and Gas. As an evidence of accountability, SEC had in a document to the joint committee disclosed that it recorded 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 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 while 25 per cent of the commission’s gross revenue was remitted to the Federation Account in June this year. The commission also assured the senators that it would return into 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, rather 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 United States Securities and Exchange Commission in Washington DC is funded by the government through appropriation processes of the 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 large 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, the Financial Conduct Authority is the equivalent of Securities and Exchange Commission. It is an independent public body, accountable to the Treasury but funds its operation through the fees charged the companies. In China, China Securities Regulatory Commission, a ministerial-level public institution under the State Council, drives the securities market. In Japan, the Securities and Exchange Surveillance Commission regulates the capital market while in Hong Kong, the Securities Futures Commission, is self-funding through levies on transactions conducted on the Stock Exchange of Hong Kong, the Hong Kong Futures Exchange and other fees charged to market participants. These securities markets do not remit funds to the government account.

The SEC in Nigeria is a government oversight agency that regulates the capital market, especially 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 therefore curious. Operations of Nigeria’s SEC are supposed to be subsidised with the government’s grant. This will reduce SEC’s over-dependence on fees from charges and penalties, make the market more competitive and enhance its regulatory fairness. Financial obligation to the government has probably pushed the Commission into imposing a two-year accumulated penalty 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 has directed that such reports should be channelled to it rather than any government agency. This has put dealing member firms in a quandary.

Why did the Commission wait for two years without serving the “erring” dealing member firms queries only to penalise them with humongous fines? The affected firms are already in panic mode. Let us sympathise with SEC. The Commission is broke. But it had benefited during the market boom and should creatively manage the burst. Investor apathy is daily fuelled by the inclement operating environment, characterised 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 basic problem is investor confidence. There is a high level of apprehension about the market and some people are still playing games. Government has fiscal crisis. It will want SEC to fund itself. But the Commission should be concerned with market stability and the cost of 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 haemorrhage. SEC must maintain cautious balancing. This is the burden of regulation. SEC’s functions have been hijacked by the Central Bank of Nigeria which has become the Sole Administrator of commodities exchange. The Commission is not represented, especially by a stockbroker in the Monetary Policy Committee of the CBN to explain the implications of every monetary policy on the capital market operations before implementation. By this gap, when Godwin Emefiele sneezes, Yuguda catches cold and passes it to Oscar Onyema. To my mind, it’s therefore 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.