THE CHALLENGES OF CAPITAL MARKET
REGULATION
BY
MRS. ABIGAIL ORITSEBEMIGHO OBHIELO
SECURITIES AND EXCHANGE COMMISSION
LAGOS.
CHALLENGES OF CAPITAL
MARKET REGULATION
I stand on existing PROTOCOL
DISTINGUISHED PROFESSIONAL COLLEGUES,
LADIES AND GENTLEMEN
Good afternoon, it is an honor to be here with you
today. I have been asked to speak to you on the
challenges of capital market regulation. Before I
begin my prepared paper, I am obligated to give you
the usual disclaimer that the views I will express
here today are my own and do not necessarily reflect
those of the SECURITIES AND EXCHANGE
COMMISSION.
PREAMBLE
As we all very well know, capital market do not
operate in isolation or is it limited to buying
and selling of shares to make urge gains all the
time. It encapsulates a whole range of
activities, institutions, and a myriad of
interested parties. The interplay of these
cumulates into challenges for the regulation of
the capital market. There is no gainsaying that
sound regulation strengthens confidence in
capital market and therefore helps its
development.
 Bank Consolidation
The year 2007 was a very busy year for the Nigerian
capital market. It was the year; the Banks had to
comply with the central bank of
Nigeria
consolidation policy. It brought with it a host of
challenges, for the Banks, the regulators, the existing
market infrastructure, the investors and other
participants. It also brought good fortune across the
board, but was short-lived by the global financial
crisis in 2008.
THE GLOBAL FINANCIAL CRISIS
The global financial crisis brought financial loss indirectly to the
Nigerian investors as well. The crisis also bought regulatory and
corporate governance issues to the front burner. It exposed the
weaknesses of the regulatory and supervisory framework of countries.
When it started, it was believed that Nigeria was not going to be
affected as the Nigerian financial system was not dealing with the type
of financial instruments that were not performing in the global scene.
We seem to forget that we were in a global market without boundaries
and that what happens in one country could affect another country
directly or indirectly. Nigeria of course, was affected indirectly. It was
the ripple effect that caught up with the Nigerian capital market.
Foreign portfolio and hedge fund managers, who had invested heavily
in the offer for subscription of banks,
had to safeguard their client investment by exiting the Nigeria
Capital Market. While they were investing in the Nigeria Capital
Market, they created a seeming liquid market. There was scarcity of
stock in the secondary market and almost all offers in the primary
market were heavily oversubscribed. Investors could not be allocated
all the shares they paid for so it became necessary to return money to
subscribers. The result of the scarcity of shares and the stimulated
interest in the capital market introduced its own challenges.
The economic principles came to play, demand was more than
supply, so Prices of all shares appreciated , even moribund
companies benefited from the unexplained sudden rise in the prices
of shares across the market. More people got involved, even those
who had very little knowledge of the workings of the capital market
sought to become shareholders, if not for anything but to sell and
make huge profits.
As the global crisis deepened, the foreign investors decided to exit
the Nigerian capital market, by off loading their large volume of
shares into the market. The market got saturated with shares without
corresponding buyers. On the part of the retail investors they could
not catch in to take profit as share certificates were not being issued
promptly and the process of certificate verification at the Registrars
offices took so long to be completed. Since the retail investor could
not exit and there were no willing buyers, share prices across the
market started plummeting. Very many investors lost out as the good
fortune which they saw passed them by. The activities above led to
the investigation, of the Stock Exchange, Capital Market Operators,
some Issuers of Securities and the companies whose shares started
rising when there were no fundamentals to support them.
NIGERIA CAPITAL MARKET CRISIS
Apart from the global financial crisis, Nigeria had its own peculiar
internal financial crisis in the capital market. There was large scale
usage of margin loan granted by Banks to stockbrokers to buy shares
which later had serious negative consequences for the banks who gave
the loans. There were cases of fraudulent and unethical practices by the
Executive and board of some banks; none purchase of shares for client
by some stockbrokers; misappropriation of client funds by receiving
agents; cases of multiple applications; non return of surplus money by
some issuers of securities; and non release of issue proceed by some
receiving bankers. SEC and CBN promptly commenced investigation of
the activities of the affected banks and capital market operators which
was stimulating the capital market negatively. Those with indentified
and proven cases of infractions were presented before the
Administrative Proceedings Committee– APC for hearing .
POLICY IMPLEMENTATION AND SUBSEQUENT
CHALLENGES
Failure of Public Banks and There Nationalization
Public banks who could not meet with the required minimum
capital, and could not also get a willing acquirer rather than allow
them to be liquidated, were taken over by central bank and NDIC.
Having streamlined their activities were subsequently Nationalized
APRIL 2011 CODE OF CORPORATE GOVERNANCE
The introduction of the code of corporate governance, required
mandatory undertaken by the Board of public companies to comply
with its provisions and to file half yearly returns within a given
timeframe. The general observation was that most companies failed
to comply, as specified. Non compliance was therefore penalized by
the commission. It took SEC the application of its enforcement
powers before public companies could embrace the code of
corporate governance and state same in their published Annual
financial statements.
ADOPTION OF THE INTERNATIONAL FINANCIAL
REPORTING STANDARD (IFRS)
Adoption of IFRS was approved by the Federal Executive
council during this period. There were quantifiable benefits to
be derived. The capital market participants were not ready at
the time approval was given for adoption. The timeframe
given for the
adoption was short and this posed a very
serious challenge. The processes to be followed were very
tasking. Knowledge of IFRS across the market was limited.
There was urgent need for capacity building. Several changes
in procedure , processes , infrastructure and huge investment
was therefore needed to address the demands adoption of
IFRS brought. Both the regulators and the public companies
were engrossed with strategies to overcome these challenges.
All of these posed serious challenges for the regulators, the
public companies, and External Auditors and Professional
bodies.
PROVISION OF FINANCIAL INFORMATION
TO THE MARKET
Compliance with Sections 60 to 65 of the Investment and Securities Act
(ISA) 2007 on corporate responsibilities of public companies posed some
challenges. To give effect, the commission designed a reporting format for
public companies to render periodic and annual audited financial
statements to the investing public. This was aimed at ensuring that
investment decisions were based on timely and reliable financial
information. A time period within which these statements should be
released to the market and the commission was also stated. Companies
generally failed to comply with this regulatory requirement. Enforcing this
rule was necessary at this time because of some of the identified causes of
the global financial crisis. Information off course is key to capital market
activities. All efforts to make public companies comply failed. Series of
reminders were sent and names of companies whose periodic reports were
due for filing and release to the market were published in the National
daily Newspapers as a reminder. As a last resort, the commission applied
the sanction rules, companies who defaulted were penalized. It was after
the punitive action that public companies started to comply.
All of these presented challenges to the Regulator as the relevant regulated
entities failed to comply regulatory requirement as and when due.
CONSEQUENCES OF THE FINANCIAL CRISIS
 The global and domestic financial crisis revealed some regulatory
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challenges which needed to be addressed, for example
The crisis brought regulatory and corporate governance issues to the
front burner as it exposed the weaknesses of the regulatory and
supervisory framework of countries.
It showed that Lack of collaboration among regulators prevented a
comprehensive and a consolidated view of the activities in their
respective domain.
It revealed that regulators were not proactive enough in identifying and
addressing possible threats to the capital market .
It became evident that financial institutions which were poorly
governed posed a risk to themselves and to others which could lead to
the collapse of financial markets.
THE PERSPECTIVE OF THE PAPER
Having dwelt a little on some key happenings in the financial
market and the Nigeria capital market, it is considered
important to put the topic for discussion in perspective by
defining the key words which
are Challenge, capital
market and regulation.
Definitions
Challenges
(1a) A challenge is something new and difficult which
requires great effort and determination. For example a
new government's first challenge could be the economy.(
Collins English dictionary )
 (1b) A challenge is a difficulty that bears within it an
opportunity for development, Once we triumph over
a challenge we rise up to a higher level than before.
CAPITAL MARKET
(2a)
Capital market according to the (Webster’s New World
Finance and Investment Dictionary), is
defined as the
markets in which debt and equity are
raised
and
then traded in the secondary market.
(2b)
the capital market can also be defined as the
segment of the financial system for the sourcing of
medium to long-term funds. The maturity or tenor
of the instruments issued and traded, by this
definition, is the major distinguishing factor
between the money and the capital markets. While
the maximum tenor or maturity date of instruments
traded in the money market is usually less than one
year that of capital market could range from one year to
perpetuity.
REGULATION
(3)
Regulation on the other hand is defined
as a rule of order having the force of law,
prescribed by a superior or competent
authority, relating to the actions of those under
the authority's control.
A summary of the definitions gives a clue that
the challenges in the capital market bears with it
an opportunity for development. The regulator
can therefore come up with enforceable rules, so
that the benefits within the opportunities can be
realised.
HOW DOES REGULATION IMPACT
ON CAPITAL MARKET
Regulation of capital markets covers the participants,
institutions, and the instruments that are traded in the
market. Regulation enables capital market to function more
efficiently, transparent and impartial.
Capital market is of great interest to the global community
that is why the International organization of securities
organization (IOSCO), the umbrella body for securities
commissions from time to time comes up with best practices
in securities regulation. As at June 2010, it came up with 38
principles of securities regulation, which are premised on
three core objectives namely:
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Protecting investors
Ensuring that markets are fair, efficient, and transparent;
Reducing systemic risks
Members of the organization are implored to practically implement the
principles under their respective legal framework.
The principles provide a good basis to analyze the activities of the
capital market and its participant’s .It also facilitate assessment of the
steps taken to ensure that the challenges of capital market regulation
are stemmed.
The entire 38 principles are included as an appendix simply for your
information and to give you a basis to assess the performance of the
capital market from the perspective of the regulator and the other
participants. They are neatly put in groups for the ease of appreciation.
Whenever the concerns about challenges of capital market is being
discussed our attention should focus on what ought to have been done
by each of these groups that was not done. Fixing them should
therefore be a collective effort of all concern . See Appendix A for the
principles.
REGULATION OF THE NIGERIAN CAPITAL
 MARKET
The Securities and Exchange Commission is the apex regulatory
body of the Nigerian Capital Market. It is responsible for the
regulation and development of the market .It’s core function is to
protect the rights and benefits of investors.
 Market Regulation
In regulating the capital market, the Commission undertakes the
following activities in order to protect investors, market
operators and also ensure market integrity.
 Registration of securities and market intermediaries ensures that
only fit and proper persons / institutions are allowed to operate in the
market. Instruments and persons registered in the market are:

Securities/Commodity Exchanges/Capital Trade Points

Futures, Options and Derivatives Exchanges

Depository, Clearing and Settlement agencies

Capital Market Operators:
Issuing Houses
 Securities dealers/Stock brokers/Sub- brokers
 Registrars/Transfer agents
 Trustees
 Reporting Accountants
 Solicitors
 Investment Advisers etc.

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Securities:
 Equities
 Debentures
 Debt instruments
 Collective investment schemes
 Inspection
is either done “on-site” or “off-site”.
The
Commission, at regular intervals, calls for information from
capital market operators. It also undertakes and conducts
inquiries and investigation of any participant in the market
whenever necessary.
 Surveillance is carried out on 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.
 Investigation of alleged breaches of the laws and regulations
governing the capital market and enforcement of sanctions
where appropriate.
 Enforcement actions are taken against market operators who are
found wanting after investigation is carried out. In minor cases, an all
parties meeting is convened by the Commission where it mediates
between parties involved in a dispute. However, if the case is serious or
where no resolution is reached or a party fails to comply with a
directive given at the all parties meeting, the defaulting party will be
called before the Administrative Proceedings Committee (APC), which
is a quasi judicial court, with only civil jurisdiction. Appeals against
decisions of the APC are usually made at the Investment and Securities
Tribunal (IST). Enforcement action may be in the form of payment of
fine, ban, suspension or even forwarding the case to the Nigeria Police
Force (NPF), Economic and Financial Crimes Commission (EFCC) or
the Attorney - General of the Federation (AGF) where allegations are
found to be criminal in nature.
 Rules are made by the Commission as developments occur. This is to
ensure that the Commission meets up with international best practices.
CAPITAL MARKET AND THE INSTRUMENT
TRADED
 Capital market exists to provide a public forum for the
raising and investing of money and as an exit mechanism
for those who have participated in the raising of this
capital. This function permits investors to enter into a
transaction to acquire a financial instrument, secure in
the belief that, should the need occur, they have an exit
route and they can turn financial instruments into cash.
 Today market – based economies evolved from the
modern economies whose health is premised on orderly
capital markets. Financial markets play a major role in
fulfilling society‘s key economic needs.
These include:
 Funding governments, local production, and international trade;
 Facilitating investment for those with excess funds above their
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immediate needs;
Expediting development of large infrastructure projects;
Permitting the conversion of investment in financial instruments
into cash;
Providing mechanisms to exchange one currency for another;
Offering mechanism to offset the risks that underlie economic
activities.
Without healthy financial markets, economic transactions would
be very expensive to transact; they could even be conducted by
barter or else settled in some type of local currency. Acquiring
goods and services from outside a local area would be difficult
and costly because there would be no readily accessible, cost
effective place to exchange one local currency for another.
Companies, financial institutions, sovereign states, local
authorities, quasi- governmental entities, not – for profit and
supra- state entities such as the World Bank use the capital
market to acquire funds to pay for the economic activities in
which they engage.
The capital market also provides financial instruments, known as
derivatives. The technical term of a derivative is a financial
instrument the value of which is derived from the value of
another asset (e.g. a bond, share, currency, or commodity). They
are mechanisms for managing financial risk and they have been
used for a long time. Derivative as a financial instrument is yet to
be fully embraced in the Nigerian financial system. They have
important risk properties; this means that they can be used as
tools for managing the risk exposures that every financial
transaction carries- the risk that the basic element supporting
the transaction may change. For example, interest rates,
currency exchange rates, commodity prices and share value all
fluctuate over time. Derivative provides a method for offsetting
the risks of these fluctuations.
However, derivatives have underlying risks of their own
that can cause problems. Lax oversight and failure to
control derivative risk led to the collapse of barring, the
merchant bank in 1995, and the write- off of $835 million
in losses accumulated over many years at a subsidiary of
Allied Irish Bank in 2001.
A number of markets have developed infrastructure for
trading derivative and the management of risk. They include
several commodity and financial futures market; the largest is
the Chicago mercantile Exchange. Such markets are used by
those who wish to ‘hedge ‘or lay off a risk, or take on a risk
with the hope of earning a return from doing so.
THE PRIMARY AND SECONDARY MARKETS
A primary market is one where new debt or equity issues are
arranged. Irrespective of the complexity or sophistication of the
instrument used in a primary market transaction, an equity or
debt issue is simply raising new cash in exchange for a new
financial claim which is evidenced by a legal instrument.
Holders of equity and debt instruments issued in the primary
market often want to sell them. Such sales are a secondary
market transaction. Stock exchange trading information reported
in financial papers is about secondary trading, the exit route for
someone who no longer wants to hold a financial instrument.
THE INSTITUTIONS THAT INTERRACT IN THE
CAPITAL MARKET
 The financial system consists of the money and capital
market. The institutions that interact within the capital
market are:
Insurance companies, Pension fund
Administrators, Central Bank of Nigeria, Nigerian Stock
Exchange, Professional bodies, Corporate Affairs commission,
Financial Reporting council, Ministry of Finance, Investment
and securities Tribunal, market intermediaries, Investors,
media, etc.
 From the list above it is clear that the capital market is
inundated
with many other key players, whose activities
greatly impact on the overall outcome of the market. Some
may be counter-productive in terms of primary loyalty when
related to the performance of the overall regulation of the
capital market
Actions taken to date by Securities and Exchange
Commission (SEC)
 The Global Financial Crisis and the domestic crisis presented
several challenges. From the investigations carried out it was
observed that participants were engaged in practices that were
either not regulated or the rules in place were no longer
adequate. To bring the market back to sanity, a host of new
Rules/amendment were put in place. See attachment B
 A new Code of Corporate Governance was introduced in April
2011.
 The Commission also took steps to put a number of structure, in
place e.g.
a.
Demutualization of the Nigerian Stock Exchange (NSE)
b.
Bond Market Development.
c.
Introduction of Book Building and Shelf Registration.
d.
Approval-in-principle granted to National Association of Securities
Dealers (NASD) Ltd to operate Over the Counter market (OTC).
e.
Introduction of New Products.
f.
Adoption of International Financial Reporting Standards (IFRS).
g.
Migration to Risk-Based Supervision (RBS).
h.
Market Automation.
i.
Investor Education Programme.
j.
Drafting of Securitization Law.
k.
l.
a.
b.
c.
d.
e.
Gazette of Anti-money Laundering (AML)/Counter Terrorism
Financing (CFT) manual for capital market operators.
Robust synergy with the Law Enforcement Agencies.
Improvement of Complaint Management System.
National Investor Protection Fund (NIFF)
International Collaborations.
Media Partnership.
Forbearance for Stockbrokers.
RECOMMENDATIONS
 The crisis has made clear that the financial system is a global system
with linkage across countries. Thus, there is need to expand the local
regulatory structure to a global level to effectively check systemic risk.
Monitoring systemic risk at the global level is therefore imperative.
 The Commission will need to continue to forge closer relationships with
other regulators, both locally through the Financial Services Regulatory
Coordinating Committee (FSRCC) which is said to have been reviewed
and re-invigorated and internationally, through the aegis of the
International Organization of Securities Commissions (IOSCO).
 The Nigerian Stock Exchange should continuously be encouraged to
more effectively assume and perform the oversight functions associated
with its Self Regulatory Organization (SRO) status. Other trade groups
which are expected to evolve into SROs should also be encouraged to
meet the conditions for assuming such status.
 SEC needs to lay more emphasis on
its oversight of capital market
institutions and participant that are subject to regulation.
 SEC needs to continue to maintain a zero tolerance policy on
infractions. Enforcement actions should be taken against defaulting
operators.
 Capital Market Operators and their employees should be encouraged to
abide by the code of conduct with a view to promoting professionalism
and accountability.
 Compliance with the code of corporate governance should be more
vigorously monitored.
 Having ensured the implementation of IFRS for the capital market,
monitoring compliance should be addressed. More capacity building
across the market is relevant to meet the daunting disclosure
requirement.
 More effort should be made to ensure that timely periodic and annual
returns to the market and the commission are aggressively pursued.
Information is key and it should not be compromised. The commission
should maintain its enforcement actions.
 Having ensured the implementation of IFRS for the capital market,
monitoring compliance should be addressed. More capacity building
across the market is relevant to meet the daunting disclosure
requirement.
 All gaps and overlap in regulatory oversight need to be bridged to avoid
regulatory arbitrage. Policy statements, rules or circulars issued by the
different primary regulators in the capital market should take
cognizance of market rules put in place by SEC.
 The commission
need to be more adequately funded, so that her staff
strength can be increased for more effective oversight activities. The US
SEC is an example
 Any market participants found to abuse the integrity of the market
need to be sanctioned, and made to face the law.
CONCLUSION
 Challenges of capital market regulation can be approached from
different perspectives, based of course from the view point of the
person dealing with the subject. On my part I have approached
the topic from the perspective of an insider but with some
personal views added. Capital markets need a collective and
positive effort to meet the intended purpose. Behavioral and
band wagon effects has serious negative impact on markets.
Markets fall and rise, people are meant to learn from history, but
this is never the case. People rather choose to learn from their
own mistakes.
 Thank you for listening and God bless you all.