Is the SEC Nigeria regulatory framework ready for the demutualisation of the NSE?
At first sight, this might seem an odd question to ask considering that the Bill (Law) authorising the demutualisation of the NSE is only waiting for the signature of the President to become law.
However, the recent fiasco that attended the lifting of the technical suspension placed on the trading in the shares of O&O Plc raises to the fore two critical issues in the regulatory framework of the Nigerian Capital Market that need to be addressed rather urgently. The two issues are
- Who should have primary responsibility for the technical suspension (and the lifting) between the Securities and Exchange Commission of Nigeria (SECNG) and the Nigerian Stock Exchange (NSE)?
- Should the SECNG’s power to give direction to and/or remove the board and /or officers of a securities exchange granted bv Sections 35 and 36 of the Investment & Securities Act (ISA) extend to the NSE when it demutualises and become either a private or public company. Indeed, one could go further and ask whether SECNG should have this power in the first place.
The two issues are critical because they highlight the issue of whether a demutualised NSE will be able to exercise its regulatory powers (whether retained or by an independent subsidiary) independently and how the SECNG should exercise its regulatory oversight of Securities Exchanges.
So how should these 2 issues be resolved? With regards to the technical suspension of shares, the answer possibly lies in taking a non-exhaustive glance at the position in leading financial markets that operate a demutualised exchange and this is produced below.
London Stock Exchange (LSE)
The Financial Conduct (FCA), through the UK Listing Authority (UKLA) (a division of the FCA has the power to suspend the listing of any securities for a number of reasons that are clearly laid out in CH 5 of the UK Listing Rules. Reasons include failure to comply with the disclosure rules, to prevent market abuse. The LSE through Rule 1510-1513 can also impose a technical suspension on the trading of shares confirms this as only the UK Listing Authority and LSE can impose a technical suspension.
Singapore Stock Exchange (SGX)
Chapter 13 of the SGX Rulebook gives the SGX the power to can impose a technical suspension on the trading of a company’s shares and/or cancel a company’s listing for a number of reasons including to ensure a fair and orderly market and protection of investors.
Johannesburg Stock Exchange (JSE)
A technical suspension or trading halt can primarily be imposed by either of the JSE’s Director of Market Regulation in conjunction with the CEO of the JSE.
New York Stock Exchange (NYSE)
The Securities and Exchange Commission can impose a technical suspension but only for 10 days and it must be based on an investigation. A press release must also be issued detailing the reasons for the suspension.
What we learn from the above is that in these markets, it is the Exchange which has the primary responsibility or power to impose a technical suspension on the shares of a company. In jurisdictions where a distinction is made between a technical suspension and the cancellation of a listing, the power is split between the Exchange and its regulator e.g. the UK where the FCA can cancel a listing whilst the LSE can impose a technical suspension. In addition to the above, the grounds for imposing a technical suspension is transparent and spelt out clearly in the rulebook. In these regards, the NSE’s new rules on technical suspension is a welcome development.
On the second issue of whether the SECNG should retain the powers granted to it by Sections 35/36 of the ISA, in our opinion, it is a resounding and emphatic NO! The powers granted to the SEC by these two sections are too wide and far reaching and could, in the wrong hands (deliberately or through incompetence) be used as a weapon to intimidate an exchange.
It is even more worrying for a demutualised exchange or indeed any exchange that the SEC can through the two sections give it directions as to how to exercise its powers and even apply to the court for its winding up. To have SECNG retain these powers is alarming as it could be used to undermine the regulatory independence of a securities exchange. In leading financial markets with deregulated exchanges, we have not seen their regulatory agencies wielding such power without recourse to the law courts.
What is the way forward? A balanced approach that recognises the importance of having an exchange that can exercise its regulatory powers independently without having to look over its shoulders with the need to have an effective oversight regime. The exchange must not be so independent without any oversight whilst the SENGC’s power of oversight must not be so powerful it becomes a Sword of Damocles that can be used against the exchange at its whims and caprices. The oversight power must be exercise carefully, transparently and with great restrain.
A balanced approach in our opinion would contain the following elements:
- The technical suspension of trading in the securities of a company should be the responsibility of the NSE and or securities exchange;
- The signing of a Memorandum of Understanding (MoU) between the SECNG and a Demutualised NSE and/or securities exchange setting out clearly how SECNG will exercise its oversight powers. The MoU should be made public and open to consultation to members of the public and interested stakeholders before being made final
- Sections 35 and 36 of the ISA should be repealed. Alternatively, the SECNG should only be able to exercise this power on the recommendation of an independent supervisory body.
This is an occasional paper produced by OpenSpaces Compliance Consultants Limited an international compliance and regulatory consultancy providing clients with innovative and practical solutions to their regulatory and compliance challenges from our offices in the UK and Nigeria
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