Roles of Capital Market Operators

Prepared by :Mr. Akeem Oyewale

Stanbic IBTC Stockbrokers Limited

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Capital Market is a financial market that provides facilities for mobilizing and dealings inmedium and long term funds. The players on the capital market are the operators who act asintermediaries between the providers of the funds and the fund users. They include, SecuritiesExchanges, Brokers/Dealers, Issuing Houses, Registrars and Investment Advisors. Inpursuance of making funds available for economic development and growth; the Securitiesand Exchange Commission was established in 1979 by the Securities and ExchangeCommission Decree (this decree was reenacted in 1988 as Securities and ExchangeCommission Decree no. 29 of 1988, for the purpose of protecting the investors as welldeveloping the capital market. A detailed review of the Nigerian Capital Market was carried outin 1996. This led to the enactment of the "Investment Securities Act (ISA) No.45 of 1999 (andthe regulations made there under). This Act replaced the Securities and ExchangeCommission Decree No.29 of 1988. It aimed at providing a more efficient and viable capitalmarket positioned to meet the country's economic and Developmental needs.

Securities and Exchange Commission

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3Securities and Exchange Commission

The origin of the Securities and Exchange Commission dates back to 1962, when an ad hocconsultative and advisory body, known as the Capital Issues Committee, was established under theaegis of the Central Bank of Nigeria (CBN). Its mandate was to examine applications from companiesseeking to raise capital from the capital market and recommend the timing of such issues to preventissues clustering which could overstretch the market’s capacity. The Committee operated within theCentral Bank of Nigeria unofficially as a capital market consultative and advisory body with noregulatory framework.

An increase in the level of economic activities, coupled with the promulgation of the NigerianEnterprises Promotion Decree in 1972, necessitated the establishment of a body backed by law toregulate capital market activities hence the creation of the Capital Issues Commission to take over theactivities of the Capital Issues Committee.

Securities and Exchange Commission

• The Capital Issues Commission was established with the promulgation of the CapitalIssues Commission Decree in March 1973. The new body had a board of nine (9)members, including a representative of the Central Bank of Nigeria who served asChairman, while the other eight (8) members were drawn from some Federal Ministries,the industrial and financial sectors of the economy.

• In order to cope with emergent challenges, the powers of the Capital Issues Commissionhad to be further enhanced. A Financial System Review Committee was set up by thefederal government to review capital market activities and proffer ways of developing themarket. The recommendations of the Financial System Review Committee in 1976, led tothe establishment of the Securities and Exchange Commission following the promulgationof the Securities and Exchange Commission Decree No. 71 of 1979 to supersede theCapital Issues Commission in 1979.

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It also had an enlarged 12-member board with a CBN representative as Chairman. Other members weredrawn from the Ministries of Finance, Trade and Industries, the Nigerian Stock Exchange and theNigerian Enterprises Promotion Board; other members were nominated on the basis of individual merit.

The Commission took off effectively on January 1, 1980 with 51 staff out of which seven (7) wereseconded (for a period of three years) from the Central Bank of Nigeria (CBN) while a few senior andsupport service staff were recruited.

Nine (9) years after the establishment of the Securities and Exchange Commission, the enabling law,Decree No. 7 of 1979, was re-enacted as SEC Decree No. 29 of 1988 with additional provisions toaddress observed lapses in the previous arrangement and to enable the Commission pursue itsfunctions more effectively

5Securities and Exchange Commission

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Role of SEC

Market Regulation

In regulating the market, the Commission undertakes the following activities in order to protectinvestors, market operators and also ensure market integrity. Regulation is carried out throughdeployment of the following tools:•Registration of securities and market intermediaries to ensure that only fit and proper persons /institutions are allowed to operate in the market. Instruments and persons registered in themarket are:

Securities/Commodity Exchanges/Capital Trade PointsDepository, Clearing and Settlement agenciesCapital Market Operators:

oIssuing HousesoSecurities dealers/Stock brokers/Sub- brokersoRegistrars/Transfer agentsoTrusteesoReporting AccountantsoSolicitorsoInvestment Advisers etc.

Securities:oEquitiesoDebenturesoDebt instrumentsoCollective Investment Schemes

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Inspection either done “onsite” or “off-site”. The Commission, at regular intervals, calls for information fromcapital market operators. It also undertakes and conducts inquiries and audits of any participant in the marketwhenever necessary.

Surveillance is carried out over exchanges and trading systems to forestall breaches of market rules as well asdeter 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 ofsanctions where appropriate

Enforcement actions are taken against market operators who are found wanting after investigation is carriedout, in minor cases, an all parties meeting is convened by the Commission where it mediates between partiesinvolved in a dispute. However, if the case is serious or where no resolution is reached or a party fails to complywith a directive given at the all parties meeting, the defaulting party will be called before the AdministrativeProceedings Committee (APC), which is a quasi judicial court, with only civil jurisdiction. Appeals againstdecisions of the APC are usually made at the Investment and Securities Tribunal (IST). Enforcement action maybe 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.

Rule making by the Commission as developments occur. This is to ensure that the Commission meets up withinternational best practices.

Role of SEC

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Market Development

In the area of market development, the Commission collaborates with relevant stakeholders to introduce new products and processes. The SEC encourages improved investor participation in the market through any or a combination of the following activities:

Workshops and seminars Town hall meetings Television/Radio programmesIntroduction of e-processes e.g. e-dividend, e- allotment, etc Secondary school quiz and essay competitions Introduction of capital market studies in tertiary institutionsPublications (i.e. Journals, bulletins and cartoons)

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The Nigerian Stock Exchange was established in 1960 as the Lagos Stock Exchange. InDecember 1977 it became The Nigerian Stock Exchange, with branches established in some ofthe major commercial cities of the country. At present, there are 13 branches of The NigerianStock Exchange. Each branch has a trading floor. Lagos is the Head Office of The Exchange.The Exchange started operations in 1961 with 19 securities listed for trading. Most of the listedcompanies have foreign/multinational affiliations and represent a cross-section the economy,ranging from agriculture through manufacturing to services.

The market has in place a tested network of Stockbrokerage Firms, Issuing Houses (MerchantBanks), practicing corporate law firms and over 50 quality firms of auditors and reportingaccountants (most with international links). The Stock Exchange and most of the nation’s stockbroking firms and issuing houses are staffed with creative financial engineers that can competeanywhere in the World. Therefore, the market has in place a network of intermediatingorganizations that can effectively and creditably meet the challenges and growing needs ofinvestors in Nigerian.

The Nigerian Stock Exchange 9

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Trading: The call over trading system was replaced with the Automated Trading System (ATS), with bids and offers now matched by stockbrokers on the Trading Floors of The Nigerian Stock Exchange through a network of computers. This is done every business day from 09.30 a.m. to 14:30.

Regulation: Transactions on The Exchange are regulated by The Nigerian Stock Exchange, as a self-regulatory organisation (SRO), and the Securities & Exchange Commission (SEC), which administers the Investments & Securities Decree 1999. They also regulate the activities of its members

Product & Market Development and EducationProvision of enabling trading platform and environmentThe NSE serve as custodian of the Trade Guarantee FundDispute Resolution

The Nigerian Stock Exchange 10

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The Central Securities Clearing System Limited was incorporated on July 29, 1992 as a subsidiary of The Nigerian stock Exchange. It was commissioned on April 8, 1997 and commenced operations on April 14, 1997. It operates a computerized depository, clearing, settlement and delivery system for transactions in shares listed on The Nigerian Stock Exchange.

FunctionsCentral depository for share certificates of companies quoted on The Nigerian Stock Exchange.Sub-registry for all quoted securities (in conjunction with registrars of quoted companies)Clearing and settlement of transactions.Safe Keeping/Custodian (in conjunction with custodian member(s) for local and foreign instruments).

11Central Securities Clearing System Limited (CSCS)

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Registered brokers shall have the following functions amongst others;sale and purchase of securities on a recognised securities exchange on behalf of his clients.Work with other capital market operators in raising of fresh capital for an Issuer.Provide relevant financial information/research for its client

Dealers Registered dealers shall have the following functions amongst otherssale and purchase of securities on a recognized securities exchange on his own account;

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Market maker

Market Marker shall mean any specialist permitted to act as a dealer, any dealer acting in the position of a block positioner, any dealer who, with respect to a security, holds himself out as being ready to buy and sell such securities for his own account on a regular and continuous basis.

Functions A registered market maker shall perform the following functions;• be a specialist in designated securities and shall hold itself out (by entering quotation in an

inter-dealer communications system or otherwise) as being willing to buy and sell the designated securities for its own account on a regular or continuous basis.

• promote continuous liquidity in the market at all times.• serve as a source of market information for the designated securities for which at all

times, it stands ready.• facilitate a smooth trading atmosphere and engender market stability as well as promote

price discovery.The market maker may carry out other functions, such as underwriting; but it shall not

combine market making functions with stockbroking.

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Issuing Houses

Issuing houses shall have the following functions amongst others;

Providing financial advisory services for schemes and issuance of securities under the relevant provisions of the Act, CAMA or any other law;

Acting as agent of issuer for purposes of issuances of securities and schemes under the relevant provisions of the Act, CAMA or any other law;

Co-ordinating activities of other professionals and parties to an issue or scheme;

Preparing the Registration Statement, the Prospectus, the scheme document or any and other transaction documents;

Any other roles ancillary to any of the above.

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Underwriters

Underwriting is an arrangement whereby an underwriter undertakes for a permissiblecommission to pay an issuer of securities at a predetermined date, an amount based onthe price of the securities determined in conjunction with the issuer and the issuing housewith a view to resale not as a form of investment. The functions of underwriter includeunderwriting of public issues either on a firm, standby or best effort basis.

Fund/Portfolio Managers

Fund/portfolio managers may perform the following functions amongst others;

investment advisory services;

selection of securities for the fund/portfolio;

publication of financial market periodicals;

management of funds and portfolios on behalf of investors;

any other role ancillary to any of the above.

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Investment Advisers investment advisers may perform the following functions:

(a) investment advisory services;

(b) making recommendations as to types of securities to buy or sell;

(c) publication of financial market periodicals.

An investment adviser shall not engage in the maintenance or management of investors’ funds.

An investment adviser shall keep proper records and file annual reports with the Commission.

An investment adviser shall not make claims and advertisement that are misleading or false in content contrary to the Act and these Rules and Regulations

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Registrars

The Registrar shall pursuant to these Rules and Regulations perform the following functionsamongst others

maintaining the register of members of a company and unit holders of Collective Investment Schemes, and effecting appropriate changes in the register;

issuing share/debenture/bond certificates;

returning surplus monies and monies for rejected applications;

preparing and despatching dividend/interest warrants;

distributing rights circulars and public offer documents;

despatching annual reports, accounts and notices of meetings;

printing and despatching securities certificates to new investors in respect of the transfers of existing securities;

verifying the genuineness of share certificate and authenticating signature on transfer instruments in respect of existing securities;

collecting interests on debenture and loan stocks from the issuer for onward despatch to debenture or stockholders where applicable;

any other function ancillary to all the above

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A Registrar shall not maintain the register of its subsidiary, associate or holding company, or any person that has the ability to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control over it.

A Registrar which is a subsidiary of an issuer shall not act as Registrar to the holding company’s issue.

No capital market operator shall act as an issuing house and a Registrar in the same issue.

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Trustees

The functions of trustees shall be as follows—

A. In respect of collective investment scheme

monitoring of the activities of the fund manager and custodian on behalf of and in the interest of unit holders or fund contributors;

ensuring that the custodian takes into custody all of the schemes assets and holds it in trust for the holders in accordance with the Trust Deed and Custodial agreement;

monitoring of the register of unit holders or contributors;

ascertaining compliance with the provisions of the Trustee Investments Act, the Investment and Securities Act and the Trust Deed by the fund manager;

ascertaining that monthly and other periodic returns/reports relating to the Scheme or Fund are sent by the fund manager to the Commission;

taking all steps and executing all documents which are necessary to secure acquisitions or disposals properly made by the fund manager in accordance with the Trust Deed and Custodial agreement;

exercising any right of voting conferred on it as the registered holder of any investment and/or forward to the fund manager within a reasonable time all notices of meetings, reports, circulars, proxy solicitations and any other document of a like nature for necessary action;

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ensuring that a scheme is managed by the fund manager in accordance with the Act these Rules and Regulations and the schemes’ Trust deed and Custodial agreement;

ensuring that the fees and expenses f a scheme are within the prescribed limits;

acting at all times in the interest of and for the benefit of unit holders of the scheme.

B. In respect of debt instruments

Protecting the interest of lenders and investors in such instruments.

Holding and enforcing (where necessary) such securities on behalf of investors or lenders.

Holding and administering sinking funds where applicable

Monitoring of register of bonds/unit holders

Performing all other functions stipulated in the requisite trust deed, ISA, CAMA,TIA and other legislations

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Banker to an issueFunctions

Acceptance of application monies from investors/receiving agents in respect of securities offers.

Refund of application monies which are not approved by the Commission in the name of the Registrar to the Lead Issuing House.

Refund of excess application monies in the name of the Registrar to the Issuing House within the stipulated days.

Remittance of approved allotment monies with accrued interest within the stipulated days.

Other services ancillary to the function.

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Rating Agency

Rating Agencies shall have the following functions: amongst others:

Provision of credit ratings to Governments and Entities.

Provision of ratings to the debt and equities Instruments.

Rating of the credit worthiness of Entities/Securities.

Other services ancillary to the function.

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Depository and Participants / CustodianDepository means a custodian who holds securities on behalf of known investors butwhose name appears on the issuers register as a fiduciary nominee for the benefit of theinvestor and who operates a system of central handling of securities of a particular classof an issuer deposited within its system and may be transferred, loaned or pledged bybookkeeping entry without physical delivery of certificates.

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