THE ROLE OF THE SECURITIES AND EXCHANGE COMMISSION

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					      THE ROLE OF THE SECURITIES AND
       EXCHANGE COMMISSION IN THE
      RESOLUTION OF CAPITAL MARKET
                 DISPUTES




                                            BY



                                   C.A. UDORA
                       SECURITIES & EXCHANGE COMMISSION
                                 ABUJA - NIGERIA




Being a paper presented at the Seminar on the Resolution of Capital Market Disputes in Nigeria
organized by the Capital Market Solicitors Association (CMSA) in Lagos on 15th September 2010
    THE ROLE OF THE NIGERIAN SECURITIES AND EXCHANGE
    COMMISSION IN THE RESOLUTION OF CAPITAL MARKET
                         DISPUTES

1. Introduction

Capital markets all over the world are regulated by a set of laws, rules and
regulations peculiar to each jurisdiction.        The provisions of these
legislations are usually guided by international best practices and the
principles of market regulation as enunciated by the International
Organization of Securities Commissions (IOSCO). Operators in the market
including corporate entities, individuals and the instruments transacted
upon are equally governed by these clearly articulated regimes of
legislations. The purpose of this is to ensure transparency, equity, fairness
and orderliness in securities transactions for the overall objective of
sustaining investor confidence in the market. Protection of investors
remain the foremost objective of the regulation of the Capital market while
market development follows as the next major focus of regulation inspired
by investor confidence.

In Nigeria, the apex regulator of the capital market is the Securities and
Exchange Commission (SEC) established by Section 1 of the Investments
and Securities Act (ISA) No. 29 of 2007 (the most recent re-enactment of
previous statutory regimes of capital market regulation that started with
the Capital Issues Commission Decree of 1973).

Section 13 of the ISA 2007 gives SEC the authority to carry out the functions
and exercise all the powers prescribed in the Act.

Enumerated below are some functions of SEC related to the topic under
discussion:

-    regulate investments and securities business in Nigeria as defined by
     the Act;
-    register and regulate corporate and individual capital market
     operators as defined in the Act;
-     protect the integrity of the securities market against all forms of
      abuses including insider dealing;
-     intervene in the management and control of capital market operators
      which it considers has failed, is failing or is in crisis, including
      entering into the premises and doing whatsoever the Commission
      deems necessary for the protection of investors;
-     enter and seal up the premises of persons illegally carrying on capital
      market operations;
-     in furtherance of its role of protecting the integrity of the securities
      market, seek judicial orders to freeze the assets (including bank
      accounts) of any person whose assets were derived from the violation
      of this Act; or any securities law or regulation in Nigeria or other
      jurisdictions;
-     prevent fraudulent and unfair trade practices relating to the securities
      industry;
-     disqualify persons considered unfit from being employed in any arm
      of the securities industry.

The above powers given to SEC are predicated on the objectives of
protecting the integrity of the market and sustaining investors’ confidence.

2. Dispute resolution in the capital market: historical perspective

Before delving into the role of SEC in the resolution of capital market
disputes, I think it would be necessary to give a brief historical perspective
of the SEC’s role in dispute resolution in the Nigerian capital market.

The Barback Committee on Financial Market Development in May 1958
recommended a formal capital market for Nigeria. However, the first
formal regulation of the Nigerian market was not done until 1973, through
the “Capital Issues Commission” (CIC) established by the Capital Issues
Commission Decree No. 14 of 1973. The Decree in Sections 6 and 7 ousted
the jurisdiction of all courts of law in Nigeria in capital market matters. The
Capital Issues Commission then, was the only agency recognized for the
purposes of dispute resolution in the Nigerian capital market (Sections 6(1)
& (2).
Appeals from decisions of the CIC went to the Federal Commissioner of
Finance (equivalent of today’s Minister of Finance), whose decisions were
final.

The ouster clauses in the CIC Decree 1973 were however without prejudice
to the right of parties to institute civil actions in pursuit of their civil rights
and obligations, as long as the Commission was not a party.

In 1980, SEC as it is known today came into existence through the
Securities and Exchange Commission Act 1979. The Act retained the
dispute resolution arrangement of the 1973 Decree with the Federal
Commissioner of Finance as the final authority on dispute resolution.
Under that regime, only the Commission and the Federal Commissioner of
Finance had authority over capital market disputes.

The 1979 SEC Act was subsequently repealed and the SEC Decree of 1988
was promulgated. This Decree, unlike the 1973 and 1979 enactments,
vested in the Federal High Court, the jurisdiction over offences and
violations arising from capital market transactions. The actions and
decisions of the Commission even in respect of dispute resolution were
made subject to judicial review by the Federal High Court. Section 24 of the
1988 Decree made it mandatory that persons under the Commission’s
regulatory purview shall be given fair hearing before being sanctioned.
This gave rise to the establishment of the Administrative Hearing
Committee (AHC) later renamed Administrative Proceedings Committee
(APC) as a formal mechanism for implementing those provisions without
prejudice to other methods of ensuring fair hearing in SEC dispute
resolution process.

In 1995, the Federal Government set up the Chief Dennis Odife Panel on
the review of the Nigerian capital market. The Panel found among others
the need to strengthen the capacity of SEC in order to reposition it to
perform the task of investor protection. Consequently the Investments and
Securities Act (ISA), 1999 was enacted. It established the Investments and
Securities Tribunal and gave it exclusive jurisdiction over capital market
disputes while allowing the Commission to continue with the
Administrative Proceedings mechanisms in resolving disputes in the
market. The IST’s jurisdiction was however, subject to the appellate
jurisdiction of the Court of Appeal and the Supreme Court. It must be
clearly noted that the IST is an independent Tribunal and not a subsidiary
or Department of SEC as erroneously believed by some people. The 1999
Act was repealed by the Investments and Securities Act No. 29 of 2007.
This Act, in Part XVI (sections 274 – 294) further reinforced the machinery
of the Investments and Securities Tribunal (IST) and through section 310,
the Administrative Proceedings Committee (APC) of the Securities and
Exchange Commission (SEC), in resolving disputes in the Nigerian capital
market.

3. Existing SEC mechanisms for dealing with disputes in the Capital
   Market

In our capital market, disputes could arise between operators in the market
or between them and investors; between operators and the Commission.
The disputes may be between one investor and another or between
investors and the Commission. There are equally disputes between Issuers
of securities and either operators, investors, or the Commission or a
combination of all. Typical examples of disputes in the market are;

  (a)   The Primary Market Disputes

   Failure by an Issuing House or Receiving Agent to remit the proceeds
    of a public offer to the Issuer;
   Failure of a Receiving agent to submit application forms of an
    investor within time in respect of an offer;
   Misappropriation of part or all the proceeds of an offer;
   Irregularities in allotment of securities;
   Non submission or late submission of allotment proposal to the
    regulator for approval;
   Non payment of fees to parties to an offer or to the regulator;
   Non receipt of share certificates/dividends by shareholder;
   Failure of an underwriter in a public offer to honour the terms of an
    underwriting agreement; etc.

  (b)   The Secondary Market
         Unauthorized sale of clients’ securities by stockbroker;
         Failure or delay by stockbroker to execute client’s mandate;
         Misappropriation of clients funds or securities by an operator;
         Misrepresentation of the true position of a client’s account in the
          register of a public company, etc.

The list is not exhaustive.

It is obvious that resolving the number and types of disputes arising
regularly from market activities require several approaches (both formal
and informal) at different levels. The Commission, therefore, put in place
several mechanisms for resolving disputes in the market. These
machineries are as follows:

i.        Written correspondences

          Usually complaints are received by the Commission in written form.
          On receipt of any complaint, it is forwarded to the relevant
          department, usually the Monitoring and Investigation Dept. to verify
          the claims, allegations or assertions of the Complainant and
          thereafter launch an investigation where necessary.

          In investigating such complaints the department writes to the person
          complained against to respond to the complaint. Through the process
          of exchanging correspondences with both the Complainant and the
          Respondent, issues are joined and ensuing contentions are usually
          resolved by the Commission applying the Act and/or the Rules to
          established set of facts. In this scenario, the Complainant and the
          Respondent need not meet physically before the dispute is resolved.
          However, where such a meeting is inevitable, the Commission invites
          the parties and plays a mediating or conciliatory role, subject to the
          provisions of the relevant statutes and rules.

ii.       All parties meetings
        The Commission could through an all-parties meeting attempt to
        resolve a dispute between capital market participants. This is usually
        when the option of written correspondences has been explored and a
        determination made that there is a need to use mediation or
        conciliation with the parties physically meeting each other and the
        Commission.

        When that situation arises, the parties are invited to the Commission
        for an all-parties meeting. Parties are requested in the letter of
        invitation to come along with all the documents they would require
        for proving or defending their cases. Parties are also free to invite
        witnesses if they desire them; and they are so advised.

        The Department in the Commission at whose instance the meeting
        was called usually chairs the meeting. In some high profile matters,
        any Executive Commissioner in the Commission or indeed the DG
        could be called upon to chair the meeting.

        At the meeting, parties are allowed to state their cases in whatever
        manner they choose and they are encouraged to reach an amicable
        settlement. At such meetings, the Commission’s benchmarks for
        resolving any case are subsisting laws, rules, and regulations
        inclusive of guidelines. The Commission mandatorily applies the
        principles of fair hearing in conducting such meetings. The outcomes
        of such meetings are usually presented by the Department to
        Management for its decision and enforcement directives. Such
        decisions are subject to appeal to the Management and subsequently
        the Board. Parties may also appeal to the IST.

(iii)   Administrative Proceedings Committee (APC) Hearing

        As the apex regulator of the Nigerian capital market, SEC is vested
        with quasi judicial powers to administratively adjudicate on
        complaints arising from transactions in the market as well breaches
        of the provisions of the ISA 2007 and the Rules and Regulations made
        pursuant to the Act.
      The APC proceedings are purely administrative and its procedures
      are prescribed by the Commission and contained in the Rules and
      Regulations. Decisions of the APC after ratification by the Board of
      the Commission are subject to appeal to the Investments and
      Securities Tribunal as provided for in Section 284(1) (a) and in
      compliance with the proviso under section 289 (1) of the ISA, 2007.

The APC is one of the Committees of the Board of the Commission
contemplated under section 310 of the ISA and it is currently chaired by a
Non-Executive Commissioner on the Board of the Commission. It is the
highest internal dispute resolution organ of the Commission in relation to
capital market transactions.

The Committee is made up of Non-Executive Commissioners on the Board
of the Commission (except the Board chairman), heads of departments in
the operations, Legal and Enforcement Directorates of the Commission as
well as observers from the market representing a variety of trade groups
and Self Regulatory Organizations (SROs) e.g. representatives of the
Capital Market Solicitors Association, Association of Issuing Houses of
Nigeria, Chartered Institute of Stockbrokers, Association of Corporate
Trustees, Institute of Capital Market Registrars, The Nigerian Stock
Exchange, Central Securities Clearing System Ltd, etc. The Abuja Securities
and Commodities Exchange (ASCE) does not currently sit as observers
because no issues relating to commodities trading had been handled by the
APC. Trade groups or SROs are co-opted as observers if the need arises i.e.
where their views are necessary in resolving any dispute under
consideration.

Complaints are received and investigated by the Commission and if the
investigation report raises prima facie case of violation of securities laws or
rules and regulations made thereunder and parties fail to reconcile via
other options as stated in (i) and (ii) above, the matter is referred to the
APC. Matters referred to the APC are usually very contentious and portend
serious consequences to the integrity of the market or considered as
capable of having a systemic impact on the market.
Before the date fixed for hearing, parties are served with the relevant
documents concerning the hearing together with the hearing notice. Parties
are given the opportunity to appear at the hearing in person, represented
by legal practitioner(s) and to file an affidavit supporting any written
submissions in response to issues before the panel. At the hearing, the
alleged violations are read out to the Respondent and testimonies of parties
are recorded. A comprehensive record of proceedings is produced and
made available to parties where judicial review of the Commission’s
decision becomes necessary.
The APC offers all parties the opportunity to state their cases before a
reasonably unbiased panel, which takes decisions based on facts before it.
Such decisions do not become effective until confirmed by the Board of the
Commission [section 310 (3)] and by implication served on the parties,
except interim/interlocutory decisions/directives which become effective
upon pronouncement.

Decisions of the APC are enforced except and until reversed, amended or
otherwise as directed by a competent court or the Investment Securities
Tribunal upon appeal by a party dissatisfied with the decision.

The decisions of the APC were tested and upheld in the case of SEC Vs
Owena Bank Plc under the 1988 SEC Act, several cases filed by Cadbury
Nigeria Plc and its Directors against SEC under the 1999 and 2007 Acts.

The Commission has used these methods of dispute resolution in enforcing
its laws, rules and regulations as well as practices in the securities market.
The process is cost effective and time saving from the point of view of the
Commission, operators and investors.

The APC has greatly enhanced investor confidence in the market through
unbiased resolution of several market disputes e.g.
  a. SEC Vs Owena Bank Plc
  b. SEC Vs Cadbury Nigeria Plc
  c. SEC Vs Bonkolans Investments Ltd and 22 others
  d. SEC Vs AP and others (list is not exhaustive)
Details of the rules governing the APC procedures can be found in
Schedule Seven of the SEC Rules and Regulations made pursuant to the
ISA 2007.

4. Power to review decisions of self regulatory organizations by the
  Commission


The ISA 2007, under Section 34 (1) empowers the Commission to review
decisions taken by SROs against their members with a view to confirming,
modifying or annulling same as it deems appropriate.
Under the Act the SEC should be notified of such decisions by SROs within
7 days.

This power gives SEC an appellate jurisdiction over decisions of SROs.

The cases of ARIAN Capital Ltd, Capital Bancorp Ltd and Hamilton
Hammer & Co. Ltd, were some of the relevant matters handled on appeal
by SEC.

Most recently (1st September 2010), The Nigerian Stock Exchange (NSE)
notified the Commission of its decision to suspend twelve (12) Broker
Dealers for not filing their 2008 Audited Accounts with the NSE as directed
since 2009. Except for any compelling reason to justify review of the
decision, the Commission is unlikely to interfere with the decision of the
NSE on that matter.


5. Conclusion

The imperative for the existence of an effective dispute resolution
mechanism within any regulatory institution cannot be over-emphasized.
This is even more germane in the Nigerian capital market where SEC is
inundated with numerous complaints on daily basis. The existence of a
reasonably adequate legal framework and internal mechanism for dispute
resolution by SEC has helped in this regard.
The Commission has also demonstrated sufficient commitment by the
application of the legal framework in resolving disputes.

Dispute resolution in the capital market requires speedy and sometimes
informal handling of matters. In my view such approach is fundamental to
effective justice delivery, enhancement of investor confidence and the
development of the market.

I must however state that the increasing interest of investors and other
participants in the market (whether positively or negatively) as well as the
downturn in the global financial markets has generated more disputes than
the Commission has capacity to handle. It has become necessary to
consider the establishment of a more robust dispute resolution mechanism
within the market. The mechanism will be expected to address dispute
resolution at both the Administrative and judicial levels.

It is my humble view that the IST needs to have divisions all over the
country where proceedings should be held on daily basis. The current
structure of the IST where only three members and the Chairman work
full-time while others (5 members) are part-time is counter-productive and
delays cases. It does not help in improving expertise among the
adjudicators and conflict of interest situations may likely be more frequent.
All members of the IST should be full-time and must be persons with
requisite knowledge and expertise in capital market regulations or
operations as well as persons of proven integrity.

The IST should also be de-linked from the Ministry of Finance and have
funding similar to SEC to ensure their independence and capacity for
growth and development.

Alternatively, Nigeria can establish the office of the Ombudsman, to deal
with disputes at preliminary or administrative levels and free SEC from the
burden of spending huge resources on dispute resolution. Where an
effective Ombudsman exist, the IST can as well become a capital market
division of the Federal High Court and retain the exclusive jurisdiction it
enjoys presently but under the judiciary as a superior court of record. The
Judge, in the proposed system, can sit with capital market assessor(s) as
adviser(s) or the court can suo motu, subpoena a competent capital market
operator (with requisite expertise) to testify in any matter where issues
canvassed are considered too technical for the Judge sitting alone to
handle. I believe that a consideration of the above proposals will help in
providing robust dispute resolution architecture for the capital market in
Nigeria.


I thank you for listening.

Charles A. Udora
September, 2010
Lagos, Nigeria




Role of SEC in dispute resolution presented at the CMSA forum, September 2010

				
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