SEC, Public Interest & Unexplained Finances – Matters Arising!

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SEC’s Unreported Money – He who comes to equity……

November 24, 2010; 1828 hrs, Abuja, Nigeria

Quis custodiet ipsos custodes? – “The essential problem was posed by Plato in
The Republic - his major work on government and morality. The perfect society as
described by Socrates, the main character in this Socratic dialogue, relies on
labourers, slaves and tradesmen. The guardian class is to protect the city. The
question is put to Socrates, "Who will guard the guardians?" or, "Who will protect us
against the protectors?" Plato's answer to this is that they will guard themselves
against themselves. We must tell the guardians a "noble lie" The noble lie will assure
them that they are better than those they serve and it is therefore their
responsibility to guard and protect those lesser than themselves. We will instil in
them distaste for power or privilege; they will rule because they believe it right, not
because they desire it”.

The new trouble about to blow up in the capital market started when a member of
the house of assembly, in seeking to expand on the motive behind Bill 325 at the
public hearing organised by the House of Representatives, and in part to the
presentation made by Mr. Mike Itegboje, President of the Chartered Institute of
Stockbrokers (CIS) gave the revenue figures earned by the Securities & Exchange
Commission (SEC) between 2006 to date – which suggested a declining ability to
meet its financial needs as is.

The member, quoting from a document stated that the SEC represented their
earnings as follows: 2006 (N16bn), 2007 (N13bn), 2008 (N10bn) and 2010 (N3bn).

Other members of the House Committee on Capital Markets took turn to explain
other aspects of the reasons why they believed that in fulfilling the public interest
mandate of the legislative house, and in ensuring that SEC is able to discharge its
responsibilities – it was imperative that it ensured a full compliance with the
constitutional requirement mandating all government agencies to put funds earned in
a federation account.

If the SEC is allowed to operate with funds raised from listed companies, brokers,
and individuals seeking various licenses to operate in the capital market, sooner or
later issues of corruption will arise (as seen in the past). With their dwindling
revenue streams, the SEC will eventually be forced to relax their rules in order to
generate more revenue. Their analogy - How can you count on a judge to be
impartial when the fund he/she uses to run the court is raised solely from
plaintiffs/defendants that appears before him/her?

Their central argument was that under such an arrangement, additional funding
could and would be sourced from government to take care of dwindling returns.

There is a school of thought that believes this move by the House of Representative
may not be a wholesome approach to the issue as such extra funding could equally
be obtained under a ‘stimulus programme’ to protect the financial system, nay
capital markets and the justification then would not be a hard sell, without
necessitating this ‘take over’.

The SEC Argument

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SEC, in responding to this hypothesis sought to explain that its ability to maintain a
world class service would have been compromised due largely to the famed
bureaucracy associated with government finances and attitudes to priorities.

Ms Arunma Oteh, the Director-General of SEC argued that the commission was
established to regulate and develop the Nigerian capital market and was
exempted from remitting its revenue into the federation account. The
argument seemed to have gained some traction till the CIS raised concerns over S23
of the ISA 2007 which dealt with SEC’s ability to hold on to penalties, fees etc.

There argument was that SEC ought to be able to hold on to this revenue stream to
enable it meet basic regulatory responsibilities in the market without being caught up
in the federal bureaucracy. It explained that comparative environments like South
Africa, Malaysia, Ontario and lately the US (for which the House of Assembly’s bill
appeared to be modelled after) has recognised the autonomy of the SEC as the way
to go after the global financial crisis.

Indeed, a strong argument was raised with regards to recommendations for the US
SEC to move hard and fast away from a regulatory environment with the congress
(legislative house) at the apex of the reporting line.

The CIS president re-echoed the views of Arunma Oteh and Emmanuel Ikhazoboh
that the passing of the bill would adversely affect the operations of the SEC – as
regulating the capital market would become a problem due to non-availability of
funds

This passionate plea and the possible stifling of funds elicited reactions from the
House Committee on Capital Markets who immediately sought to address the
concerns on funding as perhaps the key motivator for the amendments proposed.

The Committee’s Response

In his comments at the public hearing, Honourable Wadada, immediate past
Chairman of the House Committee on Capital Markets surmised as follows:
1. That financial autonomy as requested by the SEC calls for a synergy between
what SEC generates and what Government does to bridge the gap between the
needs of SEC and market imperatives;
2. That to expect SEC rely on market funding alone creates a ‘dependency culture’
which compromises its market regulatory role;
3. That SEC has been adamant in ensuring and seeing to the growth/deepening of
the Abuja Commodities and Securities Exchange;
4. That SEC has not been effective as it should in the area of market education and
awareness;
5. That the question of transparency and accountability still remains an issue in the
fulfilment of the oversight functions of the SEC based on information available to
them; and
6. That the continuous emphasis and reference to the US SEC at every point does
not suggest recognition of Nigeria’s peculiar realities and stage of development of
its institutions. It is the belief of legislators that when the SEC comes of age (as
with the CBN); the House of Assembly will revisit the issue of full autonomy.

Honourable Wadada, in addressing the continuous reference to the US SEC (as

advanced by both the SEC and CIS) on the role of regulators in a post global crisis
world must have been informed by the fact that this particular point of reference is
not without its own low points and sovereign peculiarities.

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The Follow On
A member rose up to raise issues on the relationship between the SEC and the
House of Representatives that suggested a relationship where the SEC’s position had
held sway at all times especially as it relates to revenue declarations, decisions and
the budget process – one that they feel denies them the opportunity and means of
fulfilling their public interest mandate.

The crux of the submission centred on the following key points:

1. That the House was unable to independently ascertain the true state of the
finances of the SEC beyond the audited report submitted to the MoF and the
exchanges during the budget sessions where they had no information on the
actual revenues earned (a charge the SEC rejects);
2. That
3. That the House found that a review of yearly budgets were dominated by
overheads (recurrent expenditures) with less than 1% provisions made for
capital expenditures;
4. That it continues to wonder how and where the funding for the capital
expenditures embarked upon so far came from;
5. That the shrinking budgets in the last few years only resulted in the reduction of
the recurrent expenditures SEC presented yearly;
6. That the provisions and expenditure for board member allowances was quite
significant and alarming for a public sector agency; and
7. That beyond what SEC said it received and spent, there was no independent way
it could verify or seek to fulfil its oversight role in directing resources to areas
where the larger public good was needed.

The SEC Rebuttal by Commissioner Ekineh

Seemingly determined to clear the air and set the records straight, Commissioner in
charge of Operations, Ms. Daisy Ekineh (immediate acting DG SEC) stated that the
SEC held reserves and earns interest which it spends as a prudent organisation
would.

Prodded further, she said that the SEC had revenue reserves it had kept aside from
the boom era which it hoped to rely on in case the market experienced a continuous
decline in market performance.

The suggestion that a surplus not remitted to the Federation account after meeting
its needs appear to have re-energised the case for why oversight was required. This
disclosure opened up needless doubts about the integrity matrix of the Securities &
Exchange Commission – its transparency on financial disclosures.

Before the Damning Disclosure

The analysis of the need, relevance and use of the bill at a public hearing suggested
an opportunity to build a bridge between the free market principles of the capital
market and the public interest mandate of the House of Assembly.

At the very least, the market expected a situation where our sovereign private
enterprise ethos will accommodate our emerging economy/democracy status – in
such a way as to help protect free market enterprise and establish a public interest
role played by the SEC through the establishment of caveats and provisions in the
new bill – that would ensure its operational integrity.

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If the natural intentions of the lawmakers are to strengthen the regulatory

framework, a proviso should exist in the bill establishing either a first line charge on
the revenues the SEC earns or alternatively; a creation of a consolidated account to
address the over-riding concern about government bureaucracy in matters related to
funding.

This is important in ensuring that the institution’s integrity and ability to discharge its
functions are not compromised.

At the heart of the bill it seemed, was the apparent conflict between section
19 of the ISA 2007 and the requirements of section 80 (1) of the 1999
Constitution. The notion hitherto was that the fund created under section 19 of the
ISA 2007 is established for that specific purpose, and therefore exempted from the
requirements of section 80 (1) of the 1999 Constitution. The lawmakers disagree on
this point.

Resolving this might require an advisory from the Attorney General of the Federation
but the unspoken truth in all this lies in two central gaps - what regulatory model are
we administering and who guards the guardians?

On trial, it would seem, is the inability to determine and resolve the “Quis custodiet
ipsos custodes” question.

The presence of a convoluted reporting structure within the regulatory framework

lends credence to why a public institution like SEC has not been able its financial
statements ‘public’ for the past 20 years. The last time this was done was the
1991/92 statements published by the ex-DG of SEC, Mr. George Akamiokhor.

The fact remains that SEC is a public agency set up to provide supervision over a
free market enterprise known as the Nigerian Capital Market. Sometime this year it
drank from the ‘poisoned chalice of power’ and exercised the option to exercise its
mandate on a public interest matter without a formal approval of its board or the
legislature to take over the NSE – a private enterprise; thus opening up the larger
public interest debate for which the legislature holds court.

The disclosures from the public hearing have lent credence to the need for the
oversight gap that exists with SEC’s mandate to act; in full compliance with the ISA
2007. The impression of an agency struggling with funding appears incorrect.

The Logic and the missing details – Transparency on trial

Obviously, the Commission is spending its money on issues that could be considered
over-reaching; yet may have its benefits if imputations do not accompany its
motives and management of changes desired internally and in the market space.
This is why speakers after speakers at the public hearing, singing from the same
hymn book, could reason that SEC needs financial independence in order to be able
to manage the NSE.

Apparently, because SEC is flush with money taken from the market, it can afford to
"support" Abuja Commodities and Securities Exchange. What is the basis of this
support within the context of its regulatory mandate? Is it now involved in market
management? So how much does SEC give to Abuja Commodities and Securities
Exchange annually and how is that presented in its financials? Was this previously
known to the public it represents? Who do Abuja Commodities and Securities
Exchange report to?

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In hushed tones after the public hearing came to a close were new insights into
welfare packages in 2008/09 presented as pension related packages. Taking the
legislators stance on the generous allowances to board members, it should be a
matter of public interest to see the published accounts of the SEC in the last five
years.

Based on the disclosures made and available evidence to the public, it is envisaged
that the SEC should have made up to the sum of N68.50bn during the period. The
analysis below offers a guesstimate in the absence of publicly available figures.

Nbn
The NSE Earnings (2006 - 2009) 42.00
This revenue figure, gleaned from public pronouncements by SEC/NSE post take over
was based on the 0.3% fees on transactions earned.

SEC declared earnings (2006 - 2009) 45.00

This is based on figures revealed at the Public Hearing
NB: While the NSE dropped its earnings rate by 50% in response to representation from the market to charge
0.3% in 2007, the SEC did not move its 0.6% down till nine (9) months after.

Recalibrating the Earnings of SEC during the Period:

SEC declared earnings as adjusted to reflect rate disparity (2006 - 2009) 58.50
Add:
At least 99 Private Placements Approved by SEC (based on adverts [??])
Mergers & Acquisitions in the period 10.00
Other Incomes - Fees, Penalties & the contentious recovery of cost of proceedings
Estimates from Publicly Available Data
68.50

Using the extrapolated figures as a basis of financial standing (being unable to

confirm or get a copy of its public accounts); the questions that immediately fills the
mind of the public are:

1. What happened to the difference between what was made and what was
declared?
2. Where are the financial statements for the period and how does it compare with
the disclosure that SEC has been spending from the interest earned from the
surplus invested to date?
3. Why is there a difference between what was declared to the House of
Representatives in their budgets with what actually obtained?
4. Where was the surplus invested and on whose instructions – MoF or the Board of
the Commission? Who were those involved?
5. How was this accounted for?
6. For what purpose did the SEC intend to put the surplus?
7. How were the House of Representatives to know about this concealment?
8. To what purpose was this concealment intended – protect their autonomy or an
undeclared interest?
9. What role did the auditors play in respect of this representation of the accounts?
10. How was the capital expenditure of the SEC – building et al, therefore funded?

Conclusion
If as stated by SEC that most of their revenues were returned to the purse of the
Federal Government, where did the surplus invested materialise from? In effect, it

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would have complied with the provisions of the constitution and therefore eliminate
its own arguments about a conflict – as it recognises it ought to do so.

What is now needed is for the SEC to come clean with its financial realities and
publish same without delay.

Such disclosure would be within its corporate governance and transparency mantra –
ethos which the House of Representatives have aligned with.

Having such a congruence means that the SEC will have to indicate which amount
went to the Federal Government, when and arising from what (not just say so
without details) for the years under reference – for if they are to be regarded as the
custodians of the market, they can only do this if they themselves abide by the rules
with which they expect the market to live by.

Is an audit of the revenues of the SEC now not overdue by the legislature based on
the disclosures provided by SEC itself - in part fulfilment of its public interest
mandate? It should be interesting reading the areas where its recurrent expenditures
have gone into vis-vis the market supervision role it is meant to do i.e. supervision,
enforcements, enlightenment, education and investor protection.

At the end of the day, we should be able to answer the Quis custodiet ipsos
custodes? question.

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