Memo to the Market: Reappointing Arunma Oteh as DG, SEC


Wednesday, December 31, 2014 7.50 AM / Olufemi AWOYEMI  

"No business is eager for regulation…and it is only natural to expect less zeal for almost any aspect of the job on the part of a self regulator than may be true of an outsider whose own business is not involved." - US SEC in a Special Study of the Securities Markets conducted in 1963  

By the end of today, the tenure of Ms Arunma OTEH, the Director General of the Securities and Exchange Commission (DG, SEC) will officially expire in line with the five-year single tenure limit stipulated in the Investment and Securities Act, 2007, the chief law regulating the affairs of the Commission.  

In line with this, there have been several calls for and against the re-appointment of Ms. Arunma Oteh whose tenure has been eventful and challenging (within context). 

I have had the privilege of playing a ring-side role in the market, holding strong views about the people, process and practice in the market and therefore believe I should weigh in on the decision, albeit through a short contribution. Proshare intends to issue a full report on her five year stewardship and I encourage you all to read this stewardship report.    

What the law and Practice provides
The Investment and Securities Act, 2007 (ISA 2007) clearly provides for the circumstances under which the appointment and subsequent reappointment of the Director General of the commission is undertaken and this is captured in Section 5 sub-sections 1, 2 and 5 of the Act as reproduced below:    

“(1) The Director-General and the three full time Commissioners shall be appointed by the President upon the recommendation of the Minister and confirmation by the Senate.

(2) The Director-General shall hold office for a period of 5 years in the first instance and may be reappointed for a further period of five years and no more

(5) Notwithstanding the provisions of subsections (1) and (2) of this section, the President may extend the tenure of office of the Director-General and any of the Commissioners whose term of office has expired until a successor to such Director-General or Commissioner is appointed.” 

From the above, it is clear that despite existing challenges with the National Assembly (nay the House of Representatives); section (5) of the enabling act empowers the President to act based on his judgment of whether the SEC DG (a person not initially appointed by him and for emphasis was appointed by the late President Umaru Musa Yar’Adua in 2009 but resumed in January 2010) has done enough to merit a reappointment or whether he should appoint an entirely new Director General for the apex regulatory agency for corporate entities. 

It’s time to move on.
Informed reasoning and analysis would indicate that despite the schisms that led to the decision by the House of Representatives to suspend the commission’s budget for the last two years, the timing of her renewal provides some unassailable reasons why the President should retain her; why the House should shift its stance; and why we should find a better engagement approach to moving our market forward.  

Her performance against benchmarks set and within the context she took over the reins of the commission demands that she be considered for re-appointment to sustain and re-energise the changes taking place. If retained, she will have to make changes in approach and engagement. 

While convenient to do away with reasoning when we can deploy the mob approach as we have successfully done in the past, the question then arises as to whether there are serious grounds for disagreement with the DG? I believe that these areas exist and should not be discounted. Indeed, there are issues for which the SEC as an institution and the DG, as the leader must and should continue to be held to account. This holds true for all seasons. 

It is in the nature of a learning market however that such should happen; and it is for a market like ours focused on growth, to better appreciate that these differences mainly serve to establish the emergence of institutions that can hold strong views yet can come together when it matters the most. That is the most important lesson I have learnt from the pre and post crisis market that we are all parties to.   

Some will wonder why waste time with reasoning when we can engage in deploying the principle of reflexivity,– a principle first enunciated by the sociologist William Thomas (1923, 1928) and known as the Thomas theorem: that 'the situations that men define as true, become true for them.' 

This theorem is made manifest in the interaction between beliefs and observations in a marketplace - if traders believe that prices will fall, they will sell - thus driving down prices, whereas if they believe prices will rise, they will buy – thereby driving prices up. Thus, the trigger for results lies in the belief that guides action/conduct. 

The job of the DG SEC was never going to be an easy one given the level of entrenched interest in the old order and despite steps taken by SEC to halt the battered/falling integrity of the market; old prejudices are hard to overcome. 

The key issue like market integrity that cuts across improved transparency, efficiency and compliance, which has been revamped to a minimum/acceptable standard in a short period of time can be easily ignored on the altar of prejudice. 

If going by the way the initial stages were handled (by the way, no one had a workable template that was devoid of rancor), it is only natural if people have issues/axes to grind - yet the overarching goal is the desire for a change. We as a market actively seek for a change yet want things to remain the same…. “as long as our interests are covered”.  

If our capital market stakeholders have learnt anything at all from the interplay of incestuous relationships and the financial crisis, especially those perpetrated taking advantage of a weakened SEC; it certainly is not reflecting in their conduct during this on-going conversation. I beg to differ here. 

Recall that we are talking about an era in the market where our Stock Exchange and Securities & Exchange Commission appeared either clueless or hamstrung by such ‘relationships’ and an overbearing political climate that was reportedly punitive in response to dissent and intolerant to ethical propositions in decision making. 

A number of these distinguished players have looked at the planned changes by SEC and taking an enlightened self interest position which I find difficult to fault, without prejudice. It is left for SEC to find new ways of re-engaging without sacrificing the change agenda.  

We all need to change. That is a given. It has started gradually in the nature of our relationships, deployment of technology, communications, regulatory supervision, and market response and it can only get better. Change is here. 

This realization made Proshare to start paying the NSE for data this year because, in the final analysis, it is ethical, founded on best practice and must be the way going forward.  

How we as a firm is able to fund, sustain and improve on it is another matter entirely, and if we cannot do so; that would not be because the NSE wants to kill our service. It is new way of thinking (a mindset change) we all have to readjust to.

What is possible from an Arunma OTEH led SEC  

SEC did not approve a number of State Government Bonds – this is wrong; not for the non-approval but for the non-communication of the non-approval or postponement of approval to a later date. Our history of approving bonds to out-going state governors/governments have not been one to relish or offers an accountability/governance comfort and as such SEC did the right thing but should communicate same.

We have not conclusively resolved the fall-out from the 2006-2008 financial misadventure – Yes, but we have made strides and hope that beyond the emphasis on home videos targeted at a non-existent (and quite frankly wrongly targeted audience too populist to aggregate the enlightenment-gap in the market) consumer base; we can re-introduce focus on the institution and not the personality currently in charge.

We have not resolved the issue of unclaimed dividend. Yes! But then we have stemmed the growth of unclaimed dividend and with the wholesome embracing of the e-dividend scheme we can look forward to the re-organisation and refocusing of the REGISTRAR business from a rent collecting/toll-gate administering function to a data analytics and financial market database service that it can be. We look forward to a registrar business that is not relying entirely on free floats but is able to act as a critical enabler of the credibility of the shareholding position of quoted firms, a source for financial intermediation (subject to rule changes and license review). We have taken certain steps in this regard and expect the SEC to equally recognize that any changes here must be backed by law, even as we agree that the steps taken may be in the right direction.

SEC must drop its fees and encourage the NSE to do likewise. Yes! There is room for further reduction in transaction charges in Nigerian capital market or variation of charges across different market transactions. A cursory review of transaction charges in advanced exchanges reveals that floor broker cross trades (i.e., a trade where a floor broker executes customer orders to buy and sell an equivalent amount of the same security for stocks with a per share stock price less than $1.00 do not attract any transaction charges as obtainable on NYSEThe whole idea is that transaction charges should provide some leeway for small cap stocks in order to boost their liquidity.  

The commission must begin to look at its revenue mix and glean from other climes how the supervision/enforcement versus transaction earnings ratio works out. A regulator should make money from enforcement/sanctions and not the “publish and shame” approach that does little but reverse its confidence building motives. It will be transparent and if it wants to grow the retail market, it must start by reducing its fees, especially in a contracting economy as we approach in the years ahead.    

SEC can do more to reduce the red tapes and archaic laws it currently deploys. Yes! This is a no brainer as could be gleaned from a list of laws that are no longer suitable for today’s practice and business engagements. Accommodating Private equity firms, demutualization, creating an enabling environment from crowd funding, listing of public entities, rules on minimum float requirements, use of waivers by the NSE, technical and full suspensions, listing of regional and sovereign funds, use of technology and admissibility of evidence of electronic documents, conduct of inspections, surveillance, investigation, enforcement and sanctions, rule making, market development, investor protection, collective investment schemes, certification courses, training for market participants; and definition of stakeholders and licensees are issues that will have to be addressed as part of the 10 year master plan (a document that ought to be widely distributed).   

Ongoing reforms in the Nigerian capital market including demutualization of the exchange, west African capital market integration program, capital market development master plan, bill compelling private companies of certain size to list on the exchange, market making, share buy-back arrangements, etc which are expected to further deepen/shapen the activities in the Nigerian capital market.

Conclusion – where we should go from here!

Having seen the high and low points of this administration, should we be backing the current DG for a second term in office or push for a new DG?  

The scorecard analysed by the research unit makes for a YES decision. Though market confidence/depth is still low as revealed by the current state of primary market activities; ongoing reforms in the Nigerian capital market supports this objective position.

Stakeholders however remain divided in the Nigerian capital market on this issue.

While some of those calling for the reappointment of the present DG hinge their claim on continuity of policy and reforms, the antagonist are calling for a fresh breadth in regulation in SEC. Meanwhile, given the difficult economic situation and negative outlook of the Nigerian economic environment in 2015 and beyond, an experienced regulator, transparency campaigner and enforcer in the likes of Arunma Oteh could be retained to continue the ongoing reforms in the Nigerian capital market.

Whichever way the decision goes, the history of the Nigerian capital market, and indeed SEC, will never be complete without the mention of the giant strides achieved during the Arunma Oteh-led SEC years. History will acknowledge this.

At times like this, it is worth remembering the words of Nikol Tesla who said “Let the future tell the truth, and evaluate each one according to his work and accomplishments.”   

We encourage all stakeholders to continue their rigorous examination of the commission and the DG, and we will do likewise; but this once, let the market come together and applaud one of ours for standing up to be counted. Happy New Year!

*Olufemi AWOYEMI, FCA, FICA, FIIM, FIAPM is CEO of Proshare Limited, Nigeria’s premier financial information hub and capital market analysts.  

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