The Securities and Exchange Commission: A Consumer Protection Body during Public Offers

The Securities and Exchange Commission: A Consumer Protection Body during Public Offers

Rahmatu Ishaq Ahmed *

Abstract

Investment and securities business is at the root of economic development. Through the capital market, companies and governments mobilize capital for investment, while offering opportunity to investors to seek profitable outlets for their funds. Because complex financial processes are often involved, and large numbers of investors participate, the need for guarding the mechanism for those transactions becomes apparent. Investors need to be protected, just as the process needs to be kept viable. This article examines the responsibility placed on the Securities and Exchange Commission to regulate the capital market and ensure that investors are protected and concludes that it is not enough for SEC to just ensure that necessary disclosures are made by companies offering their securities for sale, but that adequate mechanism must be put in place to ensure the veracity of such disclosures.

1.  Introduction

Certain trends in socio-economic thinking have surfaced with considerable implications for the role of the Securities and Exchange Commission as consumer protection body in ensuring that the prospectus, as an information brochure for potential investors, in public offers complies with the requirements of the law before it is approved. It is very important that when public companies seek to raise finance from the investing public, they need to make available to those people who may be interested in investing in it by purchasing its securities, some necessary information to help them make informed decisions.

The Securities and Exchange Commission is the apex regulatory body of the capital market. It regulates and supervises the executive actions behind the issuance of prospectus during public offers and determines the transparency and truthfulness of information provided in these prospectus.

This article takes a broad look at the role of the Securities and Exchange Commission (SEC) as the apex regulator under the Investment and Securities Act 2007,[1] with special attention to the role SEC plays in approval of prospectus during public offers, especially in protecting consumers. To what extent is SEC playing its role in protecting potential investors by ensuring that a company’s prospectus make the necessary disclosures to enable them make an informed decision as to whether invest in that company or not? This article therefore, seeks to examine the topic from these perspectives.

2. The Role of the Securities and Exchange Commission (SEC)

The Securities and Exchange Commission originates from the ad hoc, non-statutory Capital Issues Committee established in 1962 as an arm of the Central Bank of Nigeria. The Committee became the Security and Exchange Commission in 1973, and then the Securities and Exchange Commission was chartered with SEC Decree No. 71 of 1979. It was later chartered by the Investments and Securities Act No 45 of 1999.[2] The commission is now chartered by the Investment and Securities Act 2007.

The Securities and Exchange Commission is a body that regulates the Investment and Securities Act, 2007. This Act established SEC as the apex regulatory authority for the Nigerian capital market with a view to protecting the interests of all investors in the market. The statutes administered by SEC are designed to promote full public disclosures and to protect the investing public against fraudulent and manipulative practices in the securities market.[3] The SEC holds the primary responsibility of enforcing the federal securities laws[4] and regulating the securities industry, the nation’s stock and options exchanges,[5] and other electronic securities markets. It is supervised by the Federal Ministry of Finance,[6] to carry out functions and exercise all the powers prescribed in the Act, including but not restricted to:

1. regulating investments and securities business[7] in Nigeria as defined in the Act;
2. registering and regulating securities exchange[8], capital trade points[9], futures, options and derivative exchanges, commodity exchanges and any other recognized investment exchange;
3. regulating all offers[10] of securities by public companies and entities;
4. registering securities of public companies[11];
5. registering and regulating individual capital market operators as defined in the Act.
6. registering and regulating the workings of venture capital funds and collective investment schemes in whatever form;
7. keeping and maintaining a register of foreign direct investment[12] and foreign portfolio investments;[13]
8. registering and regulating securities depository companies, clearing and settlement companies, custodians of assets and securities, credit rating agencies and such other agencies and intermediaries;
9. protecting the integrity of the securities market against all forms of abuses including insider dealings;[14]
10. promoting and registering self regulatory organizations including securities exchanges, capital trade points and capital market trade associations to which it may delegate it powers;
11. reviewing, approving and regulating mergers, acquisitions, takeovers and all forms of business combinations and affected transactions of all companies as defined in the Act;
12. ensuring that investors are protected, and maintaining fair and orderly market;
13. establishing a nation-wide trust scheme to compensate investors whose losses are not covered by the investor protection fund;
14. conducting research into all or any aspect of the securities industry.[15]

3. Investment and Securities Business

Investment and securities business means any business in:

• debenture, stocks or bonds issued or proposed to be issued by a government;
• debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate;
• any right or option in respect of any such debentures stocks, shares, bonds or notes; or
• commodities futures, contracts, options and other derivatives, and the term securities in the Act includes those securities in the category of the above listed which may be transferred by means of any electronic mode approved by the commission and which may be deposited, kept or stored with a licensed depository or custodian company as provided in the Act.[16]

No securities exchange or capital trade point as defined in the Act shall commence operation unless it is registered with the commission and it must be a body corporate.  The commission may register a body corporate as a securities or capital trade point, if it is satisfied that amongst other things, the interest of the public would be served by the grant of the approval.

4. Public Offer

For SEC as the apex regulatory body in the investment and securities business, how public companies go about raising their capital from investing public and the legal regulations that have to be complied with when they do so, are central. In the first place, the companies need to reach out make their case to those people who may be interested in investing in it by purchasing its securities, and may choose from a number of different ways their preferred means of putting itself before investors.

The most heavily regulated of these methods is the public offer of securities,[17] simply because the company addresses its publicity to a wide range of persons, some of whom are ill-informed and the gullible and others, experienced and well-informed. The law regulates heavily the document (the “prospectus”[18]) by which such a public offer is made. From this perspective, the law relating to prospectuses (the ISA 2007) can be viewed as a branch of consumer protection legislation, but one in which the product on offer is very difficult to evaluate, because the value of shares depends heavily upon the future performance of the company and cannot be ascertained, as with a motor car, for example, by visual inspection and a test drive.

In addition to SEC’s role as a consumer protection body in relation to public offers, it also promote investment on the basis of accurate understanding of the risk and reward profile involved in buying such securities.[19] This is because since the purpose of the prospectus is so that all the potential subscribers are fully informed of all facts material to their decision to subscribe or purchase the shares of the company, the prospectus must be registered with or approved by the SEC,[20] considering the accuracy of its disclosures. The disclosures constitute the contents of the prospectus and they include:

1. Vending agreement between the issuer of security[21]  and the issuing house.[22]
2. Underwriting agreement.
3. Any independent contract the company is involved in.
4. Advertisement –its sample, to see that it makes necessary disclosures.
5. Chairman’s statement- stating how the company has prospered so far.
6. Resolutions if any like conversion from private to public, increase of share capital.
7. Auditor’s report on the financial statement of the company
8. The company’s dividends or the amount of dividends per share.
9. Forecast on the company’s standing in years to come- whether the company will be able to declare dividends in years to come or not.[23]
10. The directors’ shareholding even in percentage.[24]

In addition to the contents of a prospectus and in ensuring the genuineness of the statements contented in it, a prospectus containing a statement purported to be made by an expert must not be issued unless the expert has given and has not, before delivering of a copy of the prospectus for registration, withdrawn his written consent to the issue of the statement included in the form and context in which it is; and a statement appears in the prospectus that the expert has given and has not withdrawn his consent.[25]

There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname “red herring” for this document. The final prospectus is printed after the deal has been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates issued and the precise offering price.[26]

Also in an effort to protect the investor, the ISA has provided that, “every prospectus must carry on its face that it has been registered with the commission at the time when the invitation is first made and the date of registration must be reflected on the face.”[27]

The ISA also provides that every prospectus must on the face of it:

1. State that a copy has been delivered for registration with the commission.
2. Specify or refer to statements included in the prospectus which specify any document to be endorsed on or attached to the copy delivered.[28]

The following statement is usually required to be printed in red ink on the face of the prospectus: [29]

THE PROSPECTUS AND THE SECURITIES WHICH IT OFFERS HAVE BEEN REGISTERED BY THE SECURITIES AND EXCHANGE COMMISSION. THE INVESTMENTS AND SECURITIES ACT 2007 PROVIDES FOR CIVIL AND CRIMINAL LIABILITIES FOR THE ISSUE OF A PROSPECTUS WHICH CONTAINS FALSE OR MISLEADING INFORMATION. THE REGISTRATION OF THE PROSPECTUS AND THE SECURITIES WHICH IT OFFERS DOES NOT RELIEVE THE PARTIES OF ANY LIABILITY ARISING UNDER MISLEADING STATEMENTS OR FOR ANY COMMISSION OF A MATERIAL FACT.

This, notwithstanding, it is sensible that there is a summary as part of the prospectus because a prospectus is likely to be a long and detailed document. It is doubtful whether many retail investors read it in full or at all before deciding whether to invest. Most retail investors will not find it a user-friendly document. The summary will simply convey the essential elements of the securities concerned but with a warning that it should be read only as an introduction to the prospectus.[30]

To further protect the public from danger of losing their money, restrictions are placed on the invitation from a company to the public to sell, buy or subscribe to its securities, for example, the company must register its securities with SEC, and no securities shall be issued, sold or transferred without the prior approval of SEC.[31]

SEC also regulates public offers and sale of securities in the sense that capital market operators, issuing houses, underwriters,[32] Stock brokers, Registrars of securities,  must all be registered with Securities and Exchange Commission and must have current certification. The commission shall prescribe the conditions for registration including the level of knowledge and skill required to operate in the capital market, the accounting and other records to be kept by the operators, the maintenance of separate accounts and payment into certain trust accounts and the penalty for withdrawing money from trust account without authorization.[33]

5. Dispute Resolution Mechanism of SEC

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Crucial to the SEC’s effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

The SEC adjudicates on transaction disputes, in addition to receiving and treating investor/operator complaints. Parties that are aggrieved over market transactions and fail to get a fair treatment elsewhere can take their case to SEC. Often; defaulting parties receive the big stick.[34]

In ensuring that investors are protected, and maintaining fair and orderly market, Administrative Proceedings Committee (APC) of SEC, a quasi- judicial body was established to give parties opportunity of being heard in issues relating to capital market operators and other institutions in the market who are perceived to have violated or have actually violated the provisions of ISA.[35] For example, where a stock broker sells shares without the instruction of his client; the client can go to APC and petition or file a complaint against him.

Although the ISA has no definition of investment dispute, it defines investment[36] as shares, stocks, debentures, bonds, loan stock, warrants, certificates representing securities, units in collective investment schemes and so forth. Therefore, disputes arising from activities constituting investment business, for example, disputes between an issuing house and a company, an underwriter and a company, a registrar of company and a company,[37] can be referred to as Investment Disputes.

Administrative Proceedings Committee of SEC is guided by some Rules. The Rules provides for proceedings during trial.[38] Under the Rules, the Committee can:

• suspend or cancel registration of capital market operators,
• revoke the certification of a security exchange or capital trade point subject to the approval of the minister of finance,
• review any disciplinary action against capital market operators and capital trade point,
• remove the executive officer of a security exchange or capital trade point,
• suspend registration of securities,
• determine compensation for insider dealing cases.[39]

The decisions of the Committee must be confirmed by the Commission before it becomes effective. Confirmation shall be made not later than 14 days after the decision. Decision of the Commission shall be communicated through the secretary of the Commission within 5 days of the confirmation.[40]

Any party dissatisfied with the decision of the Commission as confirmed, may within 30 days of the receipt of the decision, appeal to the Investment and Securities Tribunal (IST).[41]

The IST was established[42] to provide an efficient dispute resolution mechanism with fairness, flexibility and transparency for the capital market, investors, public companies, capital market operators, self regulatory organizations and other market participants.[43]

The IST shall, to the exclusion of any other court of law or body in Nigeria, have jurisdiction to hear and determine any question of law or dispute involving:

1. a decision or determination of the Commission in the operation and application of the Act, and in particular, relating to any dispute between:
2. Capital market operators
3. Capital market operators and their clients
4. An investor and a securities exchange or capital trade point or clearing and settlement agency;
5. Capital market operators and self regulatory organization.
6. The commission and self regulatory organization
7. A capital market operator and the Commission
8. An investor and the Commission
9. An issuer of securities and the Commission
10. Disputes arising from the administration, management and operation of collective investment schemes.[44]

The IST shall also exercise jurisdiction as may be prescribed by the Act of the National Assembly and shall also have power to interpret any law, rules or regulation as may be applicable.

The IST also has jurisdiction over pension matters referred to it from National Pension Commission (PENCOM).[45] Any proceeding before the Tribunal shall be deemed to be a judicial proceeding and the Tribunal shall be deemed to be a civil court for all purposes.[46]

An award or judgment of the Tribunal[47] shall be enforced as if is a judgment of the Federal High Court upon registration of a copy of such award or judgment with the Chief Registrar of the Federal High Court by the Tribunal.[48]

6. Conclusion

From the above analysis of the functions of SEC as a regulatory body of ISA 2007, especially as it relates to capital market operations and sale of securities of public companies in Nigeria, SEC plays a major role in ensuring that the interest of the consumers, in this case the investors are protected but majorly through disclosures by the issuers of securities and issuing houses.

Hence, it is only these disclosures that SEC regulates at most in the event of any invitation that is later found to contain any untrue statement. Any person who made the invitation at the time when the advertisement or circular was published will then be liable upon conviction to pay compensation to any person who deposited money with the public company having relied on the advertisement or circular, for any loss they may have sustained by reason of such untrue statement.[49]

While the above is commendable, it is medicine after death; a situation where an investor trusting that there is an apex regulatory body scrutinizing all the activities of capital market operators from registration to regulation, believes that the security has been cleared by SEC as investable only to be later refund his money will definitely discourage some investors.

It will therefore be more desirable if the law or regulation can provide mechanisms designed to ensure that the information as provided is complete and accurate before it is published. An example of such mechanism long relied on in the United Kingdom is the use of a “sponsor” as a reputable intermediary, who guides the applicant for admission to trading through the applicable rules and certifies to the Exchange that there has been compliance. Certification of compliance with the requirements by the intermediary may be more reliable than that by the company alone because of the intermediary’s greater experience in the field and because the intermediary’s business model depends on its certification being accurate, for otherwise, future issuers will not be encouraged to use that intermediary.

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*           Rahmatu Ishaq Ahmed (Mrs.) Lecturer, Corporate Law Department, Nigerian Law School, Kano Campus. E-mail: ranwal11@hotmail. com.

[1]           Securities and Exchange Commission will hereinafter be abbreviated SEC while Investment and Securities Act 2007 will be ISA.

[2]           See, http://en.wikipedia.org/wiki/Securities_and_Exchange_ Commi ssion, accessed on 14/9/13.

[3]           www.investopedia.com, accessed on 13/9/13.

[4]           ISA.

[5]           Like the Nigerian Stock Exchange (NSE), even though now privately owned and self-regulatory, the SEC maintains surveillance over it with the mandate of ensuring orderly and equitable dealings in securities, and protecting the market against insider trading abuses.

[6]           http://en.wikipedia.org/wiki/Securities_and_Exchange_Commission _%28Nigeria%29, accessed on 14/9/13.

[7]           See below for details of Investment and Securities Business.

[8]           Security exchange means an exchange or approved trading facility such as a commodity exchange, metal exchange, petroleum exchange, options, future exchange, over the counter market and other derivatives exchanges. See the Interpretation and Citation part (part XVIII) of the ISA 2007. 

[9]           This is a mini exchange registered by the Commission pursuant to the ISA 2007, which constitutes, maintains or provides market place or facilities for bringing together purchasers and sellers of securities. See the Interpretation and Citation part of the ISA 2007.

[10]          This could be direct public offer or offer for sale.

[11]          Companies that can give invitation to the public to subscribe to its shares

[12]          This is one of the modes by which a foreigner can do business in Nigeria. Foreign Direct investment: A foreigner may operate alone or in joint venture with a Nigerian. See s. 54, s. 20 which provides that he/they must form a company under the provisions of CAMA after which he registers with Nigerian Investment Promotion Commission (NIPC). But under s. 17 NIPC, must not do business in items on the negative list e.g. in narcotics, arms and ammunition, production of military and paramilitary uniforms. See the case of Unipetrol Nig. PLC v Agip (Nig) PLC, (2002) 14 NWLR 312 at 330-331.

[13]          Portfolio Investment: where a foreigner buys shares in an existing company because he does not want to come physically to incorporate a company.

[14]          For example, after the Central Bank had audited the banks in 2009, due to the global financial crisis that began in 2008 which caused a severe crisis among Nigerian banks, with several forced to close, the SEC started legal proceedings at the Investments and Securities Tribunal against about 260 individuals and entities, alleging that they were involved in abuses such as insider dealing and share price manipulation.

[15]          See s. 13 ISA, 2007. This Act repealed the Investment and Securities Act 1999. Instances can be seen where the commission instituted various reforms including improving regulations so as to encourage development of the bond market, promoting collective investment schemes and reviewing the 2003 Corporate Governance Code.

[16]          See s. 315, the Interpretation and Citation part of ISA 2007.

[17]          P.L Davies, and S. Worthington, Gower & Davies Principles of Modern Company Law, (9^th ed.), (London: Sweet & Maxwell, 2012), p. 898.

[18]          A formal legal document, which is required by and filed with the Securities and Exchange Commission, which provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision. It is also known as an “offer document.”

[19]          This is possible because the ISA provides that an invitation to the public to acquire or dispose of any securities of a public company must not be made by any person unless within six months prior to the making of the invitation, a prospectus relating to it, and complying with sections 75, 76 and 79 of the Act has been delivered to the Commission for registration, and every person to whom the invitation is made is supplied with a true copy of such prospectus as filed with the commission. See s. 78 (1) (a) ISA 2007. See also H.Y. Bhadmus, Bhadmus on Corporate Law Practice, (Enugu: Chenglo Publishers, 2010), p. 368-369.

[20]          S. 68 (2) ISA 2007.

[21]          The issuer of security is the company offering its securities for sale to the public.

[22]          The issuing house acts as an agent of the issuer by helping to package the issue, pricing, preparing prospectus and other documents. It also provide advisory services to the issuer and co-ordinates the activities of other parties to the issue which include Brokers, Registrars, Trustees, Underwriters, Portfolio and Fund Managers and Investment Advisers, i.e all players in capital market operations. See Bhadmus, above note 19 at p. 364-365.

[23]          Fir example, Transcorp issued shares in 2007 but said they cannot declare dividend till 2011.

[24]          For a comprehensive and mandatory contents of prospectus; see the Third Schedule to the ISA 2001.

[25]          See s. 77(1) ISA 2007. This expert is solicitor to the offer who must be accredited with the SEC as a Capital Market Solicitor.

[26]          See, http://www.investopedia.com/terms/p/prospectus.asp, accessed on 18/9/13.

[27]          See s. 78(1) (c) ISA 2007.

[28]          See. S. 80 (3) (a) (b).

[29]          Bhadmus, above note 19 at p. 371

[30]          Davies and Worthington, above note 17 at p. 924

[31]          See ss. 68-96 ISA 2007 for the role of SEC in publics offer and sale of securities.

[32]          In direct offer to the public where the risk of failure is borne by the company, the company in order to protect itself may arrange for the issue to be underwritten at an agreed commission by the issuing house.

[33]          See ss. 38-44 ISA 2007.

[34]          See, www.smartnigerianinvestor.com/basicinvesting/stocks/securi ties-and-exchange-commission-sec.html, accessed on 15/9/13.

[35]          Bhadmus, above note 19 at p. 392.

[36]          See part I Schedule II of the ISA.

[37]          Part II of schedule II of ISA 2007.

[38]          See rules 3-9 APC rules.

[39]          See rule 10 APC Rules for the jurisdiction of the committee.

[40]          See rule 12, id.

[41]          See rule 13 id. the Investment and Securities Tribunal will henceforth be referred to as IST in this write up.

[42]          See s. 274 ISA 2007.

[43]          Bhadmus, above note 19 at p. 395

[44]          See s. 284(1) ISA 2007.

[45]          See s. 93, 94 Pension Reform Act 2004.

[46]          See s. 290(3) ISA 2007.

[47]          The tribunal can review its decision by setting aside its previous decision. Only persons who participated in the proceedings of the Tribunal may appeal against it. Generally, appeal lie to the Court of Appeal if: the decision was reached in the exercise of its appellate jurisdiction, on points of law only; or it is a final decision taken in the exercise of its original jurisdiction, on points of law or mixed law and fact, or it is an interlocutory decision of the Tribunal, on points of law only. See S. 295 ISA.

[48]          See s. 293(3) ibid. For this reason, appeals lie from the Tribunal to the Court of Appeal and then to the Supreme Court.

[49]          See s. 68 (3) ISA 2007. The compensation is in form of immediate repayment of such money with interest at the current bank rate per annum or such higher rate as may have been agreed to be paid on the deposit s. 68(5) ISA.

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