RE: NECA FLAYS SANCTIONS ON QUOTED COMPANIES BY SEC
The attention of the Securities and Exchange Commission (“SEC”) Nigeria has been drawn to a publication in The Guardian newspaper of Friday October 7, 2016 on the above caption. We hereby wish to put the issues in proper perspective for the benefit of the investing public.
Regular Timely Disclosure by Listed Companies Critical for Sustaining Investor Confidence
Capital markets all over the world thrive on investor confidence which is largely built on availability of timely and reliable information. Financial reporting helps to reduce information asymmetry between company insiders and external investors. For this reason, regulators and participants alike have various roles to play in facilitating a well-functioning capital market that narrows the information gap in order to ensure that investors are empowered to make sound investment decisions.
To this end, robust provisions on filing of financial reports are provided for in the Investment and Securities Act (ISA) 2007. Specifically, Section 60(1) of the Investment and Securities Act, 2007 requires that “a public company whose securities are required to be registered under the Act shall file with the Commission on a periodic or annual basis its audited financial statements and such other returns as may be prescribed by the Commission from time to time”. Section 65(1) prescribes that a public company who contravenes the provisions of S.60 is liable to “a penalty of not less than N1,000,000.00 and a further penalty of N25,000.00 per day for the period the violation continues”. Pursuant to this provision, the SEC Rules and Regulations require all quoted companies to make quarterly filings with the Commission. In particular, Rule 41(1) mandates listed companies to file their financials “not later than thirty (30) days from the end of each quarter”, prepared in accordance with the International Financial Reporting Standard (IFRS).
Forbearance by the SEC Board
The filing regime required by the ISA 2007 and the SEC Rules and Regulations made pursuant to the Act, was designed to provide for adequate investor protection. However, SEC records between the years 2008 and 2011 showed a dismal level of compliance from listed companies. On the average, less than 25% of quoted companies regularly filed statutory reports with the SEC. The Commission in discharge of its statutory mandate applied the penalties required by law to all the defaulting public companies.
In consideration of pleas for waiver of penalties from these defaulting companies, coupled with SEC’s mandates to develop the market, the Commission’s Board magnanimously granted significant waivers (by as much as 60%) to companies willing to take corrective steps.
First Interaction with NECA on this Issue
After the first waiver granted by the Board of the Commission, the Nigeria Employers Consultative Association (NECA) requested to meet with the Commission to discuss issues relating to penalties imposed on public companies. The SEC granted this request by meeting with the NECA team on Monday 31st March 2014. NECA’s major request at the meeting was a 100% waiver for penalty accrued up to 2010 and a further 40% on penalties owed from 2011 to 2013. Again, the Board of the Commission graciously acceded to these requests, a decision that was properly communicated to all affected companies.
Intervention of NECA and the SEC’s concern on Fourth Quarter (Q4) Reports
In keeping with its consultative approach to market regulation and development, the SEC Management agreed to meet with NECA on 22nd June 2016 to discuss NECA’s proposal to jettison the submission of Q4 returns by quoted companies. At no time did that meeting discuss the issue of waiver of penalty relating to Q4 reports. In fact, NECA admitted, during the meeting, that quoted companies had failed to take advantage of the waiver granted in the past by the Commission and promised to prevail on its members to comply with the provisions of the law.
In consideration of its primary role of investor protection, the Commission had expressed concern about jettisoning the Q4 report as requested by NECA during its visit. The Commission observed that if the Q4 report is jettisoned, there would be a 5 month period between when the Q3 returns are filed and the deadline for submitting audited annual financial statements. During this 5 month period, there would be no information on the company’s financial status to the investing public. In such a situation, investors, particularly retail investors, would be at a significant disadvantage.
The Commission Taking Steps to Address Concerns of Listed Companies
To ensure that a decision which best addresses this unique situation is taken on the matter, the Commission is consulting widely and studying practices in other jurisdictions. Furthermore, the Commission is also considering Rules on accelerated filing which would give quoted companies the options of either retaining the current Q4 filing system as provided in the SEC Rules or filing their audited annual accounts latest by the second week of February of the next year, in order to forgo the requirement of filling Q4 unaudited accounts.
The Commission has also reduced the burden of reporting on corporate governance as indicated with the introduction of the SEC Corporate Governance Scorecard. Quoted companies, with effect from 2017, will now be required to fill the SEC Scorecard on Corporate Governance once a year as against the half-yearly returns on corporate governance currently being filed.
While the Commission engages stakeholders and looks at ways to address the issue of quarterly filings, it cannot abdicate its duty of applying existing Rules and Regulations. Filing Q4 financial statements by public companies is mandatory under the SEC Rules as currently provided for. Without an amendment of the Rules, the Commission would continue to apply these Rules, while consulting with relevant stakeholders on necessary amendments.
It is rather unfortunate that in the middle of this consultative process, the Director General of NECA has taken this issue to the public space in newspaper interviews and letters to the Ministry of Finance and the Presidency, misrepresenting the facts of the matter.
Credible Deterrence Improves Market Behaviour and Compliance Levels
As the apex regulatory authority of the Nigerian capital market, the SEC will continue to live up to its responsibility of investor protection by sustaining market fairness and integrity. Sometimes this may entail applying strict sanctions as provided in the law against erring participants. In our considered opinion, maintaining a posture of zero tolerance has presented a credible deterrence that is already improving compliance levels across our market and reducing the number of infractions. It is noteworthy that the fines and penalties applied by the Commission has led to a massive improvement in filing compliance by quoted companies from less than 25% in December 2011 to over 85% as at 30th September 2016.
The implication of this development has been the significant improvement in the access and quality of information about quoted companies now available to the investing public to make more informed investment decisions. All categories of investors (retail, domestic institutional and foreign investors alike) stand to benefit from this improved market behaviour. The SEC will continue to pursue policies that sustain this momentum.
9th October, 2016