SEC to Deregister Undercapitalised Market Operators on October 2

The Securities and Exchange Commission (SEC) will on October 2, this year, deregister capital market operators (CMO) who fail to comply with the new minimum capital requirement, BusinessDay can disclose.

The apex capital market regulator which has insisted on September 30 this year as recapitalisation deadline, said affected operators would only have to apply for fresh registration to operate in the Nigerian capital market.

 

Currently at the SEC, there are 188 capital market operators with incomplete registration and 294 capital market operators with valid status.

Most of the capital market operators are Corporate Investment Advisers, Solicitors, Reporting Accountants, Issuing Houses, Receiving Bankers, FMDQ OTC Dealers, Broker/Dealers, Registrars, Fund /Portfolio Managers, Rating Agencies, Trustees, Underwriters, Custodians, and Venture Capital Managers.

This comes on the heels of the decision by SEC to prohibit brokers from proprietary trading post- recapitalisation, saying that brokers’ proprietary accounts at the Central Securities Clearing System (CSCS) would be blocked. Rather, brokers would only be allowed to maintain investment accounts with other firms (broker or broker dealer).

This regulatory decision applies to market operators who chose to reduce their number of registered functions to recapitalise, after withdrawing SEC registered function –example Broker/Dealer to Broker or Dealer; Issuing House and Fund/Portfolio Manager to Issuing House, among others.

In the capital market, proprietary trading occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm’s own money, as opposed to depositors’ money, so as to make a profit for itself.

Also, dealers are prohibited from maintaining client accounts. SEC said dealers would be required to notify all clients to transfer their accounts to another firm (Broker or Dealer) of their choice within 14 days.

The apex regulator of Nigeria’s capital market has already granted an extension till August 31 this year, notifying Capital Market Operators (CMOs) intending to consider reclassification of their functions, reduction of functions or merger/acquisition (M&A) in view of the recapitalisation exercise.

There are already indications that between 120 and 150 stockbroking firms, out of the about 219 active stock broking firms, may meet the September 30 recapitalisation deadline.

According to the commission, “CMOs should note that conversion/migration to any of the options is not automatic, as routine regulatory requirements must be fulfilled”.

Under the revised minimum capital requirements regime, the minimum capital base for Broker/ Dealer was increased by about 328.6 percent from N70million  to N300million, while a Broker, who currently operates with capital base of N40million, will now be required to have N200million , representing an increase of 400 percent.

Likewise, the minimum capital requirement for the Dealer has increased by 233.33 percent from N30million to N100million.

Issuing Houses that arrange for a company’s shares to be sold on a stock market are required to have minimum capital of N200 million, as against the current capital base of N150 million, an increase of about 33.33percent. Also, capital requirement for underwriters was increased by 100 percent from N100million to N200million.

To ensure a seamless and less rigorous exercise, the commission has reviewed the procedures on the various options saying, “Any Broker/Dealer intending to become a sub-broker shall file a Letter of Application and duly completed Form SEC 2C (in duplicate) together with the following documents: a recommendation letter from a sponsoring Broker/Dealer.

“The letter should also contain an undertaking that the sponsoring Broker/Dealer would be held responsible for losses or liabilities arising from the action (or inaction) of the Sub-Broker; a copy of the agreement with the sponsoring Broker/Dealer specifying the rights and obligations of the Sub-Broker and the Broker/Dealer; and evidence of minimum paid-up capital of N5million.”

The SEC also said that approval of the application by the commission shall be granted within five (5) working days contingent upon filing of complete documentation.

“The NSE would consider applications from Dealing Members that wish to enter into relationships with Sub-Brokers approved by the Commission and issue letters of approval for applications that comply with the applicable SEC rules and regulations within five (5) working days of filing complete documentation. “The Central Securities Clearing System (CSCS) would set up and migrate the Sub-Broker to its sponsoring Broker/Dealer, after receiving a copy of the NSE’s letter of approval to the relationship between the Sub-Broker and its sponsoring Broker/Dealer. Upon the migration, CSCS is to notify the SEC and the NSE,” the SEC further noted.

The apex regulator of Nigeria’s capital market also specified the procedure for withdrawal of SEC registered function which is applicable to registered Capital Market Operators with multiple functions, seeking to reduce the number of registered functions.

According to SEC, “application for withdrawal of function shall be filed with the Commission on Form SEC 8 (duplicate) in compliance with SEC Rule 33. Broker/Dealer seeking to withdraw a function, thereby retaining either broker or dealer function, should apply for a “Letter of No-Objection” from the NSE and thereafter notify the CSCS.”

“Brokers are prohibited from proprietary trading. To that extent, the proprietary accounts at CSCS would be blocked.  Brokers would only be allowed to maintain investment accounts with other firms (Broker or Broker Dealer). CSCS would direct brokers to transfer their proprietary accounts to a firm (Broker or Broker Dealer) of their choice, within seven days of notification of reclassification. The Broker’s proprietary accounts would become a client securities account in another firm.

“Dealers are prohibited from maintaining client accounts. To that extent, they would be required to notify all clients to transfer their accounts to another firm (Broker or Dealer) of their choice within 14 days. Dealers should do so via publication in at least two national dailies. The notice should also include the default firm for clients that do not communicate their choice within the 14 days,” the SEC further stated.

Iheanyi Nwachukwu