Capital Markets Regulation: All Talk, No Action As Fortunes Dwindle

As the fortunes of the market continue to dwindle pushing the ASI below the 20000 threshold to levels of lows not seen for close to a decade, capital market regulators must begin to ask themselves painful questions. Questions like where are we headed? Why is the retail demographic not participating? Are we doing enough to police the system?

Beyond ensuring market operators abide by existing rules and codes of ethics, regulators have a duty to ensure, to the best of their ability that there is prosperity in the market and that the market booms. Perhaps this is why Oscar Onyeama, DG of the NSE has said that his target is for the market to hit $ 1 trillion or (N 157 trillion) in less than 5 years. As at Friday, the Market Capitalization of the NSE was $ 38.91 billion ( N 6.28 trillion). Mr. Onyeama must be a die-hard optimist as he expects the market cap to grow 2,571% in less than 5 years, even though since he assumed leadership of the NSE, the market cap has shrunk 20% and the bourse is one of the worst performing in Africa.

Sure the trump card becomes the expectation of telecommunications companies and oil and gas majors to list on the exchange; however that would be a cosmetic fix leading to a boom market, yet the truth remains there are issues way beyond the surface that need to be addressed.

After the bubble burst in the equity markets circa 2008, it was discovered that there were a lot of lapses in the regulatory bodies that served to cause the calamity that was the loss of trillions of Naira worth of shareholder wealth. Average Nigerians lost their homes, businesses, and generally a lot of money. A lot of them have not recovered from their losses. People undoubtedly lost their lives as is common occurrence in such crisis.

Unscrupulous fund managers with a penchant for dribbling the system in order to circumvent regulatory frameworks and take on minimal or little collateral damage are costing investors hundreds of millions of Naira. These are not the Stanbic IBTCs, The ARMs or Vetivas of Nigeria. A lot of these firms are staffed with ex-wall street investment bankers who return home not only with heightened level of skills but sky high levels of greed. They treat business as a do or die affair, causing investors heartaches whilst their bank accounts swell due to the absence of regulatory spotlight beaming on their activities.

Sanusi has done a lot to restore sanity and more importantly confidence to the banking sector. However it is most unfortunate that his scope as a watchdog doesn’t extend beyond the banking sector, as the capital markets particularly the equity market are in need of his brand of expertise.

It is up to those who are charged with governing the capital markets to step up to the plate and clean the Augean stables of sorts.

Regulators need to open their doors and hotlines to the general investing public in order to have an idea of atrocities being committed by fund managers with an above-the-law and smarter-than-the-law attitude.

Techniques Fund managers now adopt to beat regulatory framework include and are not limited to incorporating shell corporations offshore to avoid having to register with the Securities and Exchange Commission (SEC). There ordinarily should be nothing wrong with utilization of such tax havens, except for the fact that these ex-banker fund managers use these structures to absorb billions of Naira from investors and are not accountable to local regulators. This practice should be outlawed or brought within a reasonable scope of local legislation.

The next step for the fund managers, after incorporating their offshore shell corporations with ownership of a CAC registered LTD is to bait investors with the promise of excellent corporate governance, superior returns, good customer service etc. Honestly the bait is already effective at the superior returns bit. Fancy charts are created on excel with a line that seems to ascend continuously upwards ad infinitum. Ivy league educations are touted, Harvard Business School, Yale, Stanford. Work experience is heralded, Goldman Sachs, PWC and so on on and so forth.

They have one touching humanist story on how they came home to build a brand and make a difference, yet all is just a facade.

Wordy Investment management Agreement contracts (IMAs) are drafted by same fund managers, and intending investors/clients are never advised to seek any independent legal advice to scrutinize the documents. Once the document are signed, the investor is trapped in most cases, usually with no recourse to the law, thanks to a judicial system that is painfully slow and absence of practical regulatory enforcement.

The fund managers rarely provide audited statements and there is no way to verify the integrity of financial statements/reports provided. Al though millions of naira continue to be lost on a regular basis, the fund managers fail to honor the exit clauses of the original Investment Management Agreements, relying on loopholes and the failure of regulatory presence to weasel their way through.

These callous ex-Wall street types are only concerned about their fees and performance related compensation (stipulated in the IMA). They do not care the harm caused their clients as their wealth is eroded on the market due to their gambles on a market recovery, in spite of huge consecutive losses.

Until the time comes when there is robust regulatory framework and practical actions taken by regulators to protect the investing public, one word of caution would be for intending investors to align with companies that have built a visible brand name based on trust and respect for clients. And even in that event, get a good corporate lawyer. Its worth the trouble, if any.

 

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One Comment

1. 

   Okokon Etuk

   December 3, 2011 at 8:55 pm

   “These callous ex-Wall street types are only concerned about their fees and performance related compensation (stipulated in the IMA)”  – this article portrays corruptionand greed among fund managers which the regulatory bodies has to put more lights into this sector because it also affects an investor who doesn’t know much about the market, these regulatory bodies are to monitor the activities of these fund managers to ensure safety of investor’s funds and confidence…thank you