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Promoting market integrity and investor protection in Nigeria

Chinonyelum Uwazie
The regulation of market abuse has for many years been the subject of discussions among financial market participants and scholars. It dominated discussions before the recent global financial crisis (see, for instance, Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis Regulation, Oxford University Press, 2005), and the crisis has done nothing but heighten the discussions since then.

Market abuse is generally perceived as a serious offence that damages investor confidence and the integrity of financial markets. This has caused scholars to argue that the rationale for controlling market abuse is the maintenance of investor confidence among others (RCH Alexander, Insider Dealing and Money Laundering in the EU, Ashgate, 2007). Rider, Alexander and Linklater note that integral to the efficient operation of any market is the maintenance of confidence in the integrity of its functions. (BAK Rider, C Abrams and TM Ashe, Financial Services Regulation CCH Editions 1997, cited in Alexander, Ashgate, 2007).

The series of events that occurred in the Nigerian capital market in 2008, when the market witnessed a severe decline in the value and volume of shares traded on the stock exchange, tend to suggest that the primary rationale for regulating market abuse was lost on previous administrators: many attribute the decline to the unsavoury practices that trailed the previous administration of the exchange. The market collapse also gave credence to suspicions among practitioners that insider dealing, in particular, was going on at a staggering speed with no significant control or enforcement (SA Ndanusa, 'Role of the Capital Market in National Development', Investment and Securities Law Journal, 2006).

Before the 2008 market collapse, the system had in place Part XI of the Investment and Securities Act 2007 and the Rules of the Nigerian Securities and Exchange Commission to ensure discipline, transparency and market integrity. While these provisions imposed civil and criminal sanctions on persons found guilty of forms of market abuse such as false trading, market rigging and market manipulation, among others, they did not extensively provide tools for investigation and enforcement. Thus, the regulator's powers of investigation and enforcement were under-used as it relied on reports from capital market operators while exercising its power of prosecution through the Administrative Proceedings Committee and the Investment and Securities Tribunal (see, for instance, Central Securities Clearing System (CSCS) v SEC, Appeal No. IST/APP/01/2003 & Case No. IST/APP/21/2003 on false trading).

In view of these failings, the Nigerian Stock Exchange recently created a surveillance arm to carry out daily and routine surveillance of trading activities on the exchange with focus on false trading, market manipulation and rigging. Such surveillance is also set to guard against circulation of price sensitive information. In addition, the Nigerian Stock Exchange has developed specific rules to regulate the activities of broker-dealers as well as issuers. The Rules applicable to broker-dealers impose reporting obligations on compliance officers to report legal violations within 24 hours of becoming aware of such violation. Dealing Members are equally required to report market infractions or face sanctions for failing to report.

In a similar move, the Nigerian Securities and Exchange Commission has instituted an enforcement and compliance department and implemented detailed rules to regulate the activities of capital market operators.

It is also pertinent to note the recent introductions by the Nigerian Stock Exchange in relation to short selling, securities lending and market making, aimed at promoting market integrity. The Rules on short selling prohibit dealings in naked short selling, which is defined as "the practice of seeking to profit from an expected fall in the price of an asset by selling shares [you] do not own without borrowing, or making arrangements to borrow them". Similarly, the Rules on securities lending only permit lending by licensed securities lending agents, while the Rules on market making prohibit market makers from exerting corporate control over companies in whose securities they make markets.

There are strong indications that regulators would continue to adopt measures to prevent a reoccurrence of the events that led to the collapse of the Nigerian capital market. It is hoped that such measures would continue to boost investor confidence in the market and ultimately promote growth.

Chinonyelum Uwazie

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