The Securities and Exchange Commission’s (SEC) investigation report and sanctions on Oando Plc reignites the jurisprudential debate on the extent of the powers of SEC to control public companies in Nigeria. On 10 June, 2019, the news broke that SEC suspended the proposed Annual General Meeting of Oando. The obvious question here is whether the regulator has the power to do so. In attempting to answer this question, the decision of the Court of Appeal in SEC v. Big Treat Plc & Ors on 31 January, 2019 which interpreted the powers of SEC in section 13 (v) of the Investments and Securities Act (ISA) is very germane.
Section 13 (v) of the ISA confers on SEC the power to intervene in the management and control of capital market operators. The section provide as follows:
“13. The Commission shall be the apex regulatory organization for the Nigerian capital market and shall carry out the functions and exercise all the powers prescribed in this Act and, in particular, shall-
(v) intervene in the management and control of capital market operators which it considers has failed, is failing or in crisis including entering into the premises and doing whatsoever the Commission deems necessary for the protection of investors;”
In effect, the above section empowers SEC to do ‘whatever’ it deems fit with a capital market operator in order to protect investors. This power is further strengthened and defined in Part VII of ISA which provides for inspections and investigations by the commission. The question has always been whether public companies are capital market operators for the purpose of application of the above provision and in what manner should SEC exercise its powers generally under section 13 of the ISA. These questions were answered by the Court of Appeal in the Big Treat case.
Big Treat’s case
An investigation was conducted by SEC into the affairs of Big Treat Plc in 2008. The report of the investigation revealed alleged inadequate internal control systems and a breakdown of corporate governance in the company. On the basis of the report, SEC imposed sanctions by seeking to appoint interim management for the company. When the management of the company resisted, the commission applied to the Federal High Court in 2010 and obtained ex-parte orders restraining Big Treat’s foreign Directors (Pamela Wu, Harries Wu, Steve Wu) and two entities owned by them (New Frontier Engineering and Construction Company Ltd and Skyone Group of Companies Ltd) from obstructing the Commission in appointing interim management to take charge of the day to day administration of the company.
Big Treat applied to the Federal High Court to discharge the order on the basis that the company was not a registered capital market operator performing specific functions in the capital market as defined by section 315 of ISA and rule 28 (now 45) of Securities and Exchange Commission Rules and Regulations (SECR). The Court agreed with Big Treat and set aside the ex-parte orders. SEC appealed to the Court of Appeal.
Decision of the Court of Appeal
The Court of Appeal allowed the appeal and held that Big Treat is a capital market operator subject to section 13 (v) of ISA. The court reasoned that since Big Treat’s securities are registered with SEC and is subject to filing returns and other accounts as provided by the ISA, the company is a capital market operator. The court further stated that the provision of SECR rules which define capital market operators must be construed in accordance with section 315. The court held as follows:
“Accordingly, Sections 13, 38(1),54(1) and (5), 60, 61,65 and 315 of the I.S.A. read together with paragraph 3 of the affidavit in support of the action establishes that the 1st respondent, an issuer of securities, having been duly registered with the appellant and was at all material times performing the specific function of issuing securities in the capital market was subject to the intervention of the statutory powers of the appellant as the pinnacle regulatory authority for the Nigerian capital market whose sole purpose is to ensure the protection of investors and to maintain fair, efficient and transparent capital market as well as reduction of systematic risk as stated in the preamble to the I.S.A. – the beacon-light to the powers of the appellant under the I.S.A.”
After quoting copiously from the book Company Securities: Law and Practice by Prof. Abugu, the court continued:
“The I.S.A. is therefore an effective method of preventing impropriety in the management of capital market by capital market operators through the appellant’s intervention in the decaying or paralyzing affairs of a company registered with the appellant as capital market operator in the capital market performing specific role of issuers of securities, such as the 1st respondent, which intervention is expected to arrest, minimize or forestall the drift to disaster or the dissipation of the assets and/or collapse of the mismanaged company for the protection of investors thus fulfilling one of the most important schemes of the I.S.A…
Having registered with the appellant as dealer in securities or issuer of securities in the capital market the 1st respondent’s specific role of issuer of securities in the capital market makes the 1st respondent subject to the rules and the authority of the appellant under the I.S.A. which is entitled by Section 13(v) of the I.S.A. (supra), in particular, to intervene in the management and control of capital market operators in distress or which the appellant considers has failed, is failing or in crisis by doing whatsoever the appellant deems necessary to arrest the drift for the protection of investors in the capital market. It was thus held in the case of Farid Mikhail Faloughi and Ors. v. Alain Abdala Faloughi and Ors. (1995) 3 NWLR (pt. 384) 434 that the appellant’s statutory powers can regulate the affairs of companies engaged in effecting transfer of shares; and that where public companies are run by foreigners as shareholders, for example, the approval of the appellant was a condition precedent to the transfer or intended transfer of any shares in the company concerned. The powers of control and intervention of the appellant under the I.S.A. also extends to private companies as is illustrated by the case of Societe Generale Bank Nigeria Ltd. v. S.E.C. unreported Court of Appeal judgment in appeal No. CA/L/434/98 (cited without date of delivery of the judgment in ‘Companies Securities: Law and Practice’ Second Edition page 98 by Professor Abugu) to the effect that the regulatory powers of the appellant covers private companies even where there is alien participation in the sale or transfer of shares… “
The above decision of the Court of Appeal is debatable. It seems to confer on SEC powers beyond the scope of section 13 (v) of the ISA and is dangerous to investment, particularly foreign investment in Nigeria. There is considerable merit in the argument that a public company is not a capital market operator to which section 13 (v) of the ISA is applicable. The reference to capital market operator in this section has peculiar significance, it is not intended to include public companies whose sole interest in the capital market is share listing and registration of securities. Public companies do not register with SEC as capital market operators as envisaged by section 13 (v) of ISA. A review of all the paragraphs in section 13 show that only paragraph (v) has the phrase ‘capital market operators’. It is obvious that the legislature was deliberate in using the phrase when one considers the entire provisions of the ISA.
It is contended that the court unduly placed reliance on Professor Abugu’s book in reaching its decision. The learned author did not conclude that public companies were capital market operators in the sense in which the phrase is used in the ISA. Assuming that was the conclusion, it is submitted that it is inconsistent with the ISA. SEC does not even consider public companies as capital market operators; hence, they are not listed as such on its website.
The grundnorm of statutory interpretation is that a statute must be construed to give effect to the intention of the legislature. Part VI of ISA makes provisions for regulation of capital market operations. This part also defines what constitutes the business of capital market operation and who a capital market operator is. The details of the provisions in section 38 – 44 are obviously not intended to apply to a public company simply because its securities are registered or that it files accounts with SEC. The accounts that a public company files with SEC under the ISA are different from that contained in sections 38- 44. For example, a public company is not expected to maintain trust accounts in the tenor of sections 40- 44 simply by the mere fact of being a public company.
Therefore, the definition of a capital market operator under section 315 must be interpreted within the context of the specific provisions dealing with capital market operations. It is submitted that the provisions of Part VIII dealing with registration of securities by public companies and specifying the kind of accounts they are under obligations to file has no relationship with the intent of the legislature in using the phrase ‘capital market operators’.
Furthermore, from a review of the entire provisions of ISA, the legislature carefully referred to public companies as issuers of securities in context different from ‘capital market operators’. Section 284 of the ISA which defines the jurisdiction of the Investment and Securities Tribunal (IST) for example distinguishes between capital market operators and issuers of securities. If the intent of the draftsman was to regard public companies as ‘capital market operators’ simply because their securities are required to be registered with SEC, it would have said so expressly and not left it to conjecture.
In any event, section 315 of ISA cannot be interpreted by any stretch of imagination to mean that public companies are capital market operators as provided in ISA. The section provides that:
“capital market operator” means any persons (individual or corporate), duly registered by the Commission to perform specific functions in the capital market”
The term ‘specific functions’ in the above definition does not relate to the role of public companies but capital market intermediaries. That term obviously means experts and professionals who have been registered by SEC to assist public companies and investors in the market. This is the interpretation that is consistent with the way capital market operations and operators are defined in Part VI.
The above conclusion is supported by SEC Rules and Regulations. Section 313 of the ISA empowers SEC to make rules and regulations prescribing the extent of application of the ISA. The section practically empowered SEC to modify the extent of applicability of the Act! In the exercise of this power, SEC defines capital market operators currently in Rule 45 of SEC rules and regulations to be issuing houses, underwriters, brokers, receiving banks, registrars, trustees, fund managers, rating agencies etc. The definition of capital market operators under SEC regulations is a correct reflection of the intention of parliament discernable from a combined reading of the ISA. Assuming, but not conceding that capital market operators were intended to include public companies, it is submitted that SEC regulations effectively modified the definition in line with section 313 (1) (h) of ISA.
The view of the court which suggested that SEC rules is inconsistent with section 315 of ISA did not take into cognizance the intention of the legislature in using the term capital market operators as argued above and the wide latitude given to SEC to make rules and regulations. The consideration of the issue was too simplistic and without due regards to the serious contention of the Respondents. The court placed too much emphasis on the affidavit filed by SEC. The question of whether or not Big Treat was a capital market operator was a question of law which could only be answered by a forensic review of the entire provisions of ISA and not the facts contained in the affidavit.
The court’s reliance on the cases of Faloughi v. Faloughi and Societe Generale Bank Nigeria Ltd. v. S.E.C is unjustified. The issues in these cases had nothing to do with the exercise of the powers of SEC under section 13 (v) of the ISA. In Faloughi’s case, the issue was validity of instrument of transfer of shares and jurisdiction of the Federal High Court. Societe Generale’s case was barely mentioned in Abugu’s book and is unreported. The court did not review the Societe Generale’s case before delivering the judgment except to the extent it was referred to in Abugu’s book. There was also no indication as to the date of the judgment and this fact was stated in the judgment.
Oni v. S.E.C
Another case relevant to the scope of section 13 of the ISA is Oni v. SEC. Here, the issue was whether SEC’s powers extend to membership of the boards of directors of all or any companies registered and regulated under the Companies & Allied Matters Act 1990. The Court of Appeal held that SEC has the power to disqualify persons considered unfit from being employed in any arm of the securities industry including directorship positions in public companies pursuant to section 13 (bb) of the ISA. This decision is justifiable to the extent that section 13 (bb) is a general provision which applies to all regulated entities including public companies unlike section 13(v) which specifically mentions capital market operators.
There is something significant about Oni’s case which should be the condition sine qua non for the exercise of any of the powers contained in section 13 of the ISA. Oni’s case arose from the attempt to set aside or review the findings of Administrative Proceedings Committee (APC) of SEC. Cadbury, its directors including Oni, the external auditor and the Registrars were invited before sanctions were imposed. The effect of this is that even where SEC can exercise its powers under section 13 of ISA against public companies and directors, such powers is not intended to be arbitrary. The persons or companies sought to be sanctioned must be given fair hearing in a manner that is in tune with the scale of measurement of all administrative actions- the constitutional right to fair hearing. A major criticism of the decision in Oni’s case however is that the sort of sanctions imposed ought to have been obtained from the court or, as it is now the case under the ISA, from the Investments and Securities Tribunal.
The right to fair hearing
The powers of SEC as interpreted by the Court of Appeal in Big Treat case are too wide and draconian; such powers should not be confirmed on an ex-parte application. Even if SEC had such power, it ought to have obtained a positive order of the court or tribunal before exercising it. The action at the Federal High Court was merely an attempt to rubberstamp the appointment of interim management which it had already carried out but for the resistance of the respondents. This is more so in a country such as ours where politics could interfere with regulation to the detriment of business. Most of the facts relied upon in Big Treat case are substantially corporate governance infractions which may or may not amount to breach of core capital market rules. It is interesting to note that the bulk of the complaint was against the foreign director’s management of the company. Whether these allegations are true or not, it is worrisome and unconstitutional for SEC to be allowed to wrest control and management of a public company ex- parte before the company is heard. The courts have always reprimanded the grant of ex-parte orders in such circumstances. See Pharma-Deko Plc v. F.D.C and Group Danone v. Voltic (Nigeria) Limited.
US Securities and Exchange Commission’s practice
In the United States (US) where we copy our securities law from, the Securities and Exchange Commission (US SEC) does not possess the powers to take over the management of a public company and its general powers over the securities market cannot be exercised without fair hearing. According to the US SEC on its website, the Commission cannot impose sanctions without the decision of either the federal court or administrative law judge depending on the type of sanction or relief that is being sought. Whilst the Commission may bar someone from the brokerage industry in an administrative proceeding for example, an order barring someone from acting as a corporate officer or director must be obtained in federal court.
There is a dangerous trend in applying institutional powers in a manner repulsive and toxic to investment flow in Nigeria. Investors would definitely think twice before investing in a country where regulatory action can lead to losing control of a public company within a twinkle of an eye. There has to be better ways to regulate public companies. The manner in which the powers of SEC are being currently exercised would definitely scare any serious investor. It is hoped that the Supreme Court would have the opportunity to make final pronouncements on the extent of the powers of SEC to regulate public companies and re- affirm its disdain for draconian ex-parte orders and breach of the constitutional right to fair hearing.
Elvis E. Asia, LL.M, MCIArb, Grad.Icsan, ACTI is a Legal and Tax Practitioner, Chartered Secretary, Member of the Chartered Institute of Arbitrators (UK) and Writer
 (2019) LPELR-46520(CA)
 See page 25 of the judgment
 Second Edition
 Pages 28- 30
 Section 313 (1) (h)
 (1995) 3 NWLR (pt. 384) 434
 (2014) N.W.L.R. (PART 1424) 334
 (2015) 10 NWLR (Pt. 1467) 225, 253 paras. C- G.
 (2008) All FWLR (Pt.417) 51, 80 paras C-D