UNFAIR SANCTIONS ON PUBLIC-QUOTED COMPANIES BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
Our Ref: NECA/SELA/B.4
29th September, 2016
Mrs Kemi Adeosun
Honourable Minister of Finance
Federal Ministry of Finance (FMF)
Ahmadu Bello Way, Central Business District
Dear Honourable Minister,
UNFAIR SANCTIONS ON PUBLIC-QUOTED COMPANIES BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
Who we are:
The Nigeria Employers’ Consultative Association (NECA) is the Voice of Business in Nigeria. It was formed in 1957 to provide a forum for Government to consult with private sector employers on labour and socio-economic policy issues. NECA’s primary function is to enthrone the private sector as a dependable engine of growth and development.
- a) Quarterly Filing of Returns
Our members were served with demand notices in various very huge sums as penalties for alleged failure to file Quarter 4 interim unaudited results for a number of years with threats of enforcement. The default by member-companies was not deliberate but based on the regulations and practice in the capital market on this issue.
By virtue of Rule 19.6 of the attached Nigerian Stock Exchange (NSE) which was approved by SEC as the apex regulatory authority in the capital market in Nigeria, Q4 financial statements are not required to be filed with the regulatory authorities by companies. For emphasis, NSE Rule 19.6 states that “An Issuer shall announce the financial statements for each of the FIRST THREE QUARTERS of its financial year immediately after the figures are available, but in any event not more than 30 days after the relevant financial period”. Pages 1 and 12 of the NSE Rules are relevant to this issue. This is the reason why companies file their unaudited financial statements for the first three quarters and file audited financial statements within 90 days after the end of the year. It is our view that SEC should not in one regulation exclude the filing of Q4 financial statements and subsequently decide to penalize companies for not filing the same returns without any express communication to the stakeholders mandating them to file Q4 financial statements. This is because SEC cannot have two conflicting regulations in the capital market on the same issue, as it would create avoidable confusion.
It is not the requirement that at the end of each financial year every public company must file both unaudited financial statements and audited financial statements with regulatory authorities. As you are aware, interim results are unaudited and subject to audit adjustments for accuracy and reliability. Unaudited Q4 interim results when cumulated with the earlier submitted Q1, Q2 and Q3 interim results should reflect a company’s performance for a year. However, when the audited results ends up being different from the interim unaudited results for the full year (now requested by SEC to be filed by companies) as a result of audit adjustments, it would create a serious problem. Having two sets of financial statements of the same company for the same period, one unaudited and the other audited in circulation at the same time will have confusing and misleading effects on investors and the investing public. This would have serious adverse effect on the integrity of the company and the capital market.
In order to resolve this issue, NECA led its members to dialogue with the Leadership of SEC on 22nd June 2016 to explain our position. Please find attached the Position Paper of NECA submitted to SEC during the meeting on this issue. The position of NECA was well received with a promise by SEC to revert to NECA with its decision on the request for withdrawal of penalties imposed on our members, after conferring with your office( since SEC currently does not have a Board to consider our request). We followed up about a month after the meeting through the attached reminder letters dated 19th July 2016 (with summary of the key decisions at our meeting on 22 June, 2016) and 31st August, 2016 without a feedback from SEC. We were, however, surprised that SEC, rather than revert to us as promised on its position on the matter, went ahead to slam penalties on our member-companies on the same subject matter.
The Implications of Filing Q4 Unaudited Results with only SEC, are:
- SEC has always requested that price sensitive informationmust be disclosed to all stakeholders simultaneously in order to prevent market abuse. There is no doubt that Q4 unaudited results are price sensitive information. In view of the fact that Q4 unaudited results are not required to be filed with NSE, they cannot be published by PLCs. Consequently, such sensitive information coming ahead of the year-end audited results would only be available to SEC, and there is the need to avoid any possibility of misuse of the sensitive information.
- Compromise of the Integrity of “Quiet and Close Periods”:
To protect the integrity of the market, insiders of companies are not allowed to talk about or deal in the securities of their companies until after the release of price sensitive information simultaneously to the public. However, if companies are now compelled by SEC to file their Q4 unaudited results 30 days after year-end, then, that would be the end of “quiet and closed periods” for insiders as they would rely on the release of the information to SEC (although not available to the public) to talk about and deal in the securities of their companies for their personal benefits ahead of the release of the audited results to the public. The adverse implications of the above on the capital market are better imagined, and should be avoided.
- b) SEC’s “Gun- To – The – Head Approach To Regulation”
On account of the foregoing unresolved issue with the business community, SEC has unwittingly adopted a “gun – to -the -head” approach in the discharge of its mandate. It is compelling business to act under duress simply on account of its desperation to boost revenue. For instance, we have reports that SEC had blatantly refused to treat the applications of companies trying to expand their capital base through new investment except the companies pay up the penalty imposed on them for the said alleged breach of its regulation.
First, this is an economy that could make do with a good dose of fresh investment. The question then is: Why is SEC acting in a way to stifle the growth of the capital market; nay the economy of Nigeria? We must caution that this revenue-driven disposition of SEC, which has bred illogicality and highhandedness on the part of its officials, actually runs counter to the far more noble objective of promoting good corporate governance and is antithetical to the raison d’être of SEC. We are, therefore, compelled to bring the matter for your kind attention and intervention as the Supervising Minister before the matter degenerates. This is more so in view of the absence of a Board for the Commission.
We wish to reiterate that Public Quoted Companies should not be required to file Q4 interim results with SEC based on existing Rules of the Nigerian Stock Exchange (NSE) approved by SEC, and the definition of “Interim Financial Reporting” in the Statements of Accounting Standards (SAS) issued by the Nigerian Accounting Standards Board (the predecessor of Financial Reporting Council). The NSE Rules and SAS do not require public companies to file Q4 interim results. Practices across the globe in countries such as United Kingdom, United States of America, Switzerland, South Africa, India, Australia, etc, are to the effect that public companies are not required to file Q4 interim results with regulatory authorities. In addition, Nigerian Stock Exchange and the Financial Reporting Council of Nigeria do not require any public company to file Q4 financial statements with them.
Our prayers, therefore, are as follows:
- a) Withdrawal of penalties imposed on member-companies of NECA:
As agreed in principle subject to ministerial approval at the said 22 June 2016 meeting between NECA and top leadership of SEC, SEC should withdraw the penalties imposed on member-companies of NECA. These penalties are in hundreds of millions of naira, and it would serve as a setback to companies trying to raise funds from the capital market in this recessionary environment. We note that the penalties levied by SEC for not filing Q4 unaudited accounts continue to run even after the date the companies had filed their audited accounts. As no existing or potential investors would prefer Q4 unaudited accounts to the audited accounts already lodged with SEC, this approach would appear an over-kill. Currently, companies are operating under difficult circumstances and consequently, being compelled to implement a number of very tough and unpalatable survival measures such as downsizing, redundancy, etc.
Enforcement of the payment of the humongous penalties imposed on quoted Companies may trigger the delisting of several companies from the Stock Exchange and their conversion from public to private companies, which the economy does not require at this time of economic recession, as it will send a bad signal to potential foreign investors. We hereby bring to your notice that while the processing of applications to raise funds from the capital market by companies are currently suspended by SEC due to its insistence that affected companies must first pay the penalties for failure to file Q4 financial statements, some of our members are scared of approaching the capital market due to these controversial penalties and conflicting regulations. This is not good for the development of the capital market at this challenging period.
- b) Amendment of Rules:
As agreed at the said 22 June 2016 meeting between the top leadership of SEC and NECA, SEC should amend its rules to clearly provide that a public company that can file audited results within 60 days after the financial year need not file its Q4 interim unaudited results. However, if a public company feels that it would not be able to file its audited results within 60 days after the year end, then, it must file its Q4 unaudited results.
- c) Outstanding Applications for Funds
There is the need for SEC to treat without delay the applications of companies trying to expand their capital base through new investment without the conditionality to pay up the disputed and unfair penalty imposed on them.
In the light of the foregoing, we appeal to you Honourable Minister and the Economic Management Team (EMT) of the Federation to request SEC to support companies to survive this period of recession by making the capital market attractive to them. We are available to provide further insight into the contents of this letter.
Please accept the assurances of our best regards.
O. A. Oshinowo
cc: His Excellency, Vice President of the Federal Republic of Nigeria
Members of the Economic Management Team (EMT) of the Federation
The Director General, Securities and Exchange Commission
Vice Presidents, NECA
Hon. Treasurer, NECA