September 13, 2010

Mr. Emmanuel Ikhazoboh, the Interim Administrator of the Nigerian Stock Exchange (NSE) scored a major point towards the restoration of investors confidence in the bourse last week when he informed a group of shareholders that paid him a courtesy visit that the operations of Trade Alert is being reviewed to make it more effective and efficient as a monitoring device.

In the press released issued on Friday by the exchange, Ikhazoboh had assured the shareholders that “all forms of breach of market rules and regulations shall continue to attract stiff sanctions.

This is a step in the right direction taken by the Ikhazoboh-led Stock Exchange following the action taken on non-compliance with reporting requirements, since he assumed office a little over a month ago, especially in the strengthening of the self-regulatory status of the NSE.

We recall that the transactions security monitoring devise – known as the Trade Alert, was launched in 2005 by the Central Securities Clearing System (CSCS), and powered by Adonai Net Nigeria Limited to act as an investor protection service that compels the CSCS to alert investors on any and all transactions related to his stake in the market “ serving as a security firewall of investor protection.

The Trade Alert has been a major initiative of the capital market supervision practice whose success has been by banks in Nigeria, providing transactions alert for depositors through their mobile phone numbers.

Through the operations of the CSCS Trade Alert, the Securities & Exchange Commission (SEC), the financial services apex regulator has been able to enforce its core mandate of investor protection.

The monitoring device has empowered both the market regulator, the SEC and the SRO, the Nigerian Stock Exchange to solve many cases of unauthorized transactions on the accounts of unsuspecting investors by some market operators.

There have however been some unsavoury incidents that occurred in the broker-investor relationship that has connived to create challenges in the discharge of this obligation. One major issue, not directly attributable to the platform but remains fundamental is that of the use of brokers mobile phone numbers instead of that of customers.

Unlike the banks who allow customers to fill account mandates themselves, stock brokers have been known to complete the trade alert documents themselves and some have been reported to having done this “ using their own mobile numbers “ on the pretext of working on discretionary mandate. This subverts the true purpose of the firewall initiative, and cannot be allowed to continue.

The Ikhazoboh’s administration will therefore be right in taking steps to isolate this aspect of the project objective; and can do this by focussing solely on the brokers “ the key link in the value chain.

In furtherance of this change imperative, a few suggestions are hereby highlighted –

The e NSE/SEC should introduce a Data Protection and Customer Privacy rule that would compel all brokers to ensure that they educate their customers on the need to fill this information. This can be achieved by allowing for a mobile phone confirmation of the account “ done by asking the customer to confirm information that could only be known to him via a mobile phone reply application. If this is provided by the broker and an infraction is reported later, the broker will be liable to a loss of licence for identity theft.

As practiced in the banking sector, investors should fill-out the Trade Alert forms with their own personal details that include names, addresses, emails, telephone numbers, etc. These details are “personal security information or PSI of each investor and should be lodged directly with the CSCS for trade alert purposes. This also serves as an additional layer of evidence to indict any erring broker who falsely represents himself as the client/investor.

The CSCS in conjunction with the trade alert platform operator, Adonai Net should periodically but regularly request investors to update their personal details in the trade alert database;

A half yearly technology compliance and performance assessment of the operational effectiveness and efficiency of the trade alert system should be conducted by the CSCS and the NSE and necessary upgrades, overhaul or changes, as may be necessary, should be formally documents to ensure that the firewall purpose stays ahead of changes and possible efforts to circumvent the service.

For the SEC, it is suggested that the database platform of the Trade Alert be deployed in the allotment of primary share offerings as well as in the payment of cash and bonus dividends by quoted companies. It is suggested that once the SEC approves the allotment register of any public offer or Rights Issue, the issuing house should immediately use the trade alert system to  successful applicants in the offer.

The same system could also be deployed by registrars to  shareholders of the amount credited to them as cash or bonus dividends. This arrangement could be worked out with the commercial banks to ease the current hardships some retail investors face in sorting out their dividend payments.

Indeed we are of the opinion that this would flush out any broker manipulating the system.

As the Stock Exchange moves toward a crucial milestone in its 50-year history “ demutualization, it is commendable that both the SEC and the NSE are on the “same page in ensuring investors protection and market integrity.

The NSE has received commendations since last weeks announcement of various sanctions on all quoted companies that have failed to discharge their post-listing reporting requirements. It is believed that the latest move to strengthen, not discard the operations of the Trade Alert system; will boost investors confidence in the abilities of the market regulator at this critical time in the Nigerian capital market history.

Source: Proshare