Three questions to ask (and answer) about SEC’s latest charge on investment platforms

With a new directive curtailing Capital Market Operators, has Nigeria’s SEC overreached, or are we overreacting?

Thursday’s press release from Nigeria’s Securities and Exchange Commission (SEC) riled up the local Twittersphere, prompting criticisms of heavy-handedness by the regulator.

On the face of it, the decision to limit registered Capital Market Operators’ (CMOs) engagement with online investment and trading platforms offering foreign securities may seem questionable. But objectively speaking, isn’t the situation more nuanced than it appears, and worth a deep dive?

The Balancing Act of a Regulator

Virtually every SEC seeks to balance a mandate to create an enabling business environment with a responsibility to protect stakeholders — and that negotiation isn’t always seamless. In this case, the Nigerian SEC may have opted to be more protective than progressive, but it’s technically within their remit to circumscribe the activities of the CMOs it regulates.

However, three broad questions come to mind.

Why?

Why — given the current socio-political and economic climate — would SEC have issued such a directive?

It’s probably related to another big ‘why’ — why so many Nigerians now look to invest in foreign jurisdictions. That answer is more straightforward. Like most other investment decisions, it’s about wealth creation.

In the last 2 years, Nigerians have seen a sharp increase in wealth erosion. As the charts below show, returns on investment instruments such as treasury bills have reduced considerably while inflation has jumped. In addition, the Naira has lost significant value. Unsurprisingly, there’s a renewed search for returns.

What?

That being said, what implications of this trend could be causing concern within SEC? In addition to protecting investors, might they be concerned about capital flight from Nigeria? Possibly — along with the potential impact on:

§ The Nigerian Stock Exchange — its liquidity and growth.

§ Indigenous businesses seeking to raise capital locally in an environment that already suffers from capital shortages.

§ An already strained Naira.

How?

Perhaps the most important question is how we all move forward successfully. Problems will always be the seed for opportunities, and as the world changes rapidly, it’s critical not to lose sight of openings for broad advancement.

And it’s here the SEC has to be especially mindful. As complex as the regulatory environment has become, they need to take into full recognition that we’re now very much part of a digital global village. SEC can regulate investments in Nigeria but not the investment of Nigerians. In other words, its purview is limited to activities within Nigeria, but in this super-charged digital world — for good or for bad — Nigerians can and will find ways to achieve their growing desire to earn attractive, legitimate return on their capital, be it individual or corporate investors. And they should be allowed to.

In the mid to long-term, the best-case scenario is that the investment community continues to work with regulators to develop practical win–win solutions. Collaboration over condemnation. An alternative approach may result in undesired and unintended consequences. This time, it was SEC generating far more publicity for the likes of Chaka, Trove and Bamboo than any savvy marketing executive could have achieved in 24 hours. Next time, who knows?