written by: Halima Musa-Bakwunye(Mrs), LL.B, BL, ACI Arb
THE SOLICITOR AS A CAPITAL MARKET OPERATOR A MYTH OR A REALITY?
Introduction.
A solicitor is a legal expert. He must have undergone a five (5) years law programme in any of the recognized Nigeria universities or obtained his/her first degree in law in any of the common wealth countries, after which he proceeds to the Nigerian Law School and he is called to the Nigerian bar as a Barrister and Solicitor of the Supreme court of Nigeria (the apex court of the Nigerian judiciary). The call to bar ceremony gives him the licence to practice as a solicitor and a lawyer in Nigeria.
The role of a solicitor in Nigeria and in the world as whole is numerous. A solicitor is needed in almost every transaction. A solicitor is needed to register a company in Nigeria and must be accreditated with the Corporate Affairs Commission(CAC) to carry out that function. A solicitor is needed in every commercial transaction, in advising his client on terms and conditions before signing any contract. A solicitor is needed for conveyancing , other land matters, preparation of documents for probate or letter of administration. A solicitor can also represent a client in any litigation brief, commercial arbitration, tribunals etc. It is based on this that one can say that a solicitor is indispensable.
For the purpose of this seminar i shall be looking at the role of the solicitor as a capital market operator. References shall be made to, the case of Prof Kasunmu V. SEC & AG of Federation, Suit No FHC/L/CS/70/2002, Section 38, of the Investment and Securities Act 2007, and Rules 28 and 39 respectively of the Securities and Exchange Commission(SEC) Rules and Regulation. To enable you have a broad understanding of this seminar topic i shall be addressing the following issues and questions.
1. what is the capital market?
2. Who are the operators of the capital market?
3. The solicitor as an operator of the capital market.
4. What are the roles of the solicitor in the capital market?
5. The challenges faced by the solicitor as a capital market operator.
6. The Capital Market Solicitors Association. (CMSA)
7. Is the role of a solicitor as a capital market operator a myth or a reality?/ Recommendation, Conclusion.
What is the capital market?
The capital market is the segment of the financial market which facilitates the mobilization and allocation of medium and long term funds through the issuance and trading of financial instruments. Such instruments, otherwise known as securities, include equities and bonds. While equities represent ownership stake in a company which issued them, bonds are debt instruments with the principal interest usually payable to the bond holder at specific periods. The capital market is made up of two inter – related segments;
1. The primary market
2. The secondary market
1. The primary market is made up of the mechanism for raising funds through the issuance of new securities.
2. The secondary market on the other hand provides facilities for trading in (transferring) already issued securities thereby creating liquidity in the market. Its at this level that investors are able to easily turn their investment into cash whenever they so desire.
The capital market is crucial to any nation’s economic development. It facilitates economic growth by among other things mobilizing savings from numerous economic units such as governments, individuals and institutional investors for users such as government and private sector.
The capital market operators
The capital market operators are the intermediaries who facilitate the mechanism of mobilizing funds for long term investment. They transact various businesses in the stock market. They however cannot operate in the market except they are duly registered with the securities and exchange commission. Therefore it is mandatory that the capital market operators are registered with the Securities and Exchange Commission. This is the first step to becoming an operator.
The Investment and Securities Act 2007 clearly provides for the registration and regulation of capital market operators. This is contained in Section 38(1-6) of Investment and Securities Act(ISA) 2007,
Section38(2) ISA 2007, states as follows:
“The commission shall prescribe the conditions for registration including the level of knowledge and skill required to operate in the capital market.”
However the Act does not make provisions for the category of persons to be described as Capital Market Operators. But in Rule 28(1) Securities Exchange Commission Rules and Regulations 2006. it Provides that the following market operators are subject to registration by the commission:
1. Issuing houses/merchant bankers;
2. Underwriters;
3. Brokers/dealers;
4. Sub/brokers;
5. Jobbers;
6. Share transfer agents;
7. Banker to issue/receiving bankers;
8. Registrars;
9. Trustees;
10. Investment advisers(corporate and individuals;
11. Funds/portfolio managers;
12. Rating agents;
13. Capital market consultants;
Rule 39 of the Securities and Exchange Commission Rules and Regulations 2006 further addresses the issue of capital market consultants, by providing a list of professionals that the law recognises as capital market operators. Legal practitioners are classified as Capital market consultants which also makes them capital market operators. Rule39 SEC rules and regulation provides:
“the following professionals whose opinion impact directly on capital market transactions are subject to registration by the commission-
1. Legal practitioners;
2. Accountants;
3. Auditors;
4. Engineers;
5. Estate valuers;
6. any other professional that may be determined by the commission from time to time.
It is only in Rule 39 of SEC Rules and Regulations 2006, that the word Legal professional is mentioned. It is based on this that some have observed that there is a lacuna in the Act and the Rules. This lacuna is born from the simple fact that there is no where in the Act where the names of the capital market operators are mentioned. Section 38 of the SEC Act 2007, only stipulates that any body who is to be a capital market operator must be duly registered in accordance with the Act and Rules and regulations there under.
This can however be described as an aberration as the Investment and Securities Act 2007, repealed the Investment and Securities Act 1999 and as such making the SEC Rules and Regulations of 2006 to be inconsistent with the provisions of the Act. More over, even though the names of the capital market operators are mentioned in the SEC Rules and Regulations and not in the Act, the rules and regulations so made are only subsidiary, legislations and so must be consistent with the provisions of the principal Act.
Another controversial issue is on whether legal practitioners must be registered before they can act or even be recognised as capital market operators. In the case of Prof A.B Kasunmu V. Securities & Exchange Commission& AG of Federation, suit no FHC/L/CS/70/2002. the court held as follows;
‘that the first defendant has no right or power under the provisions of Securities and Exchange Commission Act 1999 to direct or insist that the plaintiff or any legal practitioner be accredited or registered with the securities and Exchange Commissioner before participating as a solicitor to the public issue’
On the issue of whether or not Regulation 39 of the rules and regulations made by the 1st defendant pursuant to the decree is valid. It must be noted that the operative law during the trial of this case was the Securities and Exchange Commission Act and Decree 1999.
The court stated that though powers have been conferred on the commission to make Regulations, the Regulations so made are only subsidiary, legislations and so must be consistent with the provisions of the principal Act. They cannot therefore expand or limit the scope of the Act. The court held that Rule 39 of the Rules and Regulations made pursuant to Investment and Securities Act 1999 is invalid.
The solicitor as an operator of the capital market.
A solicitor advises a client in public offer either as a solicitor to the company or solicitor to the offer respectively. This is because the public relies on representations contained in the offer documents in making purchase decisions. It is the duty of the solicitor to ensure that there is no deliberate concealment of material facts or misstatement contained in the offer documents and if there is any such concealment the solicitor may be liable.
SOLICITOR TO THE COMPANY (ISSUER.)
The role of the solicitor as an operator in the capital market with regards the issuer are as follows;
1. The solicitor ensures that the issuer is in good legal and regulatory stand with regards to the issue
2. The solicitor ensures that the company’s memorandum and Articles of Association, certificate of incorporation all reflects its status as a public company.
3. The solicitor drafts the underwriting and other agreements.
4. The solicitor ensures that contracts (if any) in which any director has an interest are disclosed, e.g. contracts of service of long durations as well as contracts involving substantial properties belonging to the company.
5. The solicitor must ensure that a Power of Attorney and/or consent documents are duly executed by the Chairman and all other directors.
6. He must, in conjunction with the Company Secretary, verify all historical and present facts about the company, with the aim of, ensuring that decisions and Minutes of the Board and General Meeting for the various corporate decisions and approvals are in place.
7. The solicitor ensures that the issuer company as well as its Principal Officers are in good legal standing. E.g., that the Chairman as well as other directors are of sound mind, and that they are not minors or persons above 70 years of age.
8. The solicitor must disclose any ongoing or threatened litigation or claim, the outcome of which could adversely affect the fortunes of the company.
9. The solicitor must ensure that the prospectus to be issued conforms with the legal requirements and is packaged in the prescribed manner as provided under (CAMA).
10. The solicitor must carry out and participate in due diligence.
11. The solicitor must confirm to the Issuing House that the Issuer has been properly advised by him and that the directors have collectively and individually accepted full responsibility for the accuracy of the information given in the prospectus and the Application Forms. He must avoid contravention or breaches of the practice and procedures of SEC, CAC and NSE especially their listing requirements.
The role of the solicitor to the offer.
1 The solicitor acts as an independent professional observer acting on behalf of the general investing public and the issuing house.
2 The solicitor requests from the company all substantial contracts and critically examines and determines material contracts for disclosure.
3 He verifies the accuracy and authenticity of the Company and Offer documentation and ascertains that these condition precedents have indeed been satisfied.
4 The solicitor ensures that the entire issue exercise conforms with all the securities legislations and regulations in Nigeria especially the listing requirements of the NSE, ISA 2007 and SEC (Rules and Regulations).
5 He works in conjunction with the solicitor to the issuer by examining all documents, contracts and correspondences made available to him and advising the Issuing House accordingly on the same.
6 The solicitor Reviews pending claims and litigations of the Issuer and renders an opinion on their likely effect on the Issue.
7 Whilst acting for the Issuing House and the public, his function includes a verification of the legal status of the company whose securities are about to be offered to the public.
8 Renders advice to the Issuing House on all aspects of the Issue and attend All Parties Meetings.
The role of the solicitor to the trustees.
The primary role of the solicitor to the trustees is to render legal advice to the trustees, and advising them in selecting viable investments, avoiding investments which are attended with hazard and also ensuring that the trustees by virtue of sec 2(1) (c) of the Trustee Investment Act(TIA) 1990, invest in the following corporations. 1. PHCN (Power holding company of Nigeria.)
2. Nigerian Coal Corporation. NCC
3. Nigerian Railway Corporation NRC
4. Nigeria Ports Authority (NPA)
The solicitor also ensures that the trustees comply with the laws, regulations and guidelines of Trustee investment Act and ISA 2007, the solicitor drafts the Trust Deed, and renders advice to the trustees on all aspects of the trust deed. Finally the solicitor reviews pending claims and litigations of the schedules corporations/companies and render an opinion o their likely effect on the investments.
The role of the solicitors to the state/federal government in bond issues.
The solicitor plays a significant role to the State/Federal government in bond issues. some of his roles includes;
1. The solicitor examines the issuer’s memorandum and article of association and certifies the adequacy and compliance with ISA 2007.
2. The solicitor ensures that a trust deed is prepared.
3. He must conduct all necessary legal and institutional searches and ensures that the company and the issue confirm with mandatory periods or time frames prescribed by any statues or regulations to avoid penalties for failures or rejection of documents.
4. Lastly the solicitor also ensures compliance of the State/Federal government with the laws, regulations and guidelines of statutory authorities of the capital market.
INVESTMENT AND SECURITIES TRIBUNAL
The Investment and Securities Tribunal is a specialized court. Its main responsibility is to hear matters relating to investment and securities issues. The Investment and Tribunal Act of 2006 empowers the tribunal to act as an adjudicatory panel in investment and securities matters, while the investment and securities tribunal procedure rules 2003, applies to all proceedings before the tribunal in respect of actions instituted against, or appeals from any decision of the commission pursuant to section 236(1) of the Act. It is important to note that both the plaintiff and defendants at the tribunal are represented by solicitors.
Formation of capital market solicitors association.(CMSA)
The securities and exchange commission has introduced various measurers to ensure best investment practices. To achieve this the commission has put in place a code of conduct for market operators basically to prevent conflict of interest in their operations. It also encouraged the formation of trade groups such as Capital Market Solicitors Association also known as (CMSA). The objectives of CMSA are as follows:
1. It has created a plat form for solicitors to effectively participate in policy and regulation process within the capital market.
2. CMSA through its code of conduct sets standards of behaviour for solicitors engaged in capital market operations, this is done in order to preserve the integrity of the profession and protect the interest of both the client and the solicitor.
CSMA has also through its code of conduct impose the obligation on all its members to report cases of fraud and suspected fraud. For a capital market operator to discharge this burden, he must show that he has taken all reasonable steps to detect and possibly prevent fraud. Challenges of the solicitor as a capital market operator.
The solicitor is under utilised in the process as other professionals have hijacked the due diligence role of his job. Also other operators like the issuing houses are instructed in relation to public offers of securities well in advance of the solicitors and other capital market operators and it is they, together with the issuer that prepare and agree on the structure, manner and timing of the offer.
CONCLUSION.
The final issue to be addressed in this seminar is whether the role of the solicitor as a capital market operator is a myth or a reality. There are different angles towards addressing this issue. Since the role of solicitors was not expressly mentioned in the Investments and Securities Act 2007, there are some who believe that the role of the solicitor as a capital market operator is a myth. Though it is mentioned in the Sec Rules and Regulations, 2006, it is inconsistent with the principal provisions of the Act, since the Rules are merely subsidiary.
In my opinion, i the role of the solicitor as a capital market operator is a reality. This is because the solicitor plays a vital role as a capital market operator to the issuer/ to the issue, solicitor to the trustee and to the state/federal government in bonds issue. This to me is reality and not a myth and one that must be taken seriously by all other bodies and capital market operators involved in the capital market.
The role of the solicitor as stated in the introduction of this work is so vital in ensuring that the entire transaction is valid and that adequate due diligence is carried out on the company(issuer) and that other parties are properly advised.
RECOMMENDATION
The fact that the role of the solicitor is not expressly mentioned in the Act does not make their roles irrelevant. What it simply means is that the commission needs to consult with solicitors and others specialized in the Capital Market to review the Act. I also recommend that the Rules be reviewed on the issue of inconsistency with the Act. The registration process for solicitors who want to be capital Market Operators should also be reviewed. The registration fees should be reduced to the minimum amount.
Finally the question of whether the role of a solicitor as a capital market operator is a myth or a reality?, is rhetorical. The answer is obvious, it is a reality not a myth.
REFERENCES/ARTICLES
1. MUMUNEY QUDUS ADEOLA: ‘The role of lawyers in the Nigerian capital market’. Power point presentation’.
2. MUSA AL-FAKI: ‘Understanding the Nigerian capital market: Best investment practices and regulatory compliance’. (Article)
3. ‘New frontiers for corporate regulations in Nigeria.’(www. Hg.org/article.asp)
4. Anthony I. Idigbe (SAN): ‘The role of the solicitors to the issuer and to the issue in public offering of securities’. ‘power point presentation ’
5. Anthony I. Idigbe (SAN): ‘The capital market, the legal practitioner and the investor. A career as a capital market solicitor.” power point presentation’
BIBLIOGRAPHY.
7. Moses Olatunji Sofowora: Introduction to capital market studies for secondary schools(2006).
8. Investment and Securities Act 2007
9. Securities and Exchange Commission(SEC) Rules and Regulation.
10. Investments and Securities Tribunal Procedure Rules.
11. Companies and Allied Matters Act 1990.
12. Trustee Investment Act (TIA) 1990
