Tag: SEC

09 Jul 2021
regulatory incubation
Publications GRF Dalley & Partners 0 comment

AN OVERVIEW OF THE SECURITIES AND EXCHANGE COMMISSION REGULATORY INCUBATION GUIDELINES

The Securities and Exchange Commission (SEC) recently released the SEC Regulatory Incubation Guidelines for Specific Category of Fintech Entrepreneurs. Through its Regulatory Incubation (RI) Program, the SEC seeks to provide an environment for Fintechs to operate under limited provisions for a specified period. Regulatory Incubation makes it possible for regulators to create new rules or amend existing ones to better accommodate new business models.

 

Pre-Qualification Requirement

The Guidelines provide for a set of requirements that applicants to the RI Program must meet in order to participate. A cursory look at the pre-qualification requirements reveals that importance is placed on the innovation, usefulness and safety of the fintech product or service sought to be provided. The requirements can be summarized as follows:

  1. Innovative technology shall be used to offer a new type of product or service, or add innovation to an existing product or service;
  2. The activity in question shall be a financial service within the scope of the activities regulated by the SEC;
  3. The Applicant shall be ready to start with live customers and operate within the purview of the SEC Regulatory Framework;
  4. The Applicant shall undertake to apply for registration as soon as the SEC provides Rules;
  5. The product or service in question shall be one that addresses a problem or brings potential benefits to consumers or industry;
  6. The product must be safe for investors;
  7. The Applicant shall complete the Fintech Assessment Form and discuss the proposal with the SEC.

 

What requirements must an Applicant fulfil in respect of Regulatory Incubation Operations?

The Guidelines specify certain requirements an Applicant to the RI Program must meet in respect of Regulatory Incubation Operations namely:

  1. Possession of relevant skills in financial services and/or technology
  2. Undertaking to act with integrity, due care and diligence and provide referee information
  3. Undertaking to provide clients with full information and regular feedback
  4. Undertaking to provide full disclosure to the SEC on the business through an incubation implementation plan
  5. Undertaking to provide procedure for holding and controlling client assets
  6. Undertaking to comply with relevant laws and regulations
  7. Operating a Nigeria office
  8. Undertaking to comply with AML/CFT requirements
  9. Provision of monthly reports to the SEC.

 

What should be included in an Implementation Plan?

As earlier stated, an Applicant to the RI Program is to provide an Implementation Plan to the SEC as part of the application requirements. The Guidelines specify what is to be included in an Implementation Plan. They are as follows:

  1. Full description of the business and the proposed innovative Fintech product, service or business model including type of technology;
  2. The objectives and parameters for the incubation period;
  3. Implementation timeline and key milestones for testing;
  4. Target or existing customers;
  5. Risk Management Framework;
  6. Description of how the Fintech Operator intends to ensure customers understand the risks;
  7. Methodology of handling communications with customers before and during the incubation period;
  8. Description of steps to be taken at the expiration of the incubation period; and
  9. An exit plan if registration is not achieved.

 

Are there any restrictions Fintech operators under Regulatory Incubation must adhere to?

The Guidelines place certain restrictions on Fintech operators under Regulatory Incubation. Such operators are not permitted to conduct any other investment business except as presented to the SEC. They are also prohibited from financial promotions such as any notice, circular, letter or other written or electronic communication, guaranteeing returns. Fintech operators under Regulatory Incubation are not permitted to provide misleading or untrue information.

 

What conditions are Fintech Operators under Regulatory Incubation supposed to adhere to?

Fintech Operators under Regulatory Incubation are expected to have the capacity to onboard a maximum of 100 clients, however, this number can be increased upon the appraisal and approval of the SEC. In the case of Fintech operators that are already in operation, the Guidelines specify that they are to maintain their existing clients but cease onboarding new clients. Fintech operators are to ensure that their clients are fully informed of the product or service before onboarding.

Fintech Operators are to be under regulatory incubation only for a maximum period of one (1) year. At the end of this period, eligible Fintech Operators are expected to apply for registration or discontinue activity.

 

Can a Fintech Operator be removed from Regulatory Incubation?

The SEC reserves the right to terminate a Fintech Operator’s participation in the Regulation Incubation process in the following circumstances:

  1. The Fintech Operator is no longer meets the eligibility criteria
  2. A breach of any of the restrictions or conditions has occurred
  3. A breach of the law or guidelines has occurred
  4. The Fintech Operator deviates from the implementation plan presented to the SEC
  5. The Fintech Operator failed to take steps to apply for registration or submit notice of discontinuance at the end of the regulatory incubation process.

Applicants can also withdraw from the Regulatory Incubation process at any time by notifying the SEC.

 

 

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07 Jul 2021
Digital sub-brokers
Publications GRF Dalley & Partners 0 comment

DIGITAL SUB-BROKERS: AN OVERVIEW OF THE AMENDMENTS TO RULE 67 OF THE SECURITIES AND EXCHANGE COMMISSION RULES AND REGULATIONS 2013

In April 2021, the Securities and Exchange Commission (SEC) issued a circular advising online investment and trading platforms facilitating access to foreign stocks to desist from such activities.[1] This was in view of the fact that by virtue of a combined reading of Rules 414 and 415 of SEC Rules and Regulations 2013 and Sections 67-70 of the Investment and Securities Act 2007, foreign securities could only be sold to the public in Nigeria through the Nigerian Capital Market.

The SEC introduced major amendments to the SEC Rules and Regulations 2013.  These major amendments include introducing provisions governing sub-broker(s) serving multiple brokers through a digital platform through the insertion of subsection (3) to Rule 67.

 

Amendments

Defining the term “sub-broker”

Prior to the amendments, the SEC Rules and Regulations 2013 solely provided for the registration requirements for corporate sub-brokers and individual sub-brokers without specifically defining the term sub-broker.  Rule 67(3) corrects this by defining a sub-broker as “any person or entity not being a dealing member of an Exchange who acts on behalf of a sponsoring Broker/Dealer as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such sponsoring Broker/Dealer.”

 

Recognition of digital sub-brokers

The definition section of Rule 67(3) accords formal recognition to digital sub-brokers operating in Nigeria such as Bamboo and Chaka. By virtue of the amendments, a sub-broker serving multiple brokers through a digital platform is defined as “a sub-broker who utilizes a digital platform to serve clients and interact with the sponsoring broker or brokers.”

 

Introduction of registration requirements for digital sub-brokers

Aside from the payment of registration fees, providing evidence of minimum capital requirements, filling and submitting requisite forms and corporate documents, digital sub-brokers registering under Rule 67(3) are required to meet additional requirements as stated in Rule 67(4). They can be classified in the following manner for ease of reference:

 

Requirements in relation to agreements and policies

  • Agreements with multiple brokers
  • Copy of “multiple principal agreement” with every sponsoring broker
  • Evidence of documented policies and procedures for managing technology risks
  • Confirmation that it would not delegate its functions to another sub-broker without the written permission of the Commission
  • Binding Legal Agreement with potential clients

 

Requirements as to technology infrastructure

  • Description of the technology on which its infrastructure is built
  • Certification that the infrastructure is sufficient to perform the required function. This certification is to be given by an IT Service Provider registered by the National Information Technology Development Agency (NITDA) or other recognized Agency, and endorsed by a representative of the Association of Securities Exchanges.

 

Requirements in relation to clients

  • Electronic Communication channel through which all communications with clients would be made
  • Method of establishing the suitability of potential clients to utilize its infrastructure for transactions
  • Notice to potential clients of the features, risks, responsibilities, obligations and liabilities associated with the use of its infrastructure
  • Before execution of an order, proof that the Client is fully aware of and understands the risks associated with the service being offered
  • Adequate Know Your Customer (KYC) requirements and processes

 

Conclusion

In June 2021, Chaka Technologies Limited became the first investment company to be issued a digital sub-broker licence under the aforementioned provisions. The amendment of Rule 67 is a welcome development in the sense that it addresses the issues faced by online investment and trading platforms when it comes to offering the public access to invest in foreign securities without contravening existing laws and regulations. It is hoped that through the existence of this licence, fears over regulatory uncertainty on the part of investors would be mitigated.

 

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Footnotes

[1] https://sec.gov.ng/proliferation-of-unregistered-online-investment-and-trading-platforms-facilitating-access-to-trading-in-securities-listed-in-foreign-markets/

15 Jun 2021
Social bonds
Publications GRF Dalley & Partners 0 comment

OVERVIEW OF THE PROPOSED NEW RULE ON SOCIAL BONDS IN NIGERIA

Social bonds, which are also known as social impact bonds, are a relatively recent concept. The first social bond was issued in 2010 by Social Finance Ltd. in the United Kingdom.[1] Recent examples of social bond issuance abound such as the €13 billion dual-tranche social bond issued by the European Union to mitigate the negative effects of the COVID-19 pandemic[2] and the $463.9 million Kangaroo bond launched by the African Development Bank.[3]

The Securities and Exchange Commission recently made available the Proposed New Rule on Social Bonds. The rationale cited for this was the rise of interest in ethical investment and the recognition of social bonds being as a means of providing funding for specific projects. The realization of the potential use of social bonds to fund social projects was brought to the fore in view of the diversion of government spending to other affected areas during the COVID-19 pandemic.

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[1] https://sibdatabase.socialfinance.org.uk/?project_id=7

[2] https://cib.bnpparibas/eu-issues-e13bn-sure-social-bond-to-further-mitigate-pandemic-impact/

[3] https://www.afdb.org/en/news-and-events/press-releases/african-development-bank-launches-aud600-million-usd4639-million-kangaroo-social-bond-44119

02 Jun 2021
Publications GRF Dalley & Partners 0 comment

Checklist of Requirements to Register as a Crowdfunding Intermediary in Nigeria

The Securities and Exchange Commission (SEC) requires all existing investment crowdfunding portals/digital commodities investment platforms to register with the Commission by the 30th of June 2021. Failure to comply would attract regulatory sanctions. Thus, such entities are expected to take note of the registration requirements and ensure that they comply with the eligibility criteria.

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