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djuliuson@usa.com UK

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NSE'S TRADE ALERT SYSTEM (TAS):
HOW NOT TO PROTECT INVESTORS

've read and followed with great interest the various articles and reports on the NSE's TAS and I must confess that in my 7 year experience of compliance and financial regulation in the UK investment management industry, I have not come across or heard of a similar investor protection system either in the UK, the USA or in any other major market. This must definitely be a first for Nigeria!

As the UK Compliance Manager of Ireland's biggest asset management company, Bank of Ireland Asset Management (the UK subsidiary), I'd like to believe that I can comment with some knowledge on this issue. The fact that I am also not based in Nigeria but in the UK which is the second largest market in the world and at the forefront of financial services regulation, would hopefully establish my objectiveness and impartiality.

So what is wrong with the TAS, not a lot I say, aside from the fact that that firstly it places the duty and burden of investor protection on investors rather than on stockbrokers and the regulatory authorities.

Secondly the cost means that it is more of a tax on investors especially retail investors. For the vast majority of retail investors, the annual subscription will exceed their annual dividend income, the exemption by NSE of retail investors with portfolio of N50,000 and below notwithstanding. Capital appreciation will soon see to that and bring in more investors within the scope of the system. It is also capable of constituting a barrier to ordinary Nigerians participating in the capital market.

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Thirdly, at best the TAS is a short term answer rather than a more permanent and flexible solution to the issue of investor protection. It would be preferable if the possibilities of developing a proper conduct of business rulebook, adequate and independent investor complaints process and procedures and reviewing the regulatory framework of the Nigerian financial services industry were explored in conjunction with the TAS.

Additionally, I'm not sure of how the TSA will handle situations of where an investor is away on holiday, if the phone is stolen or the network is down. What if the text system fails to work and shares are sold fraudulently? Who will compensate the investor, is it the service provider, NSE or the stockbroker? For institutions with various officers, who will be responsible for confirming transactions? Is it the CEO? What about if he or she is away? What about cases of collusions between the service provider and the company? What is the process for handling these situations or scenarios? How will the TAS handle market developments e.g. when investors begin to invest through unit trust funds (where they only hold units and not shares). Will TSA be able to cope with this. Who will the alert be sent to ? Is it the unit holder or the fund manager?

Rather than unilaterally imposing the TSA on market operators and investors I would urge the NSE, SEC, CIS, market operators and investors to try and work together to develop a longer term solution to the issue of investor protection and the regulatory framework of the Nigerian financial markets. Possible solutions could include the following:

a) SEC, NSE, CIS, Market Operators and interested parties could work together to develop a conduct of business rulebook that would lay down detailed rules on the various activities of market operators e.g. There could be a rule requiring stockbrokers to provide their clients with a monthly valuation statement. Investors could then cross check this with the records held by CSCS or subscribe to TSA to provide them with a monthly statement. TAS could be used as a subscription service for investors to verify their stockbroker's valuation statement.;

• Making it compulsory for each stockbroker or company engaged in financial services activities (this can be defined) to employ a compliance officer who will be responsible for monitoring compliance with the rules and regulation., This has worked very well for the UK/USA financial services industry. Additionally, it is already compulsory, under the Pension Reform Act of 2004, for all PFAs;

• NSE/or SEC should devote more resources to developing a risk based approach to regulation, and the numbers and expertise of their monitoring teams.

• Developing an investor complaints procedure that will mandate market operators to investigate complaints initially. Investors should then have a right of appeal , if dissatisfied to the SEC tribunal or an appropriate body.

The above is not exhaustive but a starting point and the key to its success is the NSE, SEC, CIS , market operators and investors representative working together and consulting extensively on these issues. The SEC and NSE should also undertake rigorous assessment of all their proposals including a cost benefit analysis and a regulatory impact assessment. This will avoid regulation becoming a barrier to market development.

Finally, no amount of rules and monitoring or systems can eradicate fraudulent or criminal acts in financial markets. Regulation and systems can only reduce the incidence of them happening. If this were not so, then we would not have had a Barings or BCCI in the UK and Enron in the USA.

Adeyemi Johnson is a UK based Compliance Manager with the Bank of Ireland Asset Management (UK) Ltd