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The Imperative for Adherence to Best Practice Market Structures in Proposed CISIM Bill – CIIA

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Being a letter from The Association of Corporate and Individual Investment Advisers (CIIA) to Mr. Tunde Amolegbe, FCS, the President of the esteemed Chartered Institute of Stockbrokers of Nigeria (CIS), dated Monday 21st of September 2020 as their contribution to the planned Chartered Institute of Securities and Investment Management (CISIM) Bill.

RE: The Proposed Bill on the Chartered Institute of Securities & Investment (CISI)

Preliminaries

We start by congratulating you on your recent election and inauguration as President of the Chartered Institute of Stockbrokers (CIS). We have no doubt that your professionalism and extensive experience will stand you in good stead and wish you every success in this new role.

About CIIA

The Association of Corporate and Individual Investment Advisers is a body duly incorporated under law and registered by the Securities and Exchange Commission (SEC) as the Trade Group for all Investment Advisers (Corporate and Individual) registered by the SEC . The Association was birthed for reasons including advice by the Securities and Exchange Commission to separate our mandate for the Investment Advisory Industry from the Portfolio Management functions still covered by IAPM.

Objective

We have kept abreast of reports about the recent signing of an MOU between the CIS and certain key market trade groups including our affiliate body, IAPM with a view to revising the CISI Bill to achieve a broader and more encompassing mandate by bringing the named operator trade groups under the umbrella of an expanded institute of securities and investments for both credentialing and self-regulating purposes.

We appreciate the motivations behind this initiative and note the right of association of the collaborating entities/groups.

However, having read the drafts in circulation of the proposed CISI Bill, we wish to highlight certain aspects of the Bill that clearly need to be amended and have no doubt that you will agree with this position in the interest of a healthy and proper market structure in line with Global Best Practice.

Our engagement with you via this letter (and meeting, as follow -up) is in pursuit of our mandate as the Trade Group for all Investment Advisers (Corporate and Individual) registered by the SEC.

Accordingly, our comments here are in relation to Section 2.1 (a) of the amended draft Bill as well as every other section addressing Investment Advisory in the version of the proposed Bill seen by us (copy attached hereto for confirmation). We will be pleased to receive the authorized draft from your good self if different from this one.

Intentions of Bill Sponsors

We acknowledge with the CIS the importance of discipline and sound professional conduct as essential factors for the overall objective of market development; accordingly, we consider the CISI bill a good gesture.

The Constraints of Principle and Best Practice

In pursuing these acknowledged good intentions, the Sponsors are invited to consider fundamental principles and best practices in building the much-required consensus ab initio. We recommend that an exposure draft of the proposed Bill should be shared officially for public comments especially within the capital market and particularly to ALL stakeholders in line with best practice around the world.

The CIIA received no such communication which it should have in view of its status. Our conviction is that a program of this nature no matter how good-intentioned, should be through consensus building and we believe this can still be achieved. We believe our take on the subject as presented herein will not only convince you as known advocates of the greater good to follow universal tenets, but also set the appropriate framework by which our capital market can begin a rather long outstanding and crucial refocusing process to aid the growth of our investor base, especially across all eligible demographic groups.

The Sell-Side / Buy-Side Conflict

Global best practice has been to recognise the inherent conflicts between the Sell-side (represented by Brokers, Issuing Houses and the Corporate Finance Industry) and the Buy-side represented by Investment Advisers which derives its credibility from its Independence from the Sell-side and its fiduciary responsibilities to act exclusively in the best interest of the Client (Buyer).

Invariably, such role also includes independent evaluation of and reporting on activities of Sell-side Advisers such as Brokers and Issuing Houses. Like other Buy-side Fiduciaries like Investment Managers, Trustees and Custodians, Investment Advice is typically separated from the Sell-side in the interest of investor confidence, market transparency and professionalism. Specifically, and for the following reasons, viz:

a. The sellers’ market leadership in the proposed bill which may be unconscious, could be inimical to the much-desired growth we have ALL been working assiduously towards and;

b. The global best practice is to separate the buy and sell sides of the market. Standard rules and procedures abound preventing this.

Our position at CIIA is therefore holistically borne out of what has remained the timeless principles of:

  1. The Standard of Care owed to investors by their professional advisers. This is the Fiduciary Standard which requires that nothing else comes before the interest of the investor in every situation concerning the relationship between her and the adviser, and;
  2. The explicit universal Structure of Markets separating the roles and responsibilities between the buy and sell sides and consistently remaining clear for the avoidance/prevention of moral conflicts widely known to impugn market integrity.

These two, when consistently applied in their usual inseparable combination have also always been the universal tool for mitigating or preventing the problems of adverse selection and/or agency conflicts representing the moral hazards at the core of market failures. In the simple scenario where the attempt to self-regulate the functions of both the buy and sell sides under one Umbrella body and without appropriate guidance, may inadvertently impugn the credibility of the structure of our Capital Market.

Going by sufficient historical and contemporary perspectives, the businesses of stockbroking and investment advisory belong to the two separate sides of the financial markets and globally, every effort is always made to ensure that the commingling of their activities and regulation is prohibited/avoided. We accordingly advise against the CISI Bill’s intended or unintended objectives which go against the holy grail of global market structures due to its potential to further weaken the supply side that holds the fuelling power to market development.

In the appropriate setting, Investment Advisers and other Buy-Side professionals should be allowed to self-regulate and we would really have no objection to a super SRO for the sell side similar to the US FINRA, but investment buyers would typically be under the direct protection of public/statutory authorities like our SEC which through the supervision and control of their accredited representatives, already plays that role effectively just like the US SEC does in like manner.

We view the purport of the bill in its sweeping and severally inchoate provisions as another market regulatory device encroaching the statutory authorities of our SEC. Advisers are agents of buyers and Brokers are agents of sellers. The former is Paid on fee only basis To Provide Advice whilst the latter is Paid on commission basis To Sell Products. The buying activities of brokers for the sake of clarity, does not extend beyond the beneficial ownership of products by their clients and their own dealership authority as allowed under regulation. It does not grant an automatic mandate to buy for the purposes of discretionary management on behalf of clients without due process incorporating the Fiduciary Standard of Care. This is a typical challenge we have observed most investors take for granted and now require urgent correction. Investors therefore cannot be fully protected in an arrangement that intends to subsume the functionalities of the former into those of the latter and we must be very careful lest we become a pariah in the comity of global markets.

The Unforced Crisis of Nomenclature

Another notable but this time global market challenge from a long-standing observation, is the general public’s innocent misrepresentation of brokers as advisers. There is global widespread investor confusion about titles used by investment professionals. A 2011 US SEC study had found that such titles as “financial planner,” “financial consultant,” and “financial advisor” con­fuse investors, and no other study as at then had suggested any alternative, clarifying titles for brokers and investment advisers to improve public understanding of the standard of care required of the different profes­sionals. This as you may already be aware is one of the cardinal objectives of CIIA to correct in the clear explanatories to our Code of Ethics and Standard of Professional Practice publicly available on the CIIA website.

READ: The CIIA Code of Ethics and Standards of Professional Practice for Registered Investment Advisers in Nigeria – Mar 12, 2019

Avoiding the Slippage of a brilliant Opportunity for Market Recovery

We believe all hands must be on deck, and by our own close assessment of the potentials currently existing in our market, Nigeria generally is at a crossroads of strategies now urgently required to drive investor interest and the required volume of capital formation sufficient for sustainable economic growth. We have no doubt that a major assignment here rests with the adviser community with plans already to marshal a new generation of our own as the authorities’ foot soldiers for mobilising the interest of retail investors back into the market. The efforts to successfully harness the proficiency of minds for the types of product creation the market requires now cannot possibly be fruitful with what is being contemplated in the bill.

This proposed legislation (that further and inadvertently by objectives) would stifle this new framework we think, bodes no good to the entire investment industry which should actually be seen now as encouraging all types of genuine investors especially at the lower age bracket widely acknowledged to be tech-savvy. With the rise of technology (fintech especially) and its power now democratising processes across businesses, especially in choice-making, we consider this law will further alienate this group if not handled carefully and most professionally. We should simply align with the age-old fundamental principles and best practice of operations and let the opportunities genuinely accompanying such find prominence with the market.

Finally, we like to add that from the known inefficiencies of anti-competition (monopolies), some of the provisions of the proposed bill, for example Sections 3.1 (a-f), 3b (i-iii), 3d (i-ii), 4(a-d) & 5a, for the admission of members with no direct connection to the objective of appropriate credentialing creates room for growing an unwieldy system naturally accustomed to weakening the quality of standards in the marketplace. The advisory discipline is certainly not modelled to thrive under this monolithic structure.

Our Admonition/Prayer

The summary of our position is therefore that in the final coinage of the provisions of the proposed bill, the facts presented in this letter should be taken into cognizance for the total exclusion of the Advisory Practice from the confines of the Chartered Institute of Stockbrokers’ legitimate ambition to expand its control to cover all the sell side activities in the Nigerian Capital Market. This is the valid and appropriate approach to self-regulation, and it would certainly be at our pleasure to provide you/your team with more facts and/or assistance in understanding the issues relating to this order of things, should the need arise.

We trust you would find our submissions instructive enough as we implore the CIS to professionally reconsider the proposal and do the needful in excluding CIIA members and Investment Advisers in general from this bill in its entirety.

Thanking you most sincerely for your understanding and steadfast cooperation.

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