African Investor Relations

This note below, received from the SEC is an interesting insight into how investors should treat share trading after regulatory action. No such warnings are actively issued / disseminated by African markets so I thought I would reproduce it here.

Some of the regulatory structures mentioned below will not apply in African markets but you should get the gist. It’s content such as this that could form the basis of a retail shareholder manual to be made freely available to investors in African markets.

I like the end paragraph:- “If you cannot obtain current, reliable information about a company and its stock, this may not be a good investment for you.” I guess this would preclude a whole of investment into African listed shares if it were applied.

Here goes:-

“Investors should be very cautious when considering trading in stock after the SEC has suspended trading in the shares.  An SEC trading suspension is a “red flag,” often indicating the SEC has concerns about the information that the company has been providing to the public.  By law, an SEC suspension usually ends after ten business days, even if the company has not provided current, accurate information about itself.  However, when a company does not provide current, reliable information about itself and its finances, trading its shares can be very risky.

Why would the SEC suspend trading in a stock?

The SEC may suspend trading in a stock when the Commission is of the opinion that a suspension is required to protect investors and the public interest.  Circumstances that might lead the Commission to suspend trading include:

• A lack of current, accurate, or adequate information about the company, for example, when a company has not filed any periodic reports for an extended period;
• Questions about the accuracy of publicly available information, including in company press releases and reports, about the company’s current operational status and financial condition;
• Questions about trading in the stock, including trading by insiders, potential market manipulation, and the ability to clear and settle transactions in the stock.

How long do trading suspensions typically last?

The Securities Exchange Act of 1934 authorizes the SEC to suspend trading in a stock for up to ten business days.  A list of companies whose stock is currently suspended, or which have been subject to an SEC suspension, may be found here.

What happens after a trading suspension ends?

When an SEC trading suspension ends, a broker-dealer may not solicit investors to buy or sell the previously-suspended stock until certain requirements are met.  Before soliciting trades or resuming quotations in a stock that has been subject to a trading suspension, a broker-dealer must file a Form 211 with the Financial Industry Regulatory Authority (“FINRA”) representing that it has satisfied all applicable requirements, including those of Rule 15c2-11.

Among other things, Rule 15c2-11 requires broker-dealers to review and maintain certain documents and information about the company, including:

1. the corporation’s organization, operations, and control affiliates;
2. the nature of the securities outstanding and being traded; and
3. the issuer’s most recent balance sheet and its profit and loss and retained earnings statement.

No broker-dealer may solicit or recommend that an investor buy shares in a stock that has been subject to a trading suspension unless and until FINRA has approved a Form 211 relating to the stock.  If there are continuing regulatory concerns about the company, its disclosures, or other factors, such as a pending regulatory investigation, a Form 211 application may not be approved.

However, limited or “unsolicited” trading can occur in a stock that has been subject to a trading suspension after the suspension ends but before a Form 211 is approved.  This may allow investors to trade the stock when a broker or adviser has not solicited or recommended such a transaction.  Even though such trading is allowed, it can be very risky for investors without current and reliable information about the company.

Take Precautions Following an SEC Trading Suspension:  Check For Reliable Information.

Investor should be very cautious in considering an investment in a stock following a trading suspension.  At very least, investors should assure themselves that they have current and reliable information about a company before investing.

• Research the Company:  Always research a company before buying its stock, especially following a trading suspension.  Consider the company’s finances, organization, and business prospects.  This type of information often is included in filings that a company makes with the SEC.
• Review the Company’s SEC Filings: This information is free and can be found on the Commission’s EDGAR filing system. (good luck trying to find this sort of information in African markets!)
• Beware of Companies that do not File Reports with the SEC:  Some companies are not required to file reports with the SEC.  These are known as “non-reporting” companies.  Be aware of the risks of trading the stock of such companies, as there may not be current and accurate information that would allow you to make an informed investment decision.
• Be Skeptical:  Whenever someone gives you a “hot” tip, always ask why.  Make sure that you do your own research.  Keep in mind that information from online blogs, social networking sites, and even a company’s own website  may be inaccurate and sometimes intentionally misleading:

If you cannot obtain current, reliable information about a company and its stock, this may not be a good investment for you.”

Continue Reading

In Kenya new legislation deems that once something is published on the website of a listed company it is deemed to have been delivered to the shareholder. Beem-me-up-scotty-Star-trek-type-thing. To listed companies this avoids the hassle of dealing with the ignorant masses of retail shareholders. The SEC in Kenya and the Nairobi Stock Exchange have endorsed this.

To every listed company though, there are those shareholders that are important. The ones that will have something to say when they ask why their shareholder proxy materials were not delivered to their door. For example, the institutional shareholders that actively monitor the creation of shareholder value. Companies that adopt the deemed-Dr Spock communications method only will alienate professional investors. So these investors will need looking after. You will have a trend developing in Kenya where the mailing list will come back from the dead and start to grow and this will create an uneven playing field, or the perception of an un-even playing field in the communication platform. The more priveleged “more important” shareholders will receive their shareholder proxy material by courier or by hand delivery or by post. The ignorant peasant shareholder will not. The rich and influential will get richer and influential and the ignorant and poor will stay like that. This will be supported by the law.

Some institutions and funds are required to vote their shares and in the USA the existence of nominees or share held in “street name” has been seen to have disenfranchised shareholder suffrage. The Dodd Frank act in the USA and other initiatives are actively trying to put the vote back into the hands of the retail shareholder. In Kenya regulators are taking it away.

In the absence of progressive initiatives to provide shareholder choice the new mailing list will grow only after a shareholder has been aggrieved i.e. they don’t receive their proxy material and then they complain and then they do receive it. You will have a situation where shareholders will attend meetings under very different circumstances but in the eyes of the law they will have been treated the same. For the listed company, the man in the middle, issues of corporate reputation will arise and the African conspiracy theory attitudes may start shareholder activism. In shareholder votes, where contentious issues need shareholders’ votes, it will be very easy for someone to stand up and accuse a listed company of purposely or negligently not distributing shareholder information. The law will be irrelevant. Perception will be relevant. Once negative shareholder emotion kicks in then a different side to corporate sustainability, or lack thereof, will be seen.

For between US$10,000 and US$30,000 a year a listed company can take and make all reasonable efforts to ensure that shareholder proxy material availability is communicated to shareholders or delivered to shareholders. This is effectively an insurance policy against the sort of shareholder actions that may arise from not communicating at all or “beeming” shareholder material via Dr Spock’s Star Trek Enterprise. Its about corporate reputation. Oh and its good corporate governance. Actually delivering shareholder proxy materials to the owners of a company is good corporate governance.

Continue Reading

This was obtained from www.newsday.co.zw and the original article was posted on July 22, 2010. We are obtaining the SI 100/2010 and will provide some news in due course. The charges and levies of capital markets players are payable during the absence of an economic  upturn and improvement in Zimbabwe’s capital markets, which markets, in return, rely on political and economic certainty from the people that set these rules and regulations in the first place.

“The Securities Commission of Zimbabwe (SEC) says it will be introducing 11 more rules and regulations to tighten its regulation and surveillance of local capital markets with emphasis on compliance and transparency.

The initiative is part of Zimbabwe’s preparation for Sadc’s securities convergence in two years, a process in which Zimbabwe Stock Exchange (ZSE) and SEC chief executive officers are taking part.

The new measures aim to expand the current set of rules covered by Statutory Instruments (SI) 100/2010, which put into force the Securities Act of 2004 repealing the ZSE Act.

The Act became operational in 2008, the year the commission was apointed.

Willia Bonyongwe, SEC chairperson, says the envisaged rules seek to develop a code of conduct for corporate governance, set the criteria for accessing the investor protection fund set up last year and develop a clear complaints procedure.

The general regulations will also widen the current framework for integrated reporting and disclosures, set the qualification criteria for traders and broaden the requirements for listing, licensing, business conduct, safety of custody, corporate governance and rules of the stock exchange, among other goals.

SEC proposes regulating the number of minimum shares that go to the public for firm that intends to float an initial public offering. The regulatory body is still consulting key players comprising securities dealers, brokers, the Zimbabwe Stock Exchange (ZSE) and pension funds to develop a draft, which would be gazetted into law with the approval of the Ministry of finance.

The initiative also aims to bring additional players under SEC, including asset management companies and securities custodial services, both of which are currently under the jurisdiction of the Reserve Bank of Zimbabwe. This should happen “within the next 12 months or so”, according to Bonyongwe.

“We want to take a look at what is happening in Sadc and look at look at ourselves in the light of that,” Bonyongwe said. “The Securities Act charges us to regulate each area and come up with rules.”

“Brokers did not participate much in the development of the current set of rules. I hope it will be different this time.”

“We want to regulate the market based on where we think the market should be going.

The buzz word everywhere is compliance and transparency. Everything is our business.”

SI 100/2010 laid out specific rules that put the Securities Act of 2004 into force. The statutory instrument sets out provides for criminal and civil penalties for offenses such as insider trading, market manipulation, fraud and financial crime and the fees and levies for securities dealers and authorised brokers, making a clear distinction between a dealing firm and a licensed broker.

It also provides for the establishment of a Centralised Securities Depository.

The Securities Act deals with licensing requirements for market participants, the registration requirements for securities exchanges and the corporate governance framework for licensed players. Under the new structure, the ZSE will no longer be self-governing, but would be registered and licensed by SEC.

Its role would be limited to the supervision and monitoring of the trading process to ensure transparency, including forestalling manipulations of the market at the first level.

Every broker registered under the repealed ZSE Act is deemed a licensed under SEC, but all prospective player would have to apply.\

The deadline for registration and licensing is December 31.

The fees set by SI 100/2010 are as follows:

• Securities (dealing firm) licence $8000

• Securities (dealer) licence$2000

• Securities (authorised dealer) licence  $2000

• Securities (client liaison) dealer $1000

• Securities (transfer) licence $2000

• Securities (trustee) licence $1000

• Securities (custody) licence $1000

• Securities (investment advisor) including journalist $ 2000

• Securities (investment management) licence$10 000

• Securities (multiple) licence $10 000

• Securities (dealing firm )licence $3000

• Securities (dealer) licence$1500

• Securities (authorised dealer) licence $500

• Securities (client liaison) licence$500

• Securities (transfer) licence $1500

• Securities (trustee) licence $1000

• Securities (custody) licence $1000

• Securities (investment management ) licence $3000

• Securities (multiple) licence $4000

• Securities levy of 0.18% of total transaction consideration

• Investor protection levy charged at 0.05% of total transaction consideration

• Securities levy charged at 0.5% of monthly gross income

• Securities (investment management ) company levy charged at 0.5% of monthly gross income

• Securities (investment advisors) company levy charged at 0.35% of gross income for the month

• Corporate Action levy charged at 0.1% of gross amount raised through sale, charged monthly.”

Continue Reading

I like following the SEC in the USA for a number of reasons: they are active and progressive on a number of fronts, not least of which is that its easy to follow what they are doing. Shareholder education and active regulatory intervention are the parts that interest because niether are prevalent in the majority of African markets. And they should be. Anyway herewith the latest article lifted from their website notified to me by “push technology”.

“The Securities and Exchange Commission today announced the award of $1 million to Glen Kaiser and Karen Kaiser of Southbury, Connecticut, who provided information and documents leading to the imposition and collection of civil penalties in SEC v. Pequot Capital Management, Inc., et al. This is the largest award paid by the SEC for information provided in connection with an insider trading case.

The SEC staff previously investigated alleged insider trading in Microsoft Corp. securities by hedge fund adviser Pequot Capital Management, Inc., its chief executive, Arthur J. Samberg, and David E. Zilkha, a Microsoft employee who accepted an employment offer at Pequot, but closed its investigation without action. In late 2008, Karen Kaiser, the ex-wife of Zilkha, and her husband, Glen Kaiser, discovered key evidence that ultimately led to the filing of a settled enforcement action against Defendants Pequot and Samberg alleging they engaged in insider trading. Among other documents and information the Kaisers provided the SEC was a key email communication between Zilkha and another Microsoft employee that was not turned over to the SEC in the first investigation. Without admitting or denying the allegations in the SEC’s complaint, Pequot and Samberg consented to the entry of injunctions and orders requiring the payment of civil penalties totaling $10 million (as well as the payment of disgorgement and prejudgment interest totaling over $17 million and an investment advisory bar as to Samberg and censure as to Pequot).

The SEC approved the award earlier this week pursuant to Section 21A(e) of the Securities Exchange Act of 1934, which authorized the Commission, in its discretion, to grant an award of up to 10% of the penalties paid in a case to a person who provided information leading to the imposition of those penalties, but only in insider trading cases. That provision has since been repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added new Section 21F to the Securities Exchange Act, authorizing the Commission to award bounties to parties who provide information leading to recovery of monetary sanctions in a broader range of cases, not limited as before to civil penalties recovered in insider trading cases.

On the same day the Commission filed the settled complaint against Pequot and Samberg in the above matter, it also issued an order instituting administrative and cease-and-desist proceedings against Zilkha in connection with the conduct described above. That matter is pending before an SEC administrative law judge.

For further information, please see Litigation Release Number 21540 (May 28, 2010). [SEC v. Pequot Capital Management, Inc., et al., Civil Action No. 3:10-CV-00831-CVD (United States District Court for the District of Connecticut] (LR-21601)”

Continue Reading

This notice appeared from Pioneer Africa in the Zimbabwean press today – see below. Here are a few observations:-

- THE ANNUAL REPORT IS NOT ONLINE AS AT THE DATE OF THIS ANNOUNCEMENT – IT IS ONLY THE ABRIDGED ANNUAL REPORT THAT IS – NO PROXY VOTING MATERIAL EITHER – a few more days and shareholders will be able to claim that proper notice was not given

- This notice obviously has the sanction of the ZSE but no mention is made of this

- The notice in the hardcopy press advert does not appear on the website

- There is no mention of why the annual report was not sent – presumably because the company can’t afford it?

- There is no explanation of the threshold of shareholder votes required to approve the waiver of the receipt of the hardcopy annual report – is it 75% of the votes (in which case a majority shareholder could unilaterally deny minority shareholders) or 75% of the shareholders by number? Or 75% of the number or votes in attendance at the meeting – usually the quorum at an AGM is just a few shareholders

- is putting the annual report on the website enough? Do Directors have an obligation in terms of good corporate governance to make available to shareholders the annual report?

- proxy forms are available at the Head office but not on the website – shareholders have to collect these forms and then forward them to the Company Secretary – if the annual report can be put online why not the shareholder proxy forms? The shareholders that are asked to waive their right to receive hardcopy annual reports

- are the directors reasonably sure that all of their shareholders have a reasonable chance of receiving their shareholder voting material? How can a shareholder vote on something if the voting material is not sent to them. Surely the logical thing to do, assuming that this initiative is legal, is to send all of the hardcopy announcements of the company’s intention to be carried out in the following year.

- How many contact email addresses does Pioneer Africa have of its shareholders? What initiatives has it taken to ensure that the voting material – the stuff that all shareholders are entitled to – is sent to shareholders?

- There is no corporate governance section on the Pioneer Africa website. The 2008 annual report (since the 2009 one is not online) says that the Board endorses the King II Code of corporate governance……mmmmmm…..

- S149 of the Companies Act requires that the balance sheet etc. “be sent to all persons entitled to receive notices” – the penalty if this is not done? s149 (3) of the act says ” If default is made in complying with subsection 1 the company and every officer of the company who is in default shall be guilty of an offence and liable to a fine not exceeding one hundred dollars……….gasp.

- so why havent other companies done this previously?

- which is more or less excusable? Denying the shareholders a reasonable right to receive their voting material or denying them the right to receive the annual report?

- forgetting the bigger picture issue here – if the annual report does not get published in the next day or so the clear 21 day notice period will have been breached – so what? You may ask.

This is a good example of the ignorance of directors when it comes to their obligations associated with shareholder communications. The IOD Zimbabwe and other institutions have high-flying-fluffy-puffy corporate events and training sessions where the oft-stated cliches of progressive corporate governance etc are stated over and over again to a sleeping audience. There should be hands on practical training sessions showing how executives can use the web effectively to communicate with shareholders, interactive sessions with legislators to come up with ways of solving the issues facing Zimbabwe

I hope this does not set a dangerous trend. Pioneer Africa is not a Safaricom and does not have the ability to significantly influence the regulators in turning a blind eye to corporate governance principles that have evolved from the South Sea Bubble days.

Dominic Jones , a world leader in online investor relations, has this opinion about the trends in African markets regarding de-linking the direct communications channel with shareholders:

“Scrapping requirements for companies to mail printed disclosure documents to investors is a global trend, but it has exacerbated shareholder apathy in every jurisdiction where it has been implemented. This is largely because regulators have failed to replace printed disclosures with suitable standards of online disclosures. Apathy and an uniformed investing public is, to my mind, the single worst thing that can happen in any market. It ultimately will lead to market abuses.”

Globally intellectual debate about the end of “shareholder value maximisation” has come to the fore. A recent article in the Economist highlights that “stakeholder values” are emerging as the core objectives of management.

Continue Reading

I have been highlighting the need for listed companies in Kenya to sit down and think about the implications of the proposed Companies Bill 2008. Here is an example of why:-

“Quoted companies and the companies of public interest nature that handle public funds, must establish and maintain a Board Nomination Committee where at least two thirds of its members are shareholders in the company and together represents two third of the share capital in the company.  The Board of Nomination Committee shall propose candidates for the Board of Management.  Anybody employed by the quoted company can not serve as members of its Board Nomination Committee.”

A few questions:-

1. Does the Board appoint the members from the shareholders?
2. What is the criteria for appointment?
3. Will some shareholders protest that their representatives are not appointed?
4. Is there enough being done in Kenya and amongst the investment community to educate investment managers and prospective directors of their true role as a director?
5. If a company has no dominant shareholders (say less than 10%) how are the representatives of the nominations committee to be appointed? Will a nomination committee of + 6 members be practical?
6. What is the minimum number of nomination committee members? What if one shareholder owns more than two thirds threshold? Is there a single member of the nomination committee?
7. Where significant shareholdings are held by nominees or pension funds and other institutions, holding shares in a fiduciary capacity, how are representatives to be appointed?
8. So ordinary minority shareholders are unable to propose directors?

Continue Reading

Here is an extract of the new Kenyan Companies Bill governing deemed delivery of communications in various media. If directors disclose information online through their website it is deemed to have been delivered as soon as its posted online. Great news for listed company directors!

630 Deemed delivery of documents and information
(1) This section applies in relation to documents and information sent or supplied by a company.

(2) Where—
(a) the document or information is sent by post (whether in hard copy or electronic form) to an address in Kenya, and
(b) the company is able to show that it was properly addressed, prepaid and posted, it is deemed to have been received by the intended recipient 48 hours after it was posted.

(3) Where—
(a) the document or information is sent or supplied by electronic means, and
(b) the company is able to show that it was properly addressed, it is deemed to have been received by the intended recipient 48 hours after it was sent.

(4) Where the document or information is sent or supplied by means of a website, it is deemed to have been received by the intended recipient—
(a) when the material was first made available on the website, or
(b) if later, when the recipient received (or is deemed to have received) notice of the fact that the material was available on the website.

Seems to me that the easiest way out is to just post information on your website as there is no obligation to confirm the addressees contact details at all and your obligation to deliver shareholder communications is immediately met as soon as it is posted online. In the absence of other methods to communication with shareholders is this good corporate governance?

I wonder where the corporate governance code in Kenya and the new Companies Bill meet with respect to obligations to deliver communications directly. That’s in another post. This quote from Standard Boardroom Practice, prepared by the Institute of Directors, London, revised 1971 is still appropriate (or perhaps more appropriate) in modern times:

“Although the process of encouraging shareholders to take an interest in the affairs of the company may be a rather slow one, directors should not be discouraged. It is their duty to make the maximum use of the methods open to them of keeping the shareholders informed.”

Continue Reading

Kenyan legislators, in their bold quest to demand accountability from listed company directors, wish to punish directors with a jail term of up to 6 months and or a fine should the annual report not be published online in accordance with the requirements of section 387 of the new Companies Bill. One legislator though, nervous at this particularly draconian move, quickly slipped in section 389 below.

A failure to make information available on a website throughout the period referred to in subsection (4)(b) is disregarded if—
(a) the information is made available on the website for part of that period, and
(b) the failure is wholly attributable to circumstances that it would not be reasonable to have expected the company to prevent or avoid.

So that makes sense: if a listed company is unable to post the annual report online because of circumstances beyond its control then the directors have a “get out of jail free card”. The following general implications arise from Kenya’s news legislation:-

- all listed companies in Kenya should have a website (Kenya has the highest incidence of listed company corporate websites) up and running all the time
- the publication of information on their website requires discipline in the financial reporting process – the obligation to post information online as soon as it is practically available creates an obligation on someone to think about what they are doing
- control over the availability of information online will have to be increased to ensure that reporting requirements are not inadvertently contradicted

I have spoken to numerous listed company executives in Kenya and the level of awareness of the issues contained in the new Companies Bill is very low, if not non-existent.

Continue Reading

Please find attached the Kenya Companies Bill 2008 and Continuing Disclosure Obligations of listed companies in Kenya. Click on the links.

The Kenya Companies Bill 2008; which is the draft Companies Act. It is intended that upon passing into law, it will replace the existing Companies Act (Cap 486). You will note that it has several provisions regarding sending of resolutions by electronic means; sending of documents relating to meetings in electronic form; power to require delivery of information by electronic means and general provisions relating to electronic communications.

The Draft Securities Industry (Continuing Disclosure Obligations of Issuers) Regulations 2009; which spells out disclosure obligations for Issuers whose securities are publicly issued or are listed in a Securities Exchange. The draft Regulations do not specifically provide for the mode of submission of documents, electronic or otherwise.

More on this later.

Continue Reading