Parliament should investigate the misconduct and incompetence of officials at Capital Markets Authority – Bank of Uganda COSASE style?

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Last updated on May 18th, 2021 at 06:45 am

Shortly before lockdown measures were instituted in March, I passed by ALTX to see two of my SMACK (St. Mary’s college, Kisubi) old classmates, just to congratulate them on keeping their jobs after successfully challenging Capital Markets Authority’s(CMA) illegal move to close down Uganda’s second securities exchange.

They briefly shared with me the challenges they are facing with the regulatory authority, some of which are too ashaming – I won’t share them here. I choose to stick to the principle in this article.

Just this year, Capital Markets Authority has lost two separate judicial review court applications: the first deals with an Exchange Traded Fund (ETF) filed by Tolea Securities Ltd and another filed by ALTX East Africa. Having read both these decisions, I should say, Capital Markets Authority is both incompetent and also applies whims instead of the law when regulating our young financial markets.

CMA filed a notice of appeal and served the notice to ALTX’ s lawyers. CMA also filed another notice to appeal the court’s decision in the Tolea matter in which the court ruled that CMA applied the wrong law. My legal opinion is that this appeal lacks any grounds. I doubt it will succeed.


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CMA is appealing as a tactic, so that it can also apply for stay of execution against Tolea, to which it is supposed to pay about 150 million in damages. Maybe it doesn’t want Tolea and ALTX to ganishee money in those accounts which they use to take lots of tea, frequent the washrooms every 30 minutes and use the money to go on benchmarking trips whose impact the tax payer doesn’t seem to notice. CMA moved quickly to file notices of appeal to the court rulings, but is working ever so slowly to dispose of ALTX applications or indeed that of Tolea. Isn’t this suspicious?

Before I wrote this article, I consulted one of my best friends I met way back when residing at Nsibirwa hall in Makerere and he was of the view that I shouldn’t write this article because it would put me on a collision path with people at the authority and cost me a career in financial markets in Uganda. But quite frankly I don’t care. I have to write this because the failure of these officials to be professional coupled with their incompetence is creating stagnation in the growth of Uganda’s financial and capital markets.

“They are a dilapidated artifact of financial markets regulatory mockery”

In one of the judicial review decisions, Justice Lydia Mugambe awarded 100 million shillings in damages and costs, just because the officials at capital markets Authority “chose” to evaluate the Tolea ETF application as an Asset Backed Security. And using the Capital Markets (Asset Backed Security) regulations 2012. Really?

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Anyone who has just started watching CNBC or Bloomberg Business news will quickly and instinctively arrive at the conviction that these are two different things. Tolea is an intending issuer on ALTX that was not satisfied with the CMA’s decision to reject its application to issue Exchange Traded Funds (ETF). The CMA evaluated the ETF application using regulations it had written for a different type of security known as Asset Backed Securities (ABS).

The court ruled that CMA had applied the wrong law to evaluate the ETF application, and ordered CMA to evaluate the application using the ALTX ETF Rules.

An Exchange-traded Fund in it’s simplest meaning is a basket of securities that trade on an exchange, just like a stock. ETFs can contain all types of investments including stocks, commodities, or bonds.

When investors invest in companies, they are issued a “security” to represent the money they have invested. The most common forms of securities are shares, bonds, mutual funds and exchange traded funds (ETFs).

An asset-backed security (ABS) is just another type of security but different in the following ways: It is developed and sold on behalf of finance companies (lenders). The process includes: Pooling the assets of the finance companies (the individual loans, leases and credit card debts they have extended to their customers), securitizing them (the process of converting them into investable securities) and then selling them to investors.

These securities are backed by assets – accounts receivables, inventories, and royalties of the borrowers behind the individual loans. The lenders use the capital raised by selling these securities to lend out more money to more borrowers.

Interestingly, when I read through the Tolea ETF application to Capital Markets Authority, it didn’t seem to have any leverage (debt) in it. But how Capital Markets Authority came to conclude that it had leverage, only god knows.

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In the second ruling, which rose out of judicial review as well, filed by ALTX Exchange itself, Justice Musa Sekaana stated in his ruling that judicial review was created to prevent regulators from substituting private, personal and parochial interests for the public interest. Justice Sekaana affirmed that CMA neglected the legitimate expectations of ALTX East Africa by not giving it notice and by not affording ALTX a hearing. The ruling added, that after suspecting that ALTX East Africa had failed to comply with CMA’s directives, CMA should itself have complied with the law which provides for the initiation of criminal proceedings against ALTX East Africa, the maximum penalty for which is a fine of UGX 1 Million according to the CMA Act, and does not in any way amount to a cancellation of approval to operate an exchange.

This nullifies any conviction by anyone who claim that a few of us have a personal vendetta with the Capital Markets Authority. And that’s not all.

In August 2019, an application was made to Capital Markets Authority which dealt with the issue of Depository Receipts backed by Kenya treasury securities. ALTX securities exchange issued a Certificate of Compliance in July 2019 and the application was submitted in August 2019. CMA responded to the application in October 2019, raising a few matters which ALTX clarified in October 2019.

Although CMA committed to completing such matters in 28 days, CMA is still unable to indicate when an approval would be granted.

In April 2019, ALTX Securities exchange applied for Self-Regulatory Organization (SRO) status, which is prudent given the fact that our financial markets are still nascent. They shouldn’t be over regulated to make running them costly and bureaucratic for the majority of Ugandans who are financially illiterate. CMA should just do light touch oversight regulation. However, CMA indicated in April 2019 that the application was ready to be delivered to their Board.

In October 2019, CMA indicated that the Board had rejected the application citing three major reasons. Two of the reasons were false premises and the other related to a misreading of the licensing regulations on the issue of Net Capital enforced by CMA against brokers. ALTX responded to that letter in November 2019. CMA has now asserted that ALTX is not an SRO and therefore cannot make such an application.

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ALTX has not claimed to be an SRO, but is applying for that status.

In November, 2017 ALTX Securities exchange filed a notice of Amendment of ALTX Fees and Penalties Rules with CMA. Interestingly, either due to incompetence or malice, this is what followed. CMA has attempted to approve this notice three times, each time committing legal errors, rendering their approved instrument unusable. The latest was a disapproval of major sections of the Notice citing Regulation 15 of the Securities Central Depository(SCD) Regulations. ALTX advised CMA that Regulation 15 contravenes Section 65 of the SCD Act and was therefore illegal. CMA does not agree with that assessment.

Any first year law student who has done legal methods will quickly understand this advice. But for some reason, CMA isn’t persuaded.

Last year Stanlib and Alliance Africa which are independent asset management firms to be regulated by Capital Markets Authority exited the market. I had friends there who also told me about the similar running battles they had with CMA, but that’s a story for another day.

There is a broker currently in the market (name withheld) that isn’t following capital adequacy regulations of CMA yet the regulator turns a blind eye and lets him operate. Someday that company’s business will go burst and it will lose investor’s money. It’s a time bomb. Not so long from now, we shall get to know the name of this brokerage firm and trust me, it will be Capital Markets Authority to blame.

I have advised my friends at ALTX that this time they shouldn’t consider Judicial Review, which they have pursued successfully to date, but a full suit against CMA, its directors, executives and staff under Section 4 and Section 7 of the Capital Markets Authority Act. These sections emphasize the duties, obligations and expectations of those persons. These people at CMA are really subverting rule of law and replacing it with personal whims. Ministry of finance won’t do anything to throw out this very incompetent board and its officials.

I dreamt of working for CMA, but as things seem with their modus operandi, all the interest I had dissipated out of me. They are a dilapidated artifact of financial markets regulatory mockery. I consulted a senior lawyer that worked at JP Morgan securities who mentored me in this field of securities law and he discouraged me that I wouldn’t learn anything new from Capital Markets Authority.


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