SEC and Regulation by Toll-Gate

Something that has never happened before has inevitably happened

Minimum capital requirements are a legitimate regulatory tool for prudential management. When companies take risks with their balance sheet such as leverage, underwriting, market-making, custody and settlement exposures, or activities that threaten the wider financial system, regulators rightly demand they hold sufficient capital against potential losses.

Consider insurance, my favourite example. An insurer collects premiums upfront but may not pay have to pay claims until years later. In that interval, regulators must ensure the company remains solvent and capable of honouring its promise to pay customers when the insured risk happens. Requiring minimum capital to absorb unexpected losses is sound prudential practice.

But such a tool should only be wielded by regulators overseeing companies that actually take balance sheet risks. Nigeria’s Securities and Exchange Commission (SEC) does not really fit this description. Most entities it regulates are agency and professional-service businesses, where the principal risks are quite different: conduct and conflicts of interest (mis-selling, related-party transactions), operational failures (process breakdowns, valuation errors, cyber and data breaches), and client-asset safeguarding (segregation, custody arrangements, reconciliation). None of the risks can be solved by asking people to park billions of naira in share capital. They’re solved by boring things like examinations, enforcement, disclosure rules, segregation rules, governance standards, and insurance/bonding.

This week, the SEC published its Revised Minimum Capital for Regulated Capital Market Entities and it actually left me speechless.

Nigeria's financial regulators have fallen into a lazy habit of using paid-up capital as a proxy for "seriousness", and skipping the hard work of actual supervision. The SEC's new minimum-capital circular frames its overhaul in the language of "market resilience" and "investor protection" - but the mechanics read like a toll gate. The insurance regulator demands minimum capital. The pension regulator requires it. The CBN, naturally, mandates it. (That a market as small as Nigeria supports so many separate financial regulators, when one could do the job, is a conversation for another day.) Capital requirements have become a gatekeeping and screening device: if you can raise ₦100 billion for a licence, you must be a "serious" person.

It is a very high bar for me to say even by Nigerian standards this is too much’ (my working assumption is that anything can happen in Nigeria at any time and nothing will happen). The absurdity defies belief but let’s step through the most egregious SEC’s new requirements.

AUM “Tithe”

For Tier 1 portfolio managers (full scope), the new minimum capital is ₦5.0 billion (from ₦150 million). Then comes the kicker:

Any Fund and Portfolio Manager with NAV/AuM of more than ₦100.00 billion should have a minimum of 10% of the NAV/AuM as capital.

I can confidently say I have never come across anything like this and I have worked in the financial services industry for two decades now. This is not normal for asset management. It is bank-style thinking imported into an agency business. For a fund manager, AUM (assets under management) is not the manager’s asset. It belongs to clients. Fund managers do not owe clients the AUM back; they owe fiduciary duty, good governance, and operational competence. They are not leveraged balance-sheet institutions and this demand does not match the risk they are creating. Asking them to post 10% of clients money is simply absurd.

A rough comparison is that in the EU, alternative investment fund managers under AIFMD have an initial capital requirement typically described as €125,000 base, plus 0.02% of AUM above €250m, with the additional amount capped at €10m, and typically with professional indemnity insurance or an extra own-funds add-on for professional liability. Asset managers are fee businesses. Even if a manager earns 1% of AUM as revenue (sometimes it’s lower), a 10% capital rule implies revenue is roughly 10% of capital before costs. In a high-inflation, high-rate country, that’s explicitly an anti-growth policy.

Even worse is what this means in practice. An asset manager growing will need to raise capital every year since this capital requirement is trailing AUM. Who might invest in a business that needs new funding every year and cannot hope to earn its cost of capital? Again, I cannot stress this enough - I have never seen anything like this. (There are some rumours that the SEC is claiming this is a “typo” but I can’t imagine the number of eyes inside there that saw this and thought it was ok to go out to the public).

One more thing on this. The capital requirement is a step-change. If your AUM is ₦100 billion, you need ₦5 billion in capital. If you so much as have the temerity to grow your AUM by a single naira the following year to ₦100,000,000,001 billion, your capital requirement doubles to ₦10 billion. You can imagine the kind of things that will happen around this kind of cliff-edge.

Registrar? That will be ₦2.5 billion, please

A registrar/transfer-agent type business is fundamentally operational and data integrity risk. There is no balance-sheet risk whatsoever involved. The regulatory safeguards required come through controls, examinations, and operational standards, not massive paid-up capital. What is the logic behind asking for N2.5 billion in paid up capital for a business that maintains an email and address list?

How about ratings businesses? The new SEC guidelines demand ₦500 million in capital. Again this is odd because the core failure modes of rating agencies are not “thin capital”; but methodology risk and conflicts of interest. What is the thing that a bigger capital requirement is going to achieve here?

It is also worth noting that foreign rating agencies do not need to set foot in Nigeria to rate Nigerian companies. If this new requirement only applies to Nigerian rating agencies and they go under, their business will be picked up easily for foreign agencies not subject to the ludicrous capital requirements.

You can compare with the EU’s regulation of credit rating agencies (CRAs) where the regime is built around governance, conflicts, methodologies, transparency, and adequate resources/continuity systems - not a published numeric paid-up capital floor. For example, the CRA Regulation’s organisational requirements talk about “systems, resources and procedures” to ensure continuity of activity.

There’s more. The SEC sets the capital requirement for Non-Bank Custodians (the people who actually hold the money for asset managers) at ₦50 billion plus 0.1% of assets under custody (AUC). If the SEC does not want non-bank custodians to exist (there may be good reasons for that), why not just say so? Otherwise this is a very reckless tool to regulate them. The SEC simultaneously says bank custodians are “as prescribed by the CBN”, signalling the SEC itself recognises that prudential capital is not its natural tool for banks - yet for non-banks it reaches for an even bigger hammer. Absurd.

What belongs to Caesar?

There is additional context to all of this. Separate to all of the above, it already collects an annual supervisory fee of 0.2% of NAV of collective investment schemes, and annual regulatory fee of 0.25% of total AUM for funds under fund/portfolio managers. This means asset management is being hit by an ongoing ad valorem levy (every year, linked to AUM/NAV), and now a giant balance-sheet hurdle (including 10% of AUM above ₦100 billion). This is a regulatory pincer movement: cash out every year and capital locked permanently.

If you go back to the EU CRA Regulation linked above, it explicitly says supervisory fees should be proportionate to the costs incurred by the authority and not exceed what is necessary to cover those costs. Nigeria’s 0.2% of NAV is not “cost recovery” but an ad valorem charge that scales with market size whether or not supervisory costs scale proportionately. A ₦100 billion mutual fund would owe ₦200 million/year in a 0.2% supervisory fee. If the fund manager’s fee is, say, 1% of NAV (₦1 billion revenue), the regulator is effectively taking 20% of gross revenue before staff, systems, distribution costs, custody/trustee costs, audit, and taxes.

If you go on the SEC website where it publishes weekly NAV numbers, as at November 2025, it published a total CIS NAV of ₦7.416 trillion (excluding ETFs). This implies SEC collecting ₦14.8 billion/year at 0.2%. This means that the SEC will collect more money from the industry than the actual industry players make for themselves. Absurd.

The effect of all of this will be to create a smaller oligopolistic industry (perhaps that is what the SEC wants?). I really do not look forward to writing a F.O.O.D case study on asset management firms in a few years.

A few questions

There are some cases where the use of a minimum capital requirement by SEC is somewhat defensible. Underwriters, dealer brokers that engage in securities lending, digital asset exchanges and custodians and such like. Even for this, it is better practice to tie the amount of capital required to the amount of risk the company is exposed.

Still, I have a few questions:

• What empirical risk assessment produced 10% of AUM? Why 10 and not 0.02 (EU-style) for example?

• Does “minimum capital” mean paid-up share capital, shareholders’ funds, or net liquid capital? Because if it’s not liquid, it cannot absorb losses so what exactly is the point?

• Why is a trade repository’s capital requirement set at ₦150 million while that of a registrar is ₦2.5 billion when both of them perform information/record-keeping functions?

• Where is the published regulatory impact assessment? What number of firms are likely to die/exit and what is the expected industry concentration that a higher regulatory hurdle will create?

A final word for Nigerian businesses

It is often very difficult for me to defend regulated Nigerian businesses. More often than not, they deserve what comes to them. When they are not in a conspiracy among themselves to shaft their customers, they are in cahoots with the regulator to cripple their competition.

You will notice that what this new SEC circular does is ratchet up the capital requirements across board. That is, they’ve been in existence for a while albeit at “manageable” levels. Registrars have always had a capital requirement; its just that it has jumped from ₦150 million to the aforementioned ₦2.5 billion.

And this is why it is often hard to take the side of Nigerian businesses even in a case like this where the regulator has clearly gone round the bend: they never fight anything on principle. Perhaps the existing registrars were happy to tolerate the previous ₦150 million capital requirement because it helped to protect them from competition forget the Yoruba aphorism about how a single cane can be used on multiple people. Maybe fintechs never saw a reason to question the ₦10 million capital requirement for robo advisers (how does paid-up capital ensure the tech works better?) until now that it has gone up 10x to ₦100 million and those who already have the licence have to scramble around for an additional ₦90 million.

Fighting things on principle is the only thing that can protect them in the long term. It is in their own interest to do so, as we have preached several times in this parish. I hope that this will be a wake-up call for the industry, in particular those who are genuinely trying to do right and deepen Nigeria’s financial markets as their contribution to economic development (and for whom I am writing this piece). Stop tolerating policies that are not in your interests or the country’s just because you have a work-around to it.

I have read that the current DG of SEC is a fairly “reasonable” fellow and so this new directive - done without any consultation - came as a rude shock to many people in the industry.

Well, that’s the point.