Comparison of Disclosure Requirements in Saudi Arabia and the USA - Research Paper Example

Comparison of disclosure requirements in Saudi Arabia and USA of client of the of Department, of university. Correspondence concerning this papershould be addressed to client’s name, Name of department, name of University, address. Contact: (e-mail) In this paper the author has performed profound analysis and comparison of two legal orders existing in Saudi Arabia and USA regarding the disclosure requirements of securities. During the analysis, author referred to the current legislation, modern case law of both countries and different jurisprudence. The paper is structured and divided into two major blocks. First block is dedicated to the regime in Saudi Arabia and the second one to the USA. The conclusion on the comparison is included at the end of the paper. Disclosure itself serves as a fundamental instrument of securities market activity, as it affects the market and conduct of its participants. Disclosures imply that public should be informed of any investment decisions, while the undermining of this confidence leads to the collapse of the securities market harming national economy for a very long period of time. I. DISCLOSURE REQUIREMENTS IN SAUDI ARABIA Saudi Arabia is considered to be one of the largest developing stock markets in the world. Nowadays it shows increasing demands for various investments in corporate securities. While in 2006, Saudi Arabia securities market was regarded as the market which suffered from the lack of transparency and disclosure credibility less than average due to the economic crisis happened in this state. Great part of the investors received no compensation for the caused damages and had no any practical possibility to protect their rights with respect to the securities rights. Thus, some scholars define the current legislation of Saudi Arabia on the securities law and its disclosure as existing in place, but not functional in practice. Despite this fact, some states share the views that Saudi Arabia is one of the countries that has relatively strong disclosure requirements. This country is able to ensure investor’s protection during exercising of business transactions. Therefore, the main purpose of this paper is to describe the disclosure requirements applicable to the securities in Saudi Arabia and it comparison with the strong securities market conditions prevailing within the USA market. In Saudi Arabia, some principles applicable to the issuers of securities exist. Hence, issuers that offer securities through public offer are always subject to disclosure requirements involving shareholder voting decisions and equal treatment to each other. In any case, the body governing the issue of securities requires submission of the reports on the disclosure of significant amount of shareholders of the companies. At the same time, Saudi Arabia implements main principles of the IOSCO in relation with the disclosure of securities data. The one of them is that accurate disclosure of financial results and any other information which may be regarded as relevant and material to investor’s decisions should be provided. To go into details, one should mention that disclosure of the information by issues of securities is subject to specific and general disclosure requirements in case it is presented for public. There disclosure requirements apply to the prospectus used for securities offered on a permanent basis, including shareholder voting decisions. In Saudi Arabia, Capital Market Law of 2003 (hereinafter referred as “CML’03”) is the main source of securities law. It has created the main regulatory body – the Capital Market Authority (hereinafter referred as – “CMA”). In addition to abovementioned important principle, the CMA operating in Saudi Arabia has provided disclosure requirements in the Listing Rules to ensure that any material information is not omitted from the text of prospectus and any announcements, which are taken into account by the investor. Saudi Arabia suffers from the lack of information disclosure caused by weak civil regime for infringements of the disclosure requirements. Disclosure actually represents the effective tool applied for reduction of informational asymmetry and facilitation informed decisions taken by the investors. Thus, the state and executive bodies in sphere of securities regulation may establish some mandatory disclosure of some types of information which may be considered as supportive to investors and investment advisors in adoption of informed investment decision. With this respect, Technical Committee of IOSCO states that: Information should be disclosed on a timely basis, whether in connection with an initial public offering or listing, continuously, currently or periodically, and in a form or manner either prescribed by accounting standards, regulation listing rules or law, together with the information that is provided by the managements under the principles of fair presentation. Also pursuant to IOSCO understanding, the main purpose of the disclosure if to ensure that investors have necessary information to make informed investment decisions on a permanent basis. To state in general, disclosure rules and norms in the Saudi Arabia securities market are poor, while the profound research on this issue proves the fact that the lack of sufficient information amongst the investors in the Saudi Arabia market cause significant reduction of stock returns. II. ACTIVITY OF THE CMA IN GOVERNING OF DISCLOSURE REQUIREMENTS It worth to note that CMA is the single and only entity which is responsible for administering and governing over the CML as the primary securities law in Saudi Arabia with respect to the disclosure of information relating to the securities, . This law at issue defines what objectives are pursued by the CMA. Herein, they include the important functions, such as follows: regulation and monitoring of the full disclosure of information relating to the securities, issuers of the securities, shareholders and investors, etc. One interesting fact about this body is that all CMA staff must disclose securities holding and any securities holdings belonging to their relatives. The same disclosure requirements apply to any person, which is hired by CMA as an agent. As to the functions of CMA, it should ensure the sufficiency and accuracy of the required disclosure Compliance with any disclosure requirements, through reviewing of disclosure documents submitted by the listing companies. That means that each listed company is not allowed to publish prospectus until this principal body has reviewed and approved its publishing. Beyond these functions, the CMA is entitled with the right to impose sanctions on the companies for failure to comply with disclosure requirements, including the failure to meet the deadlines established by the CMA. These sanctions usually include taking necessary amendments steps obligatory for a person, Paying compensation, Suspension trade in security and Impositions of monetary fines. Persistent monitoring of provision of necessary disclosure requirements prevents existence of systemic risk due to the insufficient disclosure requirements e.g. In addition, the CMA enforces the disclosure requirements upon their review and review of the application just to make the proposed offering. In this way disclosure requirements are enforced due to the CMA’s review of securities offering documents and in accordance with the provisions that subject the issuer of securities and other persons involves in the offering of the securities of a Listed company to potential liability for its failure ti make required disclosure of information. Simultaneously, they are subject to possible liability of any person which makes misleading statement of material facts of the person, omitted the state the material fact of such kind in case it causes misleading of any other person in respect to the sale or purchase of the securities. Within the CMA system, the detailed enforcement procedure is also defined. The CMA has establishes a committee under the title “Committee for the Resolution of Securities Disputes’, which deals with the disputes falling within the scope of the provisions of CML’03, including corporate disclosures. Just to summarize on the legal part of the process and characteristics of disclosure requirements existing in Saudi Arabia, Capital Market Law of this country serves as the main source of regulation over securities and other papers. Even in absence of any comparison with other legislation and regime on the securities in other states, based on abovementioned facts and analysis, I wish to conclude that Saudi Arabia lacks strong disclosure, remedy regimes in case of enforcement through the court and securities commission. This finding is awful in terms of understanding of the whole financial system of Saudi Arabia. Lack of disclosure in securities undermines so-called efficiency of the market, and leads to the direct influence on the investor as he feels he is not protected by this legal order. Even despite of the fact that there is a complete legislation on securities and disclosure requirements in the Saudi Arabia, still it requires removing lack of transparency. It means that effective mechanisms for resolution of this issue should be created to ensure and improve the submission of accuracy of disclosure as it is quite essential for the exercising of investor’s protection. Given the current economic development of Saudi Arabia, stock market in this country plays extremely vital role in the economic growth of the state. That’s why improvements of operation of a strong stock market is urgently needed for Saudi Arabia. This fact serves in addition as a main distinctive feature between the securities market of USA and Saudi Arabia: while USA is a developed country, the Saudi Arabia is a developing weak market and state. Security regulation in both countries enhances the trading of securities. The security exchange council co-ordinates the international security trade affairs. According to Vault (2005), the council is also responsible for the containing frauds and errors within its security exchange operations. This commission applies merger arbitrage, a technique in investment which enables investors to benefit from the risk spread. In this regard, the commission regulates any form of bank gambling. The form of payment mode that the targeted shareholders prefer determines the strategies to be adopted by the arbitrageur in the trading process. There are two types of payment methods in a merger exercise. In a stock merger, there is receipt of bid stocks by the targeted shareholders. On the other hand, a cash merger requires that an arbitrageur buys and the sells stock to the highest bidder at the offer price after the completion of the bid exercise. This type of investment entails the buying of stock and consequent selling of the bid stock at a suitable offer price. After the trading is completed, the target stock is exchanged for the bidder stock in order to cover the short position. The arbitrageur can benefit from the trading when the bid succeeds. Therefore, if the bid does not go through, then the investor remains at the break-even state. The disclosure of information used by the arbitrageur in decision making is crucial because it makes him more a versed with the bid in quest. According to WetFeet (2008) risk arbitrage makes use of only public information with regard to bids. Therefore, it is not a covert deal with concealed information. Robert (2008) asserts that the trading is not subject to rumor information but investors only respond when a sealed deal on a bid has been announced to the public domain. Arbitrageurs believe that profitable trading is not contingent on a bid occurrence. The period set for the bid to be consummated is the overriding factor in the business. Risk is a crucial aspect in risk arbitrage because the whole process of risk spread involves some element of uncertainty. The result of the bid is usually unknown to the public. This owes to the fact that it may result to a profit or loss. For instance, the arbitrageur is likely to benefit if the bidding is completed at the initial offer price. If the initial price is revised upward, the investor will benefit more. On the other hand, if the initial offer price is lowered, the arbitrageur is bound to lose in the trade. Moreover, the time constraint on the decision making increases the uncertainty with regard to indulging in the bidding. According to Robert (2008) the stock mergers that involve collar deals employ dynamic hedging in the risk arbitrage business. This is because the exchange ratio is determined by the target stock price and the bidder price respectively. In the extreme case, the bid may be cancelled. In this case, the loss experienced is high because there is no information used in pricing. According to Robert (2008) the probability of a security exchange deal failing to materialize is negligible and it is estimated at a probability of 10%.Risk arbitrage is considered to shift risk from the target shareholders to the arbitrageurs. This is because the shareholders sell the stock to the arbitrageurs in order to avoid the risks involved with the completion of the bid especially a fall in the initial bid price. Therefore, the arbitrageurs offer insurance against exposure to risks for the shareholders. The risk spread in the bid deal compensates the arbitrageur for this service. Security exchange returns are based on the level of risks an investment is facing. The level of profits earned in this investment strategy increase with reduction in risk exposure. Robert (2008) asserts that it takes many days to the bid announcement for the target stock price to increase. Additionally, a business information system helps in the safeguarding of confidential government security information through the installation of sophisticated software. Companies are also able to safeguard insider information, which is vital for competition in the security market. According to Robert (2008), database management system enhances productive speculation in the security market because it collects all information pertaining to the environment, securities, market and competitors. This helps in outdoing rivals in the competition for market share. The system has also enhanced the working of search strategies on the internet platform. The information system involves the integration of the processes of capturing, storage, management and transmission of information. This involves the routine information systems and surveillance systems. This also includes administration, data management system and information system. According to Robert (2008), the information system also incorporates the security trade in both countries. In this regard, this system enables the collection, safe custody, processing of the information and eventual creation of security reports based on reliable information. The securities Information system constitutes of databases, telecommunications and software. The enterprise resource planning also forms part of the securities business information system. The security business system also entails societal and ethical values. Both security markets are well established due to the use of business information system. According to Robert (2008), the security information system is enabled by the hardware involved in the installation for the software used in the business information system. The business information systems are similar to the operation of online security business given that the platform of operation is the same. Additionally, the business information system also incorporates the business to consumer models. This model functions on the basis of business to consumer relationships. The system strengthens the coordination between the security consumers and the security markets. The security regulation is enhanced by adherence to the disclosure requirements for both the Saudi Arabian and the US markets. This makes the security purchasing easy. The security information disclosure requirements involve the insider information pertaining to specific blue-chip companies. This incorporates intentional tort. This involves a deliberate move to harm a person while negligence constitutes failure to rectify a particular problem, which can cause harm to an individual. Negligence occurs when duty of care has been full proved beyond doubt by the aggrieved party. In addition, the accused must have breached his duty to care. The aggrieved party must have been injured in the course of negligence of duty by the accused. Furthermore, the negligence of the accused person must have been the major cause of the affliction of the plaintiff. According to Robert (2008), the negligence must have been the proximate cause of the injury suffered by the aggrieved party. Both countries’ markets and the security clients have a fiduciary relationship whereby the ban ought to keep secret the details pertaining to the different clients. The tort action regarding the interference of the contractual relations and participating in a breach of fiduciary duty entails proving of breach of contractual agreements prior to apprehending the accused person. The positive impact of the American security regulation is that the regulation is designed to protect the best performing companies. The Saudi Arabian security market incorporates technological know-how and skills in the security regulation exercise. This leads to many economic developments including industrialization and consequent civilization. In addition, social ties were created between the Americans and the locals of Saudi Arabia. This resulted in inter-racial marriages, which enhanced co-operation, peace and harmony in implementation of various American policies in Saudi Arabia. Haddad & Esposito (2009) assert that the American influence of the Saudi Arabia media led to learning of new American culture in various aspects including dressing styles and lifestyle. This also served to foster interracial interactions because of the acquisition of new skills on doing various activities. In addition, the American of Saudi Arabia created security market for many of the American securities. The securities of Saudi Arabia also found new customers hence boost of the Saudi Arabian security business. In addition, the American influence on the security regulation in Saudi Arabia contributes to boost of the credibility of the Saudi Arabian securities. The nation is Arabic hence introduction of English into the nation systems opened up new opportunities for their students. In this regard, the education system of the nation was boost and developed. Furthermore, the Saudi Arabia had the chance to use different food apart from their cultural foods. The elements of a valid contract include the legal competency, mutual agreement, legal objective, consideration and written agreement. Competency entails the attainment of the required legal age of 18 years. This legal requirement offers protection for the minors. This is due to the fact that minors will not be held liable in case they breach any conditions. However, the guardian of a minor will be attached to the minor during the prosecution of the case. In fact, the guardian is held liable for the mistakes of the minor. The guardian will be relieved of the responsibility upon the minor attaining the required age (Robert, 2008). This aspect also incorporates the aspect of soundness of mind. In this regard a person who is mentally impaired in not qualified to enter into ant contractual agreement. Moreover, a person who is a drug addict is barred from entering into a contract. Mutual agreement is another vital aspect of a contract. There must be consent of both parties to the contact in order for the contract to be valid. Coercion is not allowed in contracting. This agreement must contain conditions to be met by the contracting parties. In this regard, there must be an offer and acceptance of the offer .A contact is sealed upon the acceptance of the offer. There must be a legal objective in every contract created otherwise the contact it be null and void. Consideration is also a vital aspect of a contract given that this provides the physical evidence of the contract and commitment to the contract. Consideration is something which has value attached to it and it can be exchanged with the item in the contractual agreement. There are two to categories of consideration. The good and value consideration .the value consideration is one that has money value whereas a good consideration is one that is given to a person in form of a gift. The other element is a written contract. This is vital in a contractual agreement given that it provides solid evidence of the contract established by the parties. This document is signed by the parties in contact to signify their consent and commitment to the contract. This document contains all the terms and conditions of the contract .In this regard, misunderstanding is eliminated in advance. The security companies in these countries have made strides in a bid to protect the software that allows for online transaction to occur through automation given mobile banking. The bank applies basic Security metrics, which are concerned with the mitigation of threats and attacks which are related to the compromise of data of the banking institution. Confidentiality of information is an aspect embraced by all organization operating across the globe. Therefore, access to insider information of entities compromises the marginal returns of their businesses and disrupts harmony in the operation of the entities. According to Weaver & Weston (2008), the competitive edge of the profit base organizations is compromised because the rival companies use the insider information to strategize. Furthermore, the blue-chip companies have beefed up security of its online data through installation of medium Security metrics, which assist in the mitigation of threats and attacks, which cause data compromise and fraudulent access into confidential data. Moreover, this category of metrics helps in aversion of malicious use of the systems. Therefore, this category of metrics helps in the protection against attacks with ill motives. The bank also applies the high level metrics, which are involved in the protection against high caliber internet data hacking programs. These hacking have dire consequences the firm especially with regard to the security of private client information and other insider information besides the profit making. The government information is also highly guarded by use of these metrics given the importance attached to the confidentiality of this information especially the social security information of the clients of the bank. Hedge fund securities ensure a well-organized portfolio of investment which is subject to modern investment strategies. These strategies include both the short-term and long-term derivative positions. The first effect of hedge fund regulated is that the best hedge funds will not be identified easily while the hedge funds with less value will dominate the market. This will in effect negatively affect the investors .This is because they will not be sure of the correct hedge funds to invest in, given the intrigues of hedged fund disclosure regulated. Robert (2008) asserts that that regulation the hedge funds will result in the disclosure of some insider information pertaining to the hedge fund industry to the public. This will culminate in reduction of the returns of the hedge fund brokers. Additionally, the information disseminated to the public pertaining to the hedge fund portfolio may not be true because the less valuable hedge funds could like to be appealing to investors. In this regard, the investors will be exploited and deceived on the best hedge fund to choose for investment. The other effect of this security regulation is that the hedge funds will be required to regulate through the security and exchange commission. This implies that the hedge funds must reveal much information pertaining to the various portfolios. This will compromise the competitiveness manifest when hedge funds are not regulated. However, the hedge fund managers can decide to personally regulate through the internet. This will be done through the creation of blogs for the hedge funds. The online marketing will positively impact on the entire security industry because the hedge funds will attract a wide array of customers. This will boost the hedge fund investment and earn the hedge fund managers high revenue. CONCLUSION Actually, the systems on disclosure information relation to the securities existing in Saudi Arabia and USA had both distinctive and common features. Although, Saudi Arabia law on the disclosure requirements, in particular, on the enforcement of defective disclosures, is a kind of evident translation of the equivalent provisions of the USA Securities Act 1933. For example, art. 55 of the CML’03 is closely related and mirrored the US provisions on the liability for misrepresentation in a prospectus. With this regard, scholars consider that simple mirroring of the legislation of American system into the legal regime of another country is not effective, as it wasn’t supported by background culture and any legal structure of the second county. References Robert B. (2008).The regulation of corporate disclosure. Cambridge, Mass: MIT Press. Read More