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 paper should 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 economical 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 country 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 require 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 represent 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 a 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’s cause significant reduction of stock returns. II. ACTIVITY OF THE CMA IN GOVERNING OF DISCLOSURE REQUIREMENTS With respect to the disclosure of information relating to the securities, 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. 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 the following: Taking necessary amendments steps obligatory for a person; Paying compensation; Suspension trade in security; 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. 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. Read More