The International Monetary Fund (IMF) has urged Saudi Arabia's securities regulator, the Capital Market Authority (CMA), to clarify its role especially where there is regulatory overlap with the Ministry of Commerce and Industry (MOCI) to improve information sharing with the Saudi Arabian Monetary Agency (SAMA) and to boost transparency and disclosure of its enforcement function which is limited due to the publication policy of its Board whereby not all enforcement actions (and agreed settlements of action) are published. The Fund also makes several recommendations as to how Saudi Arabia through the CMA can improve its implementation of the International Organization of Securities Commissions (IOSCO) Principles on Securities Regulation. IOSCO is the global professional body of securities regulators, akin to the Basle Committee and the Bank for International Settlements (BIS) for banking regulation and supervision. These bodies set the rules of the game for securities and banking regulation and supervision respectively. These recommendations have been published under the Fund's Financial Sector Assessment Program in a report titled “Saudi Arabia: The IOSCO Objectives and Principles of Securities Regulation - Report on Standards and Codes (ROSC).” In fact this is the second major report on the financial services sector in the Kingdom published this month by the IMF. In the first report titled “Saudi Arabia: Financial System Stability Assessment—Update” which was published on April 18, the IMF urged SAMA to pay far more attention to the individual large exposures of Saudi banks to major corporates especially during onsite inspections in a system that the Fund says is characterized by high single-name concentration. In general, the Fund assessors are quite upbeat about the securities regulation and supervision regime in the Kingdom, although it remains in progress and suggests constant updating to meet the changing requirements of both the Saudi capital market and developments in the international financial market. “The regulatory framework for the securities market in Saudi Arabia has significantly developed since the enactment of legislation to regulate the capital markets. The CMA has made significant progress in establishing its supervision credentials, including issuing implementing regulations. Regulation is of a high standard but the market requires further development,” observed the report. Currently, for instance, the right to take up a new issue cannot be traded on the market. Derivatives trading, regulated short selling, stock borrowing and lending, and other features of mature markets are absent. The market is predominately comprised of individuals/retail investors. On the CMA's enforcement publication policy, the report suggests that the Saudi authorities are concerned that disciplinary outcomes, specifically the announcement of sanctions against APs (Authorized Persons), may affect the development of the local market by adversely affecting investor confidence in the market and investors' willingness to continue to conduct business with the entity were its name and details of its violations to be made public. However, this is not the case in mature markets where both market confidence and consumer protection and education are of paramount importance. The recommendations are quite specific and relate to the various principles of regulation of securities under the IOSCO objectives and principles. These include: The CMA should, without delay, clarify its role with respect to joint stock companies by publishing its MOU with MOCI (in English, not just Arabic) and identify the current boundaries of each regulator's jurisdiction. There also is a potential conflict, since the CMA is responsible both for regulation and development of the capital market. The CMA should demonstrate publicly (in the CMA annual report or website) how it interprets and manages the competing obligations to develop and regulate its market, and articulate the measures in place to avoid conflicts of interest. The framework contained in the CML and the implementing regulations is still relatively new. However, revision and updating of the requirements needs to be a continuing program, involving fuller regulated entity participation. Unpublished, but mandatory regulatory instructions issued by the CMA Board to regulated entities need to be publicly available and revised. Similarly, the law should specify the permitted reasons for removal of a member of the Board or CRSD (Committee for the Resolution of Securities Disputes) from office. The CMA should have greater operational independence (including having appropriate funding to exercise its powers and responsibilities) by the publication of regulatory information, fee schedules, and financial accounts, and achieve greater transparency. The perception of conflict of interest should be eliminated by removing the CMA's ability to appoint the CRSD members and expound the case to have this provision of CML amended. Tadawul is currently not a self-regulatory organization (SRO) and therefore does not exercise regulatory powers, although it is responsible for operating the market and the Depository. The future development of Tadawul may envisage it achieving a self-listing with direct public participation in its ownership. In response to some of the substantive findings and recommendations of the IMF assessors, the Saudi authorities emphasized that the assumed conflict of interest that is arising from the CMA's power to appoint CRSD members is eliminated by the fact that the members of the Appeal Panel, whose decisions are final and supersede those of the CRSD, are appointed by the Council of Ministers. At the same time, although not all enforcement outcomes are publicized, Riyadh maintains that the significant ones are, since all sanctions imposed by CRSD resolutions and some of the CMA's Board resolutions are announced to the public. Similarly, there are no inconsistencies between the Companies Law and the CMA's corporate governance requirements. Listed Companies have to comply with the Companies Law and the mandatory articles of the Corporate Governance Regulations (CGRs). None of the mandatory Articles in the CGRs are imposed by the Companies Law, nor are they inconsistent with any provision of the Companies Law. __
