Meeting the Challenges for Developing a Modern Capital Market System in the Kingdom of Saudi Arabia

Abstract

The recent oil price collapse, and its immediate and long-term impact on the world economy, has cast light on the Saudi Arabian economy, which is the largest in the Middle East and North Africa ( 'MENA") and the 19th largest in the world. Saudi Arabia's importance is more than economic: the Kingdom is also home to the two Holy Mosques and some 30 million people. Thus, the Kingdom should consider its reaction to the oil price collapse in order to create a more modernized and sustainable future for its people.

But, the transformation of the traditional commodity-based economy of the Kingdom of Saudi Arabia to a "modem" economy poses a substantial challenge for the country. To achieve this objective, diversifying the economy with an eye towards long-term sustainability will be required. This would include meaningful central planning that would serve as an effective roadmap. Also desirable would be a leadership role for the government in international organizations such as the Gulf Cooperation Council, the World Trade Organization and the G20.

Part of the modernization process will be to develop a robust capital market that is based on transparency and fairness. This effort suffered a significant setback in the Saudi stock market crash in 2006 ("Crash of 2006"), which exposed serious flaws in the capital market's overall structure. Active membership in international organizations like the International Organization of Securities Commissions ("IOSCO") is an important part of the recovery and movement towards a modern capital market.

Moreover, there are serious questions about the dispute resolution system in Saudi Arabia in dealing with financial matters. Shari'ah law, the law of the land in the Kingdom, is not all encompassing. In fact, some components of a modern economy would_ appear to violate Islamic law, at least to some extent. To deal with this shortcoming, the Kingdom has come to rely on quasi-judicial committees, including the Committee for Resolution of Securities Disputes ("CRSD"). The CRSD has ascertainable ties to the Capital Market Authority ("CMA"), financially and administratively. This dependence arguably renders the CRSD unconstitutional, a matter that will need to be dealt with.

There should also be market disclosure requirements that are consistent with international standards. Such rules are necessary to promote confidence in an equitable capital market, thus increasing investment and diversifying the economy. The foundation is largely in place, thanks to the Capital Market Law of 2003 ("CML") and some other regulations, but violators are not apprehended, prosecuted, and punished in a manner that contributes to market fairness.

There are similar challenges facing insider-trading laws. While there is a prohibition in place, to date, there are only five cases from the CRSD that interpret the law's provisions, and the jurisprudence that does exist is not consistent. Other problematic issues include the investing public's lack of awareness of insider trading laws, anemic penalties that do not effectively deter wrongdoing, and lackluster enforcement of the laws. This system for dealing with insider trading stands in stark contrast to the one in the United States, which features a multi-layer approach to the disposition of these matters, along with an effective whistleblower program that significantly aids the prosecution of insider trading cases.

Considering these challenges, this study will focus on three substantive areas related to the Saudi transformation: (i) the roles of economic planning and a capital market in economic modernization, (ii) the level of transparency and fairness in the capital market, and (iii) appropriate judicial and administrative authorities.

The central proposition being presented in this study is that in order for Saudi Arabia to have a modern, sustainable and well-functioning economy, it must have a strong capital market. In doing so, it is important for the government, the CMA the CRSD, and Saudi law-policy makers to focus on and to develop various approaches: (i) to educate investors and the general public about illegal activities in the capital market, (ii) to increase the penalties for securities law violations, and (iii) to take full advantage of the enforcement provisions that are in place.

This study should contribute to an advancement and better understanding of the new CML and its related regulations, especially the laws related to disclosure, non-public information, and insider trading.

Subject Area

Law

Degree Date

2016

Document Type

Dissertation

Degree Name

S.J.D.

Department

Dedman School of Law

Advisor

Joseph J. Norton

Second Advisor

Marc I. Steinberg

Third Advisor

Ramy El Borai

Number of Pages

xiii, 331

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