Securities Rules and Regulations (CME-1) is part of a professional qualification to work in Saudi capital market developed by the Capital Market Authority (CMA).

These series of posts will be the notes of each section of the material. To start with, under the regulation part 1 we have the Capital Market Law.

 

Introduction

Capital Market Law is created pursuant to Royal Decree No. (M/30) dated 2/6/1424H – 31/7/2003. Notable to mention relevant parties that were established:

  • The Capital Market Authority (Issues rules and regulations to implement provisions of the Capital Market Law);
  • The Securities Market (Stock exchange for trading securities);
  • The Committee for the Resolution of Securities Disputes (Investigates disputes and complaints); and
  • The Securities Depository Center (It settle, clear and register ownership of securities).

 

  1. Securities

Let us start with knowing what are securities. A security is basically a financial certificate that has monetary value and can be traded.

What is a security?

  • Company shares.
  • Bonds and issued debt.
  • Investment fund units.
  • Any other instrument that the board of capital market authority would determines a security.

What is not a security?

  • Commercial bills, which are short term unsecured debt by a corporation.
  • Specific instruments traded exclusively between financial institutions.
  • Insurance policies.
  • Any other instruments determined by the board of capital market authority.

 

  1. Objectives of the Capital Market Authority

In general, the responsibilities given by the Capital Market Law to the Capital Market Authority are as follows:

  • To develop and regulate the securities market like improving systems and how entities trading securities.
  • Regulate issuance of securities.
  • Monitor the activities which are subject to the Committee for the Resolution of Securities Disputes.
  • To protect investors from fraud.
  • Achieve fairness and efficiency.
  • Monitor the disclosures related to issuers of securities like company’s announcements.
  • To regulate any announcement that would require shareholder to make a decision.

  

  1. Other Saudi Arabian Entities

The Securities and Exchange Commission

The Securities and Exchange Commission is the sole entity authorised to carry out trading securities in the Kingdom of Saudi Arabia. The entity main objectives are:

  • To make sure that there is fairness efficiency and transparency relating to listed securities.
  • Providing a reliable and rapid settlement clearance through Securities Depository Authority Center.
  • Establishing and enforcing professional standards for brokers and their agents.
  • Periodically review the brokers to make sure they are compliant with regulation and have enough capital.

The Committee for the Resolution of Securities Disputes

The committee goal is to investigate lawsuits and complaints that are under the Capital Market Law.

This committee has power to issue orders, impose sanctions and order issuing relevant documents for settling suits and complaints. Some key notes are:

  • The committee comprises of legal advisors specialised in securities and exchanges. They are appointed with a renewable three-year term.
  • The committee are required to start considering each dispute within a period of not more than 14 days from the dispute filing day which has to be filed first with the Capital Market Authority.
  • The final decision of the committee is imposed at the request of the capital market authority or the securities exchange request.
  • If decision requires compensation from one party to another. They can impose their claims through the regular court procedure.
  • If there was an appeal, it can be done within 30 days of the notification of the decision. The appeal panel will have three members representing the Ministry of Finance, Ministry of Commerce and Industry, and the Bureau of Experts.

 

The Securities Depository Center 

Established by the board of Capital Market Authority, it is authorised to settle, clear and register ownership of securities traded on the exchange.

Along with issuing certificates, they facilitate requests to correct any errors in the registered information.

 

  1. Broker Regulation

 A broker who buys and sells securities on behalf of investors.

Requirements of a broker

  • Must be licensed.
  • Agents who do the transactions also have to be licensed.

The idea is to make sure that investors are protected and their money is being transacted by licensed entities/individuals.

 

What do brokers do?

  • Act as intermediary for transactions of investor and also keep their money as a custodian.
  • Open relevant accounts for investors.
  • Acquiring or placing securities for issuers, or their agents.

Note: that the Securities Market has the power to investigate any licensed broker or the agent to make sure work is done with the scope of rules and instructions of the exchange.

 

  1. Investment Funds and Collective Investment Schemes

Certain investments have a unique structure to allow investors to participate in the profit generating activity. Capital Market Authority regulate these funds with regards to the below:

  • Structure of the organisation.
  • Accounting systems and operational rules.
  • Governance and decision making.
  • Custody procedure.
  • Service fees and management renumeration.
  • Performance reports and valuations.
  • Approval of launching additional funds.
  • Periodic reporting requirements.
  • Liquidity requirements.
  • Qualifications and licensing requirements.

 

  1. Disclosure

Entities raising capital through issuing securities must provide a prospectus for the Capital Market Authority for their approval. Such document should require:

  • Description of the issuer business.
  • Issued securities details.
  • Financial position of the issuer.
  • Any other information required by the authority which help in making investment decision to get the security.

 

  1. Regulation of Restricted Purchases and Restricted Offers

To ensure investors are protected, the Capital Market Authority has the right to issue rules to regulate purchases:

  • For example, a restricted purchase is a purchase that results in 10% or more ownership of a share that could result in disrupting a company.
  • A restricted offer is making an announcement to purchase voting shares and increasing their ownership by 10%.
  • When an offer or a purchase of 50% or more of the voting class take place within 60 days, the Capital Market Authority has the right to require the remaining shares to be purchased. However, the purchaser will not be required to pay more than the highest price of the share of the last twelve months.

 

  1. Sanctions and Penalties for Violations

Along with the sanctions and penalties that the Capital Market Authority could impose on insider trading and manipulation, the authority could bring legal actions to the Committee for the Resolution of Security Disputes which include:

  • Warning, barring, obliging correction, and ceasing a person activity.
  • Indemnifying those who suffered as a result of the violation.
  • Suspending trading of a security.
  • Also, seizing property, and banning travel.

Financial fine can be imposed by The Committee for the Resolution of Securities Disputes or the Capital Market Authority on who violated the law with a value between SAR 10,000 to 100,000 for each violation committed.

 

Conclusion

In summary, this section covered the entities that makes up the financial market in Saudi Arabia. I would say if you manage to remember the names of these entities and understand how they are connected with one another it should be easier to get a hang of.

Here is an activity I would do, draw a chart starting with the Capital Market Law and how it is connected to the Capital Market Authority and from there connect the lines between all these entities and how do they work together. Once this is done it should be easier to understand their connection and how the whole system works.

 

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