Identifier
Created
Classification
Origin
06RIYADH9056
2006-12-12 10:01:00
CONFIDENTIAL
Embassy Riyadh
Cable title:  

THE CAPITAL MARKET AUTHORITY'S NEED FOR ASSISTANCE

Tags:  EFIN ECON SA 
pdf how-to read a cable
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OO RUEHDE RUEHDIR
DE RUEHRH #9056/01 3461001
ZNY CCCCC ZZH
O 121001Z DEC 06
FM AMEMBASSY RIYADH
TO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 3702
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEHJI/AMCONSUL JEDDAH 8058
C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 009056 

SIPDIS

SIPDIS

DEPARTMENT PASS TO U.S. SECURITIES AND EXCHANGE COMMISSION

E.O. 12958: DECL: 12/12/2016
TAGS: EFIN ECON SA
SUBJECT: THE CAPITAL MARKET AUTHORITY'S NEED FOR ASSISTANCE
IN MARKET REGULATION AND ENFORCEMENT


Classified By: DEPUTY CHIEF OF MISSION MICHAEL GFOELLER FOR REASONS 1.4
(B) AND (D).

C O N F I D E N T I A L SECTION 01 OF 03 RIYADH 009056

SIPDIS

SIPDIS

DEPARTMENT PASS TO U.S. SECURITIES AND EXCHANGE COMMISSION

E.O. 12958: DECL: 12/12/2016
TAGS: EFIN ECON SA
SUBJECT: THE CAPITAL MARKET AUTHORITY'S NEED FOR ASSISTANCE
IN MARKET REGULATION AND ENFORCEMENT


Classified By: DEPUTY CHIEF OF MISSION MICHAEL GFOELLER FOR REASONS 1.4
(B) AND (D).


1. (U) Summary. From September 11-14, experts from the U.S.
Securities and Exchange (SEC) provided a three-day technical
assistance seminar on market oversight and enforcement
strategies to Saudi Arabia's Capital Market Authority (CMA).
The CMA freely shared information and actively engaged with
the SEC presenters. Post hopes this will be one of many
future SEC technical assistance programs for the CMA in order
to strengthen its market regulation abilities. End Summary.

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BACKGROUND ON THE SEC DELEGATION
--------------


2. (U) The SEC delegation which conducted the technical
assistance included Mr. Ethiopis Tafara, Director, Office of
International Affairs; Dr. Robert Fisher, Associate Director
of Technical Assistance, Office of International Affairs; Mr.
Ester Saverson, Associate Director, Office of International
Affairs; and Mr. Timothy Warren, Associate Regional Director.
Mr. Tafara met with Senior CMA officials to include
Commissioners Abdullah Al Abdulgader, a former professor at
the Petroleum/Mineral University, and Mohammed Al Shumrani,
former Head of Investments at the Saudi Arabian Monetary
Agency.

--------------
BACKGROUND ON THE CMA
--------------


3. (U) On 2 July 2004, the CMA became a regulatory body
governed by five board members appointed by Royal Order. The
Chairman and CEO is Dr. Abdulrahman Bin Abdulaziz
Al-Tuwaijri. The CMA has four Commissioners, Ibrahim Bin
Mohammed Al-Romaih, Mohammed Bin Meghnim Al-Shumrani, Dr.
Abdulrahman Bin Abdulmohsen al-Kalaf, and Dr. Abdullah Bin
Hasan Al-Abdul-Gader.


4. (U) The CMA is modeled after the SEC, and its mission is:

--regulate and develop Saudi Arabia's capital market;
--protect public investors;
--achieve a fair, efficient and transparent market place;
--monitor the issuance and trading of securities; and
--regulate and monitor authorized entities.


5. (U) Since the CMA's 2004 founding, it has authored and

advocated for the following laws and regulations, which now
form the legal basis for Saudi financial markets:

--16 June 2004 the Capital Market Law;
--4 December 2004 Listing Rules, Offers of Securities
Regulations and Market Conduct Regulations;
--18 July 2005 Securities Business Regulation and Authorized
Person Regulation;
--5 July 2006 Publication of Draft Corporate Governance
Regulation for public consultation;
--15 July 2006 Real Estate Investment Fund Regulation; and
--26 July 2006 Publication of Draft Investment Fund
Regulation for public consultation.


6. (U) In the future, the CMA's action plan includes:

--drafting takeover regulations;
--approving investment fund regulations;
--approving corporate governance regulations; and
--drafting stock exchange regulations.

--------------
ORGANIZATIONAL STRUCTURE
--------------


7. (U) The CMA is broken into six divisions: Investor
Awareness and CMA Staff Training; Legal and Internal Audit;
Administration; Authorization; Corporate Finance;
Enforcement; and Market Supervision. Within each division
are sub-sections: The Administration Division includes
Finance, Information Technology, Administration, and Human
Resources; the Authorization Division includes Inspection,
Licensing, and Anti-Money Laundering; the Corporate Finance
Division includes Mutual Funds, Listing, and Continuous
Obligation; the Enforcement Division includes Investigation
and Prosecution and Investor's Complain; and Market
Supervision Division includes Continuous Disclosure,
Surveillance, and Prudential Reporting.


RIYADH 00009056 002 OF 003


--------------
REGULATORY CONCERNS
--------------


8. (U) The SEC's three-day market oversight and enforcement
training yielded a great turnout with at least fifty CMA
employees participating, including Directors of the
Enforcement Division and Corporate Finance, and
Commissioners, Abdullah Al Abdulgader and Mohammed Al
Shumrani. CMA employees actively participated in discussions
and asked questions on problems faced in their market.


9. (C) The CMA is highly concerned with the general
direction of their markets movement on a day to day basis,
especially since the June 2006 market crash. The CMA is
concerned with the frequency of market manipulation, how to
prove and stop such conduct, and when to take legal
enforcement action. The CMA relies on criminal sanctions for
its enforcement power, but has no statistics to show how
often that power is used. Since the June 2006 appointment of
Chairman Al-Tuwaijri, there has been a policy shift on the
issue of settling cases. After an internal debate, cases are
now being settled. Currently, over 40 senior level board of
directors at various companies have been convicted of insider
trading, with SAR 60 million (USD $16 million) the biggest
fine.

--------------
MEETING WITH THE COMMISSIONERS
--------------


10. (C) The SEC's Tafara and EconOff also met with
Commissioner Abdulgader and Commissioner Shumrani to discuss
the CMA's future technical assistance needs. The CMA is
interested in regulatory and enforcement training to better
compete with already established worldwide markets. To
achieve this training goal, the Commissioners asked Mr.
Tafara for the SEC's assistance in developing by-laws,
requirements and training programs. In addition, the
Commissioners asked for a job-share program in which CMA
employees would go to the U.S. and work at the SEC for six to
nine months. Currently the SEC offers a two-week training
program and a one-week internship program relating to
broker-dealers with the National Association of Securities
Dealers (NASD). Also, the CMA would like the newest Edgar
Database and information technology programs to conduct
market surveillance.


11. (C) Mr. Tafara assured the Commissioners the SEC
would look into training programs, possibly to include a
three-month on the job training. However, he noted, basic
regulatory training was key, whereas on-the-job training
would be a part of a more advanced training package.


12. (C) The CMA commissioners indicated the Saudi market's
shortcomings to include low investor confidence, uneducated
investors, and frequent market manipulation. Investors are
not educated on the stock market itself and how it functions.
Specifically, the CMA is concerned with oil-related stocks,
because their stock price will increase due to oil prices.
Due to these concerns, the CMA has introduced an aggressive
investor training program to educate investors throughout the
Kingdom. This campaign includes brochures distributed widely
at banks, television advertisement campaign, and speaker
series discussing long-term investments, risks involved in
investing, and reading financial statements.


13. (C) The CMA officials noted the public frequently
blames the CMA for all problems with the stock market,
including market crashes and fluctuations, devaluation of
specific stocks, Initial Public Offering (IPO) failures. The
investors have had unrealistic expectations of financial
windfalls based on the high returns initially realized within
the first three months the market was open. Due to outsized
expectations, many investors have made highly leveraged
investments, borrowed money and sold their homes and property
to invest their life savings into the market.


14. (C) To help stabilize the market, the CMA must approve
who raises capital for companies. One of the CMA's biggest
problems is managing the market and avoiding interference
with the markets when they are too high and too low. Another
shortcoming is the lack of educated and experienced financial
analysts and broker dealers to assist in the assessment and
purchasing of stocks.

-------------- --------------
WIDE PARTICIPATION KEY TO KSA'S MARKET IMPORTANCE

RIYADH 00009056 003 OF 003


-------------- --------------


15. (C) In 2002, the stock market became open to the wider
Saudi public, whereas before it was only open to wealthy
Saudis. The first IPO was a telecommunications IPO in which
over 5 million Saudis invested. One of the latest IPOs was
the King Abdullah Economic City offering in August 2006,
which attracted a record 10 million Saudi investors.

-------------- --------------
THE CMA'S GOALS: AN ACCOUNTABLE AND TRANSPARENT
STOCK MARKET
-------------- --------------


16. (C) The CMA's goal is to achieve a transparent and open
market for foreign investors with sophisticated investing
mechanisms. Currently the CMA has few rules on market
manipulation, but is are currently developing additional
regulations. Also, the CMA would like their quasi-government
controlled stock market to spin-off as an independent
authority.


17. (C) The CMA is interested in training geared towards
enforcement, investigations and regulations. The CMA is
concerned that investors see the stock market as the lottery,
rather than a long-term investment with normal cycles of
highs and lows. The CMA needs financial analysts and a
structured investor education program to teach the novice
Saudi investor about the stock market and how it directly
relates to the economy of the Kingdom.

--------------
COMMENT
--------------


18. (C) The Saudi market is important because of the high
proportion of the public which is currently investing in it.
However, a minority of Saudi investors are institutional
investors with a sophisticated understanding of the market,
whereas the majority have little education or knowledge
regarding financial markets. The Saudi market has record
high investors with everyday people supporting IPOs, not just
big companies and corporations. This is a market to watch
for future global developments, especially once foreign
investors are invited to participate. The Kingdom has
billions in petrodollars flowing in, and much of that money
is being cycled into the stock market.
OBERWETTER