## 1. Summary Implementation of the IOSCO Principles ## Source details **Canonical URL:** [1. Summary Implementation of the IOSCO Principles](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13212.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13212.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13212.pdf.json) --- ### Executive summary - The Capital Market Authority (CMA) has made significant progress in establishing supervision credentials and issuing implementing regulations. - The CMA is a party to the IOSCO Multilateral Memorandum of Understanding (MMOU) Concerning Consultation and Cooperation and the Exchange of Information. - No information sharing arrangement exists with the Saudi Arabian Monetary Agency (SAMA). - Refinements are needed to processes, the Capital Market Law (CML), and the Committee for the Resolution of Securities Disputes (CRSD). - No major gaps identified in current regulatory and legal frameworks; transparency and procedural improvements are needed regarding how the CMA funds operations, disciplines, communicates with members, and balances potential conflicts of interest. - Unpublished but mandatory regulatory instructions issued by the CMA Board to regulated entities need to be publicly available and revised. - Board-imposed disciplinary sanctions need procedural fairness provisions. - The CMA approach to supervision is risk-based and compliance-focused; the cost of compliance should be a more central focus when establishing mandatory obligations. - More transparency should be provided by the CMA in cases of noncompliance; the CMA Board should reconsider its current publications policy to ensure appropriate transparency and regulatory effect in respect of regulated entities’ noncompliance. ### Introduction and methodology - CML came into legal effect on February 25, 2004 and the CMA was established with rule-making authority and enforcement powers (protection of investors, reduction of systemic risk, fairness, efficiency, and transparency). - The CMA possesses both civil and criminal authority and may seek civil sanctions ranging from warnings to monetary penalties, property seizure, and license suspension or revocation. - The CML defines duties and powers of the CMA, Tadawul, the Securities Depositary Center, the CRSD, and a final review authority, the Appeal Panel. - Assessment is part of the Financial Sector Assessment Program Update requested by Saudi Arabia; first assessment of implementation of the IOSCO Objectives and Principles of Securities Regulation. Assessment undertaken by Mr. Martin Kinsky in Riyadh during April 2010. - Assessment based on IOSCO Principles and Methodology adopted in 2003 and updated in 2008; Principle 30 not assessed. - Official language is Arabic; official CMA documents published in Arabic and most also available in English. - Not all mandatory relevant rules and Board directions (Board decisions) are publicly available to participants. ### Regulatory structure and market composition - CMA responsibilities: issuance of securities, listing, trading and settlement on Tadawul, credit rating agencies, investment funds, disclosure by issuers and governance, licensing, supervision, and enforcement; remit includes all offers of securities in Saudi Arabia (public offers or private placements), establishment, offering and management of funds, and regulation of participants including OTC activity. - Regulation of banks and insurers is responsibility of SAMA, except where listed company obligations bring them within CMA jurisdiction. - CMA Board of Commissioners: five full time members appointed by Royal Order for a five-year term renewable only once; the CEO is chairman of the Board. - Tadawul Board: nine members appointed by the Council of Ministers and includes representatives of MOF, MOCI, SAMA; two from listed companies and four from APs. - Depository is a department of Tadawul. - CMA is accountable to the President of the Council of Ministers and under CML (Article 13) has access to sources of funds including fees, financial penalties, and funds provided by the government. - Financial accounts of the CMA and Tadawul are not published. Key market statistics (as provided by the CMA) - At the end of December 2010, there were 146 listed companies with total market capitalization of $353.44 billion. - In 2010 there were 11 issuers of corporate bonds (comprising 16 issues with a value of SR 49.159 billions). - As at December 31, 2010, the CMA regulated 267 collective investment fund (CIF) operated by 29 fund managers. - Tadawul facilitates fully electronic trading in shares (settled T+0) and sukuk and bonds (settled two days after trade date (“T+2”)). - Tadawul does not conduct a derivative market. Trading occurs on a time price priority basis via a central order book with one session per day (11a.m. to 3.30p.m.). - Direct foreign participation in equities is only permitted via swaps entered into with APs; direct foreign participation is permitted in funds and ETFs. - During 2010, there were 9 public offerings of equity securities for an aggregate value of $1.86 billon and one public sukuk offering. - At December 31, 2010, there were 97 APs engaged in regulated securities activities (65 APs engaged in dealing; 86 in arranging; 71 in managing; 88 in advising; and 75 providing custody services). - As at March 31, 2011, there were 93 APs (544 total licensed activities). - 15 percent of APs are Saudi bank affiliated (99 licenses comprising 18 percent of the total); - 42 percent are local Saudi (182 licenses comprising 33 percent of the total); - 43 percent are foreign affiliated (263 licenses comprising 48 percent of the total). - Total paid up capital of APs was SR14.32 billion. - There were 2,963 registered persons and a total of 4,221 persons employed by APs. Market composition and indicators (selected) - No of listed companies: 2006: 86; 2007: 111; 2008: 127; 2009: 135; 2010: 146 - No of newly listed companies: 2006: 9; 2007: 25; 2008: 16; 2009: 9; 2010: 11 - Domestic market capitalization (SR millions): 2006: 1,225,759.50; 2007: 1,946,035.88; 2008: 924,528.33; 2009: 1,195,506.29; 2010: 1,325,392.25 - Share top 10 stocks in market capitalization (in percent): 2006: 72.56; 2007: 67.87; 2008: 60.89; 2009: 58.51; 2010: 61.78 - Share of top 10 stocks in turnover value (in percent): 2006: 28.01; 2007: 24.84; 2008: 46.19; 2009: 37.53; 2010: 46.93 - Daily average turnover value (SR millions): 2006: 19,856.04; 2007: 10,313.36; 2008: 7,820.50; 2009: 5,056.05; 2010: 3,048.93 - No of initial public offerings: 2006: 10; 2007: 27; 2008: 13; 2009: 13; 2010: 9 - No of secondary offerings: 2006: 2; 2007: 4; 2008: 5; 2009: 3; 2010: 1 - No of intermediaries (AP members of Tadawul): 2006: 14; 2007: 21; 2008: 31; 2009: 35; 2010: 38 - No of mutual funds: 2006: 208; 2007: 233; 2008: 262; 2009: 266; 2010: 267 - Assets under management of mutual funds (SR millions): 2006: 84,238.00; 2007: 105,098.00; 2008: 74,814.00; 2009: 89,560.00; 2010: 94,666.16 - No of ETF: 2006: -; 2007: -; 2008: -; 2009: -; 2010: 2 - Share of turnover by value – Saudi private investors (in percent): 2006: n/a; 2007: n/a; 2008: 91.0; 2009: 91.0; 2010: 86.4 Swaps and related arrangements - CMA reviews and approves the master swap agreement between the AP and the foreign counter party. - CMA does not approve the clients investing through the swap agreement but must receive a copy of the signed (standard) agreement and be notified of details of all executed deals, including identity of clients investing through the agreement and a monthly report of transactions. - The swap immobilizes the securities purchased for the benefit of the foreign interest; legal title remains with the AP but voting rights may not be exercised in respect of such securities. - Shares subject to a swap agreement are segregated in the Depositary and the AP must maintain adequate systems and controls relating to performance of the agreement. ### Effective regulation, market development and gaps - Development of capital markets requires sound macroeconomic policies, appropriate legal, tax, and accounting frameworks, absence of entry barriers, and effective regulation and supervision. - Saudi Arabia is a sharia law jurisdiction adopting global standards; the CRSD and the Appeal Committee function as special purpose financial services tribunals/courts operating under the CML. - The CMA has licensed new entrants as APs but the regulatory environment requires numerous approvals or notifications by APs which may impede business due to processing time. - Organization and internal structure of the CMA changed; management organizational change took effect in 2010 and additional staff resources were acquired under the Fit for Future project. - Regulation is of a high standard but the market requires further development (e.g., trading of rights, derivatives trading, regulated short selling, stock borrowing and lending are absent). - CMA needs to work with Tadawul to enable trading of pre-emptive rights and consider measures to increase liquidity in a market predominately comprised of retail investors. ### Main findings and cross-cutting recommendations - CMA has introduced the CML, Implementing Regulations and the Fit for Future reorganization but needs further refinements to manage conflicts between market development and investor protection. - CMA should publicly demonstrate how it manages perceptions of potential conflicts of interest/objectives when market development aims and investor protection issues clash. - CMA should ensure all mandatory obligations/regulations (including Board resolutions imposing substantive obligations) are publicly available rather than only distributed to affected persons on request. - CMA should reconsider publications policy so enforcement outcomes and settlements that have regulatory significance are appropriately transparent. - CMA should consider amending the CML to: - give it specific authority to negotiate and settle all violations of the law and regulations (not limited to insider trading), - clarify the nature of outcomes it is authorized to agree and confirm discretion to not publicize settlement terms, - provide clear immunity from civil suits for bona fide exercise of its powers, - permit remedial treatment of fine revenues (remit to government or specify authorized uses). - CMA should consider vesting appointment power for CRSD members in the Council of Ministers to strengthen perceived independence of dispute resolution. ### Principles related to the regulator (selection) - CMA is the single entity responsible for administering the CML; comprehensive and integrated regulatory framework pursuant to the CML and Implementing Regulations is in place. - Potential conflict: CMA is responsible both for regulation and development of the capital market. - There are no SROs as Tadawul does not exercise regulatory powers. - CMA has general and broad powers for inspection and investigation and conducts full electronic surveillance of the market (SMARTS/SAXESS). - CMA is a full signatory to the IOSCO MMOU and is a member of the Union of Arab Securities Authorities (UASA). - Issuers: prospectuses are approved by the CMA; a prospectus must include three years’ operating financial results. - Collective investment schemes: only person authorized by CMA to engage in “managing business” may operate and market a CIS; valuation and reporting requirements specified (valuation at least two dealing days each week for investment funds; at least once every six months for real estate investment funds). - Market intermediaries: minimum paid up capital and net capital requirements by activity (Dealing/custody/managing: SR 50 million; Arranging: SR 2 million; Advising: SR 400,000). ### Principles for secondary markets (Principles 25–29) — findings and recommendations - By law the only securities exchange authorized is Tadawul; CML does not allow establishment of a new securities exchange or trading system. - CMA must approve all rules and rule changes of the Tadawul; no rules/procedures issued for oversight of an alternative trading system or new exchange. - IOSCO grading summary: Fully implemented (FI) – 16; Broadly implemented (BI) – 5; Partly implemented (PI) – 6; Not implemented (NI) – 0; Not applicable (N/A) – 2. - Selected IOSCO findings: - Principle 25 (BI): Tadawul is sole authorized exchange; CML does not permit new exchange. - Principle 26 (FI): CMA conducts ongoing regulatory supervision of Tadawul. - Principle 27 (FI): Trading transparency via SAXESS (10 best bid/ask limits), market data available free after five-minute delay. - Principle 28 (FI): Market conduct rules prohibit manipulation, insider trading, front running; surveillance systems in place. - Principle 29 (FI): Settlement T+0 for equities, T+2 for bonds; pre-trade credit checks prevent APs exceeding credit limits. - Recommended actions specifically relating to secondary markets: - Develop a strategy for the future of Tadawul, including whether it should conduct any regulatory functions and determine regulatory changes to CML required if it does not continue to be a wholly-owned entity of government under the full control of the CMA. - Consider introducing a requirement to require licensing of any trading systems, including securities exchanges, setting out objective criteria for approval and providing a mechanism for regulatory authorization, should such a development eventuate in the future. - Demonstrate publicly the CMA’s track record of enforcement of its powers relating to market misconduct and specify details of conduct involved for each case. ### Enforcement, CRSD, procedural fairness and publication policy - CRSD is a tribunal of exclusive jurisdiction relating to obligations imposed by the CML and decisions of the CMA; empowered under CML Article 59 a. to determine listed sanctions (barring from work/trading, cease and desist orders, travel bans). - CRSD and CMA Board may impose fines of DR 10,000 to SR 100,000 per violation (CML Article 59 b.). - A person charged with insider trading (CML Article 64) may avoid CRSD proceedings by settlement with CMA up to three times the profit made (or loss avoided). CMA takes view it has inherent power to settle other violations if there is an admission of liability. - CMA may suspend trading on entire Tadawul market (for no more than one day or longer with MOF approval), approve all listings, suspensions or cancellations, and regulate the Depositary. - CMA broadened the definition of securities to assert jurisdiction over new financial instruments; to date apart from two EFTs derivatives and new financial instruments have not been issued. - Publication policy: not all enforcement outcomes are publicized; CMA states significant ones are announced (all sanctions imposed by CRSD and some CMA Board resolutions). Rationale for partial non-publication: concern about adverse effects on market confidence and development. Identified consequence: regulatory effect of sanctions not fully understood due to lack of transparency. Recommendation: publish outcomes in appropriate cases to demonstrate regulatory effect and test decisions on appeal. ### Collective investment schemes (CIS) — authorization, investor protection, valuation and custody - Only authorized persons may operate and market CIS; terms and conditions must contain 36 mandatory minimum disclosures. - Private placement criteria: amount payable by each potential investor not less than SR 1 million and offer limited to 200 persons or certain classes of sophisticated investors; notification to CMA at least 15 days in advance required. - Fund managers must calculate asset valuations on a regular basis: investment fund assets must be valued on each of at least two dealing days each week when units are sold and redeemed; real estate investment fund assets must be valued at least once every six months. - Recordkeeping: fund manager and custodian must maintain records for ten years including accurate statement of fund assets and liabilities and register of unit holders. - Asset segregation and custody: manager must segregate fund assets, establish separate bank account in fund’s name, register securities in fund’s name; custody may be maintained by manager or third parties but concerns identified about manager or affiliate custody; recommendation to encourage arm’s length custody and independent verification/audit of holdings. - Assessment: Fully implemented for authorization/oversight; Partly implemented for some issues of segregation/custody legal clarity. - Growth statistics: number of mutual funds grew from 208 in 2006 to 267 by end 2010; equity funds from 107 in 2006 to 154 in 2010; real estate funds from 3 to 6 in this period; there are now approximately 320,000 unit holders in these funds. ### Market intermediaries — authorization, prudential and conduct (Principles 21–24) - Authorization: APs must be authorized for each securities business; registered persons must pass CMA-required qualification examination; CMA publishes names of APs and authorized activities. Assessment: Fully implemented. - Prudential requirements: initial paid capital minima by activity: Dealing/custody/managing: SR 50 million; Arranging: SR 2 million; Advising: SR 400,000. Ongoing net capital standard: greater of SR 50 million, 5 percent of higher reported total revenue for the preceding 12 months (or annualized reported monthly revenue for the most recent month), or 10 percent of Aggregated Indebtedness (plus specified adjustments). Assessment: Fully implemented. Recommendations: publish Prudential Guidance Note or convert to Implementing Regulation; consider daily capital adequacy reporting. - Internal organization and client protection: APs must have compliance manuals, internal controls, MLROs, conduct periodic reconciliations (client money/assets reconciled at least once every 7 days; physical count at least every six months). Client assets protection: Article 85 requires client assets held and title registered/recorded to make clear they are client assets; client money held in client account with local bank; AP must obtain bank acknowledgement within 20 days. Assessment: Fully implemented. - Failure procedure: CMA monitors capital adequacy monthly; CMA finalizing new Prudential Rules and internal early warning policies. Identified gap: no documented multi-stakeholder procedure (CMA, Tadawul, SAMA) to deal with unexpected insolvency of an AP; recommendation to prepare and document such a plan. ### Accounting, auditing, corporate governance (Principles 14–17) - Principle 14 (Disclosure, reporting): Prospectus must include three years’ operating financial results; continuing reporting timeframes: audited annual accounts within 40 business days; interim accounts within 15 business days; material developments notified without delay (at least two hours before trading period following event). Assessment: Fully implemented. - Principle 15 (Fair and equitable treatment): Equal treatment of shareholders of same class; disclosure thresholds: 5 percent ownership notification and subsequent 1 percent changes (Listing Rules Article 30). Assessment: Broadly implemented. Issues: bifurcated corporate governance regime between CMA and MOCI creates overlap and enforcement pathway ambiguity; recommendation to clarify roles and publish guidance distinguishing mandatory vs comply-or-explain provisions. - Principle 16 (Accounting and auditing): Standards by SOCPA; listed banks and insurance companies may use IFRS per CMA Board resolution (August 12, 2008); differences between SOCPA and IFRS noted. Assessment: Broadly implemented. Recommendation: CMA should review mandatory obligation to comply with SOCPA for nonbank, noninsurance listed companies and develop timetable to adopt IFRS. - Principle 17 (CIS eligibility and regulation): Authorization, disclosure, valuation and ongoing supervision described; assessment: Fully implemented. ### CMA publications, consultation, and procedural safeguards (2011 Listing rules comments) - Implementing Regulations published in Official Gazette and on CMA website; CMA posts drafts for public comment and holds consultations when necessary. - CMA issues to regulated entities the content of Board resolutions containing substantive compliance requirements; some of these may not be public and are circulated directly to affected entities. Recommendation: publish all operative rules and Board resolutions imposing substantive obligations on website. - Procedural safeguards: Implementing Regulations require reasons and opportunity to be heard prior to adverse actions; all adverse decisions appealable to CRSD then Appeal Panel. Assessment: Partly implemented (some gaps remain, e.g., APRs not expressly giving applicant a right to be heard before rejection). Recommendation: amend CML to set out required procedural fairness obligations before Board imposes sanctions, including opportunity for hearing before impartial/independent third party. ### Information sharing, cooperation and international assistance (Principles 11–13) - CMA may share public and nonpublic information with domestic and foreign regulators (Article 17 of CML authorizes disclosure as CMA Board deems necessary for protection of investors). Assessment: Fully implemented for authority to share information; Partly implemented for information sharing mechanisms (MOU with SAMA not finalized). - CMA is a member of UASA and a full signatory to IOSCO MMOU (June 2010). CMA has shared information with securities regulators worldwide though releases to date have not involved confidential regulatory information. Recommendation: CMA should settle conditions for release of confidential regulatory information to foreign regulators consistent with IOSCO MMOU. ### Annex — CMA approach to implementation of IOSCO 2010 (key points) - IOSCO 2010 new principles noted (systemic risk, regulatory perimeter review, conflicts of interest, auditor oversight, credit rating agencies, analytical services, hedge funds). CMA positions and practices: - CMA has CML mandates contributing to systemic risk monitoring and mitigation (regulate/develop Tadawul, improve trading systems, disclosure, oversight of parties). - CMA conducts regular perimeter reviews through surveillance, inspections and Risk Management Department; engages with SAMA and Tadawul on clearing/settlement risks. - Conflicts of interest: AP obligations to disclose conflicts in writing; fund managers must avoid material conflicts unless full disclosure and board approval; CMA enforces disclosure. - Auditor oversight: SOCPA standards applied; CMA reviews financial statements and may require restatements; SOCPA has Committee for Convergence with IFRS. - Credit rating agencies: none currently operating; CML authorizes CMA to license and prescribe conditions if needed. - Analytical services/sell-side research: regulations require Chinese Walls and conflict management; CMA may regulate if market impact warrants. - Hedge funds: all funds subject to Investment Funds Regulations; no funds pursuing typical hedge fund strategies presently; any such fund would be subject to CMA oversight. *Source: 1. Summary Implementation of the IOSCO Principles (content unit _cr13212).* ### 1. Summary Implementation of the IOSCO Principles ...........................................................12 ### 1. Summary Implementation of the IOSCO Principles ### Executive Summary - The Capital Market Authority (CMA) has made significant progress in establishing supervision credentials and issuing implementing regulations. - The CMA is a party to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (MMOU) Concerning Consultation and Cooperation and the Exchange of Information. - No information sharing arrangement exists with the Saudi Arabian Monetary Agency (SAMA). - Refinements are needed to processes, the Capital Market Law (CML), and the Committee for the Resolution of Securities Disputes (CRSD). - No major gaps identified in current regulatory and legal frameworks; transparency and procedural improvements are needed regarding how the CMA funds operations, disciplines, communicates with members, and balances potential conflicts of interest. - Unpublished but mandatory regulatory instructions issued by the CMA Board to regulated entities need to be publicly available and revised. - Board-imposed disciplinary sanctions need procedural fairness provisions. - The CMA approach to supervision is risk-based and compliance-focused; the cost of compliance should be a more central focus when establishing mandatory obligations. - More transparency should be provided by the CMA in cases of noncompliance; the CMA Board should reconsider its current publications policy to ensure appropriate transparency and regulatory effect in respect of regulated entities’ noncompliance. ### Introduction - The CML came into legal effect on February 25, 2004 and the CMA was established with rule-making authority and enforcement powers (protection of investors, reduction of systemic risk, fairness, efficiency, and transparency). - The CMA possesses both civil and criminal authority and may seek civil sanctions ranging from warnings to monetary penalties, property seizure, and license suspension or revocation. - The CML defines duties and powers of the CMA, Tadawul, the Securities Depositary Center, the CRSD, and a final review authority, the Appeal Panel. - The assessment is part of the Financial Sector Assessment Program Update requested by Saudi Arabia and is the first assessment of implementation of the IOSCO Objectives and Principles of Securities Regulation. - The assessment was undertaken by Mr. Martin Kinsky, a consultant to the IMF, and took place in Riyadh during April 2010. ### Information and Methodology Used for Assessment - Assessment based on available public information relevant to CMA regulatory operations, CMA regulatory supervisory material, and direct interviews of regulated entities and CMA staff. - Assessment based on the IOSCO Principles and Objectives of Securities Regulation and its Methodology adopted in 2003 and updated in 2008. - In June 2010, IOSCO approved a revision to the IOSCO Principles, adding nine new Principles; a revised methodology had not been developed at the time of this assessment, so the current methodology was used. - Principle 30 is not assessed due to the existence of a separate standard for securities settlement systems. - Official language is Arabic; official CMA documents are published in Arabic and most are also available in English. - Not all mandatory relevant rules and Board directions (Board decisions) are publicly available to participants. ### Regulatory Structure and Market Structure - CMA responsibilities include issuance of securities, listing, trading and settlement on Tadawul, credit rating agencies, investment funds, disclosure by issuers and governance, licensing, supervision, and enforcement; remit includes all offers of securities in Saudi Arabia (public offers or private placements), establishment, offering and management of funds, and regulation of participants including OTC activity. - Regulation of banks and insurers is responsibility of SAMA, except where listed company obligations bring them within CMA jurisdiction. - CMA’s Board of Commissioners comprises five full time members appointed by Royal Order for a five-year term renewable only once. The Chief Executive Officer (CEO) is chairman of the Board. - Tadawul’s Board of Directors comprises nine members appointed by the Council of Ministers and includes representatives of MOF, MOCI, SAMA; two from listed companies and four from APs. - The Depository is a department of Tadawul. - CMA is accountable to the President of the Council of Ministers and under CML (Article 13) has access to sources of funds including fees, financial penalties, and funds provided by the government. - Financial accounts of the CMA and Tadawul are not published. Key market statistics (as provided by the CMA) - At the end of December 2010, there were 146 listed companies with total market capitalization of $353.44 billion. - In 2010 there were 11 issuers of corporate bonds (comprising 16 issues with a value of SR 49.159 billions). - As at December 31, 2010, the CMA regulated 267 collective investment fund (CIF) operated by 29 fund managers. - Tadawul facilitates fully electronic trading in shares (settled T+0) and sukuk and bonds (settled two days after trade date (“T+2”)). - Tadawul does not conduct a derivative market. Trading occurs on a time price priority basis via a central order book with one session per day (11a.m. to 3.30p.m.). - Direct foreign participation in equities is only permitted via swaps entered into with APs; direct foreign participation is permitted in funds and ETFs. - During 2010, there were 9 public offerings of equity securities for an aggregate value of $1.86 billon and one public sukuk offering. - At December 31, 2010, there were 97 APs engaged in regulated securities activities (65 APs engaged in dealing; 86 in arranging; 71 in managing; 88 in advising; and 75 providing custody services). - As at March 31, 2011, there were 93 APs (544 total licensed activities). - 15 percent of APs are Saudi bank affiliated (99 licenses comprising 18 percent of the total); - 42 percent are local Saudi (182 licenses comprising 33 percent of the total); - 43 percent are foreign affiliated (263 licenses comprising 48 percent of the total). - Total paid up capital of APs was SR14.32 billion. - There were 2,963 registered persons and a total of 4,221 persons employed by APs. Swaps and related arrangements - CMA reviews and approves the master swap agreement between the AP and the foreign counter party. - CMA does not approve the clients investing through the swap agreement but must receive a copy of the signed (standard) agreement and be notified of details of all executed deals, including identity of clients investing through the agreement and a monthly report of transactions. - The swap immobilizes the securities purchased for the benefit of the foreign interest; legal title remains with the AP but voting rights may not be exercised in respect of such securities. - Shares subject to a swap agreement are segregated in the Depositary and the AP must maintain adequate systems and controls relating to performance of the agreement. Market composition and indicators (selected) - No of listed companies: 2006: 86; 2007: 111; 2008: 127; 2009: 135; 2010: 146 - No of newly listed companies: 2006: 9; 2007: 25; 2008: 16; 2009: 9; 2010: 11 - Domestic market capitalization (SR millions): 2006: 1,225,759.50; 2007: 1,946,035.88; 2008: 924,528.33; 2009: 1,195,506.29; 2010: 1,325,392.25 - Share top 10 stocks in market capitalization (in percent): 2006: 72.56; 2007: 67.87; 2008: 60.89; 2009: 58.51; 2010: 61.78 - Share of top 10 stocks in turnover value (in percent): 2006: 28.01; 2007: 24.84; 2008: 46.19; 2009: 37.53; 2010: 46.93 - Daily average turnover value (SR millions): 2006: 19,856.04; 2007: 10,313.36; 2008: 7,820.50; 2009: 5,056.05; 2010: 3,048.93 - No of initial public offerings: 2006: 10; 2007: 27; 2008: 13; 2009: 13; 2010: 9 - No of secondary offerings: 2006: 2; 2007: 4; 2008: 5; 2009: 3; 2010: 1 - No of intermediaries (AP members of Tadawul): 2006: 14; 2007: 21; 2008: 31; 2009: 35; 2010: 38 - No of mutual funds: 2006: 208; 2007: 233; 2008: 262; 2009: 266; 2010: 267 - Assets under management of mutual funds (SR millions): 2006: 84,238.00; 2007: 105,098.00; 2008: 74,814.00; 2009: 89,560.00; 2010: 94,666.16 - No of ETF: 2006: -; 2007: -; 2008: -; 2009: -; 2010: 2 - Share of turnover by value – Saudi private investors (in percent): 2006: n/a; 2007: n/a; 2008: 91.0; 2009: 91.0; 2010: 86.4 ### Effective Regulation - Development of capital markets requires sound macroeconomic policies, appropriate legal, tax, and accounting frameworks, absence of entry barriers, and effective regulation and supervision. - Saudi Arabia is a sharia law jurisdiction adopting global standards; the CRSD and the Appeal Committee function as special purpose financial services tribunals/courts operating under the CML. - The CMA has licensed new entrants as APs but the regulatory environment requires numerous approvals or notifications by APs which may impede business due to processing time. - The CMA implemented substantive regulation through the CML and Implementing Regulations; regulated community required updating of compliance and controls. - Organization and internal structure of the CMA changed; management organizational change took effect in 2010 and additional staff resources were acquired under the Fit for Future project. - Regulation is of a high standard but the market requires further development (e.g., trading of rights, derivatives trading, regulated short selling, stock borrowing and lending are absent). - CMA needs to work with Tadawul to enable trading of pre-emptive rights and consider measures to increase liquidity in a market predominately comprised of retail investors. ### Main Findings of Principle by Principle Assessment - CMA is a relatively new organization that has made substantial progress: introduction of the CML, the Implementing Regulations and the Fit for Future reorganization. - Regulatory theory and practice are rapidly changing globally; CMA needs to consider additional important issues and introduce appropriate regulation to promote development of its capital market. - CMA needs to publicly demonstrate how it manages perceptions of potential conflicts of interest/objectives when market development aims and investor protection issues clash. *Source: 1. Summary Implementation of the IOSCO Principles (content unit _cr13212).* ### 24. Principles related to the regulator. The CMA is the single entity responsible for ### 24. Principles related to the regulator. The CMA is the single entity responsible for ### Regulator: structure, mandate, and conflicts - The CMA is the single entity responsible for administering the primary securities law of Saudi Arabia. - A comprehensive and integrated regulatory framework pursuant to the CML and Implementing Regulations is now in place. - Under CML, the CMA’s objectives, responsibilities, powers and authorities are set out. - There is a potential conflict since the CMA is responsible both for regulation and development of the capital market. - Corporate governance matters can fall within the authority of both MOCI and the CMA. ### Self-regulatory organizations (SROs) - There are no SROs as Tadawul does not exercise regulatory powers although it is responsible for operationally running the market and the Depository. ### Enforcement - The CMA has general and broad powers for inspection and investigation and it conducts full electronic surveillance of the market. - The CMA has a dedicated enforcement division, but the track record of the CMA on enforcement is not fully transparent. - The CMA has authority to investigate potential violations and to bring enforcement action seeking civil and criminal penalties. - It may suspend or withdraw the license of an AP who deliberately violates the CML or its Implementing Regulations. - An inspection program adopting a cycle of two to three years of APs (risk and compliance-based) is conducted via on-site inspections and review of specific regulations. ### Cooperation with domestic and foreign regulators - The CMA has the power to share information with domestic and foreign regulators. - The CMA is a full signatory to the IOSCO MMOU and is a member of the Union of Arab Securities Authorities (UASA). - UASA is a cooperative body which inter alia, shares information. - To date, no release of confidential regulatory information has been required to be released, although the CMA is willing to do so if requested. ### Issuers: disclosure and prospectus requirements - Issuers that offer securities by way of public offer are subject to disclosure requirements including shareholder voting decisions and provisions for equality of treatment. - Prospectuses are approved by the CMA. - Reporting and disclosure by significant shareholders of listed companies and by persons who would seek control of a listed company are required. - Minimum information requirements for prospectuses (debt and equity securities) require that the prospectus contain sufficient information to enable an investor to assess the issuer’s activities, financial position, management and prospects as well as the rights and obligations attaching to the securities. - A prospectus must include three years’ operating financial results. - Private placement activity is low. ### Collective investment schemes (CIS) - Only a person authorized by the CMA to engage in “managing business” may operate and market a CIS and must demonstrate compliance with criteria relating to honesty and integrity, adequacy of resources, financial capacity, internal management procedures and systems. - The manager is required to disclose sufficient information about the fund’s management, objectives, strategies, risks and other information to enable potential investors to make an informed investment decision. - A person seeking to offer units in an investment or real estate fund by way of a public offer must obtain the CMA approval. - Investment funds may also be offered by way of a private placement to certain classes of sophisticated investors. - Foreign investment funds may not be offered within Saudi Arabia without the CMA consent. - The CMA regulations prescribe the legal form and structure of funds but this has not been tested as no judicial upholding of the protection of clients’ rights in such schemes has occurred. - When a manager applies for approval to offer and sell units in a fund, the CMA reviews the valuation method to ensure that it is fair and reliable. - Fund managers must calculate asset valuations on a regular basis. - Valuation of the assets of an investment fund must occur on each of at least two dealing days each week when units of the fund are sold and redeemed. - Valuation of the assets of a real estate investment fund must occur at least once every six months. ### Market intermediaries - Market intermediaries require an AP license, depending on business category. - The CMA will review an applicant’s business plan, manuals, policies and procedures, and audited financial statements, including the skills, experience, competence and integrity of its employees, officers and agents, certain of whom must be registered and pass a qualification examination. - Minimum paid up capital and net capital requirements based on risk (see Principle 22) apply for each security business category. - Dealing, custody and managing requires paid capital of SR 50 million, but arranging is SR 2 million and advising requires SR 400,000. - The CMA monitors APs’ compliance with its capital adequacy and other obligations, but it has no specific or documented process or plan to assist it deal with an unexpected failure of an AP. *IMF staff report excerpt.* ### 31. Principles for secondary markets. By law, the only securities exchange authorized is ### _cr13212 - 31. Principles for secondary markets. By law, the only securities exchange authorized is ### Key findings on secondary markets and market structure - By law, the only securities exchange authorized is Tadawul which the CMA must oversee as a securities exchange and depository. - The CML does not allow for the establishment of a new securities exchange or of a trading system. - The CMA must approve all rules and rule changes of the Tadawul. - No rules, procedures or guidance have been issued to set out how the CMA would deal with the regulatory oversight to apply to an alternative trading system or new exchange. - Dealing may occur away from the market in limited circumstances as private transactions, but OTC activity would therefore appear to be low. - The CMA believes that there will never be an alternative trading system or new exchange. ### IOSCO Principles grading and specific findings (selected, related to secondary markets) - Principle 25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. - Grading: BI - Findings: - The only securities exchange authorized under the CML in Saudi Arabia is the Tadawul (which designates the CMA as the regulator), specifies its regulatory responsibilities, and grants to the CMA full responsibility and authority to oversee the Tadawul in its capacity both as a securities exchange and depository. - The CML does not allow for the establishment of a new securities exchange or of a trading system. - No rules, procedures or guidance have been issued to set out how the CMA would deal with the regulatory oversight to apply to an alternative trading system or new exchange. - The CMA believes that there will never be an alternative trading system or new exchange. - Principle 26. There should be ongoing regulatory supervision of exchanges and trading systems... - Grading: FI - Findings: - The CMA is required to regulate and develop the Tadawul; seek to develop and improve methods of systems and entities trading in securities; develop procedures that would reduce the risks related to securities transactions; and seek to achieve fairness, efficiency and transparency in securities transactions. - The CMA conducts ongoing regulatory supervision of the Tadawul. - The CML authorizes the Tadawul to adopt rules, subject to approval by the CMA; under the CML, the CMA must approve all rules and rule changes of the Tadawul. - Principle 27. Regulation should promote transparency of trading. - Grading: FI - Findings: - Tadawul has adopted trading instructions (approved by the CMA with the force of regulation) governing the disclosure of information about any transactions on the market or affecting the Depositary. - The SAXESS electronic trading system continuously disseminates to the Tadawul members in real-time the 10 best bid and 10 best ask limits in the order book for each tradable listed security, including the number of orders and total disclosed order quantity at each price limit. - Market information and trading data is available free after a five-minute delay. The SAXESS system also provides for the dissemination of information on completed transactions. - Principle 28. Regulation should be designed to detect and deter manipulation and other unfair trading practices. - Grading: FI - Findings: - CML and provisions of the Market Conduct Regulations prohibit market manipulation, the dissemination of misleading information, insider trading, front running and other fraudulent or deceptive conduct. - The CMA has included disclosure requirements in the Listing Rules to seek to ensure material information is not omitted from prospectuses and company announcements. - Principle 29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. - Grading: FI - Findings: - Trades in equities are settled on the trade date (T+ 0) basis and T + 2 for bonds, all electronically. - Securities market open positions and credit exposures are limited to the credit extended and guaranteed to an AP and its customers by a clearing bank. - Before allowing entry of an order into the order book the electronic trading system automatically checks to ensure that execution of that order will not cause the AP to exceed its daily and intra-day credit limit set by its clearing bank; any order that would cause an AP to exceed its credit limit is rejected. - Principle 30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight... - Status: Not assessed. ### Aggregate implementation summary (as presented) - Fully implemented (FI) – 16 - Broadly implemented (BI) – 5 - Partly implemented (PI) – 6 - Not implemented (NI) – 0 - Not applicable (N/A) – 2 ### Recommended actions specifically relating to secondary markets (Principles 25–29) - Develop strategy for the future of Tadawul, including whether it should conduct any regulatory functions and determine regulatory changes to CML required if it does not continue to be a wholly-owned entity of government under the full control of the CMA. - Consider introducing a requirement to require licensing of any trading systems, including securities exchanges, setting out objective criteria for approval and providing a mechanism for regulatory authorization, should such a development eventuate in the future. - Demonstrate publicly the CMA’s track record of enforcement of its powers relating to market misconduct (appropriately specifying and articulating manipulative and other unfair market practices) and remedy the lack of transparency of the outcomes it has achieved by specifying for each case, the details of the conduct involved. *Italic: Source — _cr13212 - 31. Principles for secondary markets. By law, the only securities exchange authorized is (IMF assessment excerpt).* ### 32. The authorities provided comments on the detailed assessment report, most of ### _cr13212 - 32. The authorities provided comments on the detailed assessment report, most of ### Authorities' general comments and incorporation of corrections - The authorities provided comments on the detailed assessment report, most of which have already been incorporated, including the correction of some factual errors. - On four substantive findings in the assessment, the authorities highlighted: - The assumed conflict of interest arising from the CMA’s power to appoint CRSD members is eliminated because the members of the Appeal Panel, whose decisions are final and supersede those of the CRSD, are appointed by the Council of Ministers. - Although not all enforcement outcomes are publicized, the significant ones are: all sanctions imposed by CRSD resolutions and some of the CMA’s Board resolutions are announced to the public. - 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 CGR. 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. - The CMA’s Board members may only be removed by a Royal Order, which is subject to applicable procedural rules; thus, this aspect of the assessment is unclear and would seem to be redundant. ### Executive summary / Introduction — key points from authorities - The CML is considered extremely flexible and does not require refinements at this stage; the CMA can implement the action plan without significant amendment to the CML. - Prior to the CMA, the regulator of the stock market was a ministerial committee comprising MOF, MOCI, and SAMA; some departments within SAMA were responsible for supervisory and operational roles. - Research related to securities may only be conducted by a duly AP. ### Responses organized by IOSCO Principles (selected highlights) - Principle 1. The responsibilities of the regulator should be clearly and objectively stated. - No gray area on corporate governance matters: Listed Companies must comply with the Companies Law and the mandatory articles of the CGR. Nonmandatory CGR articles require disclosure of compliance extent and reasons for noncompliance; if noncompliance constitutes a Companies Law violation, MOCI will handle it in coordination with the CMA if necessary. - The CMA has broad powers under the CML, including settlement powers beyond Article 64 on insider trading; the CMA Board issued a resolution specifying settlement criteria for other violations. - The assumed conflict between regulating and developing the market does not exist; the CML clearly defines both roles and the CMA has segregated them into different departments with measures to balance objectives. - The MOU between the CMA and MOCI is published and available on the CMA and MOCI websites (links provided in the source). - Capital increase and decrease responsibilities are shared between the CMA and MOCI; the published MOU specifies respective responsibilities. - The authorities consider PI as a grading too low for Principle 1. - Principle 2. The regulator should be operationally independent and accountable. - The assumed conflict from CMA appointing CRSD members is mitigated by the Appeal Panel appointment by the Council of Ministers; CRSD is operationally independent and measures exist to assure the public the CMA has no influence over the CRSD. - CMA’s utilization of funds is for public purposes directed to regulatory objectives under the CML; surplus funds must be remitted to the MOF. - CMA reports its financial position to the President of the Council of Ministers, the Shura Council and the MOF. - The authorities consider PI as a grading too low for Principle 2. - Principle 3. The regulator should have adequate powers, proper resources, and capacity. - CMA funding resources are sufficiently diversified. In case of shortage, the CMA may seek government funding as per the CML. - Principle 4. The regulator should adopt clear and consistent regulatory processes. - CMA uses inspection/supervision to educate participants and uses forums, workshops, media publications, and conferences. - The agenda for regulatory change is included in the CMA’s annual report (examples: 2009 annual report page 152 and 2008 annual report page 106 cited). - Procedural obligations are defined in the CML and Implementing Regulations; the CMA Board will not take enforcement action until investigations are complete and interrogation has occurred. The Resolution of Securities Disputes Proceedings Regulations set procedures for CRSD and Appeal Panel processes. - The authorities consider PI as a grading too low for Principle 4. - Principle 5. Staff should observe highest professional standards. - CMA staff Code of Conduct requires disclosure to internal Compliance of any relationships that may impact the CMA or market participants (financial, family, personal). Staff must disclose potential conflicts arising from relationships with other CMA staff. - Investment in mutual funds is included and allowed by the Code of Conduct. - Principle 6. Appropriate use of SROs. - The CML requires Tadawul’s board to establish the depository centre; it may be a separate company or a department within Tadawul. Currently it is a department; the CML allows establishment as a separate entity subject to CMA Board approval. - Principle 9. Comprehensive enforcement powers. - Authorities state enforcement outcomes over past years evidence enforcement division capabilities; annual report information demonstrates such capabilities. - Principle 10. Effective inspection, investigation, surveillance, and enforcement. - Significant enforcement outcomes are publicized: all sanctions imposed by CRSD resolutions and some CMA Board resolutions are announced to the public. The CMA annual report provides details and case numbers demonstrating enforcement activities and regulatory effect. Authorities argue the principle should not be graded PI. - Principle 12. Information-sharing mechanisms. - Authorities believe PI is too low; the CMA is in final stages of signing the MOU with SAMA. - Principle 14. Full, timely, accurate disclosure of financial results and material information. - Authorities refer to comments on the detailed assessment. - Principle 15. Fair and equitable treatment of securities holders. - No gray area or overlap between CMA and MOCI on corporate governance matters; listed companies must comply with Companies Law and mandatory CGR articles. - Mandatory CGR articles are stated as Articles 9, 12\c, 12\e, 14 and 15; authorities say these are clearly set out as mandatory on the CMA’s website and that mandatory changes are announced publicly and published in the official gazette. - General assembly agenda and shareholders’ right to participate are covered by the Companies Law. - Conflict of interest within the Board is covered by the Companies Law. - Capital increase and decrease responsibilities are shared between CMA and MOCI per the published MOU. - Principle 16. Accounting and auditing standards quality. - Translation of SOCPA standards should not create ambiguity; audit firms have full English translations reflected in English financial statements and have not caused confusion. - Principle 17. Standards for eligibility and regulation of CIS operators/marketers. - Royal Decrees waive the requirement that a company must be in operation for three years preceding application for listing; Royal Decrees do not waive requirements relating to investment funds. Funds may obtain waiver of a regulatory requirement by Board resolution; such waiver must be disclosed in the fund’s terms and conditions. - Principle 18. Legal form/structure of CIS and segregation/protection of client assets. - The absence of a legal test in an insolvency should not be viewed as uncertainty over unitholders’ protection. CML and Implementing Regulations are clear on unitholders’ entitlement to fund assets. Authorities conclude the mutual fund regime is legally effective and believe this principle is fully implemented. - Principle 20. Basis for asset valuation, pricing, and redemption of CIS units. - Fund managers may set a deadline for submitting redemption and subscription requests no more than one day prior to the valuation time on the dealing day. IFRs prohibit accepting requests after the valuation time; late requests must be transferred to the next dealing day. Authorities state this mechanism provides the same effect as a blackout period. - Principle 24. Procedure for failure of a market intermediary to minimize investor damage and systemic risk. - CMA is finalizing new Prudential Rules to develop internal policies including stages of early warning systems tied to APs’ capital adequacy. Interim monitoring: net capital positions of APs are closely monitored by the Prudential Department; APs not meeting minimum recommended by the PGN are requested to address shortfalls. - Principle 25. Establishment of trading systems and exchanges subject to authorization and oversight. - The CML does not allow an alternative trading system or new exchange; Tadawul is the only authorized securities exchange. Future new trading systems or exchanges (e.g., for derivatives) would be under Tadawul and subject to CMA powers. - Trading halts must be approved by the CMA per Article 23 of the Listing Rules. - Tadawul will remain under full regulatory control of the CMA even if it IPOs. - Authorities state this principle is fully implemented. - Principle 28. Detect and deter manipulation and unfair trading practices. - CMA’s enforcement track record is publicly demonstrated; the annual report contains a dedicated enforcement section detailing violations and enforcement actions. ### II. Detailed assessment — Principle 1 (excerpt) - Description: The CMA is the single entity responsible for administering the CML, the primary securities law of Saudi Arabia. The CML defines the CMA’s objectives, responsibilities, powers and authorities (see Article 5), which include the following: 1. Issue regulations, rules and instructions for the implementation of the CML; 2. Regulate and develop the capital market in Saudi Arabia, improve methods of systems and entities trading in securities, and develop procedures to reduce the risk related to securities transactions; 3. Regulate issuance of securities and monitor securities and dealing in securities; 4. Regulate and monitor the works and activities of parties subject to the control and supervision of the CMA; 5. Protect investors in securities from unfair and unsound practices or practices involving fraud, deceit, cheating or manipulation; 6. Achieve fairness, efficiency, and transparency in securities transactions; 7. Regulate and monitor the full disclosure of information on securities, their issuers, dealings of informed persons, major shareholders and investors; and 8. Regulate proxy and purchase requests and public offer of shares. - Mandatory requirements are enforceable by CMA action taken by its Board or at the CRSD. Decisions of either body can be enforced through an external government agency which will take action necessary to collect a fine, seize property or restrict an offender’s ability to leave the jurisdiction. - The CMA has used its authority to establish a comprehensive and integrated regulatory framework by issuing (and updating) the following Implementing Regulations: 1. APRs; 2. Securities Business Regulations; 3. Offers of Securities Regulations; 4. Market Conduct Regulations; 5. Listing Rules; 6. AML/CFT rules; 7. CGRs; 8. Merger and Acquisition Regulations; 9. Investment Funds Regulations; 10. Real Estate Investment Funds Regulations; *Italic: Source — _cr13212 - 32. The authorities provided comments on the detailed assessment report, most of* ### 11. Resolution of Securities Disputes Proceedings Regulations. ### 11. Resolution of Securities Disputes Proceedings Regulations. ### Enforcement and sanctions (CRSD and CMA powers) - The CRSD is a tribunal/court of exclusive jurisdiction relating to obligations imposed by the CML and decisions of the CMA. - CRSD is empowered under CML Article 59 a. to determine any of nine listed “sanctions” against “any person” who has violated the CML or the regulations of the CMA or the exchange. These include: - barring persons from working or trading, - cease and desist orders, - travel bans. - CRSD and the CMA Board are authorized to impose fines of DR 10,000 to SR 100,000 per violation (CML Article 59 b.). - The language of Article 59 is not exhaustive and the CRSD may impose other sanctions. - A person charged with insider trading (CML Article 64) may avoid proceedings before the CRSD by reaching a private (non published) settlement with the CMA pursuant to which it agrees to pay a sum not exceeding three times the profit made (or loss avoided). - No specific provision in the CML empowers the CMA to settle other violations, although the CMA has settled other violations and takes the view it has inherent power to settle all violations under the CML and the Implementing Regulations. The CMA will not agree to such settlements unless there is an admission of liability. ### Powers, jurisdiction, and scope of regulation - The CML (Article 6) grants the CMA all powers and authorities to carry out its functions under the CML and its Implementing Regulations, including: - approving the offering of securities, - determining the content of annual and periodical financial statements and reports, - granting licenses, - conducting inquiries and investigations regarding violations, - defining and explaining the terms and provisions set out in the CML, - performing other functions and exercising other powers as necessary or expedient to give full effect to the CML and its Implementing Regulations. - The CMA may suspend trading on the entire Tadawul market (for no more than one day or longer with the approval of the MOF), approve all listings, suspensions or cancellations of listings on the Tadawul and regulate the operation of the Depositary. - Tadawul, apart from running the Depositary, has no authority in respect of these matters. - The CMA has broadened the definition of securities to assert jurisdiction over new financial instruments, including warrants, options, futures, contracts for differences and long term insurance contracts. To date apart from two EFTs derivatives and new financial instruments have not been issued. - Regulation of Insurance Companies and Banks remains the responsibility of SAMA, although all insurance and the majority of the banks are listed and therefore must comply with the CML and Implementing Regulations relating to their listing and obligations as listed companies. ### Institutional overlaps and memorandum of understanding (MOU) issues - Accounting and auditing standards are established by SOCPA (supervised by the MOCI). - Company incorporation and corporate governance matters (Boards, general assembly meetings, capital increases/decreases of joint-stock companies) are regulated by the Companies law under the MOCI, not the CMA. - Capital increases and decreases of joint stock companies fall under the jurisdiction of both the CMA and MOCI; responsibilities are set out in an executed MOU (available only in Arabic). - The CML contains no reference to the practical division of responsibility between the CMA, MOCI, and other government entities for corporations operating in the capital market. - A proposed MOU between the CMA and SAMA has not been finalized; dialogue occurs informally and ad hoc. ### Principle 2 — Operational independence and accountability (Description, Assessment, Comments) - Description highlights: - CML (Article 4) establishes the CMA as a financially and administratively autonomous agency. - CMA governed by a Board (Article 7) of five full time members appointed by Royal Order for five-year terms renewable once. - Board members may not engage in any other profession or provide advice to private institutions; must disclose securities holdings and those of relatives upon appointment. - CML contains no criteria for terminating the Board or board members during their term; removal only by Royal Order. - CMA sources of funding (CML Article 13): 1. fees and commissions for registration of investment funds, registration, listing and trading of securities, and licensing and renewal of licenses for APs; 2. fines and financial penalties imposed for violations of the CML. - CMA may also be funded from charges for using its facilities, returns on its funds and proceeds from the sale of its assets. The CMA Board determines fee levels. - CMA must maintain a general reserve fund equal to twice its expenditures reported in the previous annual budget. - The CMA is not required to consult with or obtain approval from any other authority regarding its securities regulatory activities. - Implementing Regulations require the CMA to give reasons for its decisions and to provide an opportunity to be heard prior to adverse actions (e.g., refusal of prospectus approval, suspension or revocation of an AP’s license). - All adverse decisions and actions of the CMA are appealable to the CRSD. - CRSD members are appointed by the Board for three-year terms, are legal advisors with expertise in capital markets and financial transactions, and may not have direct or indirect pecuniary interest in or family relationships up to the fourth degree with a party to a complaint. - Decisions of the CRSD are appealable to the Appeal Panel (appointed by the Council of Ministers) comprising three members who represent the MOF, the MOCI and the Bureau of Experts at the Council of Ministers; decisions of the Appeal Panel are final. - Assessment: Partly implemented. - Comments and concerns: - CMA is not totally autonomous due to possibility of Royal Decree waivers (mentioned in Principle 17), which could compromise independence and investor protection. - CMA treats non-public information as confidential but may disclose as Board deems necessary for investor protection. - CML (Article 480) protects the CMA and its staff from liability for any false information in or omission from prospectuses, periodic reports, advertisements or other filed documents. Article 55 makes certain persons liable for incorrect prospectus statements or omissions where the prospectus is approved by the CMA. - No express statutory immunity for the CMA from suit for the bona fide exercise of its powers; law should provide clear immunity. - CMA accountable to the President of the Council of Ministers for resource use and authority; financial statements and accounts reported annually within 90 days of year end. The CMA’s financial position is not published. - CMA introduced an annual regulatory fee in 2011 payable by APs; the fee is not published. - Quantum of fines is not published, though some individual disciplinary fines may be published per publications policy. - Fine retention by the CMA may be perceived as inappropriate; suggestions: - amend CML to permit remittance of such receipts to the government as a separate payment unrelated to CMA budget; or - set out circumstances when CMA may utilize fine revenue (e.g., investor compensation, public education). - The appointment of CRSD members by the CMA Board may compromise independence; recommendation to vest appointment power in the Council of Ministers and to specify permitted reasons for removal of Board or CRSD members. ### Principle 3 — Powers, resources and capacity (Description, Assessment, Comments) - Description: - CML grants CMA broad powers to issue Implementing Regulations, conduct inquiries and investigations regarding violations, define terms, and perform other functions necessary for the CML. - Funding sources reiterated: 1. fees and commissions for registration, listing, trading, licensing and renewal of APs; 2. fines and financial penalties for violations. - CMA may also be funded from charges for using its facilities, returns on its funds, proceeds from the sale of assets, and may seek government funding. - CMA must maintain a general reserve fund equal to twice its expenditures reported in the previous annual budget. - Assessment: Fully implemented. - Comments and capacity metrics: - CMA restructured in 2010 to reflect operational responsibilities and believes it has sufficient resources to attract and retain staff with benefits (remuneration, performance bonuses, training, medical assistance). - Directors and managers: 40m percent holding a bachelor’s degree, 46 percent holding master’s degrees and 6 percent holding doctorates. Fields of study: 19 percent accounting, 22 percent financial, 15 percent legal, 19 percent management, 14 percent information technology, and 11 percent other disciplines. - In 2010, CMA hired an additional 97 employees to bring staff to 633. - In 2010, 527 employees participated in different training programs; 242 attended offshore training programs; 40 participated in continuing education programs through correspondence and 11 received on-the-job training at international organizations or entities similar to the CMA. - Regulatory department sizes vary, from 3 in International Relations to 30 in Continuous Disclosure. - Recommendation: publish financials to demonstrate appropriate funding. ### Principle 4 — Rulemaking and regulatory processes - Description: - CMA’s rulemaking process requires transparency; CMA publishes drafts of new and amended regulations for public comment as authorized by the CML. - CMA posts new and amended regulations on its website and submits them to market participants for comment; when necessary holds meetings with market participants or forms advisory committees. - Implementing Regulations are adopted by a published resolution of the CMA Board. - Operational note: - The CMA publishes rules and regulations on its website in Arabic and English, although some documents currently undergoing revision (e.g., Prudential Guidance Notes containing substantive requirements to maintain net capital) are not public documents and are only copied to APs required to comply with them. - The CMA has issued to regulated entities the content of Board resolutions which contain substantive compliance requirements. - Recommendation: ensure all mandatory obligations/regulations are publicly available rather than only distributed to affected persons on request. - The CMA has determined a publications policy specifying matters to be announced to the public; however not all regulatory decisions are public. ### Additional comments and recommendations (cross-cutting) - CMA should publish its MOU with MOCI in English (not only Arabic) and identify current boundaries of each regulator’s jurisdiction. - CMA should seek amendment of the CML to: - give it specific authority to negotiate and settle all violations of the law and regulations (not limited to insider trading), - clarify the nature of outcomes it is authorized to agree and confirm discretion to not publicize settlement terms, - provide clear immunity from civil suits for bona fide exercise of its powers, - permit remedial treatment of fine revenues (remit to government or specify authorized uses). - CMA should more positively manage perceived conflicts between its market development mandate and its regulatory functions by publicly articulating how it balances and manages competing obligations (for example in its annual report or website) and describing measures to avoid conflicts of interest. - CMA should consider amending the CML to remove its ability to appoint CRSD members and vest that power in the Council of Ministers to strengthen perceived independence of dispute resolution. *Source: _cr13212 - 11. Resolution of Securities Disputes Proceedings Regulations.* ### 2006. Investment Funds, Real Estate, Corporate Governance. ### 2006. Investment Funds, Real Estate, Corporate Governance. ### Investment Funds, Real Estate, Corporate Governance (2006) - Investment Funds referenced in 2006. - Real Estate referenced in 2006. - Corporate Governance referenced in 2006. ### Mergers and Acquisition (2007) - Mergers and Acquisition referenced in 2007. ### Offers of securities, AML/CTF (2008) - Offers of securities referenced in 2008. - AML/CTF referenced in 2008. *Source: _cr13212 - 2006. Investment Funds, Real Estate, Corporate Governance.* ### 2011. Listing rules (comments due Q2: 2011). ### _cr13212 - 2011. Listing rules (comments due Q2: 2011) ### Publication, consultation, and transparency - Implementing Regulations contain the CMA’s regulatory policy and are published in the Official Gazette and on its website when issued; publications may include an explanation of actions. - The CMA provides further explanation in the Annual Report and in press releases and interviews distributed through media channels. - The CMA generally does not publish reports on any investigation or inquiry. - The CMA issues to regulated entities the content of Board resolutions which contain substantive compliance requirements; some of these will not involve prior consultation and may not be public although circulated directly to affected entities once mandatory. - The CMA states it considers the cost of compliance when formulating new or amended regulations and via the consultation process, but it has not published any statement explaining how it does so. - Example: On January 23, 2011, the CMA issued a notice to APs requiring independent members (directors) of their boards, comprising not less than two members, or one-third of the Board, whichever is the greater. This requirement becomes mandatory from January 1, 2012. - Recommendations: - The CMA should publish and make available on its website all operative rules and regulations (including Board resolutions imposing substantive obligations). - The CMA should hold more chief executive and compliance officer forums to raise awareness about mandatory obligations and interpretations. - The CMA should consider issuing a publication confirming its consultative process, including a detailed agenda for regulatory change and how it balances the costs of compliance. - The CMA should publish Guidance notes explaining how it interprets regulatory obligations applicable to APs and regularly publish general observations of weaknesses or best practices from inspection activities. ### Procedural safeguards, appeals, and enforcement decision-making - All adverse actions of the CMA are appealable to the CRSD, which will investigate the claim and issue a reasoned decision; adverse actions may be further appealed to the Appeal Panel. - The procedural obligations of the CMA are defined in the CML/Implementing Regulations including, in some cases, the need for a hearing session. The CMA Board may never take an enforcement action unless the investigation process is completed which will always include “interrogation.” - Assessments: - Assessment: Partly implemented (procedural fairness safeguards in Implementing Regulations; some gaps remain). - Comments and recommendations: - The APRs do not expressly give an applicant a right to be heard before rejection, though they provide for a right of appeal to the CRSD from a decision to reject an application. The CMA should allow an applicant the opportunity to be heard in respect of its application before a decision is formally taken to reject the application. - Because the CMA acts as investigator, prosecutor and decision authority (Board), and the Board does not publish certain outcomes, the process can lack procedural fairness. The CMA should seek to have the CML amended to set out required procedural fairness obligations before sanctions are imposed by the Board, including an opportunity for a hearing before an impartial/independent third party prior to the Board decision. ### Enforcement powers, sanctions and remedies - The CMA may subpoena witnesses, take evidence and require production of any document it considers relevant to an investigation; may inspect records to determine violations or imminent violations. - Two methods to obtain enforcement outcomes: - Method 1: Bring an enforcement action before the CRSD under Article 59 and seek administrative, civil or criminal sanctions. - Method 2: The CMA Board itself under CML Article 59 may impose fines and other sanctions. - Sanctions and remedies: - Financial penalties shall be not less than SR 10,000 or more than SR 100,000 per violation. - Available orders include ordering a person to take or refrain from actions, suspending trading in a security, barring a person from engaging in securities business, indemnification for harmed persons, disgorgement of gains, and criminal penalties including imprisonment for unauthorized dealing or market manipulation/insider trading. - Assessment: Fully implemented (comprehensive enforcement powers in place). - Comments: - The level of fines stipulated in the CML may not be sufficiently high in all cases; the CMA should consider whether the size of possible fines is sufficient. - The CMA’s enforcement powers do not compromise private rights of action for harmed investors (damages, recession of contracts, etc.). ### Inspection, surveillance, recordkeeping, and AML/CTF - AP recordkeeping and retention requirements: - An AP must record and maintain for 10 years information about its business activities sufficient to demonstrate compliance and permit reconstruction of individual transactions. - Records must include client name, date of birth, identification number, approximate annual income and net worth, employer and bank account information, details of all orders, purchases and sales, income and expenses, receipts and payments, and a record of cash and securities held in each client account. - APs must maintain (1) a list of active accounts, (2) a record of original entry of all purchases and sales, receipts and deliveries, receipts and disbursements of money, and (3) ledgers showing assets, liabilities, income and expenses. - Inspection and surveillance authorities: - The CMA may inspect operations (including books and records) at any time without prior notification and may obtain any record required under the CML or Implementing Regulations. - The CMA has general authority to require any person to produce any book, paper or other document deemed relevant to an investigation. - The CMA has direct regulatory authority over Tadawul and conducts surveillance and inspections of its activities. - AML/CTF: - APs must comply with AML/CTF Rules issued by the CMA, including client identification, client acceptance policies to identify higher-risk clients, ongoing monitoring, and immediate reporting of suspicious activity to the Financial Intelligence Unit. - APs must record and retain information used to verify a client’s identity, beneficial ownership and the purpose and intended nature of the business relationship. - Specific supervision practices: - The CMA uses “SMARTS,” an electronic market surveillance system, to detect price or trading activity that exceeds predetermined parameters and provides “alerts” for examination. - The CMA has access to the identity of all customers of regulated entities through SMARTS and power to access records maintained by regulated entities. - The CMA inspects APs before allowing engagement in swap arrangements and requires notification and monthly reporting of executed swap transactions. - The CMA does not approve research reports prior to publication but will review reports after publication during inspections to assess compliance with anti-misleading/reporting requirements. - Assessment: Fully implemented (inspection, investigation and surveillance powers); CMA does not outsource functions. ### Compliance programs, inspection outcomes, and supervisory statistics - AP compliance obligations: - An AP must establish internal compliance procedures, document them in a compliance manual, provide employee training, and the governing body must ensure adequate resourcing of compliance. - The CMA monitors sufficiency as part of inspections and may take enforcement action for failure to establish, maintain or enforce required compliance procedures. - Inspection program and workload (2010 and adjacent years): - The CMA selects APs for routine examination based on the AP’s annual business disclosure statement and a predetermined inspection cycle of 2-3 years. - In 2010, the Inspection Department completed 18 routine inspections. - In 2010, the Inspection Department completed 54 inspections for cause and follow up. - Investor complaint handling in 2010: - The CMA received 405 investor complaints. - Of these complaints, 215 were resolved within the 90 day period. - The CMA issued 126 notices permitting investors to file claims with the CRSD. - 64 remained pending at year end. - Investigations: - In 2009, the CMA initiated 157 investigations into suspected violations of the CML. - In 2010, the CMA initiated 253 investigations into suspected violations. - At the end of 2010, the CMA had completed 220 enforcement cases, including: - 37 cases involving conducting a securities business and investment of funds without a license, - 44 involving manipulation and misleading information, - 53 involving disclosure violations or insider trading. - In 2010, the CMA filed 18 indictments with the CRSD based on information developed during investigations (cases involved manipulation and fraud to create a false and misleading impression about market price and conducting securities business without a license). - Assessment: Partly implemented (inspections and enforcement in place; some gaps in compliance program effectiveness and communication of outcomes). - Comments and recommendations: - The CMA uses inspections to educate APs and provide compliance advice, but outcomes of supervision visits (findings and fines) are not public and not made available to other APs, limiting broader learning. - The CMA should regularly publish general observations from inspections to lift market-wide compliance standards. - The CMA should consider implementing a formal recusal policy in the Code of Conduct and obtain positive affirmations from staff (e.g., annually) that they have complied with the Code, including disclosures of investments such as mutual funds that may not be detectable by SMARTS. ### Staff standards, confidentiality and Code of Conduct - Legal and internal standards: - The CML establishes standards of conduct; CMA employees are prohibited from engaging in any other job or profession and from providing advice to any company or private institution. - On accepting employment, CMA staff must disclose their securities holdings and the securities holdings of their relatives, and update this information to reflect changes. Similar disclosure requirements apply to agents of the CMA. - The CMA has adopted a Code of Conduct imposing duties to prevent disclosure of confidential or inside information. - The Code applies to all CMA personnel including employees, advisers, trainees, contract workers and any person working directly or indirectly at the CMA on a full-time or part-time basis. - Specific prohibitions and requirements: - CMA staff and their relatives may not directly or indirectly trade in shares in the Saudi capital market. - Staff may participate in investment funds and invest in debt instruments but must disclose securities holdings and notify the CMA’s Internal Compliance Officer prior to selling any securities in the Saudi capital market. - Monitoring and sanctions: - The CMA monitors staff trading via SMARTS and uses internal management and the Internal Compliance Unit to monitor compliance with other requirements. - Violations may be subject to verbal warnings, suspension, termination (per Saudi Labor Law standards), and civil or criminal penalties under the CML including fines, property seizures, travel bans and imprisonment. - Assessment: Fully implemented. - Recommendations: - Implement a formal recusal policy in the Code of Conduct. - Consider obtaining periodic positive affirmations from staff confirming compliance with the Code of Conduct. ### Principles of self-regulation and Tadawul - There is no SRO operating in Saudi Arabia; the CML does not treat Tadawul as an SRO and the CMA does not expect it to discharge regulatory functions. - Tadawul: - Must establish and maintain the Depositary of the Exchange (may be separate department or separate company) which must register ownership of securities traded on the Exchange, subject to ongoing CMA oversight. - Does not license dealing firms (firms must be authorized by the CMA), and does not have ongoing regulatory or disciplinary responsibilities for these firms. - Listing rules are Implementing Regulations of the CMA; the CMA grants approvals to list and monitors continuous disclosure by listed companies. - Tadawul’s membership and trading rules have been issued to its members but are not publicly available; Tadawul is consolidating/updating its rules for publication. - Tadawul is a wholly-owned government entity with legal status of a joint stock company under the Companies Law as provided by CML Article 20; it is the sole entity authorized to carry out trading in Securities. - Tadawul charges fees for trading and receives revenue from sale of trading data (market information and trading data is available free after a five-minute delay). It does not charge membership or listing fees. Its financial position is not published in an annual report. - Assessment: Principle 6 — Not assessed (IOSCO has set no criteria for the Principle). - Recommendation: - If a strategy for Tadawul self-listing is considered, the CMA should commence consideration of regulatory changes and complex issues that would arise. *Source: _cr13212 - 2011. Listing rules (comments due Q2: 2011).* ### 1. Final decisions of the CRSD or Appeal Panel that impose any type of sanction; ### _cr13212 - 1. Final decisions of the CRSD or Appeal Panel that impose any type of sanction; ### Enumerated final decisions and administrative actions - 1. Final decisions of the CRSD or Appeal Panel that impose any type of sanction; - 2. Penalties imposed on listed companies; - 3. Withdrawal, cancellation and suspension of AP authorization; - 4. Approval of AP application; - 5. Amendments to AP’s license; - 6. Capital increases/decreases of listed companies; - 7. Cash offer to acquire listed companies; - 8. Approval of public offers of securities/mutual funds; - 42 - 9. Issuance of implementing regulations and amendments thereof; *Source: _cr13212 - 1. Final decisions of the CRSD or Appeal Panel that impose any type of sanction;* ### 10. Suspension of public offering. ### _cr13212 - 10. Suspension of public offering. ### Suspension of public offering and publication policy - The CMA Board may decide to announce any resolution that does not fall under the abovementioned categories, if it believes it is necessary to do so. - The CMA believes that although not all enforcement outcomes are publicized, significant cases are since all sanctions imposed by the CRSD and some Board decisions are announced to the public. - Not all enforcement actions (and agreed settlements of action) will be published pursuant to the CMA’s publications policy. - The Annual report includes details of inspections and enforcement but not the case by case detail. - CMA Board outcomes can include fines, disgorgement of profit (as well as other outcomes). - Such disgorgements have been ordered (in 2009 and 2010 disgorgement with respect to 62 violations involving market manipulation/insider trading have been ordered). - Rationale stated for partial non-publication: - Concern that announcement of sanctions against APs may affect the development of the local market by adversely affecting investor confidence and investors willingness to continue to conduct business with the entity concerned. - Policy may discourage regulated entities from proceeding to CRSD (or subsequent appeal) since anonymity may be more significant to them than obtaining a review of the efficacy of the CMA’s findings. - Identified consequence: - Although substantial penalties have been levied by the CMA Board, the regulatory effect of these actions are not being understood by the regulated or broader community due to the lack of transparency relating to the violating conduct and the sanctions imposed. - Recommendation / principle: - Enforcement powers need to be seen to be fully exercised and transparent in all appropriate cases and all outcomes published to demonstrate and obtain regulatory effect by the CMA imposition of credible and proportionate sanctions. - Relevant decisions taken should also be tested on appeal to ensure that the outcomes obtained are appropriate and reasonable in the circumstances. ### Principle 11 — Authority to share public and nonpublic information (description, assessment, comments) - Description: - The CMA may share information with other regulators, both domestic and foreign. - Article 17 of the CML authorizes the CMA to disclose information and provides: - “Any undisclosed information obtained by the [CMA] is considered confidential. The [CMA] may disclose any part of this information as the [CMA Board] deems necessary for the protection of investors.” - The CMA may share information concerning investigations and enforcement, determinations in connection with authorization, licensing and approvals, surveillance market conditions and events; client identification, regulated entities, and listed companies and companies that go public. - The CMA may obtain and share records identifying the beneficial owners or controllers of bank accounts relating to securities transactions. - The CML and Implementing Regulations expressly authorize the CMA to share information received from issuers (Article 46 described). - Offers of Securities Regulations and the Listing Rules require authorization statements permitting the CMA to share relevant information with supervisory authorities. - Under article 17 of the CML, the CMA has discretion to share information with foreign regulators even if the offense being investigated is not recognized by the CMA. - Assessment: Fully implemented - Comments: - The CML grants the CMA authority to regulate the securities market for the purpose of protecting investors; language does not distinguish domestic vs. foreign investors. - The CMA interprets Article 17 broadly and believes it gives complete authority and discretion to permit any release of information. - The CMA can share information without approval from other government agencies or ministers. - Regulatory information has been provided to domestic and foreign agencies when requested without qualification, even absent prior arrangements. - To date, releases to foreign regulators have not involved confidential regulatory information; accordingly, CMA has not needed to impose conditions on releases. - Recommendation: The CMA should settle the nature of conditions it will impose on release of confidential regulatory information to foreign regulators so it can protect its rights in future circumstances, keeping in mind requirements and limitations in IOSCO MMOU. ### Principle 12 — Information sharing mechanisms (description, assessment, comments) - Description: - The CMA is a member of the UASA (cooperative body of securities regulators of 14 Arab states) with documented arrangements in its charter. - In June 2010, the CMA became a full signatory to the IOSCO MMOU. - The CMA is required to maintain confidentiality of information received under information sharing arrangements; under the CML all nonpublic information is treated as confidential, but may be disclosed as the CMA Board deems necessary for the protection of investors. - CMA may authorize a foreign regulator to make appropriate use, including use in public proceedings, of confidential information provided by the CMA where disclosure is necessary for protection of investors. - Where CMA receives confidential information from foreign regulators, it seeks conditions that provide confidentiality consistent with potential CMA use, including disclosure in public proceedings where necessary. - Assessment: Partly implemented - Comments: - CMA initiated information sharing arrangements with foreign regulators and may use them regarding securities trading activities of non-resident foreign investors. - CMA has shared information with securities regulators worldwide and maintained records of these activities. - Domestic cooperation: CMA has MOUs with MOCI (securities and related companies law matters), Minister of the Interior (AML/CTF) and Minister of Justice (real estate funds ownership of assets). - CMA has not finalized an MOU with SAMA; proposed MOU is being drafted but needs to be executed and publicly released. - Prior regulator was a ministerial committee (MOF, MOCI, SAMA); some SAMA departments had supervisory/operational roles. A formal MOU with SAMA is desirable. ### Principle 13 — Assistance to foreign regulators (description, assessment, comments) - Description: - CML powers enable CMA to provide assistance to a foreign regulator by investigating alleged breaches or providing other assistance as CMA deems appropriate to protect investors. - CMA resources enable obtaining contemporaneous records sufficient to reconstruct securities transactions (including fund and asset transfers), identities of relevant parties, audit trail information and trade information (amounts, time and price). - Under the CML, CMA may require persons to provide documents or oral statements; Article 5c authorizes subpoenas, taking evidence, and requiring production of documents. Article 18 requires any person to provide documents and information for CMA duties. - APRs authorize CMA to demand APs provide information/records without delay, require governing body and employees of an AP to comply with CMA requirements to appear/explain, and to inspect records maintained by an AP. - CMA may provide assistance for insider dealing, market manipulation, misrepresentation, fraudulent or manipulative practices, registration/issuance/offer/sale/reporting related to securities and derivatives, market intermediaries, markets (Tadawul), clearing and settlement entities, and may assist regardless of CMA independent interest, including assistance in obtaining court orders. - CMA may provide information about regulatory processes (licensing, inspection) obtained through those processes. - Assessment: Fully implemented - Comments: - APs must maintain comprehensive records including client identification and asset information and records of all securities transactions. - Tadawul maintains detailed audit trail records of trades and holdings of beneficial owners on deposit. - CMA can obtain securities account and transaction records to assist a foreign regulator. - CMA can obtain information identifying beneficial owners or controllers of nonnatural persons organized in Saudi Arabia (Articles 5 and 18). - APs must obtain ultimate beneficial owner information when opening securities accounts. - CMA may provide foreign regulators information concerning APs and affiliates (structure, capital requirements, investments in affiliates, intra-group and group-wide risk exposures, shareholder relationships, management structure). - Under Article 6 of the APRs, APs must provide such information in connection with authorization and update for material changes; CMA may obtain missing information using Articles 5 and 18. ### Principles for Issuers — Disclosure, reporting, and shareholder treatment (Principles 14–15) - Principle 14 — Full, accurate and timely disclosure (Description, Assessment, Comments) - Description: - CML and Implementing Regulations (particularly the CMA Listing Rules) regulate disclosure by issuers (listed companies and CIF) offering securities by way of public offer. - Prospectus requirements: - A prospectus must be published and approved by the CMA before a public offer. - Prospectus must include three years’ operating financial results (audited accounts must have been published for at least the previous three years, see Listing Rule Article 8) and comparative financial information for the previous two years. - The three-year operating requirement doesn’t apply to any company required by law or Royal Decree to be listed upon establishment. - A full report of an independent accountant may be required in certain circumstances. - Issuer must update audited annual financial statements included in the prospectus whenever a material change has occurred. - Supplementary prospectus required for material changes after publication. - If latest audited accounts ended more than six months prior to expected date of approval, CMA may require audited accounts covering an appropriate period up to the expected date. - CMA reviews all submitted documents and may refuse to approve a prospectus if it contains incorrect or misleading information. - Persons (issuer officers, underwriters, technical experts) may be liable to investors for incorrect statements or omissions in a prospectus. - Securities advertisements must comply with content requirements; CMA does not approve them. - Article 16 (c) of the Listing Rules requires public offering announcements to include a specific disclaimer of the CMA liability for the offering. - Article 17 of the Securities Business Regulations: only an AP or an AP-approved advertisement may make securities advertisements. - Pricing determined by book building; public investors must receive allocations based on a minimum percentage of the free float. Both book building and underwriting are required. - Continuing reporting: - Listed company must announce audited annual and interim accounts (quarterly) through Tadawul’s electronic information dissemination system. - Timeframes: audited annual accounts within 40 business days of end of accounting year; interim accounts within 15 business days of end of the period. - Company must notify CMA and the public without delay (at least two hours before the trading period following a major development) of information that may have a material effect on its financial position or market price. - Prospectus and shareholder information requirements for general assembly notifications: publish on Tadawul’s website and in two newspapers at least 20 days before meeting. - Public offerings or listings by foreign issuers currently not allowed (proposed new listing rules include provision that allows public offering of foreign issuers for cross listing). - No derivative markets; derivatives are prohibited until CMA agrees to allow them. - Assessment: Fully implemented - Comments: - Listed companies obliged to disclose all material information; Tadawul receives many hundreds of disclosure announcements each year and posts them on its website. - A listed company may apply for a waiver from disclosure if disclosure would be unduly detrimental and omission is not likely to mislead investors; CMA may later require publication. - CMA has authority to suspend trading in a security; a listed company may request a trading halt. - CML prohibits trading in possession of material nonpublic information; CMA may impose sanctions on violators. - Implementing Regulations prohibit directors and senior executives dealing in company securities during specified periods. - CMA enforces disclosure by reviewing documents and may impose or seek sanctions including corrective steps, compensatory damages, trading suspension, and monetary fines. - Principle 15 — Fair and equitable treatment of holders (Description, Assessment, Comments) - Description: - Only joint-stock companies can be listed. - CML, Implementing Regulations and Companies Law require accurate documentation of share ownership and transfer, voting rights, fair and equal treatment, and management accountability. - Listing Rules require equal treatment of all shareholders of the same class (Listing Rules Article 39). - Prospectus must describe security holder rights (Listing Rules Annex 4, Item 2ci). - Record of share ownership and transfer maintained by the Depository. - Voting is a fundamental shareholder right (Corporate Governance Regulations Article 6); shareholders must be able to participate effectively and vote (Corporate Governance Regulations Article 5). - General assembly procedures: publish date/place/agenda at least 20 days prior; shareholders may appoint proxies. - Implementing Regulations require full disclosure of material information for shareholder voting decisions (Corporate Governance Regulations Article 5 & 6). - Takeover and change of control rules: - A 30 percent threshold applies; mandatory offer and disclosure requirements. - General principles: equal treatment of shareholders of same class; equal information; sufficient information and time; directors must act without personal interest (Merger and Acquisition Regulations Article 3). - Timetable coordination with CMA required (Merger and Acquisitions Regulations Article 6d). - Offeror and disclosure requirements described (Merger and Acquisition Regulations Articles 26, 32, 27). - Specific protections when offeror purchased shares within three months or 12 months (Merger and Acquisition Regulations Articles 9a and 15) and for multiple classes (Article 18a). - Disclosure thresholds: - Any person who becomes owner of or interested in 5 percent or more of any class of voting securities or convertible debt securities must notify the company and the CMA at the end of the trading day on which the interest is acquired and provide subsequent notice any time the interest increases or decreases by 1 percent (Listing Rules Article 30). - For this calculation, interest includes spouse/minor child/company controlled by person/any person acting in concert. - A list of 5 percent shareholders must be included in prospectuses and disclosed in the annual report (Listing Rules Annex 4, Item 2a9 and Article 27). - Tadawul publishes reported information on its website. - Directors and senior executives must notify company and CMA of interests at end of trading day on acquisition and report subsequent relevant changes (Listing Rules Article 30). - Assessment: Broadly implemented - Comments: - Regulation of corporate governance for listed companies is bifurcated. - The CMA mandates requirements via Listing Rules and CGR Regulations (issued in 2006); these regulations are based on a “comply or explain” model. - The CMA has made certain corporate governance requirements mandatory (Articles 9, 12.c, 12.e, 14 and 15). *Source: _cr13212 - 10. Suspension of public offering.* ### 1. certain disclosures in directors reports (Article 9); ### 1. certain disclosures in directors reports (Article 9); ### Overlap of CMA Corporate Governance Regulations (CGR) and Companies Law (MOCI) - CMA CGR contains mandatory, nonmandatory (comply-or-explain), and provisions effectively mandatory because similar obligations exist in the Companies Law administered by MOCI. - Articles effectively mandatory because covered by Companies Law: - Article 3 (general rights of shareholders) - Article 4 (facilitation of shareholders exercise of rights and access to information; shareholders rights related to the general assembly) - Article 6 (voting rights) - Article 7 (dividend rights) - Article 10 (main functions of boards) - Article 11 (responsibilities of boards) - part of Article 12 (certain issues relating to the formation of boards) - Article 18 (conflict of interest within board) - general assembly agendas, participation of shareholders - CGR provisions not mandatory and not covered by the Companies Act include: - part Article 5 (shareholders rights to peruse general assembly minutes and requirement to inform the Exchange of results of general assembly) - part Article 6 (accumulative voting and disclosure by investment funds of voting policies) - Article 8 (written disclosure policies) - part Article 12 (prevention of chairman and CEO being the same person; notification of reasons for termination of a board member; representatives not entitled to nomination vote) - Article 13 (procedures for committees of boards) - part Article 16 (need to provide sufficient time for board members preparation and attendance at meetings) ### Enforcement, monitoring, and jurisdictional issues - MOCI’s responsibilities relate to five broad areas: incorporation, management, general assemblies, capital increases and decreases, and other areas concerning the operation of joint-stock companies. - CMA monitoring and enforcement capabilities: - CMA monitors compliance with CGR and may take enforcement action against a director of a listed company for violations of duties to shareholders if the action constitutes a violation of the CML or its Implementing Regulations. - Companies Law Articles 77 and 78 proscribe board responsibilities and give the company and each shareholder the right to file a civil liability lawsuit against the board for errors causing damage to all shareholders. - CMA can access transaction information via SMARTS and ownership information maintained by the Depositary to monitor reporting compliance by officers, directors, and major shareholders of listed companies. - CMA may take enforcement action against any person who fails to comply with the reporting requirements (CML Article 59). - CMA statements on listed companies and compliance: - (1) listed companies have to comply with the Companies Law and the mandatory articles of the CGR; - (2) none of the mandatory Articles in the Regulations are imposed by the Companies Law; - (3) listed companies must disclose the extent to which they have complied with the nonmandatory provisions and the reasons for noncompliance if any; - (4) to the extent that noncompliance of a nonmandatory requirement of the Regulations constitutes a violation of the Companies Law, this would be a matter handled by MOCI in coordination with the CMA if there was a need. - Identified problems: - Overlap regarding obligations imposed by CMA and MOCI and lack of clarity relating to jurisdiction of each agency to enforce corporate governance obligations arising from the bifurcated approach. - Lack of clarity in interpretation and operation in practice where provisions are interdependent, some are comply-or-explain, some mandatory, and statutory language is not identical. - Unclear enforcement pathway in a major case involving serious breaches of directors’ duties. ### Recommendation on roles and guidance - CMA should clarify its role relating to corporate governance and the duties of directors of listed companies by seeking appropriate amendments to MOCI and CMA legislation to give CMA unambiguous responsibility for enforcing these provisions in respect of listed companies. - Once enacted, the CMA should issue guidance clearly setting out: - the mandatory provisions and those that are comply-or-explain; - appropriate explanations of the CMA’s interpretation of these requirements to all listed companies. ### Shareholder registers, general assemblies, and foreign listings - Public offerings or listings by foreign issuers are currently not allowed in Saudi Arabia. - Fair and equitable treatment of holders of securities is set out under regulatory obligations of the CMA and MOCI. - The register of holders of securities is not publicly available; shareholders are therefore unaware of who the other shareholders are at a given point in time. - For listed companies, Tadawul acts as registrar. - CMA may attend general assembly meetings to observe proceedings, but proceedings at meetings, including verification of quorum, falls within MOCI’s jurisdiction. - Achieving a quorum of shareholders may not always take place at a meeting. --- ### Principle 16 — Accounting and auditing standards (assessment: Broadly Implemented) - Description / requirements: - Financial statements of public issuers and listed companies disclosed in offering documents and on a continuing basis are subject to accounting and auditing standards to ensure reliability and comparability. - Listed companies must include audited financial information in their offering documents and annual reports. - A prospectus must contain financial information from the company’s most recent audited financial statements. - Audited financial statements included in offering materials and the annual accounts of a listed company must be audited. - Applicable standards established by SOCPA, a professional organization operating under MOCI supervision. - Audit reports of listed companies must be prepared by a certified independent accountant. - Interim financial statements included in offering materials and interim accounts must be reviewed in accordance with SOCPA standards. - SOCPA and Listing Rules require audited financial statements to include: balance sheet; income statement (statement of the results of the company’s operations); cash flow statement; statement of changes in ownership equity; accounting policies and notes covering the most recent three financial years. - Audit must be conducted by an independent accountant who is a current member certified by SOCPA; SOCPA interprets independence to cover self-interest, self-review, advocacy, familiarity and intimidation. - Auditor selection process: selected by listed companies upon recommendation of company’s audit committee (minimum 3 persons with no executive board members) and approval of the general assembly. - Listed company must promptly notify CMA of any change in its external auditor. - If a listed company seeks to change its external auditor before the elapse of three consecutive financial years, it must disclose this fact in its annual report and explain the reason for the change. - CMA authority includes prescribing qualifications and competency of external auditors, reviewing financial statements for compliance with SOCPA standards and Listing Rules, working with listed companies to resolve audit qualifications, requiring restatements, and imposing enforcement action for failure to comply with SOCPA standards. - Comments and issues: - Public offerings or listings by foreign issuers are currently not allowed; all listed entities are domestically incorporated. - CMA believes SOCPA standards are comprehensive and of a high and internationally acceptable quality; processes are open and transparent and subject to MOCI oversight. - CMA states compliance with SOCPA and Listing Rules ensures financial statements are comprehensive, understandable, reflect consistent application of accounting standards and are comparable among accounting periods; an English translation of the standards is available. - Since IOSCO does not provide assessment criteria, assessor notes CMA’s view that SOCPA standards are of international quality, and there are differences in treatment of certain issues such as valuation of real property. - SAMA requires insurance companies and banks to comply with IFRS standards; all but one of the banks is listed, producing a situation where part of the market reports under IFRS and part under SOCPA standards. - CMA Board resolution (August 12, 2008) exempts listed banks and insurance companies from preparing accounts under SOCPA and allows use of IFRS standards. - Some listed companies have international operations where IFRS is mandatory and reflected in group accounts; transition to IFRS requires lead time and training. - Noted differences between IFRS and SOCPA: SOCPA requires historical cost basis for real property valuation and does not require write-off on intangible assets. - SOCPA formed a Committee for Convergence of Saudi Accounting Standards with IFRS working on detailed comparison. - Recommendation: - CMA should review the mandatory obligation to comply with SOCPA standards for nonbank, noninsurance listed companies and develop a timetable to enable them to switch and adopt and comply with IFRS standards. ### Principle 17 — Collective Investment Schemes (CIS) (assessment: Fully implemented) - Authorization and eligibility: - Only a person authorized by the CMA to engage in “managing business” may operate and market a CIS. - Applicants must demonstrate compliance with criteria relating to honesty and integrity, adequacy of human and technical resources, financial capacity, internal management procedures, maintenance of personnel, administrative systems and procedures, and contractual arrangements necessary to fulfill powers and duties as fund operator. - Compliance verified by CMA via document review and inspection. - Types and approval: - Implementing Regulations distinguish between investment funds and real estate investment funds. - Public offer of units in either type requires CMA approval; application must include manager information, type and objectives of fund, terms and conditions, copies of contracts for benefit of fund. - Funds’ terms and conditions must contain information necessary for investors and must contain 36 mandatory minimum disclosures. - CMA may refuse an application if it believes the fund would not be in the best interests of investors; must notify applicant in writing and provide reasons if it refuses. - Units cannot be publicly offered or sold until CMA approval. - Private placements: - Private placement criteria: amount payable by each potential investor is not less than SR 1 million and the offer limited either to 200 persons or to certain classes of sophisticated investors. - Person seeking private placement must notify CMA at least 15 days in advance and provide the private placement memorandum or other offering document. - CMA may prohibit the offer after hearing the offeror if it determines the offer is not in investors’ interest or may violate CML or Implementing Regulations. - Enforcement and sanctions: - CMA can impose administrative penalties or commence enforcement before the CRSD against persons operating investment funds without authorization or violating regulatory requirements. - CMA may impose fines or seek sanctions including imprisonment; securities transactions with unlicensed operator subject to rescission. - International funds and cross-border requirements: - An investment fund established outside Saudi Arabia may not be offered within Saudi Arabia without CMA consent. - CMA may approve an “international fund” which invests substantially all assets in securities of investment funds established outside Saudi Arabia that invest all assets outside Saudi Arabia (fund of foreign funds). - Any sub-manager operating outside Saudi Arabia must be established, authorized and supervised in a jurisdiction with regulatory standards at least equivalent to CMA; same requirement for foreign custody providers. - CMA can utilize foreign regulatory cooperation regarding these funds. - Ongoing supervision and reporting: - Fund manager has continuing obligation to maintain qualifications; CMA monitors compliance throughout fund life and may examine records and conduct on-site inspections of fund manager or custodian. - CMA conducts routine and cause examinations based on risk assessment; routine examinations designed to proactively identify suspected breaches. - Manager must submit audited financial statements to CMA and make them available to unit holders within 90 calendar days of the end of the fund’s financial year; interim financial statements at minimum semi-annual within 45 calendar days of end of the financial period. - Manager of a real estate investment fund must submit annual and interim financial statements immediately after approval by the fund’s board and make them available to unit holders within a specified timeframe. - All financial statements must be prepared in accordance with SOCPA accounting and auditing standards. - When inspection reveals non-compliance, CMA can take remedial action and has comprehensive authority to investigate and bring enforcement actions for violations of CML and other regulations. - Operational, conduct and recordkeeping requirements: - Fund manager must notify CMA of material changes in management, organization and by-laws, including immediate written notification of resignation or dismissal of any senior management member, any material event or change in business/operations and any matter material to its fitness and propriety. - As an AP, a fund manager must record and maintain sufficient information to demonstrate compliance with the APRs, including transaction, asset and liability records for each client, cash and securities held in each client account, and details of all purchases and sales for a client. - Fund manager must maintain a register of unit holders identifying each unit holder and units held, and record balance of outstanding units and units created and cancelled. - Fund manager must act for the sole benefit of fund unit holders; officers and personnel prohibited from engaging in transactions involving conflicts of interest. - Manager may not act for its own account when dealing with a fund managed by it; officers and personnel may not serve as directors or take any other office of a company that forms part of the assets of the fund. - Manager must disclose any actual or potential conflict to customers in writing and may be liable for loss from a conflict unless disclosed and customer provided written approval. - Fund managers subject to rules on best execution, timely allocation of transactions, preventing churning, related party transactions and underwriting arrangements. - Delegation and responsibility: - Fund manager may appoint a third party or affiliate as sub-manager or to provide advisory or custody services. - Any sub-manager operating in Saudi Arabia must be authorized by CMA to conduct managing activities or provide custody services. - Fund manager remains responsible for investment management, administration and custody notwithstanding delegation. - Fund terms and conditions must disclose any delegated function and identify the delegate. - Fees, commissions or charges by fund manager or affiliates for administrative, custodial or other services may not exceed charges payable for similar arm’s length services; CMA may impose a cap on any fee. - Manager may delegate compliance or other functions but retains full responsibility for regulatory compliance of delegated functions. - Implementation outcome and statistics: - Assessment: Fully implemented. - Comments: number of mutual funds grew from 208 in 2006 to 267 by the end of 2010. - Equity funds: from 107 in 2006 to 154 in 2010. - Real estate funds: from 3 to 6 in this period. - Total assets under management grew from SR 84,238 million in 2006 to SR 94,666 million by [text ends]. *Source: _cr13212 - 1. certain disclosures in directors reports (Article 9);* ### 2010. There are now approximately 320,000 unit holders in these funds. During this period sponsors of the funds ### _cr13212 - 2010. There are now approximately 320,000 unit holders in these funds. During this period sponsors of the funds ### Fund oversight, approvals, and market structure - There are now approximately 320,000 unit holders in these funds. - Approval and ongoing monitoring of APs is the responsibility of the Capital Market Institutions Supervision Division. - The CMA has established a dedicated Mutual Funds Department within the Corporate Finance and Issuance Division to regulate submissions of applications to establish a fund and the fund prospectus. The Mutual Funds Department: - Is not a merit-based reviewer of new funds; its responsibility is to ensure risks of investing are properly disclosed and full disclosure is made of accounting and other information necessary for investors in the offer document. - Monitors continuous disclosure and reporting obligations of funds, due to its expertise in these matters, rather than the Capital Market Institutions Division. - Funds are only traded or purchased and redeemed OTC and not on Tadawul. - Funds may obtain “waivers” of regulatory obligations by way of Board resolution; these waivers must be disclosed in the terms and conditions of the fund. ### Legal form, investor protections, and filings (Principle 18) - CMA regulations prescribe the legal form and structure of funds: - Investment funds and real estate funds are established by a signed contract between the fund manager and fund investors and must contain CMA-prescribed terms and conditions. - Identical terms and conditions must apply to all investors who hold the same class of units in an investment fund. - Public offers require CMA approval before offering or selling any units. Private placements require notification to the CMA and submission of offering documents; CMA may prevent a private offer if not in investors’ interest or in violation of the CML or Implementing Regulations. - A person who offers or sells units without complying with approval or filing requirements may be subject to CMA enforcement action. - Material changes to terms and conditions require CMA consent; investment fund managers must notify all fund investors at least 60 days before a material change takes effect. Notification for real estate funds is governed by the fund’s terms and conditions. - Asset segregation and custody: - A fund manager must segregate fund assets by establishing a separate bank account in the fund’s name and by registering securities and other assets in the fund’s name. Deeds to real estate may be registered to the fund manager or to any other person with a notation on the title of deed. - Custody may be maintained by the fund manager or by one or more third parties or affiliates appropriately authorized under the APRs pursuant to a written contract. The AP providing custody services must comply with the APRs. - Fees, commissions and charges for custody services provided by the fund manager or related persons may not be any higher than those payable to persons providing similar services at arm’s length. The CMA may impose a cap on any service fee or commission charged by a fund manager. - Recordkeeping and reporting: - Both the fund manager and the custodian must record and maintain for a period of ten years sufficient information to establish compliance with APRs, including an accurate statement of the fund’s assets and liabilities, transaction details, records of cash and securities held, and details of receipts and payments. - The fund manager must maintain a register of unit holders identifying each unit holder and number of units, and a record of outstanding units and units created and cancelled. - Fund managers must prepare financial statements at least twice a year and cause the annual financial statements to be audited according to SOCPA standards; copies must be submitted to the CMA and made publicly available. - Termination and CMA powers: - Manager must obtain CMA consent to terminate the fund unless termination circumstances are specified in the fund’s terms and conditions. - CMA may appoint a liquidator or appoint a new fund manager or supervise manager liquidation to conserve and manage fund assets in the best interests of unit holders when a manager ceases business, becomes unable to fulfill obligations, or becomes insolvent. - Assessment: Partly implemented ### Supervisory findings, risks, and recommendations on segregation and custody - 2010 supervisory activity and enforcement: - In 2010, the CMA initiated 39 investigations of persons suspected of conducting a securities business or the investment of funds without a license and 7 investigations of persons suspected of violating provisions of the Investment Funds Regulations or the Real Estate Investment Funds Regulations and finalized 37 cases related to conducting a securities business or investment of funds without a license. - The CMA Board issued no decisions on cases related to the unlicensed investment of funds in 2010, although 9 such decisions were issued in 2009. - Comments and identified risks: - The regulations permit the fund manager (or its affiliates) to hold and have full control of the assets of the fund; segregation can be better achieved by ensuring checks and balances applicable to custody arrangements and the manager’s ability to deal with fund assets. - Custody of fund assets should be held by an arm’s length (separate) entity and the holdings verified by independent audit. - There has been no legal test in an insolvency of fund situation; experience in other GCC regions shows investor rights to fund assets may not be clear in contested claims, particularly with complex structures. Until tested in litigation, uncertainty remains as to the effectiveness of CMA regulations to achieve legal segregation. - Recommendation highlights: - Improve checks and balances for custody arrangements and reduce reliance on managers or related parties holding custody. - Encourage arm’s length custody and independent verification/audit of holdings. - Address legal clarity in insolvency scenarios to confirm effectiveness of legal segregation protections. ### Disclosure requirements for suitability and investor information (Principle 19) - Mandatory disclosures and investor documents: - Fund managers must disclose sufficient information about fund management, objectives, strategies, risks and other information to enable potential investors to make an informed decision. - Prior to investment, managers must provide a CMA-approved document that sets forth the terms and conditions of the investment, presented in a comprehensible and easy to understand manner. - Terms and conditions must include date of issue, fund organization, management, custodian, use of external administrators or managers, investment policies, fees and charges, method of asset valuation, purchase and redemption procedures (including pricing), rights of investors, risks, and audited financial statements. - Disclosure of fund fees must include any dealing or other costs payable out of fund assets. - Filing and reporting timelines: - Managers seeking to offer by private placement must notify the CMA and provide offering documents at least 15 days before the proposed offer. - Managers must make annual audited and interim financial statements available to investors (prepared according to SOCPA). - Unit holders must be notified at least 60 days in advance of material changes; managers must revise terms and conditions annually to show actual fee and expenses and update performance information and send copies to all fund investors. - Reporting frequency to investors: investment fund managers at least once every three months; real estate investment fund managers at least once every six months must report net asset value, number and value of units held by the investor, and a record of transactions specific to the investor including any dividend payments since last report. - Advertising: - Advertisements are subject to content requirements and must be clear, fair and not misleading. Presentation of fund performance information is addressed. - Assessment: Fully implemented - Comments and potential enhancements: - The Investment Funds Regulations do not require disclosure of the assets of the fund; the new IFRs will require disclosure of top holdings. - CMA could consider mandating specific disclosure of fund assets (for example the top 10 assets) to assist unit holders. ### Asset valuation, pricing, redemption, and suspensions (Principle 20) - Valuation requirements: - Assets are required to be valued at regular intervals. Implementing Regulations require terms and conditions to describe valuation method, timing, and method of publishing unit price. - Valuations must be conducted in accordance with SOCPA standards for fair valuation when market prices are not readily available. - Valuation frequency: - Investment fund assets must be valued on each of at least two dealing days each week when units are sold and redeemed. - Real estate investment fund assets must be valued at least once every six months. - Managers must prepare financial statements at least twice a year; annual statements audited according to SOCPA by an auditor independent from the fund manager and affiliates. External auditor verifies manager’s valuation as part of the annual audit. - Pricing, dealing days, and delays: - Units in an Open-ended investment fund must be sold and redeemed on at least two dealing days during each week. - Price must be calculated by reference to net value of fund assets on the dealing day as of a time no earlier than and up to one day later than the deadline for submitting purchase or redemption instructions. - Manager may delay valuation for two days if a substantial portion of fund assets cannot be valued promptly. - Manager must disseminate fund unit prices at least weekly via the Tadawul, which the CMA monitors. - If CMA discovers a pricing error, it requests details and corrective action from the fund manager. - Redemption suspensions: - An Open-ended investment fund may suspend the right of redemption only in limited circumstances described in the fund’s terms and conditions; CMA must approve suspensions or deferrals not in accordance with the regulations and can demand or stop redemption to protect investors. - Real estate fund-specific valuation: - Real estate fund managers must evaluate fund assets at least once every six months and within three months of purchasing or selling any fund asset by obtaining valuations from two independent persons experienced in real estate; valuation reports must describe method, assumptions, and analysis of market variables. - Manager may postpone valuation after obtaining CMA approval. - Assessment: Broadly implemented - Comments and recommendations: - CMA enforces compliance via authority to bring actions or impose fines; limited evidence was provided of actions taken specifically on valuation and pricing besides a 2009 portfolio manager sanction. - CMA is reviewing and amending regulations to address pricing errors and to obtain specific authority to require notification and take action regarding suspension or deferral of redemption rights. - CMA should complete its review and amend regulations on pricing errors and suspensions and provide additional written guidance on valuation of fund assets, particularly those without readily available market prices. ### Market intermediaries — authorization, conduct, and prudential requirements (Principles 21–23) - Minimum entry standards and authorization (Principle 21): - Market intermediaries (APs) must be authorized by the CMA to carry on securities business; Article 5 of the Securities Business Regulations prohibits carrying on a securities business unless authorized as an AP. - Securities business activities include: (i) Dealing, (ii) Arranging, (iii) Managing, (iv) Advising, and (v) Custody. - An AP must be authorized with respect to each securities business it conducts and authorization is available only to legally established entities in Saudi Arabia. - Individuals performing designated functions must register with the CMA as registered persons (CEO/managing director, finance manager, director/partner, senior officer/manager, compliance officer, MLRO, and client functions such as sales representatives, investment advisers, portfolio managers and corporate finance professionals). - Applicants for registration must pass a CMA-required qualification examination or secure an exemption; the CMA prescribes examination requirements and guidance on eligibility qualifications and exemption criteria under Article 21d of the APRs. - APR Articles 6 and 7 set authorization standards: fit and proper, adequate expertise and resources, managerial expertise and systems, and qualified directors, officers, employees and agents. - The CMA may approve applications in whole or in part, impose conditions, or refuse and provide reasons; applicants may appeal to the CRSD. - Changes in controllers or close links require prior notice and approval (Articles 13 and 14). APs must notify CMA within 24 hours of specified material changes or events (Article 15). - CMA publishes on its website the names of APs and types of securities business they are authorized to conduct. - Article 16c authorizes CMA inspections of AP records; Article 18 requires any person to provide documents and information the CMA requires. - APs must electronically submit monthly prudential reports within 17 days of month-end and must submit annual financial statements. - Investment advisers authorized only to advise may not conduct other securities business. - Assessment: Fully implemented - Comments on authorization and fit-and-proper assessments: - CMA reviews business plans, manuals, policies, procedures, audited financial statements and may seek information from other regulators. - Personnel are assessed for qualifications, probity, diligence, lack of fraud or dishonesty, and compliance history. - Close links require CMA satisfaction on integrity and financial soundness of related persons. - CMA prescribes minimum paid up capital and minimum net capital requirements; financial statements must follow SOCPA or GAAP and be signed by an accountant member of SOCPA. - Prudential requirements (Principle 22): - All APs must comply with initial and ongoing capital requirements per APR Article 6 and the Prudential Guidance Note issued by the Board. - Initial paid capital minima by activity: - Dealing, custody, and managing: SR 50 million - Arranging: SR 2 million - Advising: SR 400,000 - Ongoing net capital standard: greater of SR 50 million, 5 percent of higher reported total revenue for the preceding 12 months (or annualized reported monthly revenue for the most recent month), or 10 percent of Aggregated Indebtedness (plus specified adjustments). - Net capital is defined as owners’ equity increased by approved subordinated debt but reduced by illiquid assets, adjustments and operational charges. Aggregate indebtedness is fair value of liabilities payable in cash, amounts owed to clients and other funding liabilities. - APR Article 45 mandates a minimum margin of 25 percent for margin transactions; APs may make secured or unsecured margin loans for no more than five days for margin purposes. - APs must maintain records to determine capital levels and submit monthly prudential reports including income statement, computation of net capital and aggregate indebtedness within 17 days of month-end. - Assessment: Fully implemented - Comments and recommendations: - The Prudential Guidance Note (January 2007) sets net capital requirements and mandates professional indemnity insurance; not published on CMA website but issued to all APs. - Recommend revising Guidance Note to be less technical, publish as Implementing Regulation, clarify mandatory insurance (professional indemnity vs fidelity), and review capital requirements as market evolves. - CMA should consider requiring APs to maintain daily copies of capital adequacy calculations. - Internal organization, client protections, and operational conduct (Principle 23): - APs must establish division of responsibilities among directors/partners and senior management; CEO is responsible for arranging this and overseeing systems and controls. - APs must establish written risk management policies, compliance procedures and monitoring, operating procedures, employee code of conduct, appoint a senior compliance officer and a MLRO. - Governing body must review internal controls and risk management at least annually and document reviews. - Internal and external auditors must review books and records at least annually; internal auditor appraises risk management strategy and internal controls. APs must self-report significant system or control failures. - Client protection and segregation: - APRs require segregation of client money and assets from AP assets; creditors of AP have no claim to segregated money and assets (Chapters 1-3 of Part 7). - Article 73: client money must be held in a client account with a local bank. - Article 74a: within 20 days of opening a client account, AP must obtain written acknowledgement from the bank that the account will only hold client money and the bank will not enforce claims against funds held in the client account; if not received, AP must withdraw funds and move to another local bank. - Article 84: title to accounts must make clear assets belong to client and are segregated; similar requirements apply to custodians and overseas custodians. - APs must undertake a duty of care and risk assessment when deciding where to hold client assets. - Reconciliation and counts: - APs must conduct periodic reconciliation of client money and assets at least once every 7 days, correct discrepancies and make good shortfalls. - At least every six months AP must (1) count all client assets physically held and reconcile to records, and (2) reconcile record of client holdings to record of location of client assets. - If unable to reconcile client money, AP must notify CMA as soon as possible; unresolved client asset discrepancies within seven days must be reported to CMA. - APs must maintain comprehensive records of securities business, client identification and asset information, and capital levels. - APs are subject to segregation of duties, Chinese walls arrangements, and owe a fiduciary duty to clients as prescribed in Annex 5.4 to the APRs. - Assessment: Fully implemented - Comments: - APs are required to establish and maintain appropriate systems and controls sufficient to comply with CML and Implementing Regulations. The governing body is responsible for supervising these areas. *Italic: Content derived from the supplied IMF document excerpt.* ### 1. ensuring that appropriate policies and procedures are in place to enable the AP to comply with the CML, its ### _cr13212 - 1. ensuring that appropriate policies and procedures are in place to enable the AP to comply with the CML, its ### Compliance governance and responsibilities - 1. ensuring that appropriate policies and procedures are in place to enable the AP to comply with the CML, its Implementing Regulations and all other applicable regulatory requirements; - 2. ensuring that the compliance function is appropriately resourced and has access to all records of the AP; - 3. the establishment, implementation, enforcement and maintenance of the compliance manual and the compliance monitoring program; - 4. establishing and ensuring compliance with the code of conduct; - 5. preparation of reports and notifications to the CMA; *Source: _cr13212 - 1. ensuring that appropriate policies and procedures are in place to enable the AP to comply with the CML, its* ### 6. procedures for reporting to the governing body on compliance matters. ### 6. procedures for reporting to the governing body on compliance matters. ### Delegation, outsourcing, and internal control responsibilities - Under Article 59 of the APRs an AP may delegate (outsource) specific compliance or other functions to an external party, provided that: - the AP performs adequate diligence to establish that the delegate is capable of performing the delegated task; - the delegation is clearly documented; - the AP monitors the delegate’s performance; and - appropriate remedial action is taken if concern arises as to the delegate’s performance. - Notwithstanding delegation, the AP, its compliance officer and compliance committee (if any) remain responsible for fulfilling their respective regulatory obligations. - Article 14 of the AML/CFT Rules: know your client obligations can be outsourced to a third party under specified requirements. - Article 21 of the Investment Fund Regulations: an AP managing a mutual fund may delegate specified activities to a third party subject to certain requirements. - Internal audit: - An AP may delegate part of the task of monitoring the appropriateness of its systems and safeguards to an internal audit function. - Internal audit should have clear responsibilities and reporting lines to an audit committee or appropriate senior manager, be adequately resourced and staffed by competent individuals, be independent from day-to-day activities, and have appropriate access to the AP’s records. ### Client asset protection and custodian requirements - Article 85 of the APRs: - Client assets must be held and title registered or recorded in a way that makes clear they are client assets. - Exception: title to securities acquired overseas may be registered or recorded in the AP’s name or in the name of the overseas custodian where it is not feasible to register or record title in the client’s name, provided: - the client has previously been given specified disclosure in writing as to the risks of the arrangement; and - the client agreed in writing to the arrangement. - The AP must repeat the risk assessment as frequently as needed to be satisfied on a continuing basis that any custodian has adequate arrangements to safeguard the assets and is subject to appropriate standards of regulatory oversight. - APRs require a written agreement with any custodian covering specified terms of business intended to ensure protection of client assets. ### Know your customer, client agreements, and client reporting - Before dealing, advising or managing for a customer an AP must obtain from the customer information about: - the customer’s financial situation; - investment experience; - investment objectives relevant to the services to be provided. - The AP must take reasonable steps to enable the customer to understand the nature of the risks involved in the type of transaction. - APRs require that an AP must provide a client agreement setting forth the basis on which securities business will be conducted, including details of any payment for services payable by the customer. - Regular reporting to clients: - An AP that carries out a purchase or sale of a security with or for a client must promptly send the client a record of the transaction, which includes the AP’s charges. - An AP that provides management services must send a valuation report at least once every three months that: - identifies the securities in the portfolio; - states the total value of the portfolio; - describes the basis on which each security has been valued; - reports transactions that occurred; and - reports the total amount of fees, charges and taxes paid out of the portfolio during the intervening period. - An AP must provide to each client as often as necessary, but not less frequently than annually, a statement that lists all client assets for which the AP is accountable. ### Insolvency of APs and investor protections - APRs and the CML include provisions to protect investors in the event of financial insolvency of APs, including facilitating transfer of securities positions. - Article 96 of the APRs: - If an insolvent AP has or may have insufficient client assets or money to satisfy obligations to return them to clients, the clients’ claims in respect of that shortfall rank in priority to the claims of all other creditors. - The CMA has authority to direct the liquidator to establish entitlements of the insolvent AP’s clients. - The CMA may require the transfer of client money and assets to another AP to protect investors and ensure client money, assets and all other claims of clients are resolved. - Although no court case to-date has tested these provisions, the CMA is confident the CML will operate as intended. ### Conflicts of interest and best execution - When an AP has an actual or potential conflict of interest in relation to a transaction it must disclose the conflict to the client in writing. - An AP is liable to the client for any loss the client incurs as a result of such a conflict unless: - the AP has disclosed the conflict to the client in writing; and - the client has agreed in writing that the AP can proceed notwithstanding the conflict. - An AP must comply with Article 14 of the Market Conduct Regulations which requires an AP to provide best execution when dealing with or on behalf of a client. ### Principle 24 — Procedure for failure of a market intermediary - Description of CMA arrangements: - The Capital Market Institutions Supervision Division reviews market intermediaries’ capital levels and takes appropriate action where necessary. - The Prudential Department includes: - Financial Oversight Unit — supervises financial activities of APs for compliance with the CML and Implementing Regulations. - Capital Adequacy Unit — supervises capital adequacy of APs for compliance with CMA’s capital adequacy requirements. - Assessment: Broadly implemented - Comments / operational details: - CMA conducts regular capital adequacy monitoring to seek early warning of potential failures. - Prudential Department receives monthly prudential reports from APs, which include an income statement, computation of net capital and aggregated indebtedness. - APRs require APs to provide: - prior written notice of certain actions or events that might result in a material adverse change in the AP’s financial resources or financial requirements; or - at least 14 days’ prior notice before submitting a petition to commence settlement proceedings. - CMA is finalizing new Prudential Rules and will develop internal policies and procedures for an early warning system according to different levels of APs’ capital adequacy. - Net Capital positions of APs are being monitored; APs that do not demonstrate a Net Capital position in line with the minimum are being requested to address shortfalls. - CMA powers and procedures: - notify APs of capital material deficiencies discovered; - APs required to provide written notification of corrective action within 24 hours; - power to place restrictions on the approved activities of an AP or revoke or suspend its authorization. - A committee of SAMA, the CMA, and Tadawul meets from time to time to review risks/exposures of the largest clients and APs to the Depositary and the market. - Identified gap and recommended action: - There is no documented procedure (involving at a minimum the CMA, Tadawul, and SAMA) to agree a process for dealing with an unexpected insolvency of an AP or when such an event may occur. - There does not seem to be a rule requiring specific early warning to the CMA if a specific percentage deterioration in the financial position of an AP occurs. - Recommendation: The CMA should prepare and document a plan to deal with an insolvency of a market intermediary, obtain agreement of other stakeholders on the procedure to apply, and document same. ### Principles for the Secondary Market — overview of Tadawul and CMA roles - Principle 25 — Establishment of trading systems / exchanges: - The only securities exchange authorized under the CML is the Tadawul, regulated by the CMA. - Article 20 of the CML: the Tadawul “shall be the sole entity authorized to carry out trading in Securities in Saudi Arabia.” - No rules, procedures or guidance issued on regulatory oversight for an alternative trading system or new exchange because the CML contemplates only the Tadawul. - Assessment: Broadly implemented - Comments and strategic recommendations: - Tadawul is not an SRO. - CMA reviewed functionally the Tadawul trading system and closely monitors system changes. - No objective criteria set for licensing or oversight of new or alternative trading systems or exchanges; special legislation would be required to permit new trading systems. - Recommendation: CMA should develop a strategy for the future of the Tadawul, including whether it should conduct any regulatory functions and what regulatory changes will be required if Tadawul is no longer wholly-owned by government. - Recommendation: CMA could consider introducing licensing requirements and objective criteria for any trading systems including securities exchanges, to provide a mechanism for regulatory authorization, oversight and enforcement should such development occur. ### Principle 26 — Ongoing regulatory supervision of exchanges and trading systems - Description: - CMA is required to regulate and develop the Tadawul, improve trading methods and systems, reduce risks related to securities transactions, and achieve fairness, efficiency and transparency. - CMA conducts ongoing regulatory supervision of the Tadawul via: - authorization powers over APs; - powers to adopt rules governing trading activity and conduct of market participants and to approve Tadawul rules; - ongoing surveillance through SMARTS; - inspection, investigative and enforcement powers. - Tadawul may adopt rules subject to CMA approval. - SMARTS: generates alerts based on predefined parameters to detect unusual price and volume movements, potential insider trading, manipulation, front running and other violations. - CMA inspection program monitors conduct of market intermediaries and the Tadawul; inspections used to analyze market integrity, market risks, and adequacy of surveillance. - Assessment: Fully implemented - Comments: - CMA approves all Tadawul rules, regulations and instructions. - CMA has access to pre-trade and post-trade information from the SAXESS system. - If Tadawul cannot comply with the CML or Implementing Regulations, CMA may impose corrective actions, restrict Tadawul activities, adopt regulations requiring operational changes, suspend issuance or trading of securities, suspend the Tadawul for up to one day on its own authority (longer suspension requires Minister of Finance approval), or bring enforcement action before the CRSD. ### Principle 27 — Transparency of trading - Description: - Tadawul trading instructions (approved by CMA) govern disclosure of transaction information. - SAXESS electronic trading system continuously disseminates in real-time to Tadawul members the ten best bid and ten best ask limits in the order book for each tradable listed security, including number of orders and total disclosed order quantity at each price limit, and provides dissemination of information on completed transactions. - Assessment: Fully implemented - Comments: - CML requires immediate and timely publication of transactions. - Pre-trade information for certain large orders is not displayed in real time; handling of those orders is defined in trading procedures posted on Tadawul’s website. - For each of 2007, 2008, 2009 and 2010 these large orders accounted for less than 0.2 percent of the overall value traded. - CMA has access to information concerning these large orders through SMARTS and inspection powers. ### Principle 28 — Detecting and deterring manipulation and unfair trading practices - Description: - Articles 49 and 50 of the CML and provisions of the Market Conduct Regulations prohibit market manipulation, dissemination of misleading information, insider trading, front running and other fraudulent or deceptive conduct. - Listing Rules include disclosure requirements to ensure material information is not omitted from prospectuses and company announcements. - Assessment: Fully implemented - Comments and enforcement powers: - Surveillance Department uses SMARTS oversight modules to generate alerts for unusual price and volume movements, potential insider trading, market manipulation, front running and other violations. - CMA inspects market intermediaries and Tadawul; inspections can lead to enforcement referrals. - CMA reviews offering documents and monitors company announcements for compliance with Listing Rules. - CMA monitors investor complaints, websites, internet forums, audio-visual media and recommendations of individuals/groups related to capital markets. - Possible sanctions include warnings, cease and desist orders, corrective orders, damages, disgorgement of profits, trading suspensions, bars or suspensions from acting as a broker/portfolio manager/investment adviser, seizure of property, travel bans, bars from working with listed companies, and fines of up to SR 100,000 for each violation. - Under Article 62 of the CML, CMA can suspend or revoke an AP license. - Under Article 57c of the CML, market manipulation and insider trading are punishable by imprisonment. - Historical enforcement examples: - 2009: 11 persons barred from working with companies whose securities were traded on the exchange (20 in 2010). - 2009: seven persons barred from acting as broker, portfolio manager or investment adviser (23 in 2010). - 2009: six persons barred from trading a security (19 in 2010). - 2009: two persons (one CEO and one investor) imprisoned for insider trading (nil in 2010). A public announcement via Tadawul’s website was made in Arabic only announcing the outcome relating to the CEO; the investor’s announcement has not been publicly announced as the conviction is under appeal. - There is no potential for domestic cross market trading in Saudi Arabia because Tadawul is the only domestic securities market; there are no direct foreign linkages to trading on Tadawul nor substantial foreign participation. - Recommendation: CMA needs to demonstrate publicly a track record of enforcement and remedy lack of transparency of outcomes by specifying for each case the details of the conduct involved. ### Principle 29 — Management of large exposures, default risk and market disruption - Description: - Securities market open positions and credit exposures (including credit extended by an AP to its clients) are limited to credit extended and guaranteed to an AP and its customers by a clearing bank. Clearing banks are supervised by SAMA. - Tadawul’s electronic trading system checks before entry of an order that execution will not cause the AP to exceed daily and intra-day credit limits set by its clearing bank; any order that would cause an AP to exceed its credit limit is rejected. - APRs include provisions governing extension of margin credit to customers: - require APs to take steps to ensure a customer is creditworthy before extending margin credit; - establish minimum margin requirements. - The minimum margin requirement is 25 percent of each applicable securities position. - CMA powers include instituting liquidation proceedings against an AP and representing interests of clients in insolvency, liquidation or settlement proceedings. - APRs specify notice and pre-filing procedures to be followed by an AP proposing to commence settlement proceedings. - In liquidation the CMA may instruct the liquidator to establish client entitlements and may require a liquidator to move clients’ positions to a solvent intermediary. - CMA will coordinate with Tadawul in relation to dealing activities of the AP in liquidation, including settlement proceedings and termination of AP’s connectivity to the trading system. - Assessment: Fully implemented - Comments and monitoring and triggers: - CMA monitors large exposures; APs submit prudential reports at least monthly which include information on large exposures. - APs required to give prompt (within 24 hours) notice to CMA if they have a net capital deficiency or a counterparty defaults on a transaction constituting 25 percent or more of their net capital. - Tadawul provides daily reports to CMA on activity (buy, sell, and net position) of each AP and its clients, and the size of the clearing requirement (gross and net) of each clearing bank. - All trading and collateral is managed at the beneficial owner level. - Large exposures effects on capital: - Large exposures to a single counterparty will raise the minimum net capital requirement for dealers. The triggering level is when the amount due from any party exceeds 50 percent of the minimum net capital requirement (before taking large exposures into account). - Undue concentration reduces net capital. - For undue concentration to a single class of security, the triggering level is exposure to a single class of securities whose fair value exceeds 10 percent of the AP’s net capital before any deduction of any market risk charges. - In liquidation, proceeds attributable to client transactions would be treated as protected client monies, which under the CML could not be disbursed by the AP in settlement or liquidation without the CMA’s consent. - CMA has direct access through SMARTS and the Depository to information concerning size and beneficial ownership of positions held by customers of APs. - In event of excess credit exposures or large positions or failure of a market participant to provide necessary information, CMA may mandate corrective action including reducing exposures, increasing margin requirements or revoking trading privileges. - A committee of representatives from CMA, SAMA and Tadawul exists to review the current clearing and settlement process and meets frequently to discuss and share risks associated with the process. - CMA has power to supervise compulsory and voluntary liquidation of an AP’s business under CML Article 38 and APRs Part 8 to protect client money and assets in the event of AP default. ### Principle 30 — Clearing and settlement systems - Description: - Not assessed and not required to be assessed under IOSCO methodology. *Source: _cr13212 - 6. procedures for reporting to the governing body on compliance matters.* ### Annex 1. The Capital Market Authority Approach to Implementation of the IOSCO 2010 ### Annex 1. The Capital Market Authority Approach to Implementation of the IOSCO 2010 Principles ### Overview - IOSCO amended its IOSCO Principles in 2010; assessment of compliance with these principles is not required and has not been undertaken in this assessment because the methodology to do so is not yet available. - Assessors discussed with the authorities their ability to implement the new principles in the future; an extract of key issues in the 2010 Principles and the CMA’s advice on implementation is summarized. ### Systemic risk: regulator role and CMA responsibilities (IOSCO new principle) - New principle: the regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. Systemic risk may arise from: the design, distribution or behavior under stressed conditions of investment products; activities/failure of a regulated entity; market disruption; impairment of market integrity; or gradual erosion of market trust (e.g., inadequate investor protection, lax enforcement, insufficient disclosure, inadequate resolution regimes). - Preliminary guidance: implementation requires the regulator to contribute to monitoring, mitigating and appropriately managing systemic risk with particular regard to investor protection, market integrity and proper conduct of business within markets. - CML-assigned CMA responsibilities contributing to systemic risk reduction: - (1) regulating and developing the Tadawul, improving methods of systems and entities trading in securities and developing procedures to reduce risks related to securities transaction; - (2) seeking to achieve fairness, efficiency and transparency in securities transactions; - (3) regulating and monitoring the works and activities of parties subject to its supervision and control; - (4) regulating and monitoring the full disclosure of information regarding securities and their issuers. - CMA authorities under the CML include: - (1) approve the regulations, rules and policies of the Tadawul and the Center; - (2) determine the content of financial statements, reports and documents used by issuers offering securities for public subscription; - (3) prepare regulations and rules for the surveillance and supervision of entities subject to the CML. - CML requires the CMA to coordinate with the SAMA in connection with any action it undertakes that may have an impact on the monetary situation. - CMA regulatory requirements and practices that contribute to monitoring, mitigating and managing systemic risk: - Listed Companies and investment funds and real estate investment funds that offer their units of interest by way of a public offering must disclose sufficient information to investors to enable the investors to assess the risk associated with the investment. - Persons authorized to engage in dealing, advising or managing business must determine that a proposed transaction (including any use of margin) or their advice is suitable for the customer based on financial information the customer must provide and any other facts the AP is, or reasonably should be, aware of; suitability determination includes review of customer’s knowledge and understanding, financial profile, size and nature of transactions and investment objectives; AP must take reasonable steps to enable the customer to understand the risks (also see Principle 23). - APs are subject to financial responsibility requirements; CMA-established capital requirements take into account the amount of indebtedness assumed by the AP and the nature of assets held; APs with custody of customer assets are subject to segregation and record-keeping requirements; any customer who makes use of margin must maintain a minimum margin of 25 percent of the current value of a security position. - CMA protects market integrity by monitoring large exposures and by requiring/encouraging development of trading systems that provide for prompt settlement of transactions in Listed Securities. - CMA monitors developments in the Saudi securities markets and studies practices of financial market regulators in other jurisdictions and continuously reviews existing regulations and policies to adopt measures to mitigate systemic risk as necessary. ### Regulatory perimeter: review and adaptation - New principle: the regulator should have or contribute to a process to review the perimeter of regulation. - Preliminary guidance: regulators should conduct or participate in a rigorous and regular review of markets and market participants’ activities to identify risks to investor protection, market fairness, efficiency, transparency or the financial system; review existing perimeter of regulation and consider effects of new developments on scope of regulation and validity of existing exemptions; have processes for periodic and ad hoc consideration of whether powers, operational structure and regulations are sufficient to meet emerging risks and to respond timely. - CMA actions relevant to perimeter review: - Principal legislative objective: develop the capital market, improve practices of entities trading securities, and develop procedures to reduce risks related to securities transactions. - CMA has broad powers under the CML to regulate the Saudi capital market, monitor persons engaging in securities activities and issue regulations/guidance addressing market changes. - CMA regularly reviews markets and market participants’ activities to identify emerging risks, consider adequacy of existing regulation, and consider mitigating actions. - CMA conducts active market surveillance, inspection and enforcement programs; solicits information from market participants; gathers information from public news sources; uses these inputs in setting its regulatory agenda. - In 2009, the CMA conducted a survey of investor and fund manager concerning regulatory oversight of trading to identify trading violations or practices not covered by regulation. - CMA established a Risk Management Department within its Strategy & Research Division to monitor and analyze new products, trading activities and risks around the perimeter of capital markets. - New products must be approved by the CMA before listing on the Tadawul; CMA reviews whether existing regulation covers new products or whether additional regulation/guidance is required to ensure investor protection or market integrity. - CMA evaluated and restructured its internal organization through a program that assessed the capital market and CMA’s organization, developed a blueprint for an ideal operating model addressing divisional responsibilities, and implemented planned changes. - CMA cooperates with other agencies to identify and address emerging regulatory risks, e.g., a committee of CMA, SAMA and the Tadawul reviews current clearing and settlement process for securities trading and meets frequently to discuss risks and remedies. - CMA officials consult with counterparts in other countries and experts in securities regulation to consider applicability of foreign developments to the Saudi market. ### Conflicts of interest and misalignment of incentives - New principle: the regulator should seek to ensure conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed, or otherwise managed. - Preliminary guidance: regulator must identify likely conflict circumstances and establish regulatory requirements to avoid, eliminate, disclose or otherwise manage conflicts (examples include sponsor retention of economic exposure in securitizations and independence of service providers). - Saudi implementation and CMA measures: - Securitized products are not sold or traded in Saudi Arabia. - Principal service providers likely to influence investor decisions are persons authorized to engage in securities business (dealing, managing, advising) and accountants preparing/auditing Listed Company, investment fund or real estate fund financial accounts. - CMA regulations and SOCPA standards require auditor independence. - CMA regulations require APs to: - assure no conflict of interest affects a transaction or service executed for a customer; - disclose to the customer in writing any potential or actual conflict of interest, unless disclosure would communicate inside information (in that case AP must take reasonable steps to ensure fair treatment); - if an AP fails to disclose and obtain written consent, the AP must pay the customer the value of any loss incurred by the customer due to the conflict. - APs managing an investment fund must avoid material conflicts between themselves and the fund or between the fund and another client account unless they receive board approval following full disclosure; at least one third of the board members must be independent. - Implementing Regulations require full disclosure of risks by a Listed Company offering securities by way of a public offer, an investment fund or a real estate investment fund; CMA enforces disclosure via review of offering applications and subjects issuers and offering participants to potential liability for failures or untrue statements that mislead in connection with sale/purchase of a security. ### Auditor oversight, independence and standards - New principles: auditors should be subject to adequate oversight; auditors should be independent; audit standards should be of a high and internationally accepted quality. - Saudi framework and CMA role: - Audited financial statements of Listed Companies, investment funds, real estate investment funds and APs are subject to high quality standards, including enforceable auditor independence standards. - Financial statements must be prepared in accordance with standards issued by SOCPA, a professional organization operating under the supervision of MOCI. - SOCPA standards are of a high and internationally acceptable quality; SOCPA has interpreted independence to ensure auditors are free from any influence, interest or relationship that might impair professional judgment or objectivity. - CMA has authority under the CML to establish standards and conditions applicable to auditors of Listed Companies; CMA reviews financial statements filed by Listed Companies for compliance with SOCPA standards and other applicable requirements; CMA may require restatements and take enforcement action for violations of the CML or Implementing Regulations. - SOCPA addresses auditor independence issues including self-interest, self-review, advocacy, familiarity and intimidation. - SOCPA’s process for establishing and interpreting accounting and auditing standards is open, transparent and subject to MOCI oversight. ### Credit rating agencies and analytical services - Credit rating agencies oversight: - Currently there is no credit rating agency operating in Saudi Arabia. - CML authorizes the CMA to grant licenses to credit rating agencies and prescribe conditions if regulation becomes necessary. - Oversight of providers of analytical or evaluative services (including sell-side research): - Preliminary guidance: identify entities providing analytical/evaluative services and evaluate their market impact to determine whether regulation is needed; sell-side research analysts are a specific example. - Saudi approach: - Persons may be authorized to engage in dealing, managing, advising and arranging services, creating circumstances for sell-side research. - CMA regulations require persons authorized to engage in arranging services to establish Chinese Walls preventing individuals engaged in dealing/advising from receiving advice from those with confidential or inside information from arranging activity. - Regulations prohibit an AP from dealing for its own account contrary to its investment recommendations or for a client without disclosing the recommendation and potential conflict. - General AP obligations to prevent conflicts of interest, disclose them in writing (with inside-information exception), and compensate customers for losses where conflicts are undisclosed apply to analytical services contexts. ### Hedge funds / fund strategy oversight - New principle: regulation should ensure hedge funds/managers are subject to oversight. - Saudi framework: - All investment funds in Saudi Arabia must comply with the Investment Funds Regulations or the Real-Estate Investment Funds Regulations regardless of strategy. - Currently, no public or private fund operating in Saudi Arabia pursues strategies commonly associated with hedge funds (e.g., frequent trading, short selling or the use of significant leverage). - To the extent any fund pursues such strategies in the future it would be subject to CMA oversight. - Investment funds offered by private placement must file with the CMA; CMA may prohibit proposed offer, sale or transfer. - CMA, under general regulatory authority granted by the CML, may impose reporting or other regulatory requirements on any investment fund to permit monitoring of the fund’s activities. *Annex 1. The Capital Market Authority Approach to Implementation of the IOSCO 2010 Principles* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13212.pdf_