Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Introduction
Purpose
Capital markets regulation have attained an unprecedented level world wide as a result of
growing investor concerns, economic recessions, corporate scandals, trade imbalances and fears
about the impact of failure of any of the players in the global market place. Indeed, as a result of
technological innovations, there has been an integration of financial markets worldwide such that
capital markets regulation in one part of the world is wholly or partly adapted in other countries
The relative importance of regulating the capital markets is accentuated by the revelation that
most capital market operators regard regulatory compliance as the most important strategic
requirements and the impact they have had and will have and;
• Ascertain whether or not the changes have been effective or will be effective in
Several reasons have been adduced for regulating the capital markets among which are the
following:
1
Several surveys including the 2005 survey conducted by Deloitte have identified regulatory compliance as
the most important strategic priority of every business.
1
Oluwasegun Popoola
• Ensure the efficient allocation of resources to their most optimal use in the economy
Background
Overview of Existing and Proposed Legal and Regulatory Frameworks and Legislations
While several legislations have emerged in the course of time, this paper will highlight a few of
those legislations that have had a significant impact on businesses around the world.
The Public Company Accounting Reform and Investor Protection Act of 2002 (i.e. the Sarbanes-
Oxley Act of 2002) is by far one of the most popular regulatory frameworks which emerged from
the United States of America and has been adapted wholly and partly in several countries across
the world. The SOX Act was rapidly introduced after the Enron, WorldCom and Tyco scandals
which occurred between December 2001 and June 2002. The SOX Act introduced significant
changes to financial practice and corporate governance regulation, including stringent new rules
designed to protect investors by improving the accuracy and reliability of corporate and financial
disclosures.
2
Systemic risk is defined as the likelihood of the collapse of a financial system, such as a general stock
market crash or a joint breakdown of the banking system. - Adapted from Wikipedia.
3
The Act is named after the sponsors - Senator Paul Sarbanes (D–Md.) and Representative Michael G.
Oxley (R–Oh.).
2
Oluwasegun Popoola
The most important part of the Act by all accounts is Section 404 which requires management to
submit to the Securities and Exchange Commission (SEC) with the company’s annually filed
financial statements, an internal control report, which shall state the responsibility of management
for establishing and maintaining an adequate internal control structure and procedures for
financial reporting. It should also contain an assessment, as at the end of the financial year, the
• Establishes an independent, full time oversight board (i.e. Public Company Accounting
A review of Corporate Governance would be incomplete without a look at the Cadbury code
which is widely regarded as a forerunner to the Sarbanes-Oxley Act. The Cadbury code has
witnessed a lot of modifications since 1992 to reflect changes in the general operating
environment. In 1998, it became a combined code consolidating the principles of the Cadbury,
Greenbury and Hampel reports. It was reviewed again in 2003 following the publication of the
4
The Cadbury code was codified from the Cadbury Report titled Financial Aspects of Corporate
Governance. The Cadbury report is the report of a committee chaired by Adrian Cadbury that sets out
recommendations on the arrangement of company boards and accounting systems to mitigate corporate
governance risks and failures. The report was published in 1992 and has been adopted in varying degree by
the European Union, the United States, the World Bank, and others.
3
Oluwasegun Popoola
Higgs report. The revised combined code requires that companies report on their compliance
against the code and should explain areas of non-compliance. The code calls for the following:
• One member of the audit committee to have recent and relevant financial experience; and
(iii) Basel II
bank capital accord (Basel I), which has been in effect since 1988. The aim of the framework is to
improve the consistency of capital regulations internationally, make regulatory capital more risk
sensitive, and promote enhanced risk management practices among large and internationally
This regulatory framework even though targeted at financial institutions has a worldwide appeal
(iv) Solvency II
includes a review of the overall financial position of an insurance undertaking and not just the
solvency margin requirement. Its aim is to ensure adequate policy holder protection in all
European Union (EU) Member States. It will also take into account current developments in
insurance, risk management, finance techniques, international financial reporting and prudential
standards, etc. Another important feature of the new system will be the increased focus on the
supervisory review process. The aim is to increase the level of harmonization in general,
4
Oluwasegun Popoola
The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999, includes
provisions to protect consumers’ personal financial information held by financial institutions. The
three principal parts of the privacy requirements are the Financial Privacy Rule, Safeguards Rule
and Pretexting Provisions. The rules governs the collection and disclosure of customers’ personal
protect customer information and the protection of consumers from individuals and companies
Several versions of this regulation bordering on data privacy and security exist in Europe, Asia,
authority over an industry or profession. The regulatory authority could be applied in addition to
some form of government regulation, or it could fill the vacuum of an absence of government
oversight and regulation. The ability of an SRO to exercise regulatory authority does not
Good examples of self regulatory organizations are stock exchanges located in different parts of
the world.
Several countries have adopted different regulations to deal with money laundering and fraud
perpetration. The standards, minimum recommendations and framework that serve as baseline for
these regulations have being issued by the Financial Action Task Force (FATF). The FATF was
established by the G-7 Summit that was held in Paris in 1989 and given the responsibility of
examining money laundering techniques and trends, reviewing the action which had already been
5
Oluwasegun Popoola
taken at a national or international level, and setting out the measures that still needed to be taken
to combat money laundering. Till date, the FATF has issued 40 recommendations on money
This by far remains the most significant aspect of capital markets regulation. According to a
recent survey conducted by Deloitte, half of the executives that responded cited regulation as one
of the most top influences on profits over the next three to five years. Within regulation, 77%
cited the implementation cost of compliance as having the greatest impact on profits while more
than half (57%) saw the risk of noncompliance as a top influencer of profits.5
Another survey of 321 companies conducted by Financial Executive International (FEI) in July
2004, found that the average cost of complying with Section 404 of the SOX Act is
approximately $4.6 million, and that the average cost varies with firm size.6 In addition, to this,
the cost of implementing these legislations has been huge for small businesses. For instance, there
have been calls for the establishment of a toned down SOX framework that will take care of small
businesses and a further delay in Section 404 compliance for small companies and foreign private
issuers.
Conversely, an extensive joint study of internal controls at 667 companies by the University of
Wisconsin-Madison, the University of Texas at Austin, the University of Iowa and the MIT-Sloan
School of Management found that the SOX Act helped lower the cost of equity capital by 50 to
5
The results of this survey are contained in the Deloitte 2006 Global FSI Outlook.
6
The results of this survey can be found in the report by the Financial Executives International at
www2.fei.org
6
Oluwasegun Popoola
Generally, the SOX Act has ensured the greater ownership and appreciation of internal control
systems and the timely identification and remediation of internal control weaknesses that might
Investor Confidence
Investor confidence is an off shoot of a belief in the integrity of the capital market. Indeed, the
primary purpose of any capital market legislation is to encourage investor confidence and
Disciplined Approach
Capital markets regulation will no doubt force a principle driven approach to policies, processes
and procedures (PPPs) and ensure that companies evolve a culture of values and ethos.
Ultimately, a compliance culture with a strong reward and penalty system will emerge.
Corporate Governance
Corporate governance is largely based on the view that increased shareholder engagement,
existence of an open and transparent financial disclosure regime and maintenance of a reliable
reward and penalty system are key drivers of good business practices.
Corporate Governance has continued to gain momentum as businesses begin to realize the
In the United Kingdom, companies listed on the London Stock Exchange (LSE) have been
required, since 1998, to make a “statement of compliance” with the combined code7 in their
7
Please see the Cadbury code in Page 3 of this research paper.
7
Oluwasegun Popoola
annual reports. Companies listed on the Johannesburg (JSE) are required to comply with King II8
In the United States, audit committees are required to have a formal charter that must be disclosed
along with an annual disclosure by the Audit committee to shareholders as to whether the audit
committee satisfied its responsibilities in the prior year in compliance with its charter. In Nigeria,
corporate governance tenets were formally codified in October 2003 by the Securities and
Exchange Commission and are contained in its publication titled “Code of Corporate Governance
in Nigeria”.
Financial Stability
The myriad of regulations worldwide have discouraged the deliberate misstatement of revenues
and earnings which was a major driving force behind the scandals at Enron and WorldCom.
The emergence of capital market regulation has encouraged newer investors and the emergence
of complex and advanced secondary markets. In addition, an array of financial products has also
Recommendations
The global outcry by pundits over the incidence of over regulation has led to several studies in
different parts of the world. Findings from some of these studies have been mixed with most
concluding on the need to conduct extensive studies before the passage of capital market
regulations and legislations. The writer has therefore developed a conceptual framework for
8
King II is the abbreviated name for the King Report on Corporate Governance for South Africa published
2002 in South Africa.
8
Oluwasegun Popoola
measuring proposed capital markets regulations and legislations which are called the 7C’s and
other benchmarks.
Comprehensive: Every capital market regulation must be encompassing and understandable and
Concise: Capital market regulations should be precise and straight to the point without losing
Cost Effective: The benefits of every capital market regulation should exceed the costs. It must
not only be seen to be cost effective in theory, it must be cost effective in practicality.
Consistent: Capital market regulations must constantly adhere to the same principles of thought
or action.
Communicable: A good capital market regulation must be capable of being transmitted to the
market players without any difficulty. Partnerships between the government and the private sector
will need to be sustained to ensure that regulations that can be easily transmitted and assimilated
are maintained.
Conformable: Capital market regulation must be in consonance with the laws of the sovereign
territory where it is passed and the regulations of the body responsible for its passage. In addition,
Constructive: Every capital market regulation which does not satisfy any value proposition is
unnecessary and wasteful. In other words, every capital market regulation must be advantageous
and contribute positively to the development of the market and the financial services industry in
general.
Enforcement of Regulations: Mandatory disclosure and a sound and strong regulatory and legal
framework are not effective if the expectation that the rules will be enforced is not powerful and
grounded. In other words, the existence of a politically insulated regulatory agency with the
9
Oluwasegun Popoola
independence to impose sanctions on the country’s largest economic actors is a sine qua non. In
Proactive: A good capital market regulation must be forward looking and anticipatory of
Flexible: A good capital market regulation must be capable of being easily directed or influenced
for the achievement of certain objectives. It should also be modifiable with little or no costs to the
Indeed, there is no doubt that regulations that meet the above mentioned benchmarks are capable
Conclusion
While capital markets regulations have been described as a welcome development, doubts have
been expressed about the effectiveness of these regulations. One thing comes clear though, all
market players with the exception of a negligible few agree on the need for a proactive regulatory
framework that is constantly ahead of time. However, the disagreement has been on the depth,
There is no doubt that we will continue to witness attempts by businesses, think-thanks and
stakeholders to quantify the beneficial or harmful effect of every capital market regulation.
In the long run, capital market legislation or regulation will depend on whether they will be
effective in meeting the twin objectives of stakeholders’ protection and financial stability.
10
Oluwasegun Popoola
References
Anindya Ghose and Udday Rajan. (2006, March). The Economic Impact of Regulatory
Huddersfield.
Rossouw, G.J. (2005, March). Business Ethics and Corporate Governance in Africa. Business and
Society.
11
Oluwasegun Popoola
12