Thursday, March 25, 2010

Securities Regulatory Reform

(I do not think this is a repeat but...apologies if some of it is...also I need to figure out how to use end notes on Blogger!!!!)

Regulation raises questions: is it good or bad, an obstacle to social progress? While securities industry financial reform is still a proposal in the United States, there is time yet for reflection on how best to reform securities regulation. There are two concepts that should be part of the reform dialogue, one is education and the other is responsibility.

Education of everyday participants in the economy should be required in an financial reform anticipated in the US. It is hubris not to include a heavy dose of education. As discussed above, regulators worldwide think investor education is important for a healthy market. Investor education must encompass more than an effort to build confidence in the markets—it must actually inform the investor. It is heartening to note that IOSCO and the International Forum for Investor Education (“IFIE”) have already organized a conference to address global standards for investor education. While the IFIE only began in 2005 and only 125 people were invited to attend, the conference goals were encouragingly ambitious, and necessary. The speaker list included educators from around the globe, including Africa. This is a good beginning because it is an example of how responsible regulators must think. This type of responsible forward thinking must inform our regulatory reform.

Responsibility of Care

There is a tendency in the West, to talk about capitalism- of which stock exchanges are the bell weather- as non-moral while all the time the morality is implicit. Taking responsibility for ones actions is a moral act and not one that international financial actors are accustomed with. But that does not prevent us from considering moral responsibility as part of the inevitable financial reform. Financial reformers will be better able to provide prudent legislation by considering the crisis through a lens of ethical responsibility owed by businesses involved.

As legislators contemplate how to reform financial regulations, and education, they need to consider making financial actors more responsible. Borrowing from concepts of Corporate Social Responsibility, the relationship between business and society, whether global or domestic, is permeated by ethical values. Business ethics includes social responsibility owed by companies and corporations as they interact with one another and individuals. John Rawls argued that rational persons enter into terms of association based on principles of fairness or justice, as opposed to a social contract. All persons are “similarly situated” so that no one has the upper hand in deciding their own moral fate, as opposed to how they treat others. The association garners its equality from a hypothetical ignorance of one’s own advantages and qualities. Corporations and business must consider these concepts from a global perspective.

Corporate Social Responsibility is not the only paradigm we can utilize. Self-regulation within industries can develop into industrial morality. Within the self-regulated industry there develops a responsibility to consider not only what is good for the members of the industry, and what is best for society in general. Eventually, responsibility becomes institutionalized and, when making decisions, like a moral individual, the industry will reflect on the consequences of various choices. Similar to the concept of sustainability, one of the Millennium Development Goals (“MDG”), actors in the securities industry can be incentivized through regulation to consider what is best for the common good.

Securities regulation was not at the heart of the GFC, banking regulation was. The White Paper however contains securities related reforms. The securities industry will be changed along with the banking industry by the inevitable legislative reforms. Now is the opportunity to explore the full extent of helpful securities regulatory reform. Africa does far afield from this discourse but our securities industry, through our government machinery, is involved. We need to realize that. We also need to appreciate that a global financial community exists and along with it comes responsibility. As far as the effect of the GFC on East African exchanges, since the beginning of the crisis, Kenya, Uganda, and Tanzania have postponed bond issues on international exchanges. External financing is no longer available, so African regional integration projects have stopped. The African Development Bank has, to the extent it is capable, attempted to co-finance projects. Participating in the global financial community has its risks and benefits. There are advantages to liberalized capital markets, such as the possible establishment of international standards, an increase in transparency and accountability, and potential increases in domestic competition and economic growth.

The situation in Africa illustrates the fact that liberalization exposes the economy to potential outflows of capital causing economic contraction and hardship. The question then arises whether the benefits of liberalization are outweighed by the costs—in human terms. At the same time, discussion of the GFC is not limited to economic or legal frameworks; there is an education framework. We in developed financial systems can learn from East Africa to include more education in our securities regulation regime. Additionally, there are ethical dimensions to the crisis. The consequences of risk-taking by bankers and investment professionals, namely the GFC and the global recession, were catastrophic worldwide. Regulatory reform is inevitable in the developed world in light of how devastating the effects of the GFC have been there. To be effective any reform should be guided by an understanding of the ethical responsibilities inherent in making decisions that have the potential for such dire consequences.


Rebuilding Investor Confidence: IOSCO and IFIE Hold Major Investor Education Conference.... REUTERS, Jan. 12, 2009,

Press Release, Int’l Forum for Investor Educ. & Int’l Org. Of Sec. Commissions, More than 100 of the World’s Investor Education Leaders to Attend IOSCO/IFIE Conference in Washington, D.C. (2009), available at The goal of the conference was to gather capital market experts and provide attendees information needed to start investor education programs. Id.

Id. BothAllen Rwakakooko from Uganda and an official from the CMA in Egypt were invited to speak. Id.

James Ferguson, GLOBAL SHADOWS: AFRICA IN THE NEOLIBERAL WORLD ORDER, 80-88 (2007).(discussing structural adjustment programmes imposed by the World Bank and IMF on borrower African nations)
Id at 86.
Antonion Argandona, Can Corporate Social Responsibility Help Us Understand the Credit Crisis 10 (IESE Business School, Working Paper No. WP-790, 2009).

This Article assumes that the reader is familiar with the causes of the financial crisis as well as the responsible actors such as credit rating agencies, mortgage lenders and banks. See generally, MARTIN BAILY, ROBERT LITAN, AND MATTHEW JOHNSON, BROOKINGS INST., THE ORIGINS OF THE FINANCIAL CRISIS, (2008) (explaining the causes of the financial crisis).

See Elisabet Garriga & Domènec Melé, Corporate Social Responsibility Theories: Mapping the Territory, 53 J. BUS. ETHICS 51, passim ( 2004).


John Rawls, A Theory of Justice, in AN INTRODUCTION TO BUSINESS ETHICS 214 (GEORGE D. Chryssides & John H. Kaler eds., 1993).

See Karen Ellis, Is CSR just Corporates saying the Right Things?, OVERSEAS DEV. INST. 100, 100 (2008), available at

Neil Gunningham & Joseph Rees, Industry Self-Regulation: An Institutional Perspective, 19 LAW & POL’Y, 363, 276 (1997).

Id. at 378.

Id. at 381-82.

African Development Bank, Africa and the Financial Crisis: An Agenda for Action, Policy Briefs on the Financial Crisis, No. 13 (2009).

Id. at 3.

Id. at 4.

See Paul Olivera, Investment Including Capital Movement, INT’L TRADE L. & REG., at 40 (2009).

Id. at 44.

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