Investments in the securities market: A legal perspective

The International Organization of Securities Commissioners (IOSCO) is created to help maintain consistency among securities regulators of member states. Within IOSCO, communications may take place directly among the involved and affected IOSCO members. IOSCO members may also wish to utilise the IOSCO Secretariat to facilitate communications with relevant authorities that may include foreign securities commissions and other regulators. 

This article examines matters related to the investments by international organisations in the securities market of Bangladesh. The main purpose is the examination of  IOSCO, legitimacy of IOSCO mandate as well as descriptive  and comprehensive mapping of IOSCO's core principles, and lastly the implementation of IOSCO principles in the security market of Bangladesh. 

The 1980s marked the emergence of the IOSCO as an important forum for securities regulators. IOSCO was founded in 1983 as a successor to an inter-American organisation that promoted coordination and cooperation among securities regulators in North and South America.

Currently, IOSCO's members regulate more than 90% of the world's securities markets and represent more than one hundred jurisdictions. Throughout IOSCO's history, it has served as a centralising force in the international securities arena in various circumstances. 

IOSCO's members come from various places, including national securities commissions, stock exchanges, and international and regional organisations. For example, in 1998, IOSCO adopted an influential set of advisory standards and benchmarks for regulating securities markets, called the Objectives and Principles of Securities Regulation ("Principles").

Moreover, in 2002, IOSCO adopted a multilateral memorandum of understanding designed to facilitate transnational enforcement and exchange of information among securities regulators worldwide. IOSCO mainly serves coordinating and monitoring functions, rather than being a centralized force for regulation and enforcement in international securities law. 

In terms of regulation, compliance with IOSCO's Principles or Memorandum of Understanding, which IOSCO count among its greatest successes, are voluntary until an individual nation chooses to adopt them. In terms of enforcement, IOSCO's Principles have rarely been used publicly to identify nations with poor systems of securities regulation, and IOSCO lacks the power to enforce any of the standards that it establishes.

IOSCO adopted the core principles (principles 1 to 30) in September 1998 as an evidence of IOSCO's commitment to the establishment and maintenance of high regulatory standards for the securities industry. The IOSCO core principles do not represent a single, unified regulatory framework but form a basis for an effective system of securities regulation having key objectives to protect investors ensuring that markets are fair, efficient, and transparent and finally reduce systemic risk. IOSCO sets forth 30 principles that are intended to give practical effect to these objectives.

The strategies for implementing the principles may change in accordance with changes in the market. Therefore, there is often no single correct approach to a regulatory issue because the jurisdiction and local market issues of each IOSCO member state are heterogeneous.     

The IOSCO bylaws state that the organization's members – 

1. will exchange information about their experiences so they can foster development of domestic markets, 

2. will work together to establish standards and improve market surveillance of international transactions, and 

3. will provide mutual assistance to promote market integrity. 

After 1998 IOSCO has produced many resolutions and numerous technical reports relating to different aspects of securities market regulation instead of making a framework statement covering the fundamental aspects of securities regulation. The particular manner in which a jurisdiction implements the objectives and principles described in this document must take into account      the entire domestic context, including the relevant legal and commercial framework. 

The IOSCO assessment requires the existence of some relevant preconditions for  its member states. IOSCO members are committed to ensure adherence to these principles within their jurisdiction and authority. The core principles are the benchmark towards effective security regulation. IOSCO methodology is being created to provide guidance on assessing the level of implementation of the IOSCO core principles as well as      accommodating      differences in the laws, regulatory framework, and market structures among IOSCO members. IOSCO also has set up a task force that is specifically mandated to develop a methodology which could be used by both self-assessors and third-party assessors.  

Bangladesh is a signatory member of the IOSCO Asia-Pacific Regional Committee. It is an IOSCO "A" category member state and is regular in complying with the IOSCO directives for protecting the investors from potential risk. Bangladesh Securities Exchange Commission (BSEC) regularly joins in the annual meeting of IOSCO and provides reports in accordance with the rules and regulations that are adopted for the regular basis. BSEC seeks assistance from IOSCO to protect the investors and shareholders from any future threats.

Yet in the last 10 years, billions of dollars have been wiped out in the security market of Bangladesh where a major portion of investors are ordinary citizens. The collapse of securities market  is due to the regulatory failure of the SEC as well as lack of skill in dealing with the problems. 

Photo: TBS

Now I will take Bangladesh's securities market failure to show how the developing countries like Bangladesh may survive in the complexity of security dealings by implementing provisions mentioned in the 'Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information' (MMOU) of IOSCO. IOSCO acts as an agency to its members for greater regulation, cooperation and harmonisation of security markets irrespective of the heterogeneity and jurisdictional differences. 

In the securities markets, new products are placed among retail investors without particular consideration to their awareness of the risks involved or their particular characteristics. Because of the increase in asset values, securities markets may experience price bubbles. The regulators lag behind because regulations for new products are nonexistent and inadequate to address the risks arising from rapidly developing economies. Appropriate information is necessary but the most crucial part here is "acting on that information".       

In that regard, it is particularly important that there is an organisational structure that allows the regulator to respond rapidly and effectively to changing conditions, either by enacting new regulations or taking precautionary measures when needed. The regulator must have broad enforcement powers that allow it to investigate, supervise, and proffer sanctions to market participants when required.

Securities markets deserve prudential regulation and market conduct rules with information systems for monitoring, controlling and reporting. IOSCO also does this to inform potential investors. Aside from their obligation to ensure that market participants are providing full, timely, and accurate information, regulators should take active steps to make sure that investors have a clear understanding of the nature, characteristics, and risks of the different products available in the market. Those steps may comprise the design of brochures, websites with information, and warnings regarding critical products and/or participants and, depending on the state of development of the market, even the use of collective media to reach investors. Absence of action in these areas can threaten the markets, causing reputational risks, and threaten to set back financial market development.   

Shekh Eshtiak Ahmed is an apprentice lawyer and Graduate Teaching Assistant at the Department of Law, North South University. The writer pays his utmost gratitude to his teacher Md. Rajab Ali, Advocate, Supreme Court of Bangladesh, for his never-ending support and valuable advice

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.