Libya’s New Financial Regulatory Agency: Libya’s aim to diversify its economic activity by strengthening its financial sector and encouraging investment may prove successful, as the creation of a new financial regulatory agency may restore investor confidence and increase liquidity on the Libyan Stock Market (LSM).
Created in 2006, the LSM has seen a relative amount of success.
The importance of a nation's financial regulatory agency is unquestionable. In the wake of the Stock Market Crash of 1929, the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), the U.S.'s main federal regulatory agency that oversees its securities industry. The SEC regulates the sale of securities to protect investors by promoting market transparency and fostering market integrity and financial stability.12 Just as the Financial Markets Authority of New Zealand was established after the 2008 Financial Crisis,13 the existence of a regulatory agency to enforce securities laws may increase investor confidence in the LSM. With more investors confident and willing to trade on the Libyan stock market, liquidity will increase.
Although the structures and powers of financial regulatory agencies differ across countries, many of their characteristics remain consistent across jurisdictions. In practice, regulatory agencies are granted independence to act within their scope of authority, which often includes enforcement and legislative powers. Regulatory agencies are granted enforcement powers to enforce legislation enacted by the legislative or executive branch, or to exercise the rule-making power of a state. In the US, the SEC has the power to investigate potential violations and to bring civil actions against those who violate securities laws.14 An example is securities fraud, which is an illegal activity committed during the sale of securities, with the most notorious form being insider trading.15 The SEC can further sanction violators with civil monetary penalties.16 The threat of civil suits brought by the SEC and of criminal suits brought by the Department of Justice deters actors in the securities industry from committing securities fraud. Enforcement powers, therefore, enable the regulatory agency to protect investors. For certain regulatory agencies, the scope of independence includes rule-making power, which allows the agency to elaborate on preexisting laws by enacting regulations needed to further its mission.17 The powers of the Libyan financial regulatory agency remain to be seen; however, its enforcement and investigatory powers can restore investor confidence, as its role would aim to ensure market integrity and transparency on the LSM.
With Libya's return to privatization and its growing private sector, legislation is needed to properly regulate the industry and restore
investor confidence.
After the Enron and WorldCom scandals in the U.S, Sarbanes-Oxley was enacted to restore public confidence by imposing corporate governance rules and requirements for outside auditors.18 Similarly, Dodd Frank was enacted in 2010 after the 2008 financial crisis to restore institutional investor confidence through several of its provisions.
Libya's investment laws regulate several industries, and have been in effect prior to the revolution.20 At present, the LSM is governed mainly by Law 11, enacted in 2010, which establishes the basic framework for regulating the stock market and its listed companies.21 The articles of the Law 11 mimic certain elements of U.S securities regulation, such as the thirty-day period for the approval by the SEC of an issuer's registration statement, periodic reporting, liability for misstatements on the IPO registration statement, and requirements of outside auditors for issuers' financial statements.22 The Exchanges regulation has been enforced in Libya. Several companies that were listed on the LSM prior to the revolution were not initially included in the 2012 re-opening of the stock market because they did not meet regulatory standards.23 The basic regulatory structure exists. However, updated legislation may further investor confidence and consequently boost the LSM's liquidity.
The creation of a regulatory agency is merely the beginning. Certain factors must be addressed in order to ensure the stability of the Libyan Stock Market.
Need for Economic and Political stability
In developing countries such as Libya, economic and political instability increases the likelihood of volatility, which can lead to extreme price fluctuations.24 Although market volatility may yield higher returns, fear of instability can reduce market demand.25 At present, security in Libya is the biggest factor influencing investor demand. Promoting security and economic stability could decrease the likelihood of extreme market volatility.
And if the factors are addressed?
Ranked second-highest in Africa, Libya's standard of living for its small population is considered above the continent's average.26 With the highest oil production in Africa and a major global supplier of sweet crude, Libya has the potential to become an economic powerhouse. 27 Libyas potential economic strength has important implications for the success of its capital markets, as the increase in its exports and political stability may lead to a boom in its private sector. A strong, more developed economy would indirectly increase liquidity on the LSM.
Whether Libya's regulatory agency will effectively increase investor confidence remains to be seen. However, its creation has entered the Libyan Stock Market into a new era, which may provide better investor protection and increased market liquidity.
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