Libya’s New Financial Regulatory Agency: Libya’s aim to diversify its economic activity by strengthening its financial sector and encouraging investments may prove a success, 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 nations financial regulatory agency is unquestionable. At 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 main federal regulatory agency that oversees its securities industry. The SEC regulates the sale of securities to protect investors by promoting market transparency, while attempting to foster 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 of the Libyan stock market will increase.
Regulatory Agency
Although the structure and powers of financial regulatory agencies differ per country, many of the characteristics of the agencies remain consistent throughout various jurisdictions. In practice, regulatory agencies are granted independence to act within their scope of power, which includes enforcement and often legislative powers. Regulatory agencies are granted enforcement powers to enforce legislation enacted by the legislative or executive, rule-making power of a state. In the US, the SEC is instilled with the power to investigate potential violations and bring civil action against those who violate securities laws.14 An example is securities fraud, which is defined as llegal activities committed during the sale of securities, with the most notorious 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 criminal suits brought by the Department of Justice deter actors in the securities industry from committing securities fraud. Enforcement powers therefore permit the regulatory agency to protect investors. For certain regulatory agencies, the scope of independence encompasses a rule-making power, which allows the agency to elaborate preexisting laws by enacting regulations needed to further their mission.17 The powers of the Libyan financial regulatory agency remains to be seen, however enforcement and investigatory powers of the financial regulatory agency can restore investor confidence, as its role would aim to ensure market integrity and transparency on the LSM.
With Libyas 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.
Libyas 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 issuers registration statement, periodic reporting, liability of an 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, as several companies that were listed on the LSM prior to the revolution were not initially listed in the 2012 re-opening of the stock market due to not meeting regulatory standards.23 The basic regulatory structure exists. However, updated legislation may further investor confidence and consequently boost the LSM 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 a Libya, economic and political instability increases the likelihood of volatility, which signifies the possibility of
extreme price fluctuation.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 the second highest HDI in Africa, the standard of living in
Libya for its small population is considered above the continents average.26 With the highest oil supply in Africa, and being major global supplier of sweet crude, Libya has potential to be an economic powerhouse.27 Libyas potential economic strength has thus important implications on the success of its capital markets, as the increase of 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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