Taking Responsibility-Securities Regulation Reform and the Global Financial Crisis: The United States, United Kingdom, and East Africa

• Author: June McLaughlin
• Pages: 760-795

Taking Responsibility—Securities Regulation Reform

and the Global Financial Crisis: The United States,

United Kingdom, and East Africa

June McLaughlin*

I. INTRODUCTION ............................................................................ 761

II. EFFECT OF THE CRISIS ON AFRICA .............................................. 763

III. ANGLO-AMERICAN REGULATION ................................................ 769

A. The United Kingdom ....................................................... 769

1. Statutory Objectives .............................................. 770

2. Principles-Based Regulation ................................ 773

a) Financial Capability ................................... 774

b) FSA Study of Financial Capability ............ 775

B. The United States ............................................................ 776

1. Self-Regulation in the United States Securities

System .................................................................... 778

2. Financial Industry Regulatory Authority ............ 779

C. Comparison of the Two Systems ..................................... 781

IV. EAST AFRICAN CAPITAL MARKETS ............................................. 782

A. African Regulation Under a U.S. Model ............... ......... 784

1. IOSCO .................................................................... 785

2. Capital Markets Regulation ................................. 787

V. RESPONSIBILITY FOR REGULATION ............................................. 788

A. Regulatory Response to the GFC .................................... 788

1. Fiduciary Duty....................................................... 789

2. Education as Reform ............................................. 790

3. Responsible Regulatory Reform ........................... 792

4. Responsibility of Care ........................................... 792

VI. CONCLUSION ................... ............................................................ 794

* This article greatly benefited from the efforts of the journal's editorial staff and in particular,

Hudson Kingston, whom the author

would like to personally thank.

Winter 2011] REGULATION REFORM A ND THE GLOBAL FINANCIAL CRISIS 761

Kipindi cha mavuno kimefika kuanzia kwenye uraisi na hata kwenye ubunge

na wewe mgombe utavuna ulichopanda.1

I. INTRODUCTION

The Global Financial Crisis (“GFC”) did no t directly affect the majority of

sub-Saharan Africa because the region was not significantly connected to the

international financial markets. 2 However, the resulting recession arguably

has been more devastating to the continent than the GFC w as to the

developed world. The recession first struck developed African exchanges and

then expanded to other areas of African economies, such as trade,

remittances, and aid, thereby eliminating much of the economic growth that

the people of the continent had accrued.3

This Article has a comparative focus. It considers the involvement of

Africa in the GFC and its aftermath through the lens of exchange regulation,

specifically focusing on the educ ational initiatives of those capital market s

regulators. Financial education has always bee n a duty of financial

regulators

4

The HIV/AIDS epidemic hit Easte rn Africa heavily, causing a massive

number of fatalities.

and should be included in deliberations about reform. This Article

compares the regulatory environments, including potential legislative reform,

in the United States, United Kingdom, and the countries in the East African

Community that have exchanges—namely, Burundi, Kenya, Uganda,

Tanzania, and Rwanda. These countries offer a cross section of developed and

weak states that have exchanges in varying stages of development.

5

1 Frowin Paul Nyoni, Music and Politics in Tanzania: A Case Study of Nyota-wa-Cigogo, in

SONGS AND POLITICS IN EASTERN AFRICA 241, 264 (Kimani Njogu & Hervé Maupeu eds., 2007)

(translating a political song from Tanzania as “The harvesting season is here and everyone shall

reap what he has sown”).

The region along the Uganda-Kenya border is one of

2 See Jose Brambila Macias & Isabella Massa, The Global Financial Crisis and Sub-Saharan

Africa: The Effects on Slowing Priv ate Capital Inflows on Growth 4 (Oversea s Dev. Inst.,

Working Paper No. 304, 2009) (noting that relatively inactive derivatives markets and low

foreign borrowing to finance operations resulted in less integration in the global financial system

than the initial crisis).

3 The real gross domestic product (“GDP”) growth rate for Africa was 4.2 percent in 2000, 5.7

percent in 2005, and 2.1 percent in 2009. Org. Econ. Co-operation & Dev. [OECD], African

Economic Outlook 2009, at 153 tbl.2, OECD Doc. 41 2009 021 P (May 11, 2009), available at

www.sourceoecd.org/9789264061705.

4 See Dalvinder Singh & John Raymond LaBrosse, Northern Rock, Depositors and Deposit

Insurance Coverage: Some Critical Reflections, 2 J. BUS. L. 79 (2010).

5 Deborah Potts, Development Challenges and Debates in Eastern and Southern Africa, in

EASTERN AND SOUTHERN AFRICA: DEVELOPMENT CHALLENGES IN A VOLATILE REGION 10–11

(Deborah Potts & Tanya Bowyer-Bower eds. , 2004).

762 TRANSNATIONAL LAW & CONTEMPORARY PR OBLEMS [Vol. 19:760

the poorest and most volatile places on the planet.6 Burundi has suffered

inter-ethnic violence since inde pendence from Belgium in 1962.7 Capital

market development in Burundi is far behind the rest of East Africa.8

Additionally, violence in Burundi often caused spillover conflicts in Rwanda. 9

Rwanda is among the least developed countries in the world, based on per

capita income levels and the U.N. D evelopment Programme’s Human

Development Index,10 and it is just beginning to develop its capita l markets.

Conversely, the Nairobi Stock Exchange in Kenya has a market

capitalization of $13.1 billion 11 and has increasing local participation. 12

This Article argues that the GFC and th e subsequent rece ssion illustrate

the complete interconnectedness of the global financial community.

Furthermore, the global response to the GFC by various institutions

demonstrates an understanding of this interconnectedness. Therefore,

because of this understanding, the global financial community is morally

responsible for its actio ns and misdeeds, howeve r unforeseen, uncertain, and

unexpected. The securities industry must begin to incorporate into its code of

ethics and everyday behavior th e concept that financial transact ions and

financial innovations can have an impac t beyond anticipated borders.

Additionally, the industry should understand that it is responsible to the

greater global financial commu nity for any new products it develops and

transactions into which it enters. Furthermore, all new financial regulations

must consider the responsibility financial org anizations owe. Employees of

those organizations need to consider the consequences of their activities to

the larger financial community. Regulatory re form legislation drafted in

response to the GFC should embody this responsibility.

This

Article compares the regulatory environment of East African exchanges with

the developed exchanges in the West, in an effort to determine whether the

regulatory differences provide any advantages for dealing with the GFC.

6 Dave Eaton, The Business of Peace: Raiding and Peace Work Along the Kenya-Uganda Border

(Part 1), 107 AFR. AFF. 89, 89–90 (Jan., 2008).

7 Romona Schweiger, Late Justice for Burundi, 55(3) INT’L & COMP. L.Q. 653, 653 (2006).

8 Alain Niyubahwe, Financial Reform Towards Regional Integratio n: Rationale and Orientation

for Burundi, 3 ECON. DEV. INST. REV. 4 (2008), available at

http://www.idecburundi.org/resume/ridec_v3_2/Financial_Reforms_Towards_Regional_Integratio

n.pdf.

9 Schweiger, supra note 7, at 660.

10 Potts, supra note 5, at 6; see The Human Development Report 2009: Rwanda, U.N. DEV.

PROGRAM, http://hdrstats.undp.org/en/countries/data_sheets/cty_ds_RWA.html (last visited Oct.

2, 2010) (listing Rwanda as 167th globally in the development index).

11 AFRICAN STOCK EXCH. ASSOC., AFRICAN STOCK EXCHANGE YEARBOOK 143 (2007), available at

http://www.africansea.org/ASEA/(S(pcflosss3cku0b4susbma55))/library/ASEA_Yearbook2007.pdf .

12 See ROSE W. NGUGI, DEVELOPMENT OF THE NAIROBI STOCK EXCHANGE: A HISTORICAL

PERSPECTIVE 46 (2003).