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 exchangesnamely, 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 1011
(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, 8990 (Jan., 2008).
7 Romona Schweiger, Late Justice for Burundi, 55(3) INTL & 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).

To continue reading

FREE SIGN UP