LEGAL VIEWPOINT: Stock markets need proper disclosure norms – Dr. AbdelGadir Warsama Ghalib, LEGAL COUNSEL, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

Investors in stocks and or securities normally keep stock markets alive and active due to the fact that they are the real fuel of the market. The demand and the process of investment in stocks and securities makes the fuel that leads and keeps the market machinery going in track.

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Potential investors in shares, securities, bonds or others should be provided with the required accurate information that is necessary to enable them to take or make informed and planned investment decisions that are really based on an on-going and continuous basis.

The golden principle of full, timely and accurate disclosure of current and reliable information that is material to investment decisions is directly related to the sole objective of investors’ protection as well as towards fair, efficient and transparent markets.

Disclosure of information to be effective should be clear, reasonably specific and timely. All specific disclosure of information needed, in some instances, should also be augmented by a general disclosure requirement.

Such a general disclosure requirement normally provides that disclosure is required particularly with reference to all material information that is relevant to a particular investment decision before taking such decision by the potential investor.

Another approach for such general disclosure requirement provides that disclosure is required of all material information that is required and necessary to keep any disclosure made away from being misleading and accordingly could be leading to unexpected results or failure.

Laws and regulations issued by the competent authorities should ensure the sufficiency and accuracy of any flow of information, all along the investment tenure. Generally speaking, this will involve necessary sanctions or liability to be imposed on the issuer company, in addition to all those responsible persons who fail to exercise necessary due diligence in the gathering, analyzing and provision of such information.

Regulations should ensure that proper legal and professional responsibility is taken for the content and substance of the information given. Depending upon the circumstances and merits of each case, those liable to take responsibility may include the issuing company underwriters, promoters, directors, all authorizing officers of the company and those experts and advisors who gave their consent to be named in the documentation or provide advice.

Regulators or other competent authorities may, also, need to give careful consideration to the presence of certain circumstances under which it may be necessary “ to the proper functioning of the market ” to allow something less than full disclosure or we could say “partial disclosure”.

For example, the partial disclosure could happen in case of trade secrets or in other cases of incomplete negotiations that may affect the legal, financial or corporate status of the concerned company.

In limited circumstances where the market requires some derogation from the objective of the timely and “full disclosure”, there may be a need for temporary suspensions from trading or restrictions on the trading activities of those who possess more complete full information.

In such circumstances trading should be prohibited in the absence of full disclosure. This is a very important point and should be strictly observed by the regulators and implementing \ supervisory authorities.

To safeguard the fair and equitable treatment of potential investors and current shareholders, the regulations should require full disclosure of the security holdings of the management and of those persons who hold a substantial beneficial ownership interest in a company. This is generally regarded as information that is necessary to enable certain informed investment decisions in the secondary market.

Some famous names in this respect, like Bill Gates, will definitely encourage many people to take active positive steps towards investment in that particular company. It goes without saying that the contrary could also happen because certain names or persons could encourage some people not to invest in a particular company. This is why disclosure is an important legal necessity required by the law everywhere \ anywhere with the direct aim of protecting the investors.

The regulators and other competent authorities shall prepare certain format to be filled by the concerned companies in compliance with the disclosure requirements provided by the law. Ready-made formats will directly help in covering and pin-pointing  the needed information to be disclosed to potential investors. In such instance, all are required to follow-suit, with no exception or excuse…