Institutional and Policy Framework for
the
Development of Capital Market
in
Bulgaria
Policy
Paper
September,
1997
Sofia
CENTER FOR
THE STUDY OF DEMOCRACY
The Center for the
Study of Democracy (CSD) was founded in late 1989 as an
independent, non-profit, public policy research organization
committed to fostering the stabilization of a democratic social and
economic system in Bulgaria by encouraging an open dialogue between
scholars and policy makers. CSD is not affiliated with any
political party or structure and operates on the basis of the
universal principles and values of democracy.
The objectives of
CSD are:
- to encourage economic reform in
Bulgaria by conducting independent research in the field of
privatization and private sector development, providing training to
Bulgarian experts, and building an adequate institutional framework
for reform;
- to assist the legal reform in
Bulgaria by introducing advanced foreign expertise, drafting laws
and training members of the Bulgarian legal
community;
- to contribute to the acceleration of
the process of Bulgaria’s accession to the European Union by
conducting independent studies, and encouraging an informed public
debate on integration issues;
- to provide independent analyses of
public attitudes towards social, economic, and political aspects of
the transition;
- to encourage the development of a
viable non-governmental sector that would guarantee the success of
democratic reforms in Bulgaria.
Center for
the Study of Democracy
1 Lazar
Stanev Street, Sofia 1113, Bulgaria
Phone: (359
2)971-3000, Fax: (359 2) 971-2233
E-mail: csd@onlne.bg; http://www.csd.bg
Institutional and Policy Framework for
the
Development of Capital Market
in
Bulgaria
(Action
Plan)
Action Line
1.
Development of a System to
Support Market Infrastructure
The existing legal and
institutional framework and available technical facilities in the
Bulgarian capital markets do not work very efficiently towards
supporting a fully developed securities market. The necessary
legislation, institutions and technical facilities must be put in
place, so that, over time, a market will develop which will be able
to absorb the volumes normal for a country of the size of Bulgaria
and, potentially, international trades. The following discussion
presents specific issues that need to be addressed, so that said
purposes could be met.
Action Line 1.1.
Optimizing Regulatory Authority in Line
with European and International Standards
Action Line 1.1.1.
Power to Regulate the Over-the-Counter
Market
Background
The Securities and Stock
Exchange Commission (hereinafter, the "SSEC") does not have the
power to initiate or enact rules governing the OTC market, nor does
it have the power to issue rules on record-keeping, reporting,
internal organization, internal control and conflict of interests
avoidance in respect of investment intermediaries. Thus, the OTC
market development becomes a volatile process, which does not
guarantee that international standards will be eventually
met.
Objective
Create legislative delegation
for an executive agency (most probably the Council of Ministers;
hereinafter, the "CoM") to issue secondary rules governing the OTC
market. That will enable this very important segment of the market
to develop and function according to the principles of
transparency, competition and accountability. In particular, the
investment intermediaries’ (hereinafter, the "IIs’") internal
structuring, information disclosure, conflict of interests,
accounting procedures, and loyalty and fairness standards should be
regulated in order to improve investor protection.
Actions
Amend the Law on Securities,
Stock Exchanges and Investment Companies (hereinafter, the
"LSSEIC") accordingly.
Timeframe
One to two months.
Action Line
1.1.2.
Power to Regulate the
Stock Exchange
Background
The SSEC does not have
efficient control mechanisms to guarantee that the stock exchange
(hereinafter, the "SE") will operate according to high standards,
especially as regards its Internal Rules. After the SE is licensed,
the modification of its Internal Rules is within its own
discretion, which potentially may become detrimental to
investors.
Objective
The SSEC must be granted
approval powers, as regards subsequent amendments to the SE
Internal Regulations. Thus, adequate trading and disclosure of
information rules, as well as fair disciplinary procedures will be
ensured.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.1.3.
Fostering Compliance and Streamlining
Trade
Background
Market development is
hampered by the regulatory mechanisms’ failure to cause all market
participants to follow formal market procedures (such as
registration, maintenance of up-to-date registration records,
provision of information in its various forms, etc.) and to obey
the rules of the market. If the market is to develop in compliance
with the legally established model, greater compliance with
regulatory rules and further streamlining of the regulated
securities trade are desirable. Such a policy, however, is
frustrated by the excessive fees charged by the SSEC (which results
in avoidance of various regulatory procedures) and by the lack of
fear from the relatively soft penalties.
Objectives
Registration and other fees
charged by the SSEC should be substantially reduced. That will
stimulate players on the market to comply with all registration and
supervision requirements. The SSEC’s revenues will most likely not
drop, due to the increase of turnover resulting from lower fees. In
parallel, the law must provide for stiff penalties for violators.
That will increase the discipline of all players on the
market.
Actions
Amend the LSSEIC and the Fee
Schedules of the SSEC accordingly.
Timeframe
One to two months.
Action Line
1.2.
Resolve the Problems Linked to Title in
Publicly Traded Securities
Action Line
1.2.1.
Remedying Duality of Title
Registration
Background
Current law maintains a dual
system of registration of title in publicly traded securities: the
Book of Shareholders maintained by the publicly traded company and
the Central Securities Depository’s (hereinafter, the "CDS")
registry. Potential discrepancies between these two registrations
and lack of publicity and control by shareholders over what is
registered in the Book of Shareholders, insert a lot of title
uncertainty in the system.
Objective
Reach a high level of
certainty as to who has title in publicly traded securities, thus
achieving high liquidity of the market and increasing credibility
of public trade.
Actions
Amend the LSSEIC in a way to
exclude the applicability of Law on Commerce (hereinafter, the
"LC") rule about securities title registration in the Book of
Shareholders. Thus, make registration (or lack thereof) with the
CDS the only relevant title record as to publicly traded
securities. Proposed action must be taken with respect to both
certificated and uncertificated securities.
Timeframe
One to two months.
Action Line 1.2.2.
Disabling Internal Trading
Restrictions
Background
Current law allows companies
to enact trading restrictions regarding their shares and make them
effective against third parties by just writing them in the
company’s by-laws. Lack of publicity of the by-laws exposes
third-party purchasers of securities to substantial risk of bad
title. While such limitations are acceptable as regards securities
of "private" companies, they are totally unacceptable as regards
securities admitted to public trade.
Objective
Remove uncertainty in title
to publicly traded securities by disallowing publicly traded
companies to create trading restrictions binding on third parties,
thus achieving high liquidity of the market, increasing credibility
in public trade and enhancing domestic and foreign investors
confidence.
Actions
Amend the LSSEIC in a way to
exclude the applicability of the LC rule authorizing
third-party-binding share transfer limitations, as regards
companies whose shares are admitted to public trade.
Timeframe
One to two months.
Action Line 1.2.3.
Giving Investors’ Rights Priority over
IIs’ Creditors’ Rights
Background
Current law does not address
well the issues linked to the conflict of rights of an II’s client
and an II’s creditors. Those become the sharpest in a bankruptcy
situation where investors in securities held (in custody or
account) by the II in (i) II’s name and for the investor’s account,
or (ii) in the investor’s name and for the investor’s account, may
not defend their rights against creditors of the II.
Objective
Segregate the IIs’ portfolios
into II’s personal portfolio and II’s clients’ portfolio.
Securities held in a custodial, safekeeping or other fiduciary
capacity must be segregated from proprietary holdings and
maintained to the level of beneficial owner detail. A situation
should be excluded where the II’s creditors may reach over to
securities held (in custody or account) by the II in (i) II’s name
and for certain investor’s account, or (ii) in an investor’s name
and for the investor’s account. That will help achieve high
liquidity of the market and increasing credibility of public
trade.
Actions
Amend LSSEIC to protect
client accounts, including segregation provisions. As a most
efficient measure, an exclusive CDS title registration system may
be recommended. That will guarantee the credibility of title
registrations (including of beneficial ownership) and correct
timing log of transactions. Creditors of the II will not be abused,
while II’s clients’ interests will be guaranteed.
Timeframe
One to two months.
Action Line 1.3.
Efficient Clearing and
Settlement
Action Line 1.3.1.
Creation of Detailed Rules Providing for
One Centralized Clearing and Settlement System
Background
Law does not adequately
address clearing and settlement. There is only a concise set of low
level legal provisions contained in the CDS Regulation. Further
development of those rules is made in the CDS’s internal
Rules.
Objective
Design and implement one
central clearing and settlement system with the CDS. If necessary,
by law grant the CDS a license to engage in settlement (otherwise a
banking activity). All public trade must be cleared and settled
through said system. The clearing and settlement process, guarantee
funds, and securities held on behalf of others, must be insulated
from interference of bankruptcy proceedings. Said system must be
provided for on the level of law enacted by Parliament.
Actions
Supplement the LSSEIC by a
new chapter dedicated to CDS functions, clearing and
settlement.
Timeframe
One to two months.
Action Line 1.3.2.
Coordinate Improvement of Clearing and
Settlement with Improvement of Title registration
Background
Issues discussed in Action
Line 1.2 (title issues) are relevant to clearing and settlement.
Therefore, their importance should be additionally evaluated with a
view to improving clearing and settlement
Objective
Improve title registration
and other title issues with a view to improving clearing and
settlement. To this end, remove the mandatory requirement of the LC
for uncertificated shares numbering.
Actions
Same as above
Timeframe
One to two months.
Action Line
1.4.
Improve the SE
Mechanisms
Action Line
1.4.1.
Increase SE
Accountability
Background
At present, there are no
obligations by law for the SE to keep track of trades and report to
the SSEC in relation to trading activities. This is a missing link
in the mechanism of providing for a secure market and departs from
standards set in EU law.
Objective
Accountability of the SE must
be increased. SE must keep track of trading activities and submit
periodic reports to the SSEC. The reporting must be done according
to standard formats, to be provided for by special
regulation.
Actions
Amend the LSSEIC in a way to
authorize the issuance of a Regulation on SE Reporting.
Timeframe
One to two months.
Action Line 1.4.2.
Provide for Discontinuation of Trade in
Securities, Which are Traded Without a Contract
Background
Current law does not address
the issue of involuntary discontinuation of trade in securities the
issuers of which do not have a contract with the SE. That creates
risk of abusive SE behavior.
Objective
Provide for terms and
conditions for the SE to drop issues of securities traded without a
contract, for example only after public notice and opportunity for
comment. That will stabilize the relevant segment of the market,
which is expected to be relatively important in the initial stages
of securities trading where trading without a contract will most
likely prevail. This is particularly relevant with respect to mass
privatization issues, if a separate stock exchange tier for trading
of those issues will be available.
Actions
Amend the LSSEIC to mentioned
effect.
Timeframe
One to two months.
Action Line 1.5.
Improve the Legal Framework for
IIs
Background
IIs, as they are provided for
in the LSSEIC, reveal substantial shortcomings. A major problem is
the absence of "custodian services" from the list of the possible
subject of activities of IIs. Absent that power, only banks but not
regular IIs could become involved in the provision of custodian
services.
Objective
IIs need to be provided for
in a way, which enables them to provide the full range of services
to their clients. In this respect, custodianship services, both in
regard to physical custody of certificated shares and maintenance
of securities accounts, must be authorized. As part of that, an
important function of IIs that must be authorized by law is the
maintenance of client accounts.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.6.
Create and Improve an Organized OTC
Market
Action Line 1.6.1.
Introduction of Disclosure
Requirements
Background
OTC market is totally
unregulated. Minimal requirements for disclosure of information,
regular price quotations, reporting of traded volumes, etc. must be
provided for.
Objective
Enable this very important
segment of the market to develop and function according to the
principles of transparency, competition and
accountability.
Objective
Amend the LSSEIC to mentioned
effect.
Timeframe
One to two months.
Action Line 1.6.2.
Create Legislative Backup for the
Electronic Document
Background
The OTC market is emerging
and will certainly even more develop as a market of uncertificated
securities and an electronic market. That raises a number of
potential issues: authentication of electronically generated and
transmitted purchase requests and offers; safeguarding against
electronic data transmission errors; safeguarding against criminal
behavior by way of interference with the electronic trading
systems; etc.
Objective
Create a concept of an
electronic document well grounded in the law. Make electronic
messages exchanged in the course of trade as reliable, as the
written documents exchanged in the course of traditional trade. In
the context of electronic commerce, enable electronic title
registration in the CDS Registry.
Actions
Develop and enact an
Electronic Document and Electronic Signature Law.
Timeframe
Twelve to eighteen
months.
Action Line
1.6.3.
Automated Quotation
System
Background
An OTC market requires an
automated quotation system. Thus, competing dealers will be linked
through a data network.
Objective
Create an automated quotation
system. Thus, bid and offer quotations will be entered by dealers
and will be made available to users on a real time
basis.
Actions
Start working towards
designing and implementing an automated quotation system. As a
short-term solution, create a temporary automated quotation system
operating via leased lines, to be served by Dow
Jones/Reuters.
Timeframe
Three to twenty-four
months.
Action Line 1.6.4.
Enable Self-Regulation of the Organized
OTC Market
Background
The OTC market, just like the
SE, must be self-regulated to a great extent. Therefore, similarly
to the role of the SE as regards the SE market, the
institutionalization role as regards the OTC market must be played
by a private or quasi-governmental institution. Absent such an
institution, an organized OTC market is unthinkable, for there will
be no entity to take charge and responsibility of putting the
necessary infrastructure in place. That will also enable
self-policing as the utmost guarantee for fair trading.
Objective
Accommodate in the
legislation a possibility for a NGO representative for all
dealers/brokers to be put in charge of organizing an automated
quotation system, adopting and enforcing standards of fair
dealer/broker practices, adopt OTC trading rules, advertising
standards, disciplinary procedures for members, etc.
Identify/develop an automated
quotation system to be implemented in creating an electronic OTC
market.
Actions
Amend the LSSEIC
accordingly.
Commence work towards
developing an automated quotation system
Work towards promotion of a
legitimate NGO representative of all dealers/brokers.
Timeframe
Six to twenty-four
months.
Action Line 1.6.5.
Separation between Investment and
Commercial Banking
Background
Bulgarian law does not
provide for institutional separation between investment and
commercial banking activities. While in itself this is not strange
by international standards, it must go along with clear and severe
rules for building "Chinese walls" inside banks with the purpose of
severing their simultaneous investment and commercial banking
activities. Absent such rules, conflict of interests and abuse of
insider information are likely to flourish to the detriment of the
securities market in general.
Objective
Bring banks involving
simultaneously in commercial and investment banking, to high
standards of behavior guaranteeing complete separation between
their "commercial" and "investment" arms.
Actions
Amend the Law on Banks
accordingly.
Timeframe
Two to six months.
Action Line 1.7.
Improving the Disclosure of Information
Requirements for Publicly Traded Companies
Action Line 1.7.1.
Optimize Prospectus Updates
Background
Current law requires
continued "updates" of already issued prospectuses, even after the
public offering has ended, alongside with periodic disclosures of
information. That is quite burdensome both on the SSEC and the
publicly traded companies.
Objective
Remove the requirement for
prospectus "updates" after the end of the offering, while
preserving the periodic disclosure of information
requirement.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.7.2.
Introduce Disclosure Requirements for
Companies with Numerous Shareholders
Background
At present the law does not
address the situation where one company "involuntarily" becomes
publicly traded by virtue of high level of dispersion of its
capital. Although technically company’s stock was never publicly
offered, the risk for the numerous small investors becomes
substantial.
Objective
Provide for submission to the
periodic disclosure of information requirements (annual and
semiannual reports) of companies which have not done a public
offering but whose shareholders have exceeded a certain number
(say, 500). Thus a high-risk area will be provided for and
investors will become better protected.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.7.3.
Optimize Public Takeover
Procedures
Background
At present, any person who is
willing to purchase more than 25% of the securities in a company
with publicly traded shares, must get an approval by the SSEC and
the Committee on Protection of Competition (hereinafter, "the
CPC"), before such a person may place its offer before the
shareholders. That procedure is unworkable and will result in
factual prohibition of similar acquisitions.
Objective
Provide for a workable
procedure for acquisition of large quantities (above 25%) of the
shares in publicly traded companies. All substantive requirements
before a legitimate offer must be preserved. However, it is
necessary to remove the requirement for prior verification of
compliance by way of approval of the offer by the SSEC and the CPC.
Rather, purchase-offerors must be required to immediately inform
the SSEC about initiated acquisitons, thus allowing the SSEC to
monitor the process and intervene, would there be a violation of
substantive requirements.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.8.
Creation of a Mechanism for Publicly
Traded Companies to Go Back to Private Company
Status
Background
Current law does not address
the entire situation where a company that has gone public has, as a
matter of fact, become substantially private. Therefore, such a
company is bound to drag along forever and comply with disclosure
of information and regulatory requirements, which are not
justified. Thus, a substantial amount of energy and effort is lost
both by companies and regulators, not to mention the market
participants whose world will become more and more filled by
"phantom" publicly traded companies.
Objective
Create mechanisms for
publicly traded companies which in substance have become or want to
become private, to be exempted from disclosure of information and
other regulatory requirements. This may include a mixed approach.
On the one hand, any company must be given the freedom to
"self-determination" and, provided its shareholders interests are
protected, must be allowed to stop being publicly traded. On the
other hand, under certain criteria, the SSEC must have powers to
relieve public companies from reporting requirements, thus allowing
them to discontinue their "public status". That will allow for a
"clearing" mechanism to be developed, so that efforts would not be
spent in vain by society for maintaining a formal public status of
numerous companies, which have become substantially private. This
issue is particularly relevant in the case of some of the shares,
privatized in the process of mass privatization, which are expected
to be traded for an initial period, but might become privately held
after ownership is settled.
Actions
Amend the LSSEIC
accordingly.
Timeframe
One to two months.
Action Line 1.9.
Protection of Minority Shareholders in
Publicly Traded Companies
Background
While in closely held
corporations the protection of minority shareholders is usually not
a problem, protection of minorities in public companies must be
carefully provided for. Possibility for dilution of minority
shareholders is among the more undesirable phenomena.
Objectives
Minority shareholders in
publicly traded companies must be properly protected from dilution.
In this respect, the possibility of waiving shareholders’ right to
subscribe for newly issued shares in proportion to their current
shareholding must be restricted for public companies. In addition
to high majority requirements (3/4 of the capital), high quorum
requirements might be recommended.
Actions
Amend the LSSEIC in a way to
supplement the LC 3/4-majority anti-dilution guarantee with a
quorum anti-dilution guarantee, as regards companies whose shares
are admitted to public trade.
Timeframe
One to two months.
Action Line 1.10.
Improving T-Bills Trading
Mechanisms
Action Line 1.10.1.
Creation of an Adequate, Non-Contradictory
Legal Framework of T-bills Trade on the Level of Law
Background
Under current law, T-bills
trading is not adequately provided for. In the context of a legal
framework for securities provided for by an Act of Parliament (the
LSSEIC), T-bills issuance and trade is governed by inferior
legislation, such as a Regulation by the Bulgarian National Bank
(hereinafter, the "BNB") and the Ministry of Finance. Said
regulation, on the one hand, and LSSEIC and other legislation, on
the other hand, are in outright conflict as regards a number of
issues. That creates risks for investors relying on a formally
illegitimate legal framework.
Objective
Provide for T-bills trading
through an act of Parliament. In doing this, all conflicts between
the current T-bills legislation and the LSSEIC must be resolved.
That may happen by way of accommodating the necessary provisions
governing issuance, trading and registration of title to T-bills in
the LSSEIC.
Actions
Draft necessary
legislation
Timeframe
Three to twelve
months.
Action Line 1.10.2.
Create Equal Secondary Market Conditions
for all Dealers
Background
Current T-bills law
discriminates between primary and non-primary dealers on the
secondary securities market. As a result, a proper secondary market
may not be formed.
Objectives
All IIs must have equal
access to the secondary T-bills market. That will contribute
towards competitiveness of the market and will make price formation
fairer.
Actions
Draft necessary
legislation.
Timeframe
One to two months.
Action Line 1.10.3.
Improve T-bills Registry
System
Background
The existing T-bills registry
system is not sufficiently operational. It represents a mixture of
registries and sub-registries managed by the BNB jointly with
primary dealer banks. Such a system is an impediment to real market
trade in T-bills.
Objectives
A uniform, centralized
registry system for title and other rights in T-bills must be
introduced. The BNB or the CDS may run it. A compromise is also
possible where the BNB and the CDS jointly operate a centralized
system with two departments. The legal effect of registration of
title and other rights must be clearly spelled out.
Actions
Draft necessary
legislation
Timeframe
One to six months.
Action Line 1.11.
Development of Adequate Taxation,
Valuation and Accounting Standards for Securities
Trading
Background
The existing taxation and
accounting systems are not at all geared towards securities
trading. As a result, IIs and other players on the securities
market face hardships in properly accounting for their activities
and suffers tax losses.
Objective
Adequate standards for
taxation and accounting must be developed. Thus, a number of
inconsistencies and contradictions frustrating trade will be
avoided. Further, information needed by investors, in some
instances, differs greatly from information needed by tax
authorities. Regulations and guidelines need to be set forth for
the reporting of investment related accounting
information.
Actions
Draft amendments to
appropriate tax and accounting laws and accounting standards. The
SSEC must work closely with appropriate Bulgarian tax authorities
to promote the full and fair disclosure of investment accounting
reporting requirement. In addition, the SSEC should be granted
limited oversight over reporting requirements and at very least,
tax authorities should be required to receive SSEC approval on
investment related accounting standards.
Timeframe
One to six months.
Action Line 2.
Supply and Demand of Securities, Primary
Market Development
A most significant problem of
today’s securities market is that, while being quite regulated and
structured, its has no volumes and practically does not function.
Efforts should be made, so that a sufficient amount of relatively
high quality securities are supplied to the market. That must
happen by opening the door for the only possible source: shares of
privatized companies.
Action Line 2.1.
Cash Privatization through Public
Offerings
Background
A fast and market driven
method of privatization may become the public offering of
government owned shares. The impossibility to resort to said method
results in shortage of trading volumes on the securities
market.
Objective
Provide for the necessary
procedures, including for a "prospectus" requirement, so that
government owned shares might be privatized through public
offerings. Thus, a fair and open market will be developed. The
price of privatized shares will be substantially increased as a
consequence of the professional offering and the competitive
demand.
Actions
Develop and implement a
procedure for preparation of stock for public offering by the
government. Develop specialized auction procedures.
Timeframe
One to two months.
Action Line 2.2.
Create Tradability of Privatized
Shares
Action Line 2.2.1.
Abolition of Trading
Restrictions
Background
There is a large amount of
outstanding stock that has come from privatization, which, for one
reason or another, is not tradable. That stock may become the basis
of public trading almost immediately, should the trading
restrictions be abolished.
Objective
Abolish all trading
restrictions for privatized shares and other shares: workers’
preferential shares; mass privatization shares; privatization
funds’ shares.
Actions
Amend the Law on
Transformation and Privatization of State and Municipal Enterprises
and the Law on Privatization Funds (LPF)
Timeframe
One to two months.
Action Line 2.2.2.
Improvement of Disclosure of Information
Mechanisms
Background
Under current law, mass
privatization shares are exempt from prospectus and periodic
disclosure of information requirements for the mass privatization
auctions. However, should there be formed a secondary market for
such shares, privatized companies will have to deal with prospectus
issuance. That has not been the legislator’s intent and is highly
undesirable.
Objective
Mass privatization shares
must be exempted from the issuance-of-prospectus requirements with
regard to secondary public trading. Thus, trade will develop more
vigorously. At the same time, investors’ interests must be
guaranteed by an obligation for the issuers of such shares to
disclose information periodically. The SSEC must have authority to
specify the format of such periodic disclosures.
Actions
Amend the LPF
accordingly.
Timeframe
One to two months.
Action Line 2.2.3.
Privatization Funds’ Books of
Shareholders
Background
Books of shareholders in
privatization funds are currently maintained only by the funds
themselves. That creates opportunity for abuse and confusions as to
shareholding in these typical "public" entities.
Objective
Authorize the CDS for the
maintenance of the books of shareholders of privatization
funds.
Actions
Amend the LPF
accordingly.
Timeframe
One to two months.
Action Line
3.
Preparing the Legal
Infrastructure for a Self Regulatory Environment
Background
As previously stated, the
SSEC does not currently have the means to police the entirety of
the capital markets. Several proposals contained herein, most
importantly, Action Lines 1.1.1, 1.1.2 and 1.1.3, require the
ability of the SSEC to hold responsible, IIs and Self Regulatory
Organizations ("SROs") for the actions of their employees and
members. In that regard, several broad based policies and laws need
to be in place to provide the SSEC with this legal
authority.
Objectives
To reduce the regulatory
burden of the SSEC by effectively pushing monitoring and
disciplinary responsibility down to SRO and member firm levels. To
develop registration procedures and requirements for SROs with the
SSEC, a previously defined, which gives the SSEC the authority, as
well as the obligation, under securities laws to fine, suspend,
expel or otherwise discipline member IIs and SROs, and people
associated with these members, who have violated securities
laws.
Actions
Development of legislation,
policies and opinions of the SSEC which emphasize the important
role of government oversight in the self-regulatory process and
clearly define the lines of accountability between itself, SROs,
member firms and their employees as described below.
Timeframe
One to two months.
Development of Laws and Definitions
Necessary to Support Self Regulatory Environment
Action Line 3.1.1.
Development of Laws Governing In-House
Compliance Procedures
Background
Current law does not provide
for the mandatory development of in-house compliance procedures to
guard against fraud, sales and trading abuses and other securities
laws infractions. Such legislation is used to deter and detect
fraudulent practices at or about the time of their occurrence, and
to force immediate corrective measures. For the firm, they also
serve as an affirmative defense to a "failure to supervise
liability" as described in Action Line 3.1.2 below.
Objectives
To provide the necessary
legislation that will clearly define the roles of in house
compliance policies and the liability of the firms for failing to
adhere to such legislation. These actions foresee the development
of provisions that address the misuse of material nonpublic
information as well as provide for the requirement for IIs to
establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the misuse of material nonpublic
information by such firms or any person associated with
them.
Actions
In accordance with Action
Line 1.6.5, create appropriate legislation that not only provides
for adequate "Chinese walls," but also requires in-house monitoring
of other securities violations and trading abuses.
Timeframe
One to two months.
Action Line
3.1.2.
Failure to Supervise
Liability
Background
Current law does not
authorizes the SSEC to impose sanctions against an II or SRO if it
has failed to supervise, with a view to preventing violations (of
the federal securities laws), another person who commits such a
violation, if such other person is subject to his supervision.
Failure to Supervise Liability, coupled with in-house compliance
legislation, are essential to the development of an effective self
regulatory environment.
Objectives
To provide the necessary
legislation that will authorize the SSEC to impose sanctions
against an II or SRO if it has failed reasonably to supervise and
to impose sanctions for deficient supervision on individuals
associated with broker-dealers, respectively.
Actions
Create appropriate
legislation in the LSSEIC.
Timeframe
One to two months
Action Line 3.1.3.
Development of Investment Suitability
Laws
Background
Current law fails to require
IIs to learn as much as possible about his or her clients in order
to understand clearly their investment objectives and needs and to
keep them away from investments which are not in line with their
objectives. Lack of adequate legislation and regulation, and the
lure of high commissions, may lead to abusive sales practices. Many
times, individual investors that have limited knowledge and little
time to understand the financial markets are placed in
inappropriate or unsuitable investments.
Objectives
Implement laws and
regulations that place the legal and ethical responsibility to
provide clients with suitable investments with the investment
professionals. Brokers and other financial market participants
should be bound by a "know your customer" rule, which forbids them
to place an investor in an investment for which he or she is
"unsuited" in terms of depth of investment experience, net worth,
annual income, investment objectives, and other actors as discussed
below under "Accredited" or "Sophisticated" investor
definitions.
Actions
To require all SROs and IIs,
as terms of registration with the SSEC, to include the basic
concept of suitability "know your customer" rules, which require
them to use due diligence to learn the essential facts relative to
every customer, every order, every cash or margin account accepted
or carried by their firms.
Timeframe
One to two months
Action Line 3.2.
Clear Definition of Accredited and
Sophisticated Investors
Background
Current law fails to define
accredited and sophisticated investors. Accredited investors are
generally defined by net worth and sophisticated investors are
generally defined in terms of market knowledge. The purpose of
these definitions is to provide IIs with guideline with respect to
certain investments that may fall outside what the regulatory
bodies deem to be "suitable" for the mass investing population. By
defining accredited and sophisticated investors, the regulatory
bodies allow for the accelerated placement of unregistered
securities which may be issued without standardized disclosure.
These rules can play an extremely important role in assisting the
SSEC in regulating the sale of securities as defined above under
Action Lines 1.4.2, 2.2.1, and 2.2.2.
Objectives
Develop a set of regulations
that clearly define accredited and sophisticated investors so that
the SSEC has the ability to allow certain investments to reach the
market without lengthy registration and disclosure requirements
while still maintaining the integrity of the markets and protecting
the average investor.
Actions
Develop appropriate
definition for an accredited and a definition of a sophisticated
investor in the LSSEIC.
Timeframe
One to two months.
Action Line
3.3.
Educating the
Population
Background
The most effective means for
regulating the market and protecting the general investing
population is to have a well educated investment community. An
educated public, while guarding their own investment, can also
serve as a watchdog for violative practices by market participants.
Further, when dealing with educated investors, market participants
have the business and legal incentives to develop and adhere to
sound SRO rules.
Objectives
To provide for the
dissemination of information that discusses what the average
investor needs to know about the stocks, bonds and other
investments, the SE and over the counter markets, brokers,
investment companies and investment advisors, commissions, and who
to contact in the case of expected violations.
Actions
Work with IIs and SROs to
disseminate appropriate educational material of various content and
through various medium.
Timeframe
One to twenty four
months.
CSD
Economic
Program
Publications*
Privatization
-
Analysis of the
Post-privatization Behavior of Enterprises, by St.
Barzashki.
Survey of the
Efficiency of Foreign Consulting Firms, by D. Bobeva, Y. Markov,
S. Dilova, and J. Dobreva.
Privatization and
Economic Restructuring in Bulgaria, Where Is Privatization In
Bulgaria Heading To, by CSD Team
Debt-Equity Swaps In
the Context Of Privatization: the Case Of Bulgaria, by S.
Kassidova.
Development Of the
Private Sector In Bulgaria, by D. Bobeva and CSD Team.
Evaluation Of
Privatization Results for 1994, by D.Bobeva.
Initial Attitudes
Towards Mass Privatization.
Postprivatization
Behavior Of Enterprises In Bulgaria: a Collection of Case Studies,
by D. Bobeva, S. Dilova, and S. Stefanov.
Legal and
Institutional Framework Of the Private Sector, by Valentin
Georgiev
Privatisation Funds
- the Bulgarian Model by M. Prohaska
Policy and Legal
Environment for the Growth of the SME Sector in Bulgaria, by CSD
Team.
Monitor of
Privatization.
(bi-monthly
digest of the Bulgarian press)
Banks and
Finance
Bad Credits:
Financial and Institutional Aspects, by Christina
Vutcheva
Debt Conversion
Program: Guidelines for Bulgaria, Final Study, by M.
Todorova
Social Impact of
Transformation
Emigration Of
Scientists and Engineers From Bulgaria, by D.
Bobeva.
Unemployment,
Poverty, Social Security: the Bulgarian Experience, by G.
Shopov.
The Labour Market
Policy In Bulgaria (1990 - 1993), by D. Bobeva.
At-Risk Groups and
Social Problems in Bulgaria, by CSD Team.
Unemployment and
Labor Market In Bulgaria, by Yordan Hristoskov.
© Center for the
Study of Democarcy. All rights reserved. No part of this
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