## _cr08206

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---

### Background and methodology
- Assessment update took place in early December 2007.
- Based on a detailed follow-up self-assessment prepared by the Financial Market Authority (FMA) and its responses to a questionnaire prepared by the International Monetary Fund (IMF).
- FMA provided English translations of all relevant legislation and statistical data, and arranged meetings with market participants, including personnel responsible for securities trading at credit institutions, investment fund managers, the Vienna Stock Exchange (VSE), and the Takeover Commission.
- Principal author: Richard Britton (IMF consultant on securities market regulation).

### Institutional and market structure
- By European standards, securities and capital market activity in Austria is exceptionally dominated by banks.
- Requirement: a firm must be a credit institution and be subject to the Banking Act (BWG) as well as the Securities Act (WAG 2007) in order to provide most investment services for most products (including role of broker and manager of collective investment schemes).
- Nonbank investment firms limited to:
  - provision of investment advice on an individual client basis,
  - discretionary management of portfolios on an individual client basis,
  - reception and transmission of orders,
  - operation of a Multilateral Trading Facility.
- Nonbank investment firms are not permitted to handle client money, securities, or other instruments (these restrictions do not apply to nonbank investment firms passporting into Austria).
- Note on MiFID: under MiFID, an investment firm with the appropriate license can provide the full range of investment services and activities and ancillary services including the granting of credit to purchase securities for the full range of financial instruments.

### Key market indicators and changes since 2003 FSAP — Capital Markets
- VSE market capitalization rose from €44.8 billion at end-2003 to €170.3 billion at end October 2007, an increase of 372 percent.
- Market capitalization peaked at 57 percent of GDP.
- IPOs in 2007 up to October: €2.89 billion; in 2003: €1.04 billion.
- Listing these companies on the exchange raised overall capitalization by €6.25 billion in 2007 versus €4.03 billion in 2003.
- Capital increases raised €7.2 billion up to October 2007 versus €1.7 billion in 2003.
- Average monthly turnover in domestic shares: €1.6 billion in 2003; €15.9 billion by October 2007, of which 61.7 percent was executed by the VSE’s international members (23.2 percent in 2003).
- VSE lists equity issues of 86 companies (unchanged since 2003).
- Bond market: most trading takes place off-exchange in the OTC market; 3086 bonds are listed.
- Futures and options markets are relatively undeveloped by the standards of major European exchanges.

### Collective investment schemes (statistics and developments)
- Retail funds: 1438 in 2003 to 1659 (15 percent).
- Special funds: 585 to 710 (21 percent).
- Funds under management: €111 billion to €172 billion.
- Fund management companies: 23 to 24.
- Foreign funds eligible to be marketed in Austria: 4674 (up from 3202 in 2003; 46 percent increase).
- 911 new funds were registered and 607 closed or merged (equates to an average of 228 new funds a year with approximately 152 closing every year).
- Growth in complex products: 72 guaranteed funds with lives of 3–7 years; guarantees may be granted only by licensed banks.
- UCITS III implemented via InvFG Feb 2004; InvFG broadens eligible investments including derivatives and expands disclosure requirements.

### Legislative changes and EU directives transposition
- Substantial EU/EEA legislative and regulatory changes since October 2003 driven by EU FSAP.
- Austria has a good reputation for timely transposition of EU directives into domestic law.
- Important directives and Austrian transposition:
  - UCITS III — To be in force Feb 2004 — InvFG Feb 2004
  - Market Abuse Directive — To be in force Oct 2004 — BorseG Jan 2005
  - Prospectus Directive — To be in force Jul 2005 — KMG + BorseG Aug 2005
  - Takeover Directive — To be in force May 2006 — UbG May 2006
  - Capital Adequacy Directive — To be in force Jan 2007 — BWG Jan 2007
  - Transparency Directive — To be in force Jan 2007 — BorseG Apr 2007
  - MiFID — To be in force Nov 2007 — WAG 2007 + BorseG Nov 2007

### Regulator, governance, and institutional arrangements
- Organizational changes:
  - OeNB will conduct all on-site inspections of credit institutions under the Banking Act and all analysis of results and related information.
  - FMA will be legally responsible for prudential supervision including legal interpretations, supervisory proceedings (sanctions and approvals), and initiating supervisory enquiries.
  - FMA’s responsibilities under WAG 2007, BorseG, KMG, and BWG as it applies to nonbank investment firms remain unchanged, including powers to carry out related on-site inspections of banks and nonbank investment firms.
- Accountability and independence:
  - Article 16 of the FMABG gives the Federal Minister of Finance power to seek information from the FMA on all matters relating to supervision, with FMA required to provide the information without delay, in any event no later than within two weeks.
  - Concern: potential for political pressure; recommendation to narrow scope to exclude information on current or prospective enforcement cases.
- Resources and capacity:
  - Industry participants agree FMA lacks sufficient numbers of staff but has well-skilled and experienced senior officials.
  - Uncompetitive salary levels hinder recruitment of experienced lower-level staff; FMA recruits young but relatively experienced staff and provides training via FMA Academy.
  - Staffing shortfalls noted across multiple principles.

### Enforcement, sanctions, and operational activity
- Administrative fines increased to a maximum of €50,000 for each offense following a Constitutional Court ruling; Court stated this amount is the maximum permitted under the Constitution.
- Criminal sanctions for serious breaches of the KMG (e.g., offering to the public without an approved prospectus):
  - up to two years in jail; or a (salary-related) fine of up to €180,000.
- Insider dealing:
  - Insider dealing remains a criminal offense; maximum prison sentence raised to five years, and a (salary-related) fine can be imposed of up to €180,000.
- Administrative sanctions by the FMA for less serious offenses: a fine of up to €50,000.
- Disciplinary cases not involving insider trading run at around 30 a year.
- March 2006 legislative change: FMA received additional enforcement powers to combat unlicensed or dubious investment service providers and unlicensed deposit takers, including power to close down such firms.
- FMA formed an Enforcement Task Force in the Legal Department of four persons; in 2006 carried out five unannounced on-site inspections using new powers and one in 2007.
- Prospectus approvals:
  - 2006 the FMA approved 80 prospectuses and 17 supplementary prospectuses.
  - First three quarters of 2007: 56 and 19 respectively.
  - The process is operated by a staff of 5 persons and appears efficient.

### Cooperation and cross-border information exchange
- 2003 assessment: FMA had limited powers to provide full cooperation to foreign regulators.
- Principle 12: FMA completed IOSCO questionnaire as first step toward signing IOSCO MMOU; Austrian Constitution does not prohibit the FMA from becoming a signatory.
- Improvements from MAD (BorseG 2005) and MiFID (WAG 2007) increased investigation and information-exchange powers; WAG 2007 A91(4 and 6) may open additional gateways.
- WAG 2007 removes need to demonstrate dual criminality for exchange of information concerning unauthorized investment business and unauthorized deposit taking.
- FMA’s power to compel testimony on behalf of a foreign regulator likely depends on a connection to Austria; FMA does not have power to represent a foreign regulator in court.
- Banking secrecy relaxed in securities market enforcement cases but remains a residual problem where no Austrian regulatory connection can be established.
- Austria on IOSCO “B List” committed to sign but domestic legal impediments remain; FMA intended to reopen discussions with the IOSCO Screening Group after WAG 2007.

### Issuers, prospectus regime, and takeover law
- Under new KMG the FMA is the competent authority for approval of prospectuses. No prospectus may be published until approved by the FMA (A10(1)).
- Article 8a KMG: FMA may require supplementary information; suspend or prohibit a public offering if reasonable grounds for suspecting an infringement of KMG or BorseG.
- OKB designated as officially appointed mechanism for central storage of regulated information (A86(4)) and retains role as depository for prospectuses; OKB must satisfy itself that submitted prospectuses have required information and FMA approval.
- Directors’ dealings reporting: reporting limit now 5 days under A48(d)(4) BorseG, except for small sales amounting to less than €5,000 in any one year; extended to derivatives and shares in associated companies.
- Takeover Law (UbG) amended May 2006 to implement the Takeover Directive; amended UbG no longer permits articles limiting minority shareholders to receiving only 85 percent of the bid price; mandatory bid provisions largely unchanged and somewhat strengthened.
- Institutional cooperation: Takeover Commission has exclusive competence under Article 29 UbG; FMA and Takeover Commission legally obliged to mutually assist (A21 para. 2 FMABG) and to collaborate with equivalent bodies in other EEA Member States (A27d UbG).
- Potential overlap between FMA’s Article 86 BorseG powers and Takeover Commission’s remit requires close cooperation.

### Market intermediaries, MiFID implementation, and supervisory impact
- MiFID greatest impact on FMA departments supervising investment firms and banks providing investment services; MiFID imposes detailed firm/client regulation while allowing discretion in suitability, best execution, client agreements, and conflicts management.
- MiFID primarily implemented through WAG 2007.
- Pre-existing investor protection instruments (Standard Compliance Code and Guideline on Providing Investment Advice) are now largely enforceable under WAG 2007.
- FMA tasks shifted to educating staff on MiFID, updating supervisory/inspection manuals, and advising licensees and external auditors.
- Timing and audit cycle:
  - Auditors’ reports required within six months of the business year end.
  - Most firms use calendar year; FMA expects 2007 reports to report on installation of organizational, risk management and control mechanisms.
  - An FMA circular on organizational requirements will not be published until end of 2007.
  - FMA expects comprehensive data on MiFID compliance to begin to be available only in the summer of 2009, when the 2008 audit reports are received.
  - Period until mid-2009 poses heightened risk of significant problems going undetected unless on-site inspection resources are increased.
- Tied agents and freelancers:
  - MiFID permits tied agents and a category of natural person “freelancers”; Austria permits both and maintains public registers.
  - There are 12,327 tied agents and freelancers in Austria.
  - A re-registration process is underway under MiFID; FMA expects substantial realignment within this sector.
- Staffing for securities supervision:
  - Two divisions concerned have a total staffing of 16, compared with 11 in 2003.
  - Includes 3 experts on financial instruments including one with some understanding of commodity derivatives.
  - Article 91 WAG 2007 authorizes on-site inspections of 318 licensed nonbank investment firms and investment service providers and some 850 credit institutions that provide investment services.
  - Department also responsible for insider dealing compliance by 50 insurance companies and 20 pension funds.
  - On-site inspections: 13 in 2006 (compared with 15 in 2003); planned 11 in 2007.
  - A planned further increase of 14 staff is expected to make a significant improvement but resource constraints remain.

### Market surveillance, MADe, and enforcement outcomes
- FMA brought market surveillance in-house; system fully implemented in November 2006.
- Market Abuse Detector (MADe) combines multiple data sources including real-time order data from the VSE, OTC and on-exchange trade data reported directly to the FMA, media, investment research, Client IDs on trade reports, directors dealings, disclosed inside information, and share buy-back programs.
- MADe can automatically connect a warrant to the underlying security; further expansion planned to include IPOs and capital increases.
- Market Supervision staffing: six (three monitor market and analyze MADe alerts; three analyze potential insider dealing and market manipulation and undertake preliminary investigations).
- Investigation activity:
  - 2006: launched three formal insider dealing investigations and nine market manipulation investigations (insider dealing numbers lower than 2004’s 14; market manipulation rose slightly from 7).
  - 2007: out of 14 preliminary investigations the FMA proceeded with 5 insider dealing and 5 market manipulation cases.
- Courts: outcomes have been disappointing; courts do not always understand securities and derivatives technicalities. Concentration of prosecutions in Vienna and appointment of a special group of prosecutors has somewhat improved the situation.
- FMA can lodge appeals and demand reopening of criminal cases (A48k(2)(1) BorseG).

### Market suspension, MTFs, and regulatory approach
- FMA power to suspend a security or derivative contract from trading on a regulated market to “safeguard the interests of a properly functioning market and is not contrary to the interests of investors” (BorseG A25b(3)).
- Market manipulation remains an administrative offense; maximum fine €50,000; Constitutional Court ruled €50,000 is the maximum for an administrative offense under the Constitution.
- Rationale for retaining market manipulation as an administrative offense:
  - possibility to apply multiple offenses approach to increase total sanction exposure;
  - administrative process is faster (18 months initiation and 3 years to complete including appeals) versus over 5 years for criminal prosecutions;
  - burden of proof lower; penalty can include disgorgement of profits.
- MiFID created the MTF category; one Austrian MTF exists operated by the VSE after converting its third market.
- FMA concerns if foreign MTFs passport into Austria: ensuring no loss of trade data for market surveillance and effective cooperation with Home State regulator.
- FMA believes its licensing and supervisory procedures will be sufficient for entities wishing to establish an MTF in Austria, with minimal adaptation.

### Recommendations (selected by theme)
- Powers and resources of the regulator (Principle 2):
  - Remove the BMF’s powers to instruct the FMA to conduct audits.
  - Narrow the BMF’s power to require the FMA to provide information so as to exclude information on current or prospective enforcement cases.
  - Ensure cases concerning the public liability of the State do not impede the FMA’s ability to perform functions and meet responsibilities.
- Resources and supervision (Principle 3):
  - Increase human resources of the Securities Supervision Department of the FMA, especially for on-site inspections, beyond the 14 planned appointments.
  - Recognize and address gap in securing compliance with MiFID business conduct rules until first full audit reports in June 2009.
  - Raise administrative fines to levels comparable with elsewhere in Europe.
- Cooperation (Principles 11 and 13):
  - Resume discussions with IOSCO to become a full signatory of the IOSCO MMOU.
- Supervision of intermediaries (Principles 22 and 23):
  - Review reliance on external auditors for compliance assessment and consider increasing auditor reporting obligations to the FMA.
  - Encourage rotation of audit firms (not just individual auditors).
  - Conduct management dialogues with supervised entities on-site.

### Authorities’ reactions
- The Austrian Ministry of Finance and the FMA consider the recommendations very valuable and generally in line with their own assessments and priorities for forthcoming years.
- They fully agree that adequate staffing and intensification of on-site presence are important to advance supervisory effectiveness.
- They concur that issues arising with implementation of MiFID are important challenges for the future.
- They will continue efforts to become a full signatory of the IOSCO MMOU.

*Source: _cr08206 - IMF staff report content.*

### 1.  This note presents a factual update and analysis of regulatory developments in

### _cr08206 - 1.  This note presents a factual update and analysis of regulatory developments in

### Background and methodology
- Assessment update took place in early December 2007.
- Based on a detailed follow-up self-assessment prepared by the Financial Market Authority (FMA) and its responses to a questionnaire prepared by the International Monetary Fund (IMF).
- FMA provided English translations of all relevant legislation and statistical data, and arranged meetings with market participants, including personnel responsible for securities trading at credit institutions, investment fund managers, the Vienna Stock Exchange (VSE), and the Takeover Commission.
- Principal author: Richard Britton (IMF consultant on securities market regulation).

### Institutional and market structure
- By European standards, securities and capital market activity in Austria is exceptionally dominated by banks.
- Requirement: a firm must be a credit institution and be subject to the Banking Act (BWG) as well as the Securities Act (WAG 2007) in order to provide most investment services for most products (including role of broker and manager of collective investment schemes).
- Nonbank investment firms are limited to:
  - provision of investment advice on an individual client basis,
  - discretionary management of portfolios on an individual client basis,
  - reception and transmission of orders,
  - operation of a Multilateral Trading Facility.
- Nonbank investment firms are not permitted to handle client money, securities, or other instruments (these restrictions do not apply to nonbank investment firms passporting into Austria).
- Note on MiFID: under MiFID, an investment firm with the appropriate license can provide the full range of investment services and activities and ancillary services including the granting of credit to purchase securities for the full range of financial instruments.

### Key market indicators and changes since the 2003 FSAP — Capital Markets
- VSE market capitalization rose from €44.8 billion at end-2003 to €170.3 billion at end October 2007, an increase of 372 percent.
- Market capitalization peaked at 57 percent of GDP.
- IPOs in 2007 up to October: €2.89 billion; in 2003: €1.04 billion.
- Listing these companies on the exchange raised overall capitalization by €6.25 billion in 2007 versus €4.03 billion in 2003.
- Capital increases raised €7.2 billion up to October 2007 versus €1.7 billion in 2003.
- Average monthly turnover in domestic shares: €1.6 billion in 2003; €15.9 billion by October 2007, of which 61.7 percent was executed by the VSE’s international members (23.2 percent in 2003).
- VSE lists equity issues of 86 companies (unchanged since 2003).
- Bond market: most trading takes place off-exchange in the OTC market, although 3086 bonds are listed; reliable statistics on turnover are not available.
- Futures and options markets are relatively undeveloped by the standards of major European exchanges.

### Collective investment schemes
- Number of retail funds: 1438 in 2003 to 1659 (15 percent).
- Number of special funds: 585 to 710 (21 percent).
- Funds under management: €111 billion to €172 billion.
- Number of fund management companies: 23 to 24.
- Foreign funds eligible to be marketed in Austria: 4674 (up from 3202 in 2003; 46 percent increase).

### Legislative changes and EU directives transposition
- Substantial EU/EEA legislative and regulatory changes since October 2003 driven by EU FSAP.
- Austria has a good reputation for timely transposition of EU directives into domestic law.
- Important directives and Austrian transposition (as presented):
  - UCITS III — To be in force Feb 2004 — InvFG Feb 2004
  - Market Abuse Directive — To be in force Oct 2004 — BorseG Jan 2005
  - Prospectus Directive — To be in force Jul 2005 — KMG + BorseG Aug 2005
  - Takeover Directive — To be in force May 2006 — UbG May 2006
  - Capital Adequacy Directive — To be in force Jan 2007 — BWG Jan 2007
  - Transparency Directive — To be in force Jan 2007 — BorseG Apr 2007
  - MiFID — To be in force Nov 2007 — WAG 2007 + BorseG Nov 2007

### Conclusions of the 2003 assessment
- Austria had fully or broadly implemented a large majority of IOSCO principles; a few were partially implemented or not applicable; none were not implemented.
- Main recommendations related to cooperation, collective investment schemes, and secondary market regulation.

### Principles review — regulator and governance (Principles 1–5)
- Principle 1 (clarity of responsibilities): Recent legislation changed the organization of financial services regulation in Austria with regard to banking supervision:
  - OeNB will conduct all on-site inspections of credit institutions under the Banking Act and all analysis of results and related information.
  - FMA will be legally responsible for prudential supervision including legal interpretations, supervisory proceedings (sanctions and approvals), and initiating supervisory enquiries.
  - FMA’s responsibilities under WAG 2007, BorseG, KMG, and BWG as it applies to nonbank investment firms remain unchanged, including powers to carry out related on-site inspections of banks and nonbank investment firms.
- Principle 2 (operational independence and accountability): Article 16 of the FMABG provides the Federal Minister of Finance power to seek information from the FMA on all matters relating to the supervision of the financial market, with the FMA required to provide the required information without delay, in any event no later than within two weeks.
  - Concern: this power could be used to apply political pressure or improperly obtain information; recommendation to consider narrowing scope to exclude information on current or prospective enforcement cases.
- Principle 3 (powers, resources, capacity):
  - 2003 concerns: administrative fines too low; staffing levels in Securities Supervision Department too low.
  - During update, industry participants agreed FMA lacks sufficient numbers of staff but has well-skilled and experienced senior officials.
  - Uncompetitive salary levels make recruiting experienced lower-level staff difficult; FMA recruits young but relatively experienced staff and provides training via FMA Academy.
  - Staffing shortfalls noted again with reference to Principles 9, 17, 22, 23, and 28.
- Principle 4 (clear and consistent regulatory policies):
  - Recommendation from 2003: broader opportunities for stakeholder input and publication of consultation papers.
  - FMA has published consultation materials in MiFID implementation process and established targeted mailing list; importance of maintaining and improving public consultation process emphasized.

### Enforcement (Principles 8–10)
- Administrative fines increased to a maximum of €50,000 for each offense following a ruling of the Constitutional Court; the Court stated this amount is the maximum permitted under the Constitution.
  - Austria remains out of step with jurisdictions such as the U.K. and France in fine levels.
  - FMA may apply multiple offenses approach to increase total sanction exposure for a single wrongdoing.
- Disciplinary cases not involving insider trading are running at around 30 a year.
- March 2006 legislative change: FMA received additional enforcement powers to combat unlicensed or dubious investment service providers and unlicensed deposit takers, including power to close down such firms.
- Workload in supervision and compliance has grown faster than staffing increases due to a large volume of new detailed securities market legislation introduced in the last four years.
- FMA formed an Enforcement Task Force in the Legal Department of four persons; in 2006 carried out five unannounced on-site inspections using new powers and one in 2007.
- Market surveillance and collective investment scheme supervision: FMA introduced new systems — market surveillance involves cutting-edge technology; collective investments system is partly automated but primarily manual.

### Cooperation (Principles 11–13)
- 2003 assessment: FMA had limited powers to provide full cooperation to foreign regulators (e.g., conducting investigations, compelling testimony, representing foreign regulators in court).
- Principle 12: FMA completed IOSCO questionnaire as first step toward signing IOSCO MMOU; Austrian Constitution does not prohibit the FMA (rather than government) from becoming a signatory.
- Improvements since 2003 driven by implementation of Market Abuse Directive (MAD) in 2005 via BorseG and MiFID in November 2007 via WAG 2007.
  - BorseG provides comprehensive definitions of insider dealing and market manipulation and extensive investigation powers for the FMA.
  - WAG 2007 A91(4 and 6) may have opened additional gateways for information exchange; practical/judicial impediments remain to be tested.
- WAG 2007 provides FMA with new powers to exchange information concerning persons conducting unauthorized investment business and unauthorized deposit taking; the need to demonstrate dual criminality has been removed.
  - FMA’s power to compel testimony on behalf of a foreign regulator likely depends on whether a connection to Austria can be made (e.g., order given from Austria or security listed on an Austrian exchange).
  - FMA does not have power to represent a foreign regulator in court.
- Banking secrecy: relaxed to a large degree in securities market enforcement cases but remains a residual problem in a small minority of cases where no Austrian regulatory connection can be established.
  - Fundamental change to banking secrecy legislation (A28 Banking Act) requires a two-thirds vote by the National Council.
  - Austria has been unable to sign the IOSCO MMOU to date but has been admitted to the “B List” of states committed to sign but where domestic legal impediments remain.
- Following WAG 2007 coming into force in November 2007, FMA intended to reopen discussions with the IOSCO Screening Group, which may result in Austria becoming a full signatory to the MMOU.

### Issuers (Principles 14–16)
- 2003 recommendation: FMA should be responsible for depositing prospectuses for public offering with implementation of the EU prospectus directive.
- Interaction of Prospectus Directive with Transparency Directive: Austria implemented both in a way that achieves the underlying purpose of the recommendation.
- In the EEA, issuance of prospectuses since July 2005 governed by the Prospectus Directive and its implementing Regulation.
  - Directive transposed partly in the KMG and partly in the BorseG in August 2005.
  - Regulation is directly applicable as if it were national law and did not require transposition; its primary purpose is detailed content requirements for prospectuses for various types of securities.

*Source: _cr08206 - 1.  This note presents a factual update and analysis of regulatory developments in*

### 31.  As recommended in the FSAP, under the new KMG the FMA has been

### _cr08206 - 31.  As recommended in the FSAP, under the new KMG the FMA has been

### Prospectus approval and FMA powers
- Under the new KMG the FMA has been appointed the competent authority for the approval of prospectuses. No prospectus may be published until it has been approved by the FMA (A10(1)).
- Under Article 8a the FMA may:
  - require issuers to provide supplementary information;
  - suspend or prohibit a public offering if it has reasonable grounds for suspecting an infringement of the KMG or BorseG.
- The OKB is designated as the officially appointed mechanism for central storage of regulated information (A86(4)) and retains its role as depository for prospectuses. OKB responsibilities include:
  - answering questions from the public regarding securities subject to a prospectus, timing of an offer, where a prospectus can be obtained, etc.;
  - satisfying itself that the prospectus and other regulated information submitted to it contain the required information, including that the FMA has approved the prospectus;
  - providing such information to members of the public for a reasonable fee.
- The FMA can set, by decree, minimum technical standards for the OKB’s systems including easy access for end-users (A86(5.2)); the FMA is considering whether to exercise this power.

### Sanctions, supervisory activity, and operational statistics
- Criminal sanctions for serious breaches of the KMG (e.g., offering to the public without an approved prospectus):
  - up to two years in jail;
  - or a (salary-related) fine of up to €180,000.
- Administrative sanctions by the FMA for less serious offenses: a fine of up to €50,000.
- Prospectus approvals:
  - In 2006 the FMA approved 80 prospectuses and 17 supplementary prospectuses.
  - In the first three quarters of 2007 those numbers were 56 and 19.
  - The process is operated by a staff of 5 persons and appears efficient.
- Directors’ dealings reporting:
  - Under A48(d)(4) BorseG the reporting limit is now 5 days, except for small sales amounting to less than €5,000 in any one year; extended to derivatives and shares in associated companies.
  - The FMA has issued standardized forms to facilitate aggregation and analysis.

### Market transparency, trading supervision, and takeover interactions
- Ongoing issuer and investor obligations (annual and semi-annual accounts; disclosure of changes in large shareholdings) are set out in the Transparency Directive and transposed in the amended BorseG.
- The FMA has new supervisory powers including the power to suspend or prohibit trading and to conduct on-site inspections of issuers (A86(6)).
- Circumstances for exercising FMA powers include a reasonable belief that an issuer failed to treat equally all shareholders in the same situation (Article 83(2) BorseG).
- Takeover Law (UbG) changes:
  - 2006 amendment to implement the Takeover Directive; main provisions were already modeled on the U.K. Takeover Code.
  - The amended UbG no longer permits articles of association limiting minority shareholders to receiving only 85 percent of the bid price.
  - Mandatory bid provisions largely unchanged and somewhat strengthened.
- Institutional cooperation:
  - Takeover Commission has exclusive competence under Article 29 UbG.
  - FMA and Takeover Commission legally obliged to mutually assist (A21 para. 2 FMABG) and to collaborate with equivalent bodies in other EEA Member States (A27d UbG).
  - Transposing the Transparency Directive created potential overlap: FMA’s Article 86 BorseG powers over issuers (new as of April 2007) may intersect with the Takeover Commission’s remit in takeover situations, requiring close cooperation.

### Corporate governance reforms
- 2005 Corporate Governance Act (GesRAG) introduced mandatory measures including:
  - strengthening independence of supervisory boards and external auditors;
  - limiting the number of supervisory boards an individual can be a member of;
  - requiring audit committees for supervisory boards of companies listed on the first or “Prime” section of the VSE and all companies with more than five supervisory board members;
  - requiring all listed companies to appoint a financial expert to the audit committee.
- Further obligations will shortly apply to significant banks and insurance companies, listed or unlisted.
- The Austrian Code of Corporate Governance (established 2002) is updated annually and incorporates the new legally binding obligations; the Code contains mandatory legal requirements, “comply or explain” requirements, and recommendations.

### Collective investment schemes (Principles 17–20)
- 2003 assessment recommendation to make voluntary quality standards compulsory has not been fully implemented; the Austrian Association of Investment Management Companies continues to update standards in consultation with the FMA.
- The FMA endorses the standards and expects adherence; breaches will be regarded as breaches of the Banking Act obligation to act with due diligence.
- Supervisory organization and staffing:
  - Supervision of collective investment scheme management was transferred from the Banking Department to the Securities Supervision Department in January 2008.
  - Rationale: closer interface with securities supervision, off-site analyses and on-site inspections of credit institutions by OeNB, and international consensus (e.g., CESR) favoring securities supervision for investment fund managers.
  - Staffing has remained static since 2003 at 10 persons; turnover has been a problem.
- Fund sector activity and workload statistics:
  - Retail funds increased from 1438 to 1659 (15 percent).
  - Special funds increased from 585 to 710 (21 percent).
  - 911 new funds were registered and 607 closed or merged (equates to an average of 228 new funds a year with approximately 152 closing every year).
  - Foreign funds increased by 1400 since 2003.
- Supervision systems and inspections:
  - Department developing ARIS to combine quantitative and qualitative data into a “traffic light” scoring system; full evaluations annually and management dialogues on schedule.
  - On-site inspections of management companies limited to two a year; after transferring inspection powers to OeNB, the department intends cooperative inspections focused on risk management and hopes to carry out 3 to 5 such inspections annually.
  - The intended inspection number remains limited relative to the number of companies (38).
- Product complexity and disclosure:
  - Growth in complex funds, e.g., 72 guaranteed funds with lives of 3–7 years, principal guaranteed at maturity and in some cases payback includes 80 percent of the highest net asset value achieved during the fund’s life.
  - Guarantees may be granted only by licensed banks (not management companies); disclosure requirements for funds with embedded derivatives are more detailed under the InvFG.
  - Index funds are not permitted to use derivatives in a way that might generate performance gaps between the index and the fund.
- UCITS III implementation and ongoing updates:
  - UCITS III implemented in Austria by amendment to the InvFG that came into force in February 2004.
  - Implementation did not require extensive changes to regulatory capital because Austrian investment managers have long been licensed as banks.
  - InvFG increases cross-border freedom and broadens eligible investments including derivatives; required disclosure expanded (including pending legal proceedings material to an investment decision).
  - Continuous EU guidance from the Commission and CESR implemented via InvFG amendments and FMA regulations; updates to InvFG will continue through 2008 (UCITS IV under preliminary discussion).
- New domestic legislation requiring FMA attention: Real Estates Funds Act and Staff Provisions Funds Act (governing special funds).

### Market intermediaries and MiFID impact (Principles 21–24)
- MiFID impact:
  - Greatest impact on FMA departments supervising investment firms and banks providing investment services.
  - MiFID imposes detailed regulation of the firm/client relationship while allowing discretion in areas such as suitability assessment, best execution processes, client agreements, and conflict management.
  - Austria’s prior regime already required licensing for provision of investment advice; MiFID extended and formalized such obligations across Europe.
- Implementation and regulatory instruments:
  - MiFID primarily implemented through the WAG 2007.
  - Pre-existing investor protection instruments included a “self-binding” Standard Compliance Code (SCC) for Financial Institutions and the Guideline on Providing Investment Advice (including a booklet on risk warnings) prepared by the Austrian Chamber of Commerce; these were binding practically only on banks.
  - Post-MiFID many SCC and Guideline provisions are now enforceable regulation under WAG 2007.
- Resource and supervisory challenges:
  - Heavy burden on FMA supervision staff in preparing for MiFID over the previous three years, including participation in CESR working parties and assisting BMF in Brussels negotiations.
  - Legislative framework stabilized with Level 1 and Level 2 Directive and Regulation, but CESR and EU Commission continued to publish interpretive opinions and guidance through late summer.
  - FMA tasks shifted to:
    - educating supervisory and enforcement staff on MiFID requirements and updating supervisory/inspection manuals (external training, internal projects, management-level discussions);
    - advising licensees and their external auditors on client obligations and FMA expectations under the new regime.
  - These tasks are time-consuming while maintaining supervisory oversight and analyzing external auditors’ on-site inspections, especially “for cause.”
- Industry views:
  - Industry representatives report a generally positive relationship with the FMA; staff described as open, helpful, knowledgeable.
  - Views on FMA’s role in MiFID implementation varied: some found the FMA helpful and deeply involved in updating the SCC and Guideline; others suggested the FMA limited its role to setting out legal requirements and CESR-devised guidance.

*Source: _cr08206 - 31.  As recommended in the FSAP, under the new KMG the FMA has been (IMF staff report content).*

### 62.  In practice, despite the small size of the FMA Security Supervision Department

### 62. In practice, despite the small size of the FMA Security Supervision Department

### Implementation guidance and publication
- The FMA has developed and published guidance expanding upon the MiFID requirements, including:
  - A circular clarifying the differences between tied agents and freelancers and their obligations;
  - A list of minimum records;
  - Guidance on licensing procedures; and
  - Passporting requirements.
- The implementation measures, as well as the SCC and the Guidelines, are published on the FMA’s Web site.

### Senior management responsibility and legal culture
- MiFID’s key policy principle: senior managements should take responsibility for their firms’ actions and should not rely solely on detailed rules from the regulator.
- In civil law jurisdictions such as Austria, this is a new approach requiring time for adaptation by the regulator, investment firms, and the judiciary.

### Enforcement risk, auditors, and timing of compliance data
- Due to very limited on-site inspection resources and heavy reliance on licensees’ external auditors, the near-term risk of FMA enforcement action for breach of MiFID is assessed as low.
- Firms remain exposed to the risk of suit by customers and the possible award of damages; public liability exposure of authorities may arise.
- Auditors’ reports are required within six months of the business year end.
- Most Austrian firms use a calendar year; the FMA expects 2007 reports (which include the first two months of the MiFID regime) to report only on whether firms have properly installed necessary organizational, risk management and control mechanisms.
- An FMA circular on organizational requirements (compliance function, risk management, internal audit) will not be published until the end of 2007.
- The FMA expects that comprehensive data on MiFID compliance will begin to be available only in the summer of 2009, when the 2008 audit reports are received.
- The period until mid-2009 therefore poses a heightened risk of significant problems going undetected unless on-site inspection resources are increased.

### Passporting and transposition timing
- Some Member States delayed bringing MiFID into force; most met the deadline or will have done so by the end of November 2007; the remainder expected to do so in early 2008.
- As of early December 2007 the FMA was not aware of any problems regarding inward or outward passporting for Austria or Austrian firms, though at least two late jurisdictions are of particular relevance to Austria.
- Some banking sources report that certain governments are unlikely to bring MiFID into force until 2009.
- CESR has issued extensive guidance to member regulators on handling passporting problems.

### Role and limitations of external auditors
- The FMA recognizes external auditors may be the weak link: they were least involved in negotiations and pre-implementation planning yet will be required to investigate compliance with MiFID as a mandatory task.
- Emphasis is being placed on informing the “Big Four” auditing firms and smaller firms specializing in auditing investment firms.
- General risks of heavy reliance on auditors are discussed in the Basel Core Principles update.
- Specific concerns:
  - Many auditors may be unable to adequately assess outcome-focused compliance issues (e.g., treatment of clients, conflicts of interest, maintenance of Chinese walls, “insider lists”).
  - Auditors may report in a way not explicit enough to put the FMA on notice or report too late after investor damage has occurred.
  - Legal liability caps on auditing firms are low, ranging from €2 million to €12 million, apply even to gross negligence, and in any case must be covered by insurance.
  - The closeness of auditors to their clients, developed over many years, is a cause for concern.
- The Securities Supervision Department routinely returns two-thirds of the financial statements and other routine reports it receives from auditors for revision and clarification.

### Tied agents, freelancers, and registers
- MiFID permits continued use of tied agents (natural or legal persons allowed to offer all financial services whose conduct is the responsibility of the investment firm to which they are “tied”), subject to strict obligations and a public register maintained by the national regulator.
- The FMA has adopted the MiFID approach to tied agents and maintains and publishes such a register.
- MiFID permits Member States to exempt a category of natural person (freelancers) who can conduct a restricted set of investment services for more than one firm but cannot handle client money or assets; these persons do not have passporting rights.
- Austria permits such “freelancers” and requires them to join a public register maintained by the FMA.
- There are 12,327 tied agents and freelancers in Austria.
- A re-registration process is underway under MiFID; the FMA expects substantial realignment within this sector and between tied agents and investment service providers, with many investment service providers electing to become tied agents.

### Staffing, inspections, and supervisory resources
- Two divisions concerned have a total staffing of 16, compared with 11 in 2003.
- This includes 3 experts on financial instruments including one with some understanding of commodity derivatives (commodity derivatives are included in MiFID but were excluded from its predecessor).
- Article 91 of WAG 2007 authorizes the Securities Supervision Department to carry out on-site inspections of:
  - 318 licensed nonbank investment firms and investment service providers for compliance with WAG 2007; and
  - some 850 credit institutions that provide investment services for compliance with the second chapter of WAG 2007.
- The department is also responsible for compliance with insider dealing legislation by 50 insurance companies and 20 pension funds.
- Despite increased staff since 2003, the department carried out fewer on-site inspections in 2006 (13) than in 2003 (15) and will carry out 11 inspections in 2007.
- The FMA attributes the decline to diversion of staff to assist the BMF in implementing MiFID, to help the industry prepare for MiFID, and to updating inspection procedures to cope with the directive’s demands.
- A planned further increase of 14 staff is expected to make a significant improvement, but inspection and analysis resources will remain limited and heavy reliance on external auditors will persist.
- Consequences of limited staffing:
  - FMA staff are unable to develop first-hand expertise in reviewing licensed entities’ activities;
  - There is a significant possibility that warning signals will be missed;
  - It is difficult to reconcile limited periodic inspections with the risk-based supervisory approach, since the department does not periodically inspect even all high- to medium-risk firms.

### Management dialogues and supervisory engagement
- The use of “management dialogues,” begun in 2003, increased from 11 to 27 in 2006.
- A dialogue is undertaken when a firm has come to the department’s attention for reasons such as investor complaints, statements in the external auditor’s report, or frequent changes of managing director.
- By end-2007:
  - 8 management dialogues will have taken place with credit institutions;
  - 32 with investment firms to discuss conduct-of-business-related matters;
  - almost all 24 collective investment scheme management companies are routinely subject to an annual dialogue.
- The department regards dialogues as useful for reacting quickly to emerging problems and securing necessary changes.
- Almost all management dialogues take place at the FMA offices (in 2007 only one took place at the firm); more dialogues should take place at firms to give FMA staff hands-on insight.

### Secondary markets: surveillance, MADe, and enforcement
- Past concern about conflict of interest in exchange ownership has been satisfactorily addressed by the FMA.
- In 2004 the FMA began bringing market surveillance “in house,” reviewed systems from other EU regulators, and developed its own system over two years after some 3,300 person hours; the system was fully implemented in November 2006.
- The Market Abuse Detector (MADe) combines information from multiple sources including:
  - Real-time order data from the VSE;
  - OTC and on-exchange trade data reported directly to the FMA;
  - Newspapers and other media;
  - Investment research;
  - Dealings by specific investors (via mandatory Client IDs on trade reports);
  - Directors dealings;
  - Disclosed inside information; and
  - Share buy-back programs.
- OTC transactions defined: off-exchange trades executed by Austrian-based banks in financial instruments admitted to trading on an exchange or where the underlying security is traded on exchange; includes reporting of trades in OTC-covered warrants where the underlying is an exchange-traded security.
- MADe can automatically connect a warrant to the underlying security for analytical purposes; further expansion will include IPOs and capital increases.
- The system generates alerts for investigation and appears highly efficient in collating information and helping Markets and Exchanges staff identify and prioritize potential insider dealing and market abuse cases.
- Market Supervision has a staff of six:
  - Three monitor the market and analyze MADe alerts;
  - Three analyze potential instances of insider dealing and market manipulation and undertake preliminary investigations involving contacts with issuers, brokers, banks, and other firms.
- Six people are judged unlikely to be sufficient given the complexity and investigative demands.
- Short selling is not regulated by the FMA and is not common in Austria; “naked shorting” is constrained by trade matching against the Central Counterparty, which issues escalating fines for failure to deliver.
- Investigation activity:
  - In 2006 the FMA launched three formal insider dealing investigations and nine market manipulation investigations (insider dealing numbers lower than 2004’s 14; market manipulation rose slightly from 7).
  - In 2007, out of 14 preliminary investigations the FMA proceeded with 5 insider dealing and 5 market manipulation cases, all described as complex.
- Court outcomes have been disappointing; courts do not always understand securities and derivatives technicalities. Concentration of prosecutions in Vienna and appointment of a special group of prosecutors has somewhat improved the situation.
- The FMA can lodge appeals and demand reopening of criminal cases (A48k(2)(1) BorseG).

### Exchange and prospectus powers, and enforcement of exchange obligations
- The VSE must continue to monitor trading in real time and maintain an orderly market using XETRA Observer; it must report suspicious transactions to the FMA daily, though its role has diminished as FMA powers increased.
- The Exchange Commissioner appointed by the BMF still attends supervisory and management board meetings of the exchange; the Commissioner reports to the FMA and the head of the FMA’s Securities Supervision Department is appointed Deputy Exchange Commissioner.
- The Commissioner must lodge an objection if a supervisory or management board decision violates federal laws, decrees or FMA rules; such an objection postpones the decision until the FMA rules, binding on the exchange—this has never happened to date.
- The FMA now has sole responsibility for approval of prospectuses required for public offerings and admission of securities to trading on an exchange under the KMG and for enforcing ongoing disclosure obligations of issuers under the BorseG.
- Under MiFID and its implementing regulation, the VSE as operator of a regulated market retains residual obligations regarding issuers and derivatives contracts; BorseG A66 imposes additional obligations the VSE must meet before admitting securities or derivatives to trading and requires arrangements to verify issuer compliance with disclosures (BorseG A66(7)).
- Compliance with these obligations is monitored and can be enforced by the FMA via its licensing powers (BorseG A2(2)) and by withdrawal of a license if the operating company “continually fails to fulfill its duties relating to the management and the administration of an exchange adequately and in accordance with the regulations” (BorseG A4(2)).
- Short of de-licensing, the FMA can impose administrative fines on a person responsible for an exchange operating company for a range of offenses, up to a maximum of €30,000 (BorseG A48(5)).

*Source: _cr08206 - 62.  In practice, despite the small size of the FMA Security Supervision Department*

### 90.  The FMA has the power to suspend a security or derivative contract from

### _cr08206 - 90.  The FMA has the power to suspend a security or derivative contract from

### Market suspension and market abuse framework
- The FMA has the power to suspend a security or derivative contract from trading on a regulated market if this is necessary to “safeguard the interests of a properly functioning market and is not contrary to the interests of investors” (BorseG A25b(3)).
- In 2003 the definition of market manipulation was very narrow and the fine of €20,000 was judged “much too low”.
- Insider dealing was already a criminal offense in 2003, subject to a maximum term of two years imprisonment. Insider dealing remains a criminal offense but:
  - the maximum prison sentence has been raised to five years, and
  - a (salary-related) fine can be imposed of up to €180,000.
- The Market Abuse Directive implementation via BorseG amendments in January 2005:
  - introduced more extensive definitions of insider dealing and market manipulation;
  - required a comprehensive regime to give practical effect to the prohibition of market manipulation;
  - gave the FMA powers to suspend trading in a stock (A48q(3) BorseG) and to conduct on-site inspections at an issuer’s office (A48q(1)(3) BorseG).
- Market manipulation remains an administrative offense; the maximum fine has been increased to €50,000.
  - The Constitutional Court has ruled that €50,000 is the maximum fine that can be levied for an administrative offense under the Austrian Constitution.
  - The report notes €50,000 appears still too low compared with many other jurisdictions and that higher fines would provide a more significant deterrent and greater incentive for FMA staff to pursue cases.
- FMA arguments for retaining market manipulation as an administrative offense (despite low fines):
  - A market manipulation will often consist of several offenses, each subject to the €50,000 maximum, which increases the “headline” figure.
  - The administrative process is faster and subject to shorter formal time limitations than criminal offenses—18 months for initiation and 3 years to complete including appeals versus over 5 years for criminal prosecutions.
  - First instance decisions are determined by experienced FSA staff subject to appeal to a Tribunal where the FMA is a party; the only subsequent appeal is to the Administrative Court and the FMA can appeal as well as the plaintiff.
  - The burden of proof is lower (though courts in some jurisdictions may require a standard equivalent to the criminal standard due to reputational and employment consequences).
  - The penalty can include disgorgement of profits.
- The assessment concludes these arguments have merit and that maintaining market manipulation as an administrative offense may be the most appropriate pragmatic approach given Constitutional constraints; any opportunity to raise the maximum limit should be taken.

### MiFID, Multilateral Trading Facilities (MTFs), and supervision concerns
- MiFID created a new category of investment activity requiring licensing: operation of a Multilateral Trading Facility (MTF).
  - The MTF definition corresponds almost exactly to that of a regulated market or exchange, with the key difference that an MTF does not have to impose listing criteria for the instruments users trade on its system.
  - As of the report, there is only one MTF in Austria; it is operated by the VSE, which converted its third market from an exchange to an MTF to maintain a very light regime on securities traded on it.
  - If an MTF from another EU Member State passports into Austria (probable in the course of 2008), the FMA’s primary concerns are:
    - ensuring no loss of trade data for market surveillance purposes, and
    - effective cooperation with the Home State regulator of the MTF operator.
  - MiFID sets out obligations and procedures to achieve those ends.
  - The FMA believes its current licensing and ongoing supervisory procedures will be sufficient for an entity wishing to establish an MTF in Austria, with minimal adaptation.
- There is a need to recognize and deal with securing compliance with the enhanced business conduct rules of MiFID in the period until the first full audit reports are received in June 2009.

### Key findings on resources, enforcement, and cooperation
- Human resources:
  - The Securities Supervision Department of the FMA needs increased staffing, especially to conduct on-site inspections, in addition to the 14 planned appointments.
  - The increase since 2003 has been absorbed by heavier workload from new EU Directives, leaving a shortfall greater than in 2003.
- Administrative fines should be raised further to levels elsewhere in Europe.
- Cooperation:
  - Discussions should be resumed with IOSCO with a view to Austria’s becoming a full signatory of the IOSCO MMOU at the earliest opportunity; any outstanding problems regarding Austrian law or the FMA’s powers should be resolved.
- Supervision of market intermediaries:
  - The heavy reliance on external auditors in assessing compliance with new client-facing obligations should be reviewed, including measures to increase reporting obligations of external auditors to the FMA.
  - Consideration should be given to encouraging rotation of audit firms and not merely of individual auditors, especially when an audit company with few partners is used.
  - Management dialogues with investment firms and credit institutions should be held “on-site” rather than in the FMA’s offices.

### Recommendations for action (selected, by theme)
- Powers and resources of the regulator (Principle 2):
  - Remove the BMF’s powers to instruct the FMA to conduct audits.
  - Narrow the BMF’s power to require the FMA to provide information on current and prospective enforcement cases so as to exclude information on current or prospective enforcement cases.
  - Ensure cases concerning the public liability of the State do not impede the FMA’s ability to perform functions and meet responsibilities.
- Resources and supervision (Principle 3):
  - Increase human resources of the Securities Supervision Department of the FMA, especially for on-site inspections, beyond the 14 planned appointments.
  - Recognize and address the gap in securing compliance with MiFID business conduct rules until first full audit reports in June 2009.
  - Raise administrative fines to levels comparable with elsewhere in Europe.
- Cooperation (Principles 11 and 13):
  - Resume discussions with IOSCO to become a full signatory of the IOSCO MMOU.
- Supervision of intermediaries (Principles 22 and 23):
  - Review reliance on external auditors for compliance assessment and consider increasing auditor reporting obligations to the FMA.
  - Encourage rotation of audit firms (not just individual auditors).
  - Conduct management dialogues with supervised entities on-site.

### Authorities’ reactions
- The Austrian Ministry of Finance and the FMA consider the recommendations very valuable and generally in line with their own assessments and priorities for forthcoming years.
- They fully agree that adequate staffing and intensification of on-site presence are important to advance supervisory effectiveness.
- They concur that issues arising with implementation of MiFID are important challenges for the future.
- They will continue efforts to become a full signatory of the IOSCO MMOU.

*Source: _cr08206 - 90.  The FMA has the power to suspend a security or derivative contract from*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08206.pdf_