## Technical Note — Evolution of the observance of the IOSCO objectives and principles of securities by the Lithuania Securities Commission (LSC)

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---

### Scope and focus
- The Technical Note provides an analysis of the evolution of the observance of the IOSCO objectives and principles of securities by the Lithuania Securities Commission (LSC).
- The analysis focuses on the Core Principles for which there have been changes in observance since the IOSCO Detailed Assessment carried out in the framework of the Lithuania FSAP in 2001.

### CP2 / CP3 — Regulator independence, powers, resources and capacity
- Assessment:
  - The DA warned attracting and retaining qualified staff is difficult for the LSC because of the requirement to adhere to civil service pay scales, and reliance on the state budget may decrease operational independence; it recommended LSC be given authority to pay market-based salaries.
  - The warning has not been heeded. LSC has only limited capacity to perform its functions and exercise its powers to date.
  - Between 2005 and 2007, 75 percent of LSC professional staff moved mainly to the supervised sector.
  - New hires are recent university graduates who generally leave the Commission within 12 to 24 months.
  - All LSC Departments are affected; the Law and Enforcement Department is particularly acute, where there is only one senior legal counsel left; his departure would leave LSC without adequate representation in court.
  - There are no specialists with prior work experience in financial institutions, or with CFA, CPA, or any other certificate of proficiency as financial analyst, accountant or auditor.
  - Pay gap between civil service pay scales and private sector securities industry: currently 2 to 1; projected to reach 2.7 times in 2008, and to widen further in coming years.
  - Tight labor market due to high migration of young graduates to other European countries exacerbates recruitment problems.
  - LSC only carries out perfunctory surveillance of securities markets and does not exercise adequate oversight of governance and business practices of financial brokerages, investment funds, and the rapidly growing pension fund industry.
  - LSC does not exercise adequate oversight of second pillar pension funds with aggressive investment strategies concentrated in regions such as the Balkans and in Ukraine, where asset valuations are highly dubious and the risk of asset loss through fraudulent market practices is very high.
  - Failure of LSC to effectively perform market supervisory duties risks putting Lithuania in breach of implementation of EU Directives including Market Abuse Directive (2003/6/EC), Prospectus Directive (2003/71/EC), Takeover Directive (2004/25/EC), Transparency Directive (2004/109/EC), and MIFID Directive (2004/39/EC).
  - MIFID entry into force in early November 2007 allows intermediaries licensed in one EU Member State to operate in any other Member State upon notification, creating risk of regulatory arbitrage and damage to EU single market integrity if Lithuania’s supervisory framework is defective.
- Recommendations:
  - Change the legal status of the LSC and of its staff, and provide LSC with an adequate and sustainable source of funding, including fees from market participants, to enable it to pay market-based salaries to its staff.
  - Develop and implement a comprehensive staff recruitment, development and incentive plan to create a stable corps of experienced supervisors with relevant market experience in licensing, surveillance, inspection, investigation and enforcement.
  - Implement change of status and sustainable funding without delay as part of the planned overhaul of the financial sector supervisory architecture to maintain effective supervision and avoid potential damage to the integrity of the EU single financial market.

### CP5 — Professional standards and conflicts of interest
- Assessment:
  - DA recommended formal restrictions on Commissioners and staff taking contractual, advisory or management positions with licensed market intermediaries be included in the Law on Securities, beyond general civil servant restrictions.
  - Implemented at regulatory level: Law on Markets in Financial Instruments (LMFI) adopted on January 18, 2007 prohibits Commissioners and administration employees of the LSC and their spouses from transferring acquired financial instruments traded on regulated markets of the Republic of Lithuania earlier than six months after acquisition.
  - Law on the Adjustment of Public and Private Interests in the Public Service sets rigid limitations on post-public-service employment and representation for one year in specified circumstances.
- Recommendation:
  - Provided LSC is given authority and funding to establish market-based salaries, LSC should consider implementing a one-year cooling-off period preventing LSC staff from joining companies they supervised at LSC.

### CP7 — SRO oversight, fairness and confidentiality
- Assessment:
  - DA recommended LSE and CSDL employees be excluded from membership of boards of securities firms and issuers to avoid appearance of conflict; AITPS had limited resources and staff and may not ensure compliance.
  - Implemented at regulatory level: LMFI requires regulated markets to establish transparent, non-discriminatory rules endorsed by LSC; requires monitoring of members, reporting significant breaches to LSC, and providing information and assistance to LSC for investigating and prosecuting market abuse.
  - Since MiFID entry on November 1, 2007, OTC trades are no longer reported to the exchange; TRS is not operational to date so OTC trades are not reported by brokerages to LSC.
  - LSC relies on daily data downloads from Vilnius Stock Exchange (VSE) and Central Securities Depository of Lithuania (CSDL) to track on-exchange and OTC trades respectively.
  - LSC joined the Scandinavian TRS project (includes transaction reporting system and analytical software to detect suspicious transactions); LSC shared creation cost with Scandinavian authorities; TRS scheduled to be operational before the end of 2007.
  - VSE can impose pecuniary sanctions on members for failure to prevent market abuse; VSE is introducing suspicious transactions detection system (SMART) intended operational at beginning of 2008.
  - LSC role: exercise market surveillance via post-trade data from regulated exchange, First North, and brokers through TRS, and supervise VSE’s surveillance performance.
  - Performance of CSDL as SRO is satisfactory.
  - AITPS is required to enforce Code of Ethics but in practice fails; LSC formally notified AITPS of failure two years ago without response.
- Recommendations:
  - Enhance market surveillance after MiFID:
    - complete TRS implementation with market intermediaries;
    - extend TRS coverage to SME First North market;
    - carry out enhanced market surveillance through TRS and SMART reports provided daily by VSE;
    - investigate breaches of Code of Ethics by market intermediaries and sanction AITPS when it fails to enforce the Code, in addition to sanctions applied to offenders.

### CP10 — Inspection, investigation, surveillance and enforcement capacity
- Assessment:
  - DA indicated need to improve qualification of inspections staff.
  - High staff turnover has left LSC with few experienced staff for market surveillance, inspections and investigations.
  - Legal enforcement capacity reduced to one senior counsel, severely threatening enforcement.
  - LSC is developing internal rules to implement risk-based supervision as required under MIFID but currently has no capacity to implement risk-based supervision.
- Recommendations:
  - Reduce staff turnover and build a corps of experienced securities market supervisors capable of risk-based supervision.
  - Authorities must proceed without delay with reform of LSC status and funding (see CP2-CP3 Recommendations).

### CP11 / CP12 / CP13 — Information sharing and cooperation with domestic and foreign counterparts
- Assessment:
  - DA indicated LSC could not share confidential information with other domestic or foreign regulators except criminal authorities in case of criminal prosecutions; formal mechanism needed to provide timely assistance to foreign regulators without court intervention.
  - Problem solved at regulatory level: LMFI empowers LSC to cooperate with supervisory authorities of other Member States and third countries, including information exchange and participation in investigations, subject to confidentiality provisions.
  - LSC empowered to obtain existing telephone and existing data traffic records, and to communicate materials obtained during inspections to law enforcement.
  - In practice, LSC has MOUs with regulatory authorities in other EU Member States, several bilateral MOUs with third countries, and a multilateral IOSCO MOU; Russia and Ukraine are not covered by bilateral MOUs or by the multilateral IOSCO MOU.
  - In practice, LSC requested access to telephone records on several occasions but access has been denied; access to emails would likely be denied because of conflict between the Telecommunications Directive and the Market Abuse Directive at the European level.
- Recommendations:
  - LSC should sign bilateral MOUs with supervisory authorities in Russia and in Ukraine.
  - Authorities should adopt laws and regulations empowering the LSC to have access to telephone and email records, upon resolution of the conflict between the Telecommunications Directive and the Market Abuse Directive at the EU level.

### CP14 / CP16 — Disclosure, accounting and auditing standards
- Assessment:
  - DA indicated insider buying or selling of shares of a listed company should be disclosed immediately and publicly; delays undermine investor confidence.
  - DA raised concerns that financial information filed with LSC is not scrutinized adequately due to lack of professional resources, particularly accountants.
  - Listed companies must provide LSC with list of persons with access to inside information; any insider transaction must be reported to the LSE and to LSC within 3 working days. However, serious deficiencies exist in the regulatory and enforcement framework for insider dealing (see CP28).
  - Trades in securities of unlisted companies are not supervised by LSC.
  - Listed companies required to prepare financial statements in accordance with IFRS since 2005. Financial brokerages and asset management companies will have the option to prepare statements in accordance with IFRS starting January 1, 2008.
  - Starting January 1, 2008, LSC will be responsible for supervising implementation of IFRS by regulated entities and issuers.
  - To date, LSC has no staff with an accounting degree and no capacity to check accuracy of financial statements filed by regulated entities; no capacity to analyze adequacy of risk disclosure in public offering documents or to check how funds are applied.
  - LSC does not vigorously pursue lapses in disclosure requirements of public companies that do not trade frequently.
- Recommendations:
  - Authorities should extend mandatory adoption of financial statements according to IFRS to asset management companies and financial brokerages.
  - LSC must build a corps of experienced accountants to check accuracy of financial statements filed by regulated market intermediaries, listed companies and companies trading through MTFs and systemic internalizers.
  - LSC must build a corps of corporate risk analysts to verify adequacy of risk disclosure in public offering documents.

### CP20 — Asset valuation and redemption in collective investment schemes
- Assessment:
  - LSC regulations provide three alternative methods to value infrequently traded securities:
    - (i) an independent certified asset assessment if time lag from last evaluation is less than one year and no important event occurred;
    - (ii) according to the P/E ratio of similar company times the profit per security of the evaluated company;
    - (iii) at fair value.
  - Regulations do not provide a method or methods to calculate fair value.
- Recommendation:
  - LSC should prepare and adopt a regulation with alternative methods to calculate fair value for different types of assets.

### CP22 — Capital and prudential requirements for intermediaries
- Assessment:
  - DA identified deficiencies in capital adequacy rules for market intermediaries.
  - Problem solved at regulatory level: as of to date, all capital adequacy rules for market intermediaries are compliant with Basle II and relevant EU Directives.
  - LSC responsible for supervising capital adequacy rules for all asset management companies and financial brokerages.
  - Asset management companies that manage UCITs and do not provide investment services (individual portfolio management) are not subject to the Capital Requirement Directive.
  - For asset management companies that are subsidiaries of banks, supervisory responsibility can be transferred to the BoL starting January 1, 2008.
  - LSC has very limited capacity to supervise compliance with capital adequacy regulations. Short-term problem limited due to small number of brokerages trading on own account; largest independent brokerage intends to become an investment bank and will be supervised by BoL.
  - Limited LSC capacity will become an issue as investment funds develop following adoption of new law on investment funds, effective in March 2008.
- Recommendation:
  - LSC needs to attract and build a corps of experienced financial analysts to analyze financial statements of regulated entities and verify compliance with capital adequacy regulations.

### CP23 — Internal organization, conduct of intermediaries, enforcement powers
- Assessment:
  - Lithuania fully implemented detailed know your client provisions from MiFID under LMFI and in Rules for providing investment services and reception and execution of orders on behalf of clients (LSC Resolution No 1K-22 of 5/31/07).
  - Detailed KYC AML/CFT regulations are in LSC Resolution No 1K-12 (5/12/05) and Resolution No 1K-20 (7/7/05).
  - DA indicated enforcement would be more effective if right to impose sanctions on individuals was included in securities market legislation, and maximum fines for individuals were considerably raised.
  - Partially solved: LMFI empowers LSC to impose sanctions on legal persons; Law on Securities empowers LSC to impose sanctions on legal and natural persons with substantial fines for specific violations. Fines on individuals under the General Administrative Code are low.
  - Ministry of Justice preparing a new Administrative Code with increased fines.
- Recommendation:
  - Authorities should adopt a revised Administrative Code with increased fines.

### CP24 — Procedures for intermediary failure and investor protection
- Assessment:
  - DA recommended new legislation establishing an investment protection guarantee scheme in compliance with EU Directive.
  - New legislation adopted in 2002; system triggered in 2005 and the compensation mechanism performed smoothly within required time frame.
- Recommendation:
  - n.a.

### CP28 — Detection and deterrence of manipulation and unfair trading
- Assessment:
  - Listed companies required to disclose insider list (see CP14).
  - LMFI Article 62.5 requires issuers and persons acting for issuers to furnish to LSC data (including personal codes) on persons entitled to access inside information and on related persons; definition of related parties includes financial brokerages and auditors. Rules on disclosure of Information about Issuers approved 12.17.04 by LSC resolution 26 elaborate these provisions.
  - Corporations filing for listing do not need to disclose shareholders and voting rights beyond the first level of control; if first-level shareholder is a legal person, LSC can request information on its shareholders but requests have been turned down citing banking secrecy; LSC investigates ultimate controllers on a case by case basis.
  - Financial brokerage companies have “black lists” identifying companies whose shares may not be traded by specific staff, but these “black lists” are not communicated to LSC.
  - Courts' interpretation of the Criminal Code prevents Prosecutor’s Office from successfully prosecuting insider dealing: courts consider information shared by an insider with a related party becomes public information and therefore no longer insider information, undermining prosecution of cases referred to Financial Crimes Investigation Service (FCIS).
- Recommendations:
  - LSC should issue a regulation requiring companies to disclose their ultimate controllers throughout the chain of control as part of their listing application, and to disclose any change in ultimate controllership following their listing.
  - LSC should issue a regulation requiring financial brokerage companies to share their “black lists” with the LSC.
  - Authorities should revise the Criminal Code to exclude information shared by an insider with a related party from the concept of public information.

*Prepared by Michel Noel, World Bank; targeted review of the initial IOSCO Assessment (2001) — this analysis does not constitute a full or formal reassessment of the initial IOSCO Assessment.*

### 1.      This Technical Note provides an analysis of the evolution of the observance of

### 1.      This Technical Note provides an analysis of the evolution of the observance of the IOSCO objectives and principles of securities by the Lithuania Securities Commission (LSC).

### Scope and focus
- The Technical Note provides an analysis of the evolution of the observance of the IOSCO objectives and principles of securities by the Lithuania Securities Commission (LSC).1
- The analysis focuses on the Core Principles for which there have been changes in observance since the IOSCO Detailed Assessment carried out in the framework of the Lithuania FSAP in 2001.2

*Source: _cr08247 - 1.      This Technical Note provides an analysis of the evolution of the observance of*

### 2.      The analysis is presented principle by principle or for a group of principles

### 2.      The analysis is presented principle by principle or for a group of principles

### CP2 / CP3 — Regulator independence, powers, resources and capacity
- Assessment:
  - The DA warned attracting and retaining qualified staff is difficult for the LSC because of the requirement to adhere to civil service pay scales, and reliance on the state budget may decrease operational independence; it recommended LSC be given authority to pay market-based salaries.
  - The warning has not been heeded. LSC has only limited capacity to perform its functions and exercise its powers to date.
  - Between 2005 and 2007, 75 percent of LSC professional staff moved mainly to the supervised sector.
  - New hires are recent university graduates who generally leave the Commission within 12 to 24 months.
  - All LSC Departments are affected; the Law and Enforcement Department is particularly acute, where there is only one senior legal counsel left; his departure would leave LSC without adequate representation in court.
  - There are no specialists with prior work experience in financial institutions, or with CFA, CPA, or any other certificate of proficiency as financial analyst, accountant or auditor.
  - Pay gap between civil service pay scales and private sector securities industry: currently 2 to 1; projected to reach 2.7 times in 2008, and to widen further in coming years.
  - Tight labor market due to high migration of young graduates to other European countries exacerbates recruitment problems.
  - LSC only carries out perfunctory surveillance of securities markets and does not exercise adequate oversight of governance and business practices of financial brokerages, investment funds, and the rapidly growing pension fund industry.
  - LSC does not exercise adequate oversight of second pillar pension funds with aggressive investment strategies concentrated in regions such as the Balkans and in Ukraine, where asset valuations are highly dubious and the risk of asset loss through fraudulent market practices is very high.
  - Failure of LSC to effectively perform market supervisory duties risks putting Lithuania in breach of implementation of EU Directives including Market Abuse Directive (2003/6/EC), Prospectus Directive (2003/71/EC), Takeover Directive (2004/25/EC), Transparency Directive (2004/109/EC), and MIFID Directive (2004/39/EC).
  - MIFID entry into force in early November 2007 allows intermediaries licensed in one EU Member State to operate in any other Member State upon notification, creating risk of regulatory arbitrage and damage to EU single market integrity if Lithuania’s supervisory framework is defective.
- Recommendations:
  - Change the legal status of the LSC and of its staff, and provide LSC with an adequate and sustainable source of funding, including fees from market participants, to enable it to pay market-based salaries to its staff.
  - Develop and implement a comprehensive staff recruitment, development and incentive plan to create a stable corps of experienced supervisors with relevant market experience in licensing, surveillance, inspection, investigation and enforcement.
  - Implement change of status and sustainable funding without delay as part of the planned overhaul of the financial sector supervisory architecture to maintain effective supervision and avoid potential damage to the integrity of the EU single financial market.

### CP5 — Professional standards and conflicts of interest
- Assessment:
  - DA recommended formal restrictions on Commissioners and staff taking contractual, advisory or management positions with licensed market intermediaries be included in the Law on Securities, beyond general civil servant restrictions.
  - Implemented at regulatory level: Law on Markets in Financial Instruments (LMFI) adopted on January 18, 2007 prohibits Commissioners and administration employees of the LSC and their spouses from transferring acquired financial instruments traded on regulated markets of the Republic of Lithuania earlier than six months after acquisition.
  - Law on the Adjustment of Public and Private Interests in the Public Service sets rigid limitations on post-public-service employment and representation for one year in specified circumstances.
- Recommendation:
  - Provided LSC is given authority and funding to establish market-based salaries, LSC should consider implementing a one-year cooling-off period preventing LSC staff from joining companies they supervised at LSC.

### CP7 — SRO oversight, fairness and confidentiality
- Assessment:
  - DA recommended LSE and CSDL employees be excluded from membership of boards of securities firms and issuers to avoid appearance of conflict; AITPS had limited resources and staff and may not ensure compliance.
  - Implemented at regulatory level: LMFI requires regulated markets to establish transparent, non-discriminatory rules endorsed by LSC; requires monitoring of members, reporting significant breaches to LSC, and providing information and assistance to LSC for investigating and prosecuting market abuse.
  - Since MiFID entry on November 1, 2007, OTC trades are no longer reported to the exchange; TRS is not operational to date so OTC trades are not reported by brokerages to LSC.
  - LSC relies on daily data downloads from Vilnius Stock Exchange (VSE) and Central Securities Depository of Lithuania (CSDL) to track on-exchange and OTC trades respectively.
  - LSC joined the Scandinavian TRS project (includes transaction reporting system and analytical software to detect suspicious transactions); LSC shared creation cost with Scandinavian authorities; TRS scheduled to be operational before the end of 2007.
  - VSE can impose pecuniary sanctions on members for failure to prevent market abuse; VSE is introducing suspicious transactions detection system (SMART) intended operational at beginning of 2008.
  - LSC role: exercise market surveillance via post-trade data from regulated exchange, First North, and brokers through TRS, and supervise VSE’s surveillance performance.
  - Performance of CSDL as SRO is satisfactory.
  - AITPS is required to enforce Code of Ethics but in practice fails; LSC formally notified AITPS of failure two years ago without response.
- Recommendations:
  - Enhance market surveillance after MiFID: (i) complete TRS implementation with market intermediaries; (ii) extend TRS coverage to SME First North market; (iii) carry out enhanced market surveillance through TRS and SMART reports provided daily by VSE; (iv) investigate breaches of Code of Ethics by market intermediaries and sanction AITPS when it fails to enforce the Code, in addition to sanctions applied to offenders.

### CP10 — Inspection, investigation, surveillance and enforcement capacity
- Assessment:
  - DA indicated need to improve qualification of inspections staff.
  - High staff turnover has left LSC with few experienced staff for market surveillance, inspections and investigations.
  - Legal enforcement capacity reduced to one senior counsel, severely threatening enforcement.
  - LSC is developing internal rules to implement risk-based supervision as required under MIFID but currently has no capacity to implement risk-based supervision.
- Recommendations:
  - Reduce staff turnover and build a corps of experienced securities market supervisors capable of risk-based supervision.
  - Authorities must proceed without delay with reform of LSC status and funding (see CP2-CP3 Recommendations).

### CP11 / CP12 / CP13 — Information sharing and cooperation with domestic and foreign counterparts
- Assessment:
  - DA indicated LSC could not share confidential information with other domestic or foreign regulators except criminal authorities in case of criminal prosecutions; formal mechanism needed to provide timely assistance to foreign regulators without court intervention.
  - Problem solved at regulatory level: LMFI empowers LSC to cooperate with supervisory authorities of other Member States and third countries, including information exchange and participation in investigations, subject to confidentiality provisions.
  - LSC empowered to obtain existing telephone and existing data traffic records, and to communicate materials obtained during inspections to law enforcement.
  - In practice, LSC has MOUs with regulatory authorities in other EU Member States, several bilateral MOUs with third countries, and a multilateral IOSCO MOU; Russia and Ukraine are not covered by bilateral MOUs or by the multilateral IOSCO MOU.
  - In practice, LSC requested access to telephone records on several occasions but access has been denied; access to emails would likely be denied because of conflict between the Telecommunications Directive and the Market Abuse Directive at the European level.
- Recommendations:
  - LSC should sign bilateral MOUs with supervisory authorities in Russia and in Ukraine.
  - Authorities should adopt laws and regulations empowering the LSC to have access to telephone and email records, upon resolution of the conflict between the Telecommunications Directive and the Market Abuse Directive at the EU level.

### CP14 / CP16 — Disclosure, accounting and auditing standards
- Assessment:
  - DA indicated insider buying or selling of shares of a listed company should be disclosed immediately and publicly; delays undermine investor confidence.
  - DA raised concerns that financial information filed with LSC is not scrutinized adequately due to lack of professional resources, particularly accountants.
  - Listed companies must provide LSC with list of persons with access to inside information; any insider transaction must be reported to the LSE and to LSC within 3 working days. However, serious deficiencies exist in the regulatory and enforcement framework for insider dealing (see CP28).
  - Trades in securities of unlisted companies are not supervised by LSC.
  - Listed companies required to prepare financial statements in accordance with IFRS since 2005. Financial brokerages and asset management companies will have the option to prepare statements in accordance with IFRS starting January 1, 2008.
  - Starting January 1, 2008, LSC will be responsible for supervising implementation of IFRS by regulated entities and issuers.
  - To date, LSC has no staff with an accounting degree and no capacity to check accuracy of financial statements filed by regulated entities; no capacity to analyze adequacy of risk disclosure in public offering documents or to check how funds are applied.
  - LSC does not vigorously pursue lapses in disclosure requirements of public companies that do not trade frequently.
- Recommendations:
  - Authorities should extend mandatory adoption of financial statements according to IFRS to asset management companies and financial brokerages.
  - LSC must build a corps of experienced accountants to check accuracy of financial statements filed by regulated market intermediaries, listed companies and companies trading through MTFs and systemic internalizers.
  - LSC must build a corps of corporate risk analysts to verify adequacy of risk disclosure in public offering documents.

### CP20 — Asset valuation and redemption in collective investment schemes
- Assessment:
  - LSC regulations provide three alternative methods to value infrequently traded securities:
    - (i) an independent certified asset assessment if time lag from last evaluation is less than one year and no important event occurred;
    - (ii) according to the P/E ratio of similar company times the profit per security of the evaluated company;
    - (iii) at fair value.
  - Regulations do not provide a method or methods to calculate fair value.
- Recommendation:
  - LSC should prepare and adopt a regulation with alternative methods to calculate fair value for different types of assets.

### CP22 — Capital and prudential requirements for intermediaries
- Assessment:
  - DA identified deficiencies in capital adequacy rules for market intermediaries.
  - Problem solved at regulatory level: as of to date, all capital adequacy rules for market intermediaries are compliant with Basle II and relevant EU Directives.
  - LSC responsible for supervising capital adequacy rules for all asset management companies and financial brokerages.
  - Asset management companies that manage UCITs and do not provide investment services (individual portfolio management) are not subject to the Capital Requirement Directive.
  - For asset management companies that are subsidiaries of banks, supervisory responsibility can be transferred to the BoL starting January 1, 2008.
  - LSC has very limited capacity to supervise compliance with capital adequacy regulations. Short-term problem limited due to small number of brokerages trading on own account; largest independent brokerage intends to become an investment bank and will be supervised by BoL.
  - Limited LSC capacity will become an issue as investment funds develop following adoption of new law on investment funds, effective in March 2008.
- Recommendation:
  - LSC needs to attract and build a corps of experienced financial analysts to analyze financial statements of regulated entities and verify compliance with capital adequacy regulations.

### CP23 — Internal organization, conduct of intermediaries, enforcement powers
- Assessment:
  - Lithuania fully implemented detailed know your client provisions from MiFID under LMFI and in Rules for providing investment services and reception and execution of orders on behalf of clients (LSC Resolution No 1K-22 of 5/31/07).
  - Detailed KYC AML/CFT regulations are in LSC Resolution No 1K-12 (5/12/05) and Resolution No 1K-20 (7/7/05).
  - DA indicated enforcement would be more effective if right to impose sanctions on individuals was included in securities market legislation, and maximum fines for individuals were considerably raised.
  - Partially solved: LMFI empowers LSC to impose sanctions on legal persons; Law on Securities empowers LSC to impose sanctions on legal and natural persons with substantial fines for specific violations. Fines on individuals under the General Administrative Code are low.
  - Ministry of Justice preparing a new Administrative Code with increased fines.
- Recommendation:
  - Authorities should adopt a revised Administrative Code with increased fines.

### CP24 — Procedures for intermediary failure and investor protection
- Assessment:
  - DA recommended new legislation establishing an investment protection guarantee scheme in compliance with EU Directive.
  - New legislation adopted in 2002; system triggered in 2005 and the compensation mechanism performed smoothly within required time frame.
- Recommendation:
  - n.a.

### CP28 — Detection and deterrence of manipulation and unfair trading
- Assessment:
  - Listed companies required to disclose insider list (see CP14).
  - LMFI Article 62.5 requires issuers and persons acting for issuers to furnish to LSC data (including personal codes) on persons entitled to access inside information and on related persons; definition of related parties includes financial brokerages and auditors. Rules on disclosure of Information about Issuers approved 12.17.04 by LSC resolution 26 elaborate these provisions.
  - Corporations filing for listing do not need to disclose shareholders and voting rights beyond the first level of control; if first-level shareholder is a legal person, LSC can request information on its shareholders but requests have been turned down citing banking secrecy; LSC investigates ultimate controllers on a case by case basis.
  - Financial brokerage companies have “black lists” identifying companies whose shares may not be traded by specific staff, but these “black lists” are not communicated to LSC.
  - Courts' interpretation of the Criminal Code prevents Prosecutor’s Office from successfully prosecuting insider dealing: courts consider information shared by an insider with a related party becomes public information and therefore no longer insider information, undermining prosecution of cases referred to Financial Crimes Investigation Service (FCIS).
- Recommendations:
  - LSC should issue a regulation requiring companies to disclose their ultimate controllers throughout the chain of control as part of their listing application, and to disclose any change in ultimate controllership following their listing.
  - LSC should issue a regulation requiring financial brokerage companies to share their “black lists” with the LSC.
  - Authorities should revise the Criminal Code to exclude information shared by an insider with a related party from the concept of public information.

*Prepared by Michel Noel, World Bank; targeted review of the initial IOSCO Assessment (2001) — this analysis does not constitute a full or formal reassessment of the initial IOSCO Assessment.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08247.pdf_