## Summary Implementation of the IOSCO Principles—ROSCs ## Source details **Canonical URL:** [Summary Implementation of the IOSCO Principles—ROSCs](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11274.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11274.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11274.pdf.json) --- ### Summary, Key Findings, and Recommendations - Germany has a comprehensive legislative and institutional framework for effective supervision of the securities markets. - BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) and State-based Exchange Supervisory Authorities (ESAs) appear operationally independent (ESAs not formally so) and have sufficient resources to fulfill regulatory functions. - Overall level of compliance with IOSCO Principles is high; many principles rated fully implemented. - Main limitations to highest IOSCO standards: - Continued existence of “grey market” activity means functionally similar products and activities are not subject to the same regulatory standards (notably certain closed-end funds and retail products with embedded options). - BaFin relies heavily on analysis of incoming reports and annual external auditors’ compliance reports and makes comparatively little use of on-site inspections; this affects compliance with several IOSCO Principles. - Post-trade transparency: - Fully compliant at the individual market level under the European regime (MiFID) but absence of standards for consolidating post-trade data prevents an overall “whole of market” transparency for equities. - Authorities recommended to pursue a consolidated post-trade reporting mechanism in the context of the European MiFID review. - Industry concerns: - Implementation costs from rapidly changing European legislative framework. - Differences in timing of implementation between Germany and other EU States. - Material differences between some German legislation and European directives with implications for compliance costs and competitiveness. ### Assessment methodology and timing - Assessment timing: part of FSAP Update mission to Germany (January 19–February 4, 2011). - Assessor: Malcolm Rodgers. - Methodology: IOSCO Objectives and Principles of Securities Regulation and 2003 methodology updated 2008; Principle 30 (settlement systems) assessed separately under CPSS/IOSCO Recommendations. - New IOSCO principles adopted June 2010 were discussed informally and reflected in Appendix 1 but not formally assessed. - Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, not applicable. - Conclusions based on information as of January 2011. ### Institutional structure and regulatory roles - Federal and State roles: - Germany is a Federal Republic; lawmaking and subordinate legislation occur at Federal and States (Länder) levels. - State-based ESAs responsible for authorization and direct supervision of exchange markets. - BaFin (Federal) administers and enforces laws governing capital and financial services market activity. - Within BaFin: - Securities Directorate responsible for capital market activity, collective investments, regulated markets other than exchange markets, insider trading/market manipulation compliance, and investment services by intermediaries. - Banking Directorate handles prudential supervision of banks providing investment services. - BaFin rulemaking: limited to technical rules where legislation permits; broader rulemaking generally at BMF/Parliament level. - European framework significance: MiFID and ESMA (operations commenced January 1, 2011) create challenges for national regulators. ### Market structure and activity (selected exact figures) - Exchanges and trading venues: - Seven securities exchanges: Frankfurt, München, Berlin, Hamburg, Hannover, Düsseldorf, Stuttgart. - One derivatives exchange: Eurex Deutschland (Frankfurt). - One energy exchange: EEX (Leipzig). - Two approved multilateral trading facilities (MTFs). - Frankfurt exchange conducts well in excess of 90 percent of equities trading. - Stuttgart market: large retail trading in non-share instruments. - Licensed firms: - At end-2010, 717 nonbank financial institutions licensed by BaFin to provide investment services; 521 licensed to provide portfolio management services. - Around 800 banks also provide investment services under credit institution licenses. - Issuers and issuance activity: - At end–2010, 908 issuers admitted to trade on regulated markets. - IPOs: 65 in 2010 (down from 97 in 2008). - Takeovers: declined from 39 in 2008 to 27 in 2010. - Asset management: - At end-2010, 73 authorized asset management companies managing 5,997 funds with total assets under management of €1,127 billion, including 42 hedge funds and funds of hedge funds. - Over 8,000 foreign investment funds licensed to distribute in Germany (majority UCITS). - Product breadth (Stuttgart example): - More than 500,000 products available for trading on Stuttgart market: 70 percent structured products (“certificates”), 25 percent bonds, 5 percent shares or mutual fund ETFs. ### Recent developments and key challenges - Legislative and regulatory change at EU and national level (examples since 2003): Transparency Directive, MiFID directives, short selling restrictions and transparency regimes. - ESMA began operations on January 1, 2011 with policymaking, oversight of national authorities, and supervisory responsibility over CRAs. - Industry concerns: implementation costs, timing differences across Europe, material differences between German and EU standards. ### Stress points from the financial crisis (selected data) - Retail open-ended real estate funds: - Total of 48 regulated funds manage assets of almost €87 million. - These funds represent more than 25 percent of total value of all domestic funds operating at the retail level. - Thirteen funds closed their redemption facility. - 3 funds decided to liquidate. - Remaining 10 must decide whether to reopen or liquidate in near future. - Investor compensation fund (EAEG): - Came under funding pressure due to a single incident with a very large number of claims; resulted in special levies and reconsideration of long-term contribution basis. ### Supervisory approach and capacity — main observations - BaFin supervisory approach: - Heavy reliance on incoming reports, mandatory external auditors’ compliance reports, and compliance with legislative obligations. - Risk scoring methodology adopted recently but early stage; not yet resulting in active risk-calibrated monitoring programs. - New cross-divisional system for examining systemic risks being established. - Supervisory strengths: - Extensive powers to requisition documents and information; capacity to enforce and sanction including market intervention and monetary penalties. - Effective cooperation with prosecutorial authorities and track record of enforcement, including criminal action. - Supervisory weaknesses: - Limited use of routine on-site inspections; over-reliance on audit reports may delay detection of conduct-of-business issues. - ESAs are operationally independent but their placement within State Ministries does not meet IOSCO formal independence standards. ### Graded assessment summaries (selected Principles and ratings) - Principle 1 (Responsibilities of the regulator): Broadly implemented (BI). - Principle 2 (Independence and accountability): Partly implemented (PI). - Principle 3 (Powers, resources, capacity): Fully implemented (FI). - Principle 4 (Regulatory processes): Fully implemented (FI). - Principle 5 (Professional standards of staff): Fully implemented (FI). - Principles 6 and 7 (SROs): n/a (TSOs are public law entities). - Principle 8 (Inspection, investigation, surveillance powers): FI. - Principle 9 (Enforcement powers): FI. - Principle 10 (Effective use of powers and compliance program): BI (BaFin credible but limited on-site inspections). - Principles 11–13 (Information sharing and assistance): FI. - Principle 14 (Disclosure by issuers): FI. - Principles 16–20 (Accounting, CIS regulation, valuation and disclosure): FI or PI by sub-principle (see detailed sections). - Principles 21–24 (Intermediaries, prudential requirements, conduct, failure procedures): BI–FI across sub-principles. - Principles 25–30 (Secondary markets): FI for most; Principle 27 (transparency) graded BI due to lack of consolidated post-trade data standards. - Principle 30 (Clearing and settlement systems oversight): assessed separately under CPSS-IOSCO standards. ### Secondary markets, exchanges and MTFs — key systemic observations - Exchanges require ESA authorization; MTFs require BaFin authorization (licensed as financial services under Banking Act). - Exchange markets monitored by Trading Surveillance Offices (TSOs) and ESAs; BaFin investigates and takes action on market abuse. - Supervision of MTFs by BaFin “does not appear as intensive as that applying to exchange markets.” - MiFID transparency obligations apply to trading in shares and certificates representing shares on exchange markets and MTFs but not to other instruments traded on regulated markets. - Dispersed trading venues and absence of consolidation standards for post-trade information reduce overall market transparency for shares. - April 2011 proposals published to treat “grey market” products as financial instruments and to extend full BaFin supervision over investment services in grey capital market products. ### Principal weaknesses and risks identified - Supervision intensity for the two licensed MTFs is lower relative to exchange markets. - Heavy reliance on submitted materials and annual audit reports, with limited on-site inspection use, increases risk of delayed detection of misconduct. - Absence of standards for consolidation of post-trade data across venues reduces overall transparency. - ESAs’ placement within State Ministries does not meet formal IOSCO independence standards, posing potential exposure to political direction. ### Policy implications and supervisory priorities (recommended) - Strengthen consolidation of post-trade information to provide integrated overview of trading across venues for shares (work within European MiFID review). - Assess and intensify supervision of MTFs to achieve parity with exchange market supervision. - Increase BaFin’s use of on-site inspections and reduce exclusive reliance on external audit reports for timely detection of conduct-of-business risks, especially for CIS operators and market intermediaries (this requires additional resources). - Consider structural adjustments to enhance formal independence of State ESAs. - Implement April 2011 proposals to treat grey market products as financial instruments and extend BaFin supervision over investment services in these products. ### Recommended Action Plan (selected actions mapped to Principles) - Principle 1: Urgently ensure uniform regulatory standards across functionally similar products and services, especially advice, selling and marketing. - Principle 2: Consider mechanisms to: - strengthen formal independence of State ESAs; - review and streamline BaFin reporting obligations to BMF; - secure tenure of BaFin president and senior management (e.g., fixed term contracts). - Principles 10, 17, 21 (Regulatory compliance programs): BaFin should refine risk assessment system and make more intensive use of on-site inspections; additional resources required. - Principle 27 (Market transparency): Authorities should pursue a more complete transparency regime including standards for data interoperability and consolidated post-trade reporting for equities. ### Authorities’ response (selected) - Authorities broadly agree with the assessment. - Government proposal on “grey capital market products” published April 2011; law scheduled for publication end-2011 or early 2012 (draft law would classify grey capital market products as financial instruments under WpHG and provide full BaFin supervision over investment services in these products). ### Supervision, inspection, surveillance and compliance (detailed supervisory tools and activity) - Supervisory toolkit: - risk rating system (adopted 2009) using quality and impact scores with a twelve-field matrix (3 = high impact to 1 = low; A–D quality scale; example category 3C). - continuing monitoring of reports, monthly/weekly/daily reporting requirements for liquidity-sensitive funds. - specification of annual external compliance audit scope (Section 36 WpHG), participation in audits, review of audit reports, and commissioning special audits (Section 35 WpHG). - thematic reviews (e.g., 2010 reviews on minutes of dealings with advice clients). - Risk Ratings of (Non-Bank) Financial Services Institutions for 2010 (Total 770): - 1A: 227 - 1B: 386 - 1C: 43 - 1D: 14 - 2A: 29 - 2B: 55 - 2C: 13 - 2D: 3 - Total: 770 - Use of external auditors: - Routine annual compliance audits and BaFin-directed “special” audits; auditors must report serious contraventions without undue delay. - BaFin extensively relies on external auditors’ annual compliance audits; in 2010 BaFin commissioned 10 “regular review” audits and was present for 76 annual audits and one special audit in intermediaries area. - Assessment (Principle 10): Broadly implemented; recommendations to refine risk scoring and increase on-site inspections. ### Enforcement powers, penalties and procedures (selected exact legal points) - Criminal penalties: § 38 WpHG, § 54 KWG — insider trading and market manipulation: monetary fine or imprisonment up to five years; § 54 KWG — prohibited banking services: monetary fine or imprisonment up to three years. - Administrative fines: §§ 39 WpHG, 56 KWG, 30 WpPG, 17 VerkProspG, 143 InvG, 60 WpÜG — fines range from up to 50.000 Euro to a maximum fine of 1.000.000 Euro; economic profit of an offence can be withdrawn without specific limitation. - Non-compliance with BaFin information access orders: administrative penalty up to €200,000 (Sections 39(3) and (4) WpHG). - BaFin may impose remedial orders (Sections 6 and 6a KWG; Sections 4 and s4a WpHG), suspend trading, revoke licenses (Section 32(2) and Section 35(2) KWG), and compel issuers to publish corrections (Section 37q(2) WpHG). - Sanctions unit in Securities Directorate imposes administrative penalties; exchange Disciplinary Committees can fine participants up to EUR 250,000 and suspend trading participation up to 30 days. ### Record keeping, AML and client protection (selected rules) - Client agreements and minutes of investment advice to retail clients must be kept for minimum of five years (section 9a InvG; Section 34(2a) WpHG). - Anti-money laundering reporting under Money Laundering Act (Geldwäschegesetz, GwG). - Client funds and securities segregation requirements: Section 34a WpHG requires separate trustee accounts with deposit-taking institutions; Safe Custody Act (DepotG) provides further protections. - Suitability and appropriateness: Section 31(4)–(5) WpHG requires collection of client information and suitability/appropriateness tests; warnings if product/service inappropriate. ### Collective Investment Schemes (CIS) — key regulatory features and supervisory observations - CIS regulated primarily under Investment Act (InvG); diversified open-ended funds covered; closed-end or undiversified funds not covered by InvG. - Authorization and licensing: - Asset management companies must be licensed under InvG; eligibility includes integrity, competence, adequate internal controls and minimum initial capital (€300,000). - Fund operations and custody: - Fund assets must be segregated and held by a licensed custodian bank; fund rules and changes require BaFin approval for retail funds. - Disclosure and reporting: - Full and simplified prospectuses required; simplified prospectus to be replaced by Key Information Document by mid-2011 as part of UCITS IV implementation. - Annual reports published within 4 months; half-yearly reports required. - Supervisory intensity: - BaFin heavily reliant on audit reports; in 2010 BaFin carried out 10 on-site inspections (regular on-site inspections) with auditors by order of BaFin; limited number of BaFin direct on-site inspections relative to scale (73 licensed operators and over 6,000 funds). - Assessment (Principle 17): Partly implemented for supervisory execution; recommendation to increase on-site inspections. ### Pricing, valuation and redemptions for CIS (selected points) - Section 23(2) InvG: issue price must be pro rata value of share plus issuance fee; redemption price pro rata value less redemption fee. - Unit values must be calculated on each trading day (exceptions for certain fund types where less frequent valuation allowed). - Valuation uses “four-eyes” principle between CIS operator and custodian bank (Sections 36 (1) and 27 (1) InvG; Section 22 InvRBV). - Suspension of redemptions: - Sections 37 and 81 InvG permit suspension by fund rules or BaFin order; legal maximum suspension period: 2 years continuous suspension. - Practical example: October 2008 suspensions for 12 real estate funds; at end of October 2010 three funds liquidated, changes to InvG introduced a 1-year-notice prior to redemptions of units in real estate funds. ### Transparency regime — pre-trade and post-trade (Section 31g WpHG and BörsG) - Pre-trade transparency: disclosure of bid/offer prices and tradable volumes (section 30 BörsG; exchange-specific rules e.g., section 30 BO FWB). - Post-trade transparency: exchange prices, volume and time must be published without delay; Frankfurt: real time publication not later than three minutes after occurrence (section 174 BO FWB). - Waivers and deferred publication available consistent with MiFID (large-in-scale orders, negotiated trades, reference price systems, iceberg orders). - Assessment: Broadly implemented due to absence of standards for consolidation of post-trade information across venues. ### Market abuse and surveillance (Principle 28) - Insider trading and market manipulation prohibited (sections 13–14 and 20a WpHG); definitions extend to derivatives and a range of financial instruments. - Reporting obligations: daily transaction reports from licensees to BaFin (section 9 WpHG); TSOs and intermediaries report suspect trading to BaFin; issuers maintain insider lists (section 15b WpHG) and ad hoc disclosure (section 15 WpHG). - Enforcement activity (selected statistics): - 2009: ten court convictions for insider trading (two custodial sentences in one case). - 2010: eleven court convictions for insider trading. - 2010: BaFin commenced 116 new investigations into market manipulation, found evidence of criminal breaches in 62 cases and reported 109 suspected persons to public prosecutor. - Assessment: Fully implemented. ### Clearing, margining, position limits and default management (Principle 29) - Use of central counterparties (CCPs), margin requirements and position limits at Eurex and Frankfurt to manage exposures. - Eurex and Frankfurt require margin; positions monitored daily; Eurex Rules allow setting position limits (Rule 4.7.1) and TSO monitoring (4.7.3). - Default procedures: liquidation of margin and suspension or restriction of participant rights per exchange rules (Sections 21–24 FWB BO; Section 28 BO FWB). - Assessment: Fully implemented. ### Securitization framework (effective January 1, 2011) - Retention rule: 5 percent retention by originator/sponsor/original lender for securitizations after January 1, 2011; minimum retention to increase to 10 percent in 2015. - Disclosure rules: sponsors and originators must disclose materially relevant data on credit quality, performance of underlying exposures, cash flows, collateral and stress test information. - Investor obligations: investors must demonstrate comprehensive understanding, perform own stress tests, analyze structural features and monitor performance; investors must notify authorities of breaches. - Sanctions: competent authorities may impose a risk weight at least 3.5 times higher than the regular risk weight (maximum 1 250 percent); progressive increases for subsequent infringements. - Compliance: new rules form part of banks’ annual audit; BaFin circular MaComp strengthens compliance function and measures to detect/manage conflicts of interest. ### Auditors, CRAs, analysts and hedge funds (selected points) - Auditor oversight: auditors registered by Chamber of Auditors (WPK); public oversight by Auditor Oversight Commission (APAK); auditor rotation after 7 years required; audit standards largely in line with ISAs. - CRAs: EU-level Regulation EC 1060/2009 applies; ESMA to assume CRA oversight from mid-2011; local oversight by BaFin for locally based CRAs pending ESMA. - Analysts and research providers: - Licensed firms’ research supervised under MiFID and MAD; BaFin conducted thematic work on research conflicts in 2010. - Independent analysts not required to be licensed but must inform BaFin and are subject to MAD and disclosure rules (section 34b WpHG). - Hedge funds: - Regulated under CIS regime with specific additional rules; public marketing of hedge funds prohibited (Section 112(2) InvG). - Hedge fund management automatically considered high impact in BaFin risk classification. - European AIFM Directive approved late 2010 to be transposed by Member States by 2013. ### Cross-border cooperation and information exchange (Principles 11–13) - BaFin signatory to IOSCO MMOU and numerous bilateral MoUs; used 193 requests for assistance to foreign authorities in 2010 and received 69 requests. - Section 37s WpHG: BaFin responsible for cooperation with foreign authorities and transmission of anonymized transcripts of FREP decisions. - Confidentiality: information provided generally limited to regulatory purposes and confidential use; consent or notice requirements apply before onward disclosure. - BaFin powers available to assist foreign regulators include obtaining transaction records, client identities, beneficial owner details, and commencing formal investigations where required. *Italic: Source — Summary Implementation of the IOSCO Principles—ROSCs (assessment conclusions and supporting material as of January 2011).* ### 1. Summary Implementation of the IOSCO Principles—ROSCs ...........................................14 ### 1. Summary Implementation of the IOSCO Principles—ROSCs ...........................................14 ### Summary, Key Findings, and Recommendations - Germany has a comprehensive legislative and institutional framework for the effective supervision of the securities markets. - The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) and the State-based Exchange Supervisory Authorities (ESAs) appear operationally independent (though in the case of ESAs not in formal terms), and have sufficient resources to fulfill their regulatory functions. - The overall level of compliance with the International Organization of Securities Commissions (IOSCO) Principles is high, with many principles being fully implemented. - Main factors limiting attainment of the highest IOSCO standards: - The continued existence of “grey market” activity outside the fully regulated market means functionally similar financial market products and activities are not subject to the same standard of regulation (issue mainly regarding certain closed-end funds and retail-oriented products with embedded options, where regulations on potential mis-selling and services to retail investors are relatively light). - BaFin relies heavily on analysis of incoming reports and other data, including annual compliance reports prepared by external auditors, and makes comparatively little use of on-site compliance inspections (routine or risk-driven). This affects compliance with a number of the IOSCO Principles. - Post trade transparency for trading on equities markets is fully compliant with standards required under the European regime but applies only at the level of the individual market and does not result in an overall level of transparency because of the absence of standards for consolidating and disseminating post trade data. - Authorities should work toward achieving a more complete “whole of market” transparency regime in the context of the current European-wide review of aspects of the Markets in Financial Instruments Directive (MiFID) regime. - There are significant industry concerns about implementation costs from a rapidly changing legislative framework in Europe and Germany, particularly: - Differences in the timing of implementation between Germany and other States in Europe. - Material differences between standards set in some German legislation and those required by European directives. - Potential impacts on compliance costs and competitiveness for German-based firms active in the broader European market. ### Introduction and Assessment Methodology - Assessment timing: part of the Financial Sector Assessment Program (FSAP) Update mission to Germany that took place between January 19 and February 4, 2011. - Assessor: Malcolm Rodgers, former Executive Director and Acting Commissioner of the Australian Securities and Investments Commission. - Methodology: - Based on the IOSCO Objectives and Principles of Securities Regulation and the associated methodology adopted in 2003, as updated in 2008. - Principle 30 (securities settlement systems) was assessed separately under the Committee on Payment and Settlement Systems (CPSS)/IOSCO Recommendations and is not considered here. - New IOSCO principles adopted in June 2010 were discussed informally; not part of the formal assessment but reflected in Appendix 1. - Assessment categories used: fully implemented, broadly implemented, partly implemented, not implemented, and not applicable, with definitions reproduced from the IOSCO methodology. - This is the second assessment of the German system against IOSCO Principles; the first was conducted in 2003. The 2003 assessment found all but three principles rated fully implemented, with Principle 1 broadly implemented and Principle 2 partly implemented; Principle 30 was not assessed. - Conclusions are based on information and findings as of January 2011. ### Institutional Structure and Regulatory Roles - Germany is a Federal Republic; lawmaking and some subordinate legislation (Ordinances) occur at both Federal and States (Länder) levels. State-based ESAs have responsibility for authorization and direct supervision of exchange markets. - BaFin (Federal level) is responsible for administering and enforcing the large body of different laws that govern capital and financial services market activity. - Other federal legislation (company law, public auditors, competition) affects market activity and the regulatory environment. - Within BaFin, the Securities Directorate is responsible for most securities regulation activity including: - capital market activity such as public securities issues, takeovers and issuers’ disclosure and reporting obligations; - collective investments; - regulated markets other than exchange markets; - compliance with prohibitions on insider trading and market manipulation; and - investment services provided by market intermediaries. - Prudential supervision of banks that provide investment services is carried out by BaFin’s Banking Directorate. - Other authorities (Bundesbank, prosecutorial authorities) work with BaFin on matters such as criminal prosecution of market and financial services offences. - BaFin’s structure and activities are governed by the legislation that created it and by public administration legislation (e.g., Administrative Procedures Act). - BaFin does not play an active rulemaking role in the sense of creating binding rules except where specific legislation permits; in practice BaFin’s rule-making is largely confined to detailed, technical rules pursuant to primary or secondary legislation. - The European regulatory framework plays a very significant role in Germany; some parts are translated into national law and some apply directly. Reforms at the European level (including MiFID) and the new European Securities Market Authority (ESMA) (commenced operations on January 1, 2011) present challenges and changes for national regulators and market participants. ### Market Structure and Activity - The German financial sector is dominated by banking institutions; banks are major players including in asset management and securities and derivatives market activity. - Exchange and other regulated markets (MTFs): - Seven securities exchanges: Frankfurt, München, Berlin, Hamburg, Hannover, Düsseldorf, Stuttgart. - One derivatives exchange: Eurex Deutschland in Frankfurt. - One energy exchange: EEX in Leipzig. - Two approved multilateral trading facilities (MTFs); their activities predated regulatory approval and no totally new MTF markets have commenced. - The Frankfurt exchange dominates trading in equities, with well in excess of 90 percent of trading taking place on that exchange. - The Stuttgart Stock Exchange has created a strong market in retail level trading of non-share instruments. - Financial services firms licensed by BaFin: - At end-2010, there were 717 nonbank financial institutions licensed to provide investment services by BaFin, of which 521 were licensed to provide portfolio management services. - Around 800 banks also provide investment services under the licenses they hold as credit institutions. - Capital market activity: - As at end–2010, 908 issuers have been admitted to trade on regulated markets. - There were 65 initial public offerings (IPOs) in 2010 (down from 97 in 2008). - Takeover activity declined from a total of 39 in 2008 to 27 in 2010. - Investment business: - At end-2010, there were 73 authorized asset management companies managing 5,997 funds with total assets under management of €1,127 billion, including 42 hedge funds and funds of hedge funds. - Over 8,000 foreign investment funds were licensed to distribute in German, of which all but a relatively small number are Undertakings for Collective Investment in Transferable Securities (UCITS) funds. - A very large number of financial products are traded on some German markets (for example, more than 500,000 products are available for trading on the Stuttgart market), of which 70 percent are structured products—“certificates”—25 percent are bonds and 5 percent shares or mutual fund exchange traded funds. ### Recent Developments and Challenges - Continuing change in the legislative framework and regulatory environment for securities regulation at both the European and German national levels. - Examples of developments since 2003 include the Transparency and the Markets in Financial Instruments Directive (MiFID) directives and national legislation such as restrictions and transparency regimes for short selling. - The new European body ESMA began operations on January 1, 2011 and will have policymaking functions, oversight responsibilities over national authorities, and supervisory responsibility over credit rating agencies (CRAs). - Industry concerns highlighted include implementation costs, timing differences in implementation across Europe, and material differences between German legislation and European directives, with implications for compliance costs and competitiveness of German-based firms active in broader European markets. *Source: Summary Implementation of the IOSCO Principles—ROSCs (assessment conclusions and supporting material as of January 2011).* ### 27. The financial crisis and its aftermath have affected activity in the securities ### 27. The financial crisis and its aftermath have affected activity in the securities ### Stress points in the securities sector - Retail open-ended real estate funds: - A total of 48 regulated funds manage assets of almost €87 million. - These funds represent more than 25 percent of the total value of all domestic funds operating at the retail level. - Thirteen funds closed their redemption facility. - 3 funds have made the decision to liquidate. - The remaining 10 must decide whether to reopen or liquidate in the near future. - Investor compensation fund (under the Deposit Guarantee and Investor Compensation Act (EAEG)): - Came under funding pressure because of a single incident—potentially involving fraud—that resulted in a very large number of claims. - These claims placed stress on the ongoing liquidity of the fund, resulting in special levies and reconsideration of the long-term basis for fund contributions. ### Preconditions for Effective Securities Regulation - General preconditions appear to be in place in Germany: - Stable macroeconomic environment. - No significant barriers to entry and exit for market participants. - Competition is encouraged and foreign participation is welcomed. - Legal and accounting framework is described as sound. - Legal and corporate framework: - German legal framework for the securities sector is complemented by comprehensive legislation for companies and for commercial activity generally. - Commercial law has been kept modern and corporate governance standards have been recently reviewed. ### Main Findings — supervisory approach and capacity - BaFin’s supervisory approach: - Relies very heavily on (i) the flow of information coming to it from the regulated population; (ii) mandatory reports such as auditors’ reports on regulated entities’ financial condition; and (iii) compliance with legislative obligations. - Has recently adopted a risk scoring methodology for the regulated population; this is in its early stages and does not seem to have yet resulted in active monitoring programs calibrated on a risk basis. - A new cross-divisional system of examining more systemic risks is in the process of being established. - Principles for the regulator (Principles 1-5): - Regulators at both the Federal and State levels work with a clear legal framework and clearly defined powers and responsibilities. - BaFin and the ESAs appear to be operationally independent; however, since the ESAs are within the State Ministries, formal preconditions of independence are not met. - BaFin has a high level of accountability to the BMF, supported by documented arrangements for information flows from BaFin to the Ministry. - Consideration should be given to: - Streamlining BaFin’s reporting obligations to the Ministry of Finance. - Mechanisms to enhance the security of tenure of its most senior management. - Powers available to the regulators are sufficient for effective supervision of market activity. - BaFin’s funding arrangements and level of resources enable it to carry out regulatory mandate for securities markets. - All authorities that play a role in regulation are treated as public bodies and subject to the framework for fairness and accountability; their decisions can be challenged under administrative law processes. - BaFin has adopted integrity policies supporting high standards of professional conduct. - Significant “grey market” activity remains, where financial products (such as closed end funds, or participation rights) and services relating to them (especially marketing and advice) are subject to regulation at a lower standard than would be required under the IOSCO Principles. - Principles for enforcement (Principles 8-10): - BaFin (and relevant State Trading Supervisory Offices and ESAs) have extensive powers to requisition documents and records and seek information from regulated entities and other persons. - Regulated entities have extensive reporting obligations that provide a basis for review of compliance. - BaFin and the State authorities can take enforcement actions and sanction regulated entities and other persons for breaches, including market intervention, issuance of mandatory instructions, and imposing monetary penalties. - BaFin’s supervision is systematic, based on report- and event-driven monitoring of conduct and possible market abuse. - Heavy reliance on annual reports from external auditors relating to compliance systems; limited use of on-site inspections as a general monitoring tool. - Effective working arrangements with prosecution authorities and a track record of enforcement action, including criminal action. - It is unclear whether BaFin is making full use of routine on-site inspection to create a regulatory presence and to address conduct-of-business issues not apparent off-site. - Principles for cooperation (Principles 11-13): - BaFin has obligations to share information and cooperate with other domestic regulators; arrangements appear to work effectively in practice. - ESAs have similar obligations in their role as exchange regulators. - BaFin has sole responsibility for ensuring cooperation with foreign regulators, both within the EU and elsewhere. - There are no material barriers to BaFin obtaining and sharing information with foreign counterparts about entities under its supervision or other persons, including where no breach of German law is at issue. - BaFin is a signatory of the IOSCO Multilateral Memorandum of Understanding (MMOU), and many bilateral memorandums of understanding (MOUs). - Good evidence of BaFin’s practical cooperation with foreign regulators. - Principles for issuers (Principles 14-16): - A prospectus approved by BaFin is required for securities offered to the public or admitted to trading on a regulated market. - Prospectus content requirements conform to IOSCO principles. - Issuers are subject to: - Audited annual financial reports. - Half yearly reports. - Interim management statements. - Material event reporting for issuers of securities traded on a regulated market. - Financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS) as adopted in EU for issuers that consolidate; and under German accounting standards for other issuers. - Issuers submitting company-only statements can issue them in accordance to national standards. - BaFin monitors compliance with reporting and disclosure obligations; the Financial Reporting Enforcement Panel reviews compliance with financial statement requirements, and BaFin takes enforcement action for breaches. - Substantial shareholder disclosure and specific takeover legislation, including mandatory bid requirements, provide an effective framework for change of control transactions. - Principles for collective investment schemes (CIS) (Principles 17-20): - Operators of CIS schemes must hold a license issued by BaFin. - Licensing criteria include: - Integrity requirements for managers and holders of more than 10 percent shareholdings. - Managers’ competence. - Adequacy of internal controls and risk management systems. - Minimum capital. - Funds rules and changes must be approved by BaFin. - BaFin reviews all prospectuses; CIS operators must keep fund assets segregated and use a licensed bank to hold fund assets and perform other roles. - Operators must prepare and publish annual and semi-annual reports for each fund and are subject to annual audits focusing on compliance with legislative requirements. - Each CIS requires a prospectus, the content of which accords with IOSCO Principles, and the operator must lodge a copy with BaFin. - Asset valuation methodology and price calculation on issue and redemption are detailed in legislation; there is specific accounting standards legislation to be used in valuing assets. - BaFin uses annual audit reports extensively in supervision of CIS operators; it conducts a small number of on-site inspections and relies largely on audit and other reports. - Principles for intermediaries (Principles 21-24): - A license issued by BaFin is required to carry on a business of providing financial services, broadly defined to cover a wide range of market activity, including proprietary trading and providing customer-specific advice about financial instruments. - Licensing criteria include: - Integrity requirements for managers and holders of more than 10 percent shareholdings. - Managers’ competence. - Adequacy of internal controls and risk management systems. - Minimum capital requirements (varying by activity). - Ongoing risk-based capital requirements reflect credit and market risk for bank intermediaries permitted to hold client funds or assets; other intermediaries are not permitted to hold client funds or assets and are subject to the minimum capital requirement and a general obligation to remain solvent. - Licensees must submit monthly reports about their financial position and compliance with prudential standards (where required) to the Bundesbank, which passes them on to BaFin with its analysis. - BaFin also receives daily reports of all market transactions by licensed entities. - The comments under Principle 10 apply to BaFin’s monitoring arrangements, especially in relation to on-site inspections for licensed intermediaries. *IMF staff report content unit _cr11274 - 27.* ### 36. Principles for secondary markets (Principles 25-30): Exchanges and MTFs require ### 36. Principles for secondary markets (Principles 25-30): Exchanges and MTFs require ### Overview and key systemic observations - Exchanges require authorization by the relevant State authority (ESA); MTFs require authorization by BaFin. - Exchange markets are subject to continuous supervision by Trading Surveillance Offices (TSOs) and ESAs; BaFin is responsible for investigating and taking action on market abuse. - The two MTFs are subject to direct supervision by BaFin, but this supervision "does not appear as intensive as that applying to exchange markets." - MiFID transparency obligations apply to trading in shares and certificates representing shares on exchange markets and MTFs, but "not other instruments traded on regulated markets." - Multiple trading venues both within Germany and elsewhere, and "the absence of standards for consolidation of post trade information detracts from the overall transparency of the market for trading in shares." - Proposals were published in April 2011 to treat "grey market" products as other financial instruments and to provide full BaFin supervision over investment services in grey capital market products performed by investment firms under BaFin’s supervision. ### Implementation and regulator roles (summary of graded Principles) - Principle 1 (Responsibilities of the regulator): Grading BI - BaFin and State-based ESAs responsibilities are clearly established by law. - Legislation requires cooperation and information sharing between main regulators. - At assessment time, advice on, selling, and marketing of certain investment products (such as closed-end funds) "was not regulated as fully as are other investment services," although prospectus approval has been unified. - Principle 2 (Independence and accountability): Grading PI - BaFin is operationally independent with strong accountability to the BMF; BMF approval is not required for BaFin operational decisions. - ESAs are units within State Ministries; this structure "does not meet the formal standards for independence required by the IOSCO principles" despite limited practical political interference. - Principle 3 (Powers, resources, capacity): Grading FI - BaFin has extensive powers, including licensing, supervisory and enforcement powers; limitation: can only make enforceable rules where Parliament expressly provides. - Resources appear adequate; BaFin can employ expertise outside civil service when needed. - State-based ESAs and exchange TSOs have powers needed for their functions. - Principle 4 (Regulatory processes): Grading FI - BaFin, ESAs, and TSOs are subject to comprehensive administrative law requiring consistency and fairness. - No formal requirement for BaFin to take compliance costs into account; policy formation occurs at BMF level. - Principle 5 (Professional standards of staff): Grading FI - BaFin staff bound by extensive obligations including confidentiality; BaFin has internal policies supplementing these obligations. - Principles 6 and 7 (SROs): Grading n/a - Exchanges and TSOs are public law entities, not private SROs under delegated authority; regulatory role of TSOs is covered under secondary markets principles. - Principle 8 (Inspection, investigation, surveillance powers): Grading FI - Regulators have broad supervisory, investigative and enforcement powers and extensive information gathering powers, not confined to regulated entities. - Principle 9 (Enforcement powers): Grading FI - BaFin can requisition information, inspect documents, enter premises, and compel oral evidence (subject to self-incrimination limits); can impose substantial administrative fines. - Criminal prosecution is public prosecutor responsibility; ESAs appear to have adequate powers for exchange market regulation. - Principle 10 (Effective use of powers and compliance program): Grading BI - BaFin has a credible monitoring and enforcement program but relies heavily on analysis of reported material (annual audit reports) and "makes limited use of its on-site inspection powers." - This reliance may delay detection of conduct-of-business issues as market conditions change. - Principles 11–13 (Information sharing and assistance): Grading FI - BaFin obliged to cooperate domestically and internationally; signatory to IOSCO MMOU and numerous MOUs; practical assistance to foreign regulators is provided though it cannot directly represent them in court. - Principle 14 (Disclosure by issuers): Grading FI - Prospectus approval by BaFin required to offer securities or admit them to regulated market; issuers must publish annual and half-yearly reports and disclose price sensitive information without delay. - Principle 15 (Treatment of holders of securities): Grading FI - German company law provides shareholder rights; takeover legislation administered by BaFin includes a mandatory bid requirement at a "30 percent holding" threshold and disclosure rules. - Principles 16–20 (Accounting, CIS regulation, valuation and disclosure): Gradings FI or PI as follows - Principle 16 (Accounting and auditing): FI — IFRS required for traded issuers; auditing standards analogous to ISAs; monitoring by Financial Reporting Enforcement Panel and BaFin. - Principle 17 (Eligibility and regulation of CIS marketers/operators): PI — CIS operators must be licensed by BaFin and meet eligibility criteria; marketing can occur without BaFin license under certain conditions and then falls under general commercial code. - BaFin's monitoring of CIS operators "is heavily reliant on analysis of audit reports" with limited on-site inspections. - Principle 18 (Legal form, segregation, protection of assets): FI — Fund assets must be kept separate and held by a licensed custodian bank approved by BaFin; individual fund rules require BaFin approval. - Principle 19 (Disclosure for CIS): FI — Full and simplified prospectuses required; simplified prospectus to be replaced by Key Information Document by mid 2011 as part of UCITS IV implementation. - Principle 20 (Valuation, pricing, redemption): FI — Investment Act contains detailed valuation and pricing provisions; compliance monitored by internal audit and annual external audit. - Principles 21–24 (Market intermediaries, prudential requirements, conduct, failure procedures) - Principle 21 (Entry standards): BI — Authorization by BaFin required to provide financial services; eligibility standards include integrity, competence, capital, internal controls; reporting obligations and reviews performed by BaFin. - Principle 22 (Capital and prudential requirements): FI — Authorized institutions subject to minimum capital; nonbank intermediaries not permitted to hold client assets; banks subject to ongoing risk-based solvency and liquidity requirements monitored with Bundesbank. - Principle 23 (Internal organization and conduct): FI — Licensees must have risk management, compliance and internal control functions; compliance reviewed in annual audit. - Principle 24 (Procedure for dealing with intermediary failure): FI — No specific ex ante procedures; failures handled ad hoc. For nonbank sector BaFin would focus on orderly winding up through Court ordered insolvency; Banking Department handles banks involved in securities business. - Principles 25–30 (Secondary markets focus) - Principle 25 (Authorization of trading systems/exchanges): FI - Exchange markets require ESA approval under the Stock Exchange Act; MTFs must hold a license from BaFin under the Banking Act. - Exchange markets monitored by exchange Trading Supervisory Offices under ESAs; BaFin supervises the two licensed MTFs. - Principle 26 (Ongoing supervision of exchanges and trading systems): FI - TSOs conduct real time monitoring and supervision of exchange markets under ESA supervision; ESAs perform periodic reviews. - Two MTFs are licensed by BaFin as investment services enterprises under the Banking Act; they are subject to MTF-specific obligations under the Securities Trading Act. - BaFin monitoring activity for MTFs aligns generally with monitoring applying to market intermediaries. - Principle 27 (Transparency of trading): BI - Regulatory framework provides pre- and post-trade transparency in equities per MiFID for exchange markets, MTFs and systematic internalizers; permitted exceptions align with market norms in other jurisdictions. - "Dispersal of trading across multiple venues highlights the absence of an integrated overview of activity." - Principle 28 (Detect and deter manipulation/unfair practices): FI - Insider trading, market manipulation, and front running are criminal and administrative offences; definitions are appropriately broad and apply to derivatives and securities. - BaFin has an active detection and enforcement program supported by ESAs and TSOs; BaFin reviews daily trading reports from all market participants. - Principle 29 (Management of large exposures, default risk, market disruption): FI - Derivatives trading platforms can monitor large positions and set position limits; large counterparty exposures for banks are monitored under prudential supervision. - Principle 30 (Clearing and settlement systems oversight): Grading n/a - Clearing and settlement systems oversight status not graded in this section. ### Principal weaknesses and risks identified - Supervision intensity for the two MTFs "does not appear as intensive as that applying to exchange markets." - Heavy reliance by BaFin on analysis of submitted materials and annual audit reports with "limited use of its on-site inspection powers" increases risk that undesirable conduct will not be detected in a timely fashion. - Absence of standards for consolidation of post-trade information and dispersed trading venues leads to reduced overall market transparency for shares. - ESAs’ institutional placement within State Ministries "does not meet the formal standards for independence required by the IOSCO principles," leaving potential exposure to political direction despite limited practical interference. ### Policy implications and recommended supervisory priorities (implied by findings) - Strengthen consolidation of post-trade information to restore an integrated overview of trading activity across multiple venues for shares. - Assess and, where appropriate, intensify supervision of MTFs to achieve supervisory parity with exchange markets. - Increase BaFin’s use of on-site inspections and reduce exclusive reliance on reported audit materials to improve timely detection of conduct-of-business risks, particularly for CIS operators and market intermediaries. - Consider structural adjustments to enhance formal independence of ESAs from State Ministries to better align with IOSCO independence standards. - Implement proposals (published April 2011) to treat "grey market" products as other financial instruments and extend full BaFin supervision over investment services in grey capital market products. *Source: _cr11274 - 36. Principles for secondary markets (Principles 25-30): Exchanges and MTFs require* ### 37. The following recommendations aim to suggest measures to further improve the ### The following recommendations aim to suggest measures to further improve the securities regulation framework and supervision. ### Table 2. Germany: Recommended Action Plan to Improve Compliance with the IOSCO Objectives and Principles for Securities Regulation - Responsibilities of the regulator (Principle 1) - The authorities should, as a matter of urgency, continue with steps to ensure that uniform regulatory standards apply across functionally similar financial market products and services, especially with regard to standards for advice on, selling, and marketing of products, as was recommended in 2003. - Independence of the regulator (Principle 2) - The authorities should give consideration to: - a. mechanisms to strengthen the formal independence of the State ESAs; - b. reviewing the reporting obligations of BaFin to the BMF with a view to streamlining them; and - c. mechanisms, such as fixed term contracts, to ensure the position of the president and senior management of BaFin is secure and not open to potential arbitrary decisions based on political or other non-performance related considerations. - Regulatory compliance programs (Principles 10, 17 and 21) - BaFin should continue to develop and refine its risk assessment system, and make more intensive use of on-site inspections by BaFin staff as part of its monitoring activities. This will require additional resources. It is understood that BaFin is moving in this direction. - Market transparency (Principle 27) - The authorities should work toward achieving a more complete transparency regime in the context of the current European-wide review of aspects of the MiFID regime. At a minimum such a regime should include standards for data interoperability, and it should result in an effective mechanism to produce consolidated post-trade reporting for the equities market. ### Authorities’ response - Paragraph 38 - The authorities broadly agree with the assessment. - Paragraph 39 - A proposal of the government on “grey capital market products” was published in April 2011. The law is scheduled to be published at end-2011 or early 2012. According to the draft law, grey capital market products will be financial instruments in the terms of Securities Trading Act (Wertpapierhandelsgesetz, WpHG). The new definition of financial instruments will cover all grey market products, which are currently subject to the non-securities investment prospectus regime: this includes registered bonds, shares in civil-law partnerships, general partnerships or limited partnerships, silent partnerships, participation rights, trust units and units in other closed-end funds. According to the draft, the new regulation provides full BaFin supervision over investment services in grey capital market products performed by investment firms under BaFin’s supervision. This means that the whole obligations of the WpHG are applicable. *Source: IMF staff report content unit _cr11274 - 37.* ### 40. Enterprises which provide investment services in investment funds or grey ### _cr11274 - 40. Enterprises which provide investment services in investment funds or grey ### Overview - Enterprises providing investment services in investment funds or grey capital market products that consist solely of investment advice or investment brokerage to certain financial enterprises, and that are not authorized to obtain ownership or possession of monies or shares from clients, will be supervised by the local commercial supervision authority. - These enterprises are generally small entities with limited staff or run as sole trader businesses; thus full BaFin supervision including all legal requirements for investment firms is considered inappropriate under the draft law. - Core organizational requirements and rules of conduct of the securities trading act (WpHG) will be applicable according to the draft law; the applicable rules of WpHG will be specified in an ordinance following the law. ### Regulatory structure and responsibilities - Germany has a tiered securities regulation regime with these main components: - Federal level: BaFin is an integrated regulator responsible for banking, insurance and securities supervision. The Deutsches Bundesbank plays a significant role in monitoring aspects of securities industry activity (e.g., receiving and analyzing reports for regulated intermediaries). - State authorities (ESAs): responsible for authorization and regulation of exchanges that operate securities and derivatives markets. Each exchange is a public body required to have a TSO, supervised by the relevant ESA. - Local (State-based) authorities: responsible for authorization and supervision of some entities not required to be licensed under BaFin-administered legislation (e.g., intermediaries providing advice or services for products not regulated as financial instruments under the Banking Act and the Securities Trading Act). - BaFin’s responsibilities in the securities sector include: - regulation of public issues of securities and other financial instruments; - public issuers’ reporting and disclosures; - collective investment activity; - market intermediaries; - insider trading and other forms of market abuse; and - markets not conducted by exchanges. - Main laws in the securities legislative framework: - The Securities Trading Act (Wertpapierhandelsgesetz (WpHG)) - The Securities Prospectus Act (Wertpapierprospektgesetz, (WpPG)) - Act on the Prospectus for Securities Offered for Sale (Verkaufsprospektgesetz, (VerkProspG)) - The Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG) - The Banking Act (Kreditwesengesetz, KWG) - The Investment Act (Investmentgesetz, InvG) ### Powers, discretion, and subordinate rulemaking - BaFin must act within the authority granted by legislation and in accordance with administrative law; it can provide guidance on the laws it administers and its enforcement approach. - BaFin does not have a general power to make legally binding rules for market participants; binding rulemaking is reserved for Parliament or those Parliament delegates (ordinarily the BMF). In some cases BMF may delegate to BaFin, typically for technical matters (e.g., details of required disclosures). - ESAs, TSOs and stock exchange disciplinary committees have roles and responsibilities specified in legislation and must act within prescribed legislative limits. ### Coordination, cooperation, and information sharing - BaFin, the Bundesbank, the Federal Cartel Office, ESAs and TSOs are obliged by legislation to cooperate and share information, including personal data, needed for their functions (see especially s6 WpHG). - The Banking Act contains detailed provisions on BaFin and Bundesbank roles for supervision of entities licensed under the Banking Act, including requirements for information sharing. - An MOU and a BaFin guideline support the framework for ongoing monitoring of credit and financial services institutions by the Deutsche Bundesbank. - TSOs under State Authorities monitor exchange compliance and must report suspicions of market abuse to BaFin. BaFin receives transaction reports from licensed intermediaries and actively monitors for insider trading and other market abuse. - BaFin must report facts giving rise to suspicion of a criminal offence without undue delay to prosecutorial authorities (see s4 WpHG). ### Assessments, risks, and comments (Principle 1) - Assessment: Broadly implemented. - Key observations: - The division of responsibility between BaFin and State authorities is clearly delineated and does not appear to give rise to gaps or overlaps. - Some products and services—particularly advice, marketing and distribution services related to products not regulated as financial instruments (for example, closed-end funds)—are regulated differentially. There is no Federal regulation of the selling function for closed-end funds, although prospectuses for these funds are now subject to approval. - Selling and intermediation functions for some products are subject to authorization under the Commercial Code administered by local authorities; regulation imposed in this way is not as stringent as BaFin-administered financial instruments regulation. - All prospectuses are now subject to the same regime. - The existence of a “grey market” creates a persisting risk of mis-selling of these products at the retail level and potential incentives to structure product activities to avoid the full securities regime, risking damage to retail investor confidence. - Policy development: - Authorities are developing proposals to address mis-selling risks in the grey market and to provide more uniform regulation of advice and selling functions across the financial sector. - Proposals to regulate these functions to a standard equivalent to the BaFin licensing regime were released for public comment in April 2011 (shortly after the date of the assessment). ### Governance and independence (Principle 2) - BaFin governance and oversight: - Established by FinDAG as a separate institution governed by public law with its own legal personality. - Administrative Council monitors and supports performance; composition includes representatives seconded by BMF, Federal Ministries, the Bundestag, and regulated entities (10 representatives: five from credit institutions, four from insurance undertakings, and one from asset management companies). - Day-to-day management by an executive board: President and four chief executive directors; President and directors are appointed by the President of the Federal Republic upon recommendation by the Federal Government (BMF) and hold office as civil servants. - Four directorates perform statutory functions: Regulatory Services/Human Resources (including Cross Sectoral Issues); Banking Supervision; Insurance Supervision; Securities Supervision. - Advisory bodies include a Securities Council and an Advisory Council. - Interaction with government: - BaFin is part of the BMF portfolio and subject to legal and technical supervision by BMF (section 2 of FinDAG). - BMF roles include approving BaFin’s formal rules of procedure, appointing Administrative Council members, being the supreme official authority for BaFin’s President and Chief Executive Directors, and considering audits of BaFin’s accounts and financial management. - Despite formal oversight, de facto independence of BaFin’s day-to-day regulatory decision-making does not appear adversely impacted; BaFin does not participate in broad public policy debate. - Funding: - BaFin draws up its own budget and raises revenue to cover costs; it does not rely on a Federal government budget allocation. - Revenue sources: fees charged for official acts; reimbursements for costs incurred (e.g., liquidator, auditor); contributions from regulated entities. - Fee and contribution rules are set by the Ordinance on the Imposition of Fees and Allocation of Costs Pursuant to the FinDAG (FinDAGKostV) and special rules governing BaFin charges. - 2010 figures: approximately 88 percent of BaFin’s total budget of close to EUR 160 million was derived from industry contributions. The fee proportion declined from 25 percent in 2009 to 11 percent. - The executive board draws up the budget each year for approval by the Administrative Council. - Legal protection and accountability: - BaFin staff are protected from legal liability for acts or omissions provided they act in good faith; individual liability arises only for intentional or grossly negligent misconduct. These protections apply to ESAs and TSOs staff as well. - BaFin is accountable to BMF; Principles governing BMF supervision contain detailed reporting requirements (see Part III). Rights of review by courts are available under German administrative law. - Assessment: Partially implemented. - Comments and recommended considerations: - Formal aspects do not fully meet IOSCO independence standards—for example, ESAs’ location within State Ministries subjects them to ministerial accountability and potential direction. - BaFin is operationally independent and accountable but subject to potentially burdensome reporting obligations to BMF; senior management are civil servants and could, at least in theory, be transferred within the civil service. - No evidence of political interference in day-to-day operations of ESAs or BaFin; detailed legislation contributes to de facto independence. - Authorities should consider: - mechanisms to strengthen the formal independence of the State ESAs; - reviewing BaFin’s reporting obligations to BMF to streamline them; - mechanisms, such as fixed term contracts, to ensure the position of the President and senior management of BaFin is secure and not open to potential arbitrary decisions based on political or other non-performance related considerations. ### Powers, resources, and capacity (Principle 3) - Powers: - BaFin has adequate powers to: - issue authorizations (licenses) to entities carrying on business as financial services institutions; - approve capital market activities, such as fundraising and takeovers; - obtain information to monitor compliance by regulated entities and issuers and to detect market abuse; - take corrective action to remedy breaches and reduce non-compliance risk. - BaFin does not have a general power to make legally binding rules on market participants; subordinate rulemaking is ordinarily with BMF and sometimes delegated to BaFin for technical matters. - The Stock Exchange Act (Börsengesetz, BörsG) gives ESAs sufficient powers to approve new exchanges, approve exchange rules and amendments, monitor compliance, approve key regulatory appointments (management board of exchanges, head of the TSO, chair of the exchange’s disciplinary committee), and take corrective action if needed. - Resources and capacity: - BaFin’s resources appear adequate; the budget process gives flexibility to allocate resources to priority areas. - Staffing: scheduled to increase by 12 percent in the 2011 year, against a background of proposed cuts of 1.8 percent in government positions generally. - At the end of 2010, BaFin’s Securities Supervision Directorate (located in Frankfurt) employed around 380 out of BaFin’s total staff of 1,900. - Staff numbers, including in the Securities Directorate, are scheduled to increase (text ends mid-sentence in source). *Source: _cr11274 - 40.* ### 2011. Some functions relevant to compliance with IOSCO Principles are carried out by ### _cr11274 - 2011. Some functions relevant to compliance with IOSCO Principles are carried out by ### Staffing, resources, and recruitment - Assessment: Fully implemented - BaFin staffs are largely permanent civil servants or public employees; some scope exists to employ specialist expertise outside the public sector remuneration framework. - Pay scales do not match those available in the financial markets, but employment is secure and staffs generally make a career as BaFin employees. - Many BaFin staffs are recruited directly from their university studies at masters or doctorate level, as well as from the private or professional sector. - Training is provided through training programs and through rotation through different parts of BaFin in the early stages of recruits’ careers. - Comment: BaFin has adequate powers and financial resources to be an effective regulator. It employs professional staff with high qualifications. Its staff profile is largely permanent civil servants and it may lack depth of industry experience in some areas. It may be desirable for it to draw on industry expertise through, for example, secondments to ensure staff have exposure to industry practice. ### Regulatory processes, transparency, and procedures - Principle 4: The regulator should adopt clear and consistent regulatory processes. - Description: Regulatory authorities (including BaFin and ESAs) are bound by general administrative law provisions requiring consistent and fair processes codified in the Administrative Procedures Act (Verwaltungsverfahrensgesetz, VwVfG). In some cases, they are supplemented by specific procedural requirements in the legislation BaFin administers, such as the Securities Trading Act, the Securities Prospectus Act, and the Takeovers Act. - Procedures and guidance: - Proposed rules, regulations and policies (other than some enforcement policies) are subject to prior consultations with affected stakeholders and, where appropriate, to public consultation. - Proposals are always published on the BaFin-website, and sometimes also circulated in print form. BaFin also make public the comments it receives through the consultation process. - Important policies are often also subject to an additional hearing on BaFin's premises. - All policies are, when adopted, made available on BaFin’s website, as are changes to existing policies and rules made by BaFin under delegated authority. - BaFin does not have a formal obligation to conduct formal cost-benefit analyses of proposed rules or guidance, but its mission statement commits it to both proportionality and cost consciousness in carrying out its functions.8 - BaFin Decisions: - The criteria on which BaFin makes decisions—including a decision to grant, deny or revoke a license, and other regulatory decisions—are set out in the relevant legislation and any associated guidance issued by BaFin. - These decisions are administrative acts to which VwVfG applies, including Section 28 which entitles the subject of the decision to a hearing if they are not satisfied with the decision. - Section 39(1) of VwVfG requires reasons to be given for decisions that affect the rights or interests of others. - Under the Code of Administrative Court Procedures (Verwaltungsgerichtsordnung, VwGO), BaFin’s formal regulatory decisions can be appealed to formal judicial review. A prior internal administrative review is required before judicial review. - BaFin does not generally make reports on investigations public, though it has the power to do so when a proceeding is complete (section 40B WpHG). - Investor Education: - BaFin produces information sheets and leaflets that provide information to investors. Its website has a consumer portal, a frequently asked questions facility, and provides readily accessible databases listing all licensed firms, approved prospectuses, and major holdings in voting rights. - BaFin does not have a broad mandate for financial literacy or generalized investor education and its activities in this area are largely limited to those described above. - Assessment: Fully implemented 8 Published on BaFin’s website at http://www.bafin.de/cln_179/nn_721300/EN/BaFin/Legalbasis/Missionstatement/missionstatement__node.html?__nnn=true ### Professional standards, confidentiality, and conflicts - Principle 5: The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. - Assessment: Fully implemented - Description of legal and internal framework: - BaFin staff obligations derive from: a. general administrative law provisions (e.g., Federal Civil Service Act (Bundesbeamtengesetz, BBG); the Administrative Procedures Act (VwVfG); the Code of Criminal Procedure (Strafprozessordnung)); b. specific provisions in legislation that BaFin administers (e.g., the Securities Trading Act, the Banking Act, the Takeovers Act and the Prospectus Act); c. regulations and internal instructions and directives (e.g., regulations on personal account dealings by BaFin staff; standing instructions for the prevention of corruption at BaFin; a directive on the acceptance of rewards and gifts). - This framework is supplemented by BaFin’s internal control system which defines procedures, responsibilities and reporting lines; and establishes compliance monitoring arrangements to detect and deal with potential misconduct. - Confidentiality and sanctions: - The Banking Act (section 9 KWG) and the Securities Trading Act (Section 8 WpHG), together with the Federal Data Protection Act require personal data and business/trade secrets to be kept confidential. Breaches may expose a staff member to criminal penalties. - Regulation on the Monitoring of Personal Account Dealings: - prohibits any dealings by BaFin staff that may amount to insider trading under the Securities Trading Act; - requires all BaFin staff to keep records of personal account dealings (dealing on the account of a staff member or a relative or friend of a staff member); - requires BaFin staff who have or may have access to inside information (in practice, all regulatory staff of BaFin are in this category) to immediately report trading transactions to senior management or a designated person; - establishes processes for monitoring compliance with these rules. - Anti-corruption and oversight: - The Standing Instructions for the Prevention of Corruption at BaFin mandates that BaFin appoints an anti-corruption officer and sets out the functions of that role. - Compliance by BaFin staff with these standards is the responsibility of senior management, working with internal audit and the anti-corruption officer. - Senior management are responsible for dealing with complaints about the conduct of BaFin staff, except for complaints about conduct by the President and Chief Executive, for which BMF has responsibility. - Breaches by BaFin staff expose them to administrative action, and potentially to criminal sanctions (for example for insider trading). - Staff of ESAs are subject to similar standards of conduct through general administrative law, specific provisions in the legislation they administer, and relevant internal instructions that apply to staff in the Ministries they work in. ### Self-Regulation and SROs - Principle 6: Use of Self-Regulatory Organizations (SROs) - Description: Under the German system, only public law bodies perform regulatory functions and these functions are defined by and specified in legislation. The role played by stock exchange TSOs and other administrative bodies is within this characterization and for the purposes of this assessment TSOs are not treated as SROs. The role played by TSOs and other exchange bodies is described under the Principles for secondary markets. - Assessment: NA - Principle 7: Oversight of SROs - Description: See comments under Principle 6. - Assessment: NA ### Inspection, investigation, and surveillance powers - Principle 8: The regulator should have comprehensive inspection, investigation and surveillance powers. - Description and powers: - BaFin has extensive powers to monitor compliance by entities it regulates and other persons subject to obligations or prohibitions under legislation it administers. - Under the Securities Trading Act (Section 4 WpHG), BaFin has powers to require any person (including a person who is not a regulated entity) to supply information and documents and to answer questions, subject to safeguards provided by German constitutional law. - This power includes the power to compel a person to provide details about changes in holdings of financial instruments, and the identity of those acquiring rights under transactions. - BaFin also has the power to enter premises, including without prior notice. These powers give BaFin the authority to carry out on–site inspections of regulated entities, whether on a routine or for-cause basis. - The Banking Act (section 44 KWG) confers similarly broad powers to require information and carry out inspections in relation to credit and financial services institutions. - The Investment Act empowers BaFin to issue any order deemed necessary to ensure compliance with that Act and related legislation (Section 5 InvG); and to require information and carry out inspections in relation to investment managers (Section 19g InvG). - These powers can be used on a routine basis and do not require BaFin to suspect misconduct. - WpHG requires a regulated entity to make and keep records of its business activity, transactions and the use of customer funds. It also requires the entity to keep records of the investment services it provides in such a way as to permit BaFin to verify the entity’s compliance with the legislation (see primarily Section 34 and also Section 25a KWG). *IMF staff report excerpt.* ### section 9a InvG). This includes records of client agreements, and minutes of investment ### _cr11274 - section 9a InvG). This includes records of client agreements, and minutes of investment ### Record keeping, AML, and client identity - Records of client agreements, and minutes of investment advice provided to retail clients, are required to be kept for a minimum of five years. - Particular record keeping rules apply under the anti-money laundering legislation administered by BaFin, including customer identity data for specified types of transactions. - Regulated entities must report transactions involving suspect anti-money laundering or anti terrorist financing under the Money Laundering Act (Geldwäschegesetz, GwG). - BaFin has power to require investment services institutions to supply information about the identity of clients. Some information regularly reported to BaFin (such as daily transaction reports submitted by investment services institutions) contains client identity information. See sections 4 and s9 WpHG. ### Use of external auditors - BaFin makes extensive use of compliance audits by regulated institutions’ external auditors. Two audit groups: - a. routine annual compliance audits (see Section 36 WpHG) - Separate from financial statement audits; focus on compliance with conduct and organizational rules. - BaFin can specify scope and determine points of emphasis. - Auditors must report to BaFin without undue delay any serious contraventions of reporting or conduct obligations. - b. “special” audits (see Section 35 WpHG) - Commissioned by BaFin; carried out by an external auditor (normally other than the firm’s usual auditor), or by BaFin staff directly, or by BaFin staff working with an external auditor. - No special reason or prior notice required. ### Enforcement powers (Principle 9) — scope and legal foundations - BaFin’s enforcement powers fall into three broad categories: - a. requiring a regulated entity to take corrective action; - b. imposing administrative penalties; and - c. referring a breach to the public prosecutor for prosecution as a criminal offence. - ESAs and TSOs have powers to monitor and act to preserve market trading integrity. - Criminal penalties: - § 38 WpHG, § 54 KWG: Insider trading and market manipulation: monetary fine or imprisonment up to five years. - § 54 KWG: Providing prohibited banking services or services without BaFin permission: monetary fine or imprisonment up to three years. - Administrative fines: - §§ 39 WpHG, 56 KWG, 30 WpPG, 17 VerkProspG, 143 InvG, 60 WpÜG: fines for intentional or negligent breaches. - Fines range from up to 50.000 Euro to a maximum fine of 1.000.000 Euro. - Economic profit of an offence can be withdrawn without a specific limitation. - Penalty payment, coercive detention, execution by substitution: - VwVG (Verwaltungsvollstreckungsgesetz) allows enforcement of administrative measures by penalty payment, coercive detention or execution by substitution. - Professional ban: - § 36 KWG, StGB: BaFin can recall managers of investment firms for substantial breaches; criminal courts can order a professional ban for up to five years. ### Corrective action and administrative process - BaFin can, without court orders, impose remedial measures such as: - issue orders to stop or prevent violations or developments endangering assets or impairing financial services; - issue instructions to management, prohibit withdrawals/transfers, prohibit execution of financial transactions (Sections 6 and 6a KWG); - suspend trading in one or more financial instruments, including market trading; - after consultation with the Bundesbank, issue orders to eliminate or prevent undesirable developments harming market stability or confidence (Sections 4 and s4a WpHG); - impose conditions on or revoke a license (Section 32(2) and Section 35(2) KWG); - compel an issuer to publish errors in financial reports (Section 37q(2) WpHG). - ESAs and TSOs can suspend/discontinue trading and issue orders in response to irregularities (Section 3(5) BörsG). ### Administrative penalties and criminal referrals - Distinction between administrative offences (subject to fines) and criminal offences (e.g., insider trading) is explicit (Sections 38 and 39 WpHG). - BaFin imposes fines; public prosecutors handle criminal prosecution. - Securities Trading Act (Sections 39 and 40 WpHG) allows BaFin to impose administrative penalties up to €1 million for a broad range of administrative offences; largest maximum penalty for market manipulation. - Penalties apply to conduct, reporting and record keeping obligations. - Within BaFin, a sanctions unit in the Securities Directorate imposes administrative penalties, typically on referral from functional units; decisions are reviewable internally and then by public prosecutor and courts. - Disciplinary Committees of stock exchanges can fine trading participants up to EUR 250,000, and suspend a trading participant for up to 30 days (section 22 of BörsG). - If BaFin suspects a criminal offence, it must report without delay to the public prosecutor and may provide confidential information including personal data (Sections 4(5) and 40a WpHG). - Non-compliance with BaFin’s instruction to supply information/documents or permit access can attract an administrative penalty of up to €200,000 (Sections 39(3) and (4) WpHG). - BaFin does not have authority to request telephone records or records from internet service providers; public prosecutors may access these with a court permission. - Enforcement actions by BaFin or prosecutors do not compromise other parties’ rights to take civil action; breach of legislative obligation does not of itself form the basis of a private right of action. ### Assessment under Principle 9 - Assessment: Fully implemented - Comments: Clear distinction between administrative action by BaFin and criminal prosecution by public prosecutor. BaFin has extensive powers to gather information and evidence to support referrals. ### Supervision, inspection, surveillance and compliance (Principle 10) - Description of supervisory tools used for licensed market intermediaries and investment managers: - a. risk rating; - b. continuing monitoring of reports and regular contact with regulated entities; - c. specification of the scope and points of emphasis of annual external compliance audits; - d. direct participation in annual compliance audits; - e. review of compliance audits; - f. commissioning “special” audits; - g. thematic reviews (e.g., 2010 reviews on minutes of dealings with advice clients). - Risk rating system adopted in 2009: - Entities are risk rated based on quality and impact scores, resulting in a twelve-field matrix on a green-amber-red basis. - Quality determined by risk-relevant information: financial position, business organisation, management quality, conduct-of-business criteria. - Three sub-categories: Asset, financial and income situation (sub-category 1); quality of management (sub-category 2); quality of organisation (sub-category 3). - Impact scores based on predefined thresholds depending on entity size (for asset managers, amount of assets under management) and type of business (e.g., hedge funds management is automatically considered high impact). - Classification ranges from 3 (high impact) to 1 (low impact) combined with A (high quality) to D (low quality). Example: 3C indicates high impact and lower quality, subject to more intensive supervision. - Separate ratings: - Banks are subject to separate rating by the Securities Supervision Directorate (conduct of business) and by the Banking Supervision Directorate of BaFin (prudential factors). - Risk matrix inputs: - Information at license issuance, review of annual compliance audit reports, and other information from supervisory work including public complaints. - Position in risk matrix affects frequency of on-site inspections, review of reports, or instructions about audit topics. - In intermediaries area, an amber zone rating triggers BaFin staff presence at annual compliance audit (no institutions currently in red zone). - Risk Ratings of (Non-Bank) Financial Services Institutions for 2010 (Total 770): - 1A: 227 - 1B: 386 - 1C: 43 - 1D: 14 - 2A: 29 - 2B: 55 - 2C: 13 - 2D: 3 - Total: 770 - Compliance audits: - Auditors of market intermediaries (Section 36 WpHG) and investment managers (Sections 19f and 110a InvG) must examine and report annually on compliance. - Audit scope detailed in legislation: WpDPV for market intermediaries; InvPrüfbV for investment managers. - BaFin can direct audit focus (Prüfungsschwerpunkte). Example: in 2010 auditors of banks were required to focus on provision of investment advice and performance of clients’ accounts over several years. - BaFin can commission special audits (in addition to annual) often conducted by an auditor other than the entity’s normal auditor. - BaFin staff participate in some annual compliance audits and routinely in special audits; on-site inspections often carried out jointly by an auditor and BaFin staff. - Example: in 2010, the section supervising 147 foreign and private banks participated in 26 audits. - Major banks are visited regularly, most yearly; selection of other visits based on risk assessment. - Supervision of market intermediaries: - For (non-bank) financial services institutions, one BaFin person is permanently allocated for supervision of approximately 30 regulated entities. - Supervisory contact with eight supervised entities per supervisor is foreseen in Department WA 3 (approximately every four years), allocated based on risk assessment. - Deutsche Bundesbank holds yearly meetings with all financial services institutions; BaFin staff participate when necessary. - Ongoing supervision of investment managers (examples, 2010): - a. meetings with industry representatives and auditors: BaFin held 20 such meetings in 2010 and two industry-wide workshops. - b. meetings with individual companies: routine meetings with more than half of supervised companies; 50 meetings outside regular plan in 2010. - c. audits and inspections: - For annual compliance audits normally two officers review each report; written comment and senior officer review; head of section decides measures. - Actions after review include follow up calls with auditors, follow up calls to investment manager, letters requesting reasons and remedial action, and meetings for major shortcomings. - In 2010, BaFin staff directly participated in seven special audits of investment managers. - d. targeted information requests: - October 2008: all German management companies had to submit trend reports on a daily basis to monitor liquidity risk; daily reporting on money market funds’ cash flows; daily reports on open-ended real estate funds’ liquidity; since October 2010 daily reports for funds of funds with real estate fund exposure. - BaFin changed some daily reports to weekly as liquidity stress weakened. - Use of external auditors in supervision: - BaFin extensively relies on external auditors’ annual compliance audits as first line of compliance monitoring; BaFin reads all such audits. - In 2010 BaFin commissioned 10 “regular review” audits and was present for some annual compliance audits; intermediaries department staff were present for 76 annual audits and for one special audit. - Staff from Securities Directorate participate in annual supervisors conference with BMF bank supervisors, anti-money laundering staff, and Bundesbank to plan supervisory measures. - Assessments and recommendations: - Assessment (Principle 10): Broadly implemented - Comments: - BaFin’s use of enforcement powers is robust; effective use of investigative and enforcement powers and referrals to prosecutors. - Monitoring is heavily reliant on incoming reports and annual compliance audits prepared by external auditors; comparatively little use of on-site compliance inspections. - Annual compliance audits ensure all regulated entities are subject to a compliance-focused audit yearly, but this reliance places high importance on auditor quality and may reduce BaFin’s direct market presence. - BaFin staff nonetheless have direct contact during licensing, registration, and participate in some audits and special audits. - The assessor views that measures may not give BaFin a sufficiently active marketplace presence and risk over-reliance on backward-looking indicators, possibly limiting early detection of adverse market conduct patterns affecting investor protection. - These comments apply across homogeneous sectors (asset management) and disparate intermediaries sectors. - Recommendations: - a. continuing to refine its approach to assessing and scoring risk; and - b. making more frequent use of on-site inspections to monitor compliance, both on a risk score basis and for thematic issues such as the selling practices of market intermediaries. *Source: _cr11274 - section 9a InvG). This includes records of client agreements, and minutes of investment* ### Section 37s WpHG makes BaFin responsible for cooperation with foreign authorities ### _cr11274 - Section 37s WpHG makes BaFin responsible for cooperation with foreign authorities ### Cooperation with foreign authorities and regulatory responsibilities - Section 37s WpHG makes BaFin responsible for investigating possible violations of accounting regulations by companies whose securities are admitted to trading on an organized market. - BaFin can provide authorities in other EU states or signatories to the Agreement on the EEA with transcripts of decisions that it or the Financial Reporting Enforcement Panel (FREP) have made in individual cases; the transcripts of decisions may only be made available in anonymous form. - BaFin's cooperation with international authorities is carried out after consultation with the FREP. - BaFin is a member of the European Enforcers Coordination Sessions (EECS), a subgroup of CESR-Financial (now ESMA). - The Takeovers Act (Section 8 WpÜG) requires BaFin to cooperate with authorities of other countries responsible for supervision of offers for the acquisition of securities, supervision of exchanges or other securities or derivatives markets, and supervision of trading in securities and derivatives. - BaFin is entitled to transmit to those authorities information necessary for the supervision of offers for the acquisition of securities or administrative or related court proceedings. ### Information sharing mechanisms and legal framework (Principle 12) - BaFin: - has obligations to co-operate with domestic regulators, including by exchanging information with them; a detailed Guideline sets out cooperation arrangements between BaFin and the Deutsche Bundesbank for the supervision of licensed banks and financial services institutions; - is a signatory to two multilateral MMoUs and numerous bilateral MoUs. - The obligation to provide mutual assistance domestically arises under constitutional law and exists directly; no further arrangements are necessary for information shared with courts, other authorities of the federation, the Federal States (Länder) or other corporations under public law. - The Securities Trading Act provides that BaFin may cooperate with competent authorities of countries that are not members of the EU or the EEA and conclude information-sharing agreements with them (Section 7 (7) WpHG). - BaFin has a department specializing in concluding bilateral agreements on securities regulation as well as banking and insurance supervision. - Enforcement-related information exchange in 2010: - BaFin made 193 requests for assistance to foreign authorities. - BaFin received 69 requests on the basis of the IOSCO MMoU, the CESR MMoU and bilateral MoUs. ### Confidentiality and permitted uses of shared information - Rules on confidentiality are contained in legislation and embodied in the multilateral and other MoUs signed by BaFin. - The rules provide that: - information supplied can only be used for the regulatory purpose for which it was requested, including related judicial or administrative actions; - to the extent permitted by law, confidentiality is to be maintained; - the receiving authority will provide advance notice to (and in some cases seek the consent of) the receiving authority before making any disclosure to a third party. ### Assistance to foreign regulators (Principle 13) - BaFin has used powers to enter MMOUs and bilateral MOUs on securities supervision with 30 countries (including MOUs signed by BaFin’s predecessor organizations). - BaFin can use information-gathering and investigation powers (as described under Principles 8-10) to assist foreign regulators; powers include the ability: - to obtain transaction records and records of fund and asset transfers associated with those transactions; - to obtain records that identify the names of clients and other parties involved in transactions; - to obtain details of transactions; - to obtain beneficial owners/controllers of issuers (both listed and non-listed) and regulated entities. - These powers can be used to provide assistance to foreign regulators to secure compliance with laws relating to insider trading and other forms of market abuse; the issue, offer or sale of securities or derivatives; licensed market intermediaries, including collective investment schemes and advisers; and markets, exchanges or clearing and settlement facilities. - BaFin can commence a formal investigation to secure information of this kind, including where it has no direct regulatory interest in the activities the foreign regulator is making enquiries about. - BaFin cannot normally approach a court for orders (such as freezing of assets) unless carrying out its own investigations and must demonstrate an imminent risk; BaFin can assist foreign regulators by providing advice on the German legal environment. - In criminal activity circumstances, the public prosecutor can approach a court asking for assets to be frozen. - Pursuant to the Financial Conglomerates Directive (2002/87/EC), the Banking Act and the Insurance Act require BaFin to cooperate with competent authorities in other EEA states regarding identification and supervision of financial conglomerates (for example, Banking Act sections 8a and 8b); these provisions can be extended to cover conglomerates based in a country outside the EEA subject to equivalent regulation (examples given: USA regulatory regime, relevant Swiss authorities). ### Principles for issuers — disclosure and prospectus regime (Principle 14) - The legislative framework provides a detailed framework for disclosure of information material to investors in publicly offered and publicly traded securities. - BaFin has issued a detailed Issuer Guideline covering issuers’ obligations for material event (ad hoc) disclosure and financial reporting. - For publicly offered securities, the framework consists of: - initial disclosure (prospectus) obligation; - requirements for audited annual financial reports; - half yearly reports; - interim management statements (required around the mid-point of the half yearly cycle); - and (for listed securities) material event reporting. - Securities Prospectus Act (Wertpapierprospektgesetz, WpPG) gives effect to the European Prospectus Directive; the EC Prospectus Regulation applies of its own force in Germany. - The broad principle: no public offer without a published prospectus and no prospectus may be published without prior approval by BaFin under Section 13(1) WpPG. - Under Sections 14(1) and 14(3) WpPG, the offeror or the person asking for admission to trading must publish the prospectus and inform BaFin immediately about the time and place of publication. - Section 5(1) WpPG requires the issuer to disclose in a securities prospectus all information necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities; information must be presented in an easily analyzable and comprehensible form. - The Prospectus Regulation includes requirements such as information about those who have a significant interest in a listed company or who seek control of a company and a requirement for a summary in brief non-technical language. - A securities prospectus must be made available to the public at least one day before the beginning of the offer to the public or the admission to trading (Section 14 WpPG). A copy must be made available free of charge upon request. - Related material, such as advertisements, must comply with Section 15 WpPG and be consistent with the prospectus. - If prospectus information becomes materially out-of-date or inaccurate, the issuer must publish a supplementary prospectus (Section 16 WpPG) which also needs BaFin approval. ### Public offers of non-securities and related prospectus regime - A separate prospectus regime applies for public offers of certain non-securities investments under: - Act on the Prospectus for Securities Offered for Sale (Wertpapier-Verkaufsprospektgesetz - VerkProspG); - Investment Prospectus Ordinance (Verordnung über Vermögensanlagen-Verkaufsprospekte - VermVerkProspV). - This regime requires a published prospectus approved by BaFin for public offers of non-securitized instruments that grant participation in a company's profits (participation rights), shares in trust assets, or units in other closed-end funds not represented by securities within the meaning of the WpPG (Section 8f (1) VerkProspG). - The regime applies to registered bonds (example: Stuttgart Stock Exchange activity where over 75,000 final term sheets were issued in 2010). - The term "non-securities investments" includes shares in civil-law partnerships, general partnerships or limited partnerships interests, silent partnerships or participation rights. - Content requirements, distribution arrangements, and supplementary disclosure requirements (Sections 8g, 9, 11 of VerkProspG and related regulations) are analogous to those applying under WpPG. ### BaFin practice on prospectuses and monitoring - BaFin review process: - Securities prospectuses are reviewed by BaFin staff; each prospectus examined by two staff members and, for IPOs, three staff members. - Staff check compliance with legislative requirements and test for comprehensibility, consistency and completeness; a specialist group reviews financial information in prospectuses. - BaFin’s decision on a prospectus is to be made within ten working days of its receipt; this time frame is extended to twenty working days for an IPO prospectus. - If a prospectus is defective, BaFin will ordinarily require correction or a supplementary prospectus, but can refuse or revoke approval and prohibit the public offer under Section 21 WpPG. - BaFin monitors the market to identify public offers made without an approved prospectus by sampling media such as newspapers and the internet; this applies to offers of securities and non-securities for which a prospectus is required. ### Prospectus and related figures (2009 and 2010) - Securities prospectuses approved (Includes supplements): - 2009: 2,477 - 2010: 2,102 - IPOs and capital increases: - 2009: 88 - 2010: 65 - Derivative products: - 2009: 148 - 2010: 166 - Bonds: - 2009: 197 - 2010: 219 - Registration forms: - 2009: 28 - 2010: 32 - Supplements: - 2009: 2,016 - 2010: 1,620 - Non-securities prospectuses approved (Non-securities company shares, registered bonds, trust assets etc): - 2009: 515 - 2010: 535 - In 2010, BaFin commenced nine new cases for breaches of the prospectus provisions. ### Financial reporting framework and BaFin monitoring of issuer reporting - WpHG amended in 2007 to transpose the EU Transparency Directive; domestic issuers are required to meet extended periodic financial reporting requirements. - Issuer reporting requirements include: - prepare and publish an annual financial report, including audited financial statements by no later than 4 months after year end (Sections 37v); - half yearly financial reports (Section 37w); - interim management statements unless issuers publish quarterly financial reports (Section 37x). - Issuers must make these reports publicly available and inform BaFin of their publication. - BaFin monitoring and enforcement: - BaFin monitors compliance and can issue orders appropriate and necessary for enforcement. - BaFin can enforce its orders with means of penalty fines of up to EUR 200,000 (Section 39(4) WpHG). - BaFin adopts a risk-oriented approach, conducts inspections on a random basis and in response to specific indications of breach. - BaFin usually checks each domestic issuer domiciled in Germany once a year. - The financial reporting requirements are supervised by six employees. - In 2009, BaFin commenced 46 new administrative procedures relating to reporting obligations of issuers. - BaFin can impose administrative fines not exceeding EUR 250,000 (Section 17 FinDAG) for offences against the financial reporting requirements. - In 2009, BaFin commenced 21 administrative offence procedures because of delayed and incomplete periodic financial reporting. - Annual financial report requirements: - Domestic issuers must prepare an annual financial report as at the end of each financial year and make it available to the public no later than four months after the end of the financial year. - The annual financial report must include audited annual financial statements prepared in accordance with the national law of the member state in which the domestic issuer is registered, a management report and a compliance statement. - If a domestic issuer is obliged to prepare consolidated financial statements and a group management report, the annual financial report must contain the audited consolidated financial statements prepared in accordance with IAS/IFRS, the group management report and a compliance statement concerning the consolidated financial statements and the group management report (Section 37y no. 1 WpHG). *Source: _cr11274 - Section 37s WpHG makes BaFin responsible for cooperation with foreign authorities* ### Section 15 WpHG requires an issuer of securities traded on a regulated market to ### Section 15 WpHG requires an issuer of securities traded on a regulated market to ### Publication of material (inside) information - Issuers must publish any non-public material information that relates to the issuer or the securities. - Material information defined as information about circumstances relating to one or more issuers of insider securities, or to the insider securities themselves, which are not publicly known and would be likely to have a significant impact on the market price of insider security if it became publicly known. - Before publication issuers must ensure information is: - published on the company register, and - notified to any regulated markets in Germany on which the financial instruments are traded, any market in Germany on which derivatives based on the securities are traded, and BaFin. - By Section 10 WpPG issuers must provide an annual disclosure to BaFin listing all information released by the issuer in last 12 months. - Exemption: issuers may postpone publication if necessary to protect legitimate interests, provided: - there is no reason to expect misleading of the public, and - the issuer can ensure confidentiality of the inside information. - Issuers must notify BaFin regarding grounds for exemption together with the notification, stating the time of the decision concerning the postponement of the publication. - BaFin can check whether non-publication is within the permitted exception and, if not, require immediate disclosure. ### Shareholder voting decisions and shareholder meeting disclosures - Stock Corporations Act (AktG) requirements: - a shareholders' meeting must be convened a minimum of 30 days prior to the day of the meeting (Section 121); - the agenda, including board proposals, motions and nominations must be disclosed with the convening notice (Sections 121 and 124); - motions and counter motions submitted by non-director shareholders must be disclosed if submitted at least 14 days prior to the meeting (Section 126); - same information must be given to credit institutions and associations of shareholders which exercised voting rights at the previous shareholders meeting or demanded notice (Section 125). - Listed issuers must publish documents related to the shareholders’ meeting on the company’s internet site shortly after convening (section 124a). - Details of any voting must be published within seven days on the company’s internet site (section 130 (6)). - Enforcement of these provisions is a matter of private law; BaFin does not have regulatory responsibility for compliance with them. ### Admissions of securities to a regulated market and prospectus requirements - Subject to limited exceptions, an approved prospectus must be issued for all securities admitted to trading on a regulated market (s1(1) WpPG and s32 BörsG). - Prospectus must contain additional information about the market on which securities are to be traded and about intermediaries providing market making functions. - Issuer must meet other listing requirements including minimum market value, free float and shareholder diversification requirements (Section 32 BörsG et seq., and BörsZulV). - Advertising or other information relating to an offer to the public or admission to trading must comply with s15 WpPG; all information concerning the offer or admission must be consistent with the prospectus. ### Derivative markets — prospectus information requirements - Prospectus regime applies to offers of derivatives. - Annex XII Item 4 of the European Prospectus Regulation requires issuers of derivative securities to provide in the prospectus: - a clear and comprehensive explanation to help investors understand how the value of their investment is affected by the value of the underlying instrument(s) if the securities' denomination or the minimum subscription amount is less than EUR 50,000 (Item 4.1.2.); - a description of the rights, including any limitations, attached to the securities and procedure for the exercise of those rights (Item 4.1.7.); - information about the underlying (Item 4.2.). - Prospectus must specify any market disruption or settlement disruption events that may affect the underlying as well as adjustment rules relating to the underlying. - Offeror or person seeking admission must disclose any risks to enable the investor to assess the market risk associated with the securities (Annex XII Item 2 Prospectus Regulation). ### Financial leverage of issuers and issuer-specific prospectus disclosures - If securities prospectus rules apply to an issue or offer of derivative securities by market operators or intermediaries, prospectus must include: - audited historical financial information of the issuer (Annex IV Items 13 et seq. Prospectus Regulation); - risk factors that may affect the issuer's ability to fulfill its obligations (Annex IV Item 4 Prospectus Regulation). ### Responsibility for information in regulated offer documents - Persons or entities responsible for content of securities and non-securities prospectuses must be clearly identified by name and function. - These persons must declare that to the best of their knowledge the information in the prospectus is accurate and contain no material omissions (s5(4) WpPG and s3 VermVerkProsV). ### Derogations and omissions from prospectus disclosure - Section 8(1) WpPG: final pricing and issued amount information may be omitted from a prospectus, provided means of determining pricing/amount are disclosed and a maximum price is stated. - BaFin power (Section s8(2) WpPG): may permit omission if disclosure would be contrary to the issuer or seriously detrimental to the issuer or is of minor relevance. BaFin interprets narrowly and has permitted only one such exception in practice. - For secondary markets, issuer may withhold ad hoc information if necessary to protect legitimate interests, provided it would not mislead the public and information remains confidential: s15(1) WpHG — requires BaFin approval. This aligns with the Transparency Directive. ### Cross-border issues - European Prospectus Directive (Recital 22 and Art 7(3)) explicitly refers to and incorporates IOSCO standards for cross-border offerings and initial listings by foreign issuers. *Assessment: Fully implemented* --- ### Principle 15 — Rights and equitable treatment of shareholders (summary) - AktG (and WpPG) provide regulatory framework; AktG amended in 2009 to implement the European Shareholders Rights Directive. - AktG provisions: - all shareholders to be treated equally under equivalent circumstances (sections 53a and 134); - all shareholders with the same class of shares to be treated equally (Sections 12, 53a and 179); - shareholders entitled to vote on: 1. the appointment of members of the supervisory board (other than employee representatives); 2. the appropriation of distributable profits; 3. the ratification of acts of management and supervisory board members; 4. the appointment of the auditor; 5. amendments to the articles; 6. measures to increase or reduce share capital; 7. the appointment of auditors for examination of matters in connection with formation or management of the company; 8. the dissolution of the company. - Shareholders must be given 30 days’ notice of a shareholders meeting (Section 123 AktG and section 121). Proxy voting is permitted; special provisions for notices to credit institutions and shareholder associations (Section 125). - Registered shares: transfer procedures Sections 67 and 68 AktG. No restrictions for transfer of unregistered shares. - BaFin does not administer AktG; assertion of rights under AktG is a private law matter. ### Changes of corporate control — WpÜG and takeover regime - Takeovers regulated by Securities Acquisition and Takeover Act (WpÜG) and related Ordinance; administered by BaFin. - Mergers not involving takeovers regulated by Reorganization of Companies Act (UmwG). - WpÜG general principles for takeovers (Section 3 WpÜG): 1. Holders of securities of the same class treated equally. 2. Holders must have sufficient time and adequate information to make an informed decision. 3. Board of management and supervisory board must act in interests of the target company. 4. Offeror and target must implement procedure speedily; target must not be hindered unreasonably. 5. Trading related to the offer must not result in market distortions. - WpÜG distinguishes three kinds of offers: - mandatory offers — required if offeror achieves control of at least 30 percent of voting rights; - voluntary offers — offeror attempting to achieve control; consideration subject to minimum price rule by Section 31 WpÜG and Sections 3-6 of WpÜGAngebV; - simple offers for acquisition — where offeror seeks to acquire securities without gaining control; equal treatment principle applies but minimum price rules do not. - Section 31: minimum price must be at least equal to the value of the highest consideration paid or agreed by the offeror, persons acting in concert, or their subsidiaries, to acquire shares in the target company within the last six months prior to publication of the offer. ### Disclosure and timing in takeovers - Shareholders to whom an offer is made must have at least four weeks to consider the offer (section 16 WpÜG). - Section 11 WpÜG and Section 2 WpÜGAngebV require adequate information to offerees, including type and amount of consideration, valuation methods, funds available, offeror’s intentions, existing shareholdings, etc. - Management and supervisory board of target must issue a statement regarding the offer (Section 27 WpÜG) and are prohibited from actions that may frustrate the offer (Section 33). - BaFin monitors compliance and its approval required before offer document is sent to shareholders. - Non-compliance can result in BaFin ordering suspension of the offer (section 15 WpÜG) and administrative penalties up to EUR 1 million (section 60 WpÜG). ### BaFin takeover activity (2009 and 2010) - Offers approved: - 2009: 18 - 2010: 23 - Acquisition offers: 2009: 3; 2010: 3 - Takeover bids: 2009: 8; 2010: 11 - Mandatory offers: 2009: 7; 2010: 9 - BaFin new administrative fine proceedings for breach of WpÜG: - 2009: 28 - 2010: 16 ### Bankruptcy and insolvency - Issuer insolvency governed by Insolvency Statute (Insolvenzordnung, InsO). - Purpose: ensure collective satisfaction of creditors by liquidation or by an insolvency plan to maintain the enterprise (Section 1 InsO). - Within an insolvency plan, parties to be treated equally (Section 226 InsO). - AktG provisions on equal treatment of shareholders apply in insolvency; on dissolution remaining funds distributed equally in proportion to share capital interest (Section 271 AktG). ### Substantial holder information and thresholds - Disclosure required when thresholds of 3 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 50 percent and 75 percent are reached or crossed for issuers whose shares are admitted to trading on an organized market (Sections 21, 22 and 26 WpHG). - Obligations apply to shareholdings and rights to acquire such as options. - Disclosure must be made to the issuer and to BaFin no later than 4 days after change. - Issuer must disclose the holding no later than 3 days after receiving notice. - BaFin makes this information publicly available on its website. - Prospectus disclosure required if holding is notifiable as substantial beneficial ownership (3 percent or more). - BaFin can impose financial penalties up to €250,000 for breaches (Section s39 WpHG) and can make the disclosure on the issuer’s behalf. ### Disclosure of directors’/managers’ holdings and voting - Directors and senior managers’ holdings are notifiable if they amount to substantial holdings. - Directors and managers must notify the issuer of transactions in shares or financial instruments based on the shares within 5 business days after the transaction (Section 15a WpHG). - Disclosures are made public by the issuer and on BaFin’s website. - Exception if sum of transactions in year is less than €5,000. - BaFin can enforce disclosure obligations of director/manager, impose financial penalties up to €250,000 and remove voting rights of offending director/manager (s28WpHG). ### Breach statistics (2009 and 2010) - Breach of ad hoc disclosure rules: 2009: 20; 2010: 22 - Breach of duty to report directors dealings/offers: 2009: 7; 2010: 4 - Breach of disclosure rules for changes in voting rights: 2009: 228; 2010: 342 *Assessment: Fully implemented* --- ### Principle 16 — Accounting and auditing standards - Framework contained in Commercial Code (Handelsgesetzbuch, HGB) supplemented by WpHG and other legislation. ### Audited financial statements and reporting timelines - Companies whose securities are traded on a regulated market must include comprehensive audited financial statements in prospectuses and other public offer documents. EU Prospectus Regulation (Annex I, Item 20.1) ordinarily requires 3 years historical information. - Annual reports including audited financial statements must be prepared and published on the Federal Register (and for issuers whose securities are admitted to trading on a regulated market, made available on their website) within 4 months of the close of the relevant financial year (section 325 HGB and Section 37v WpHG). - Reports must include: - balance sheet; - income statement; - a statement showing either all changes in equity or changes in equity other than those arising from capital transactions with owners and distributions to owners; - cash flow statement; - accounting policies and explanatory notes. - Half yearly reports containing condensed financial reports must be prepared and published within two months of the close of the relevant period. Half yearly reports need not be audited (Section 37w WpHG). They must be prepared in accordance with accounting standards required for the annual report. ### Setting of accounting standards - Financial statements must be prepared in accordance with domestic accounting standards, IFRS or accounting standards recognized as equivalent to IFRS. - IFRS required for consolidated financial statements of companies whose securities are admitted to trading on a regulated market. - For other companies, IFRS may be used for information purposes but German domestic standards must be used for profit distribution, taxation and financial services supervision purposes. - Requirements for German domestic standards set out in HGB and regulations under that Act; these accord with relevant European directives. - German Accounting Standards Committee (Deutscher Standardisierungsrat, DSR) provides elaborations and guidance; DSR is standard setting arm of German Accounting Standards Committee (DSRC) and is a private institution contracted by the Federal Ministry of Justice. Once standards are published by the Ministry, they represent German Proper Accounting Principles for consolidated financial reporting. - DSR responsible for interpretation of standards, in conjunction with IASB IC for IFRS. - Issuers may use international standards recognized for preparation of financial statements required under German securities legislation. ### Setting of auditing standards and auditor registration - Audits undertaken by auditors registered by the Chamber of Auditors under the Public Auditors Act (WPO). - Auditors are appointed by shareholders. - Legislation (section 317(5) HGB) provides that audit standards adopted by the European Commission apply to statutory audits; to date there are no such standards and the audit standards in use are those issued by the Institute of Auditors (Institut der Wirtschaftsprüfer in Deutschland e.V., IDW). ### Auditor independence - WPO imposes professional obligations on auditors, including independence. - HGB prohibits the auditor from acting in specified circumstances (see Section 43 WPO; and [text continues in source]). *Assessment: Fully implemented* *Italic: Source — _cr11274 - Section 15 WpHG requires an issuer of securities traded on a regulated market to_* ### Section 319ff HGB.). ### _cr11274 - Section 319ff HGB.). ### Compliance monitoring - Issuers’ compliance with their obligations in the preparation of financial statements is subject to review at two levels. - The Financial Reporting Enforcement Panel (FREP, Deutsche Prüfstelle für Rechnungslegung (DRP) – a private body) reviews financial statements: - a. breaches of the legislation or standards are suspected; - b. at BaFin’s request; - c. as part of a random sample (under principles agreed with the Federal Ministries of Justice and Finance, sampling involves both risk-based and statistically random sampling techniques).. - FREP carries out round 120-130 such reviews each year, 90 percent of which are selected through the random sample process. - FREP has no enforcement powers, so BaFin reviews compliance by issuers with financial statement obligations either on referral of a matter from FREP or if it is concerned about the review carried out by FREP. - BaFin ordinarily requires issuers to publish the errors established by BaFin or FREP. (See section 37q WpHG.) - Non-German companies are also subject to the enforcement procedure if their securities are admitted to trading on the regulated market of a German stock exchange. (See Section 37n WpHG) - To 1 July 2009, 960 companies have been subject to this enforcement process – 815 German and 145 non-German companies. - BaFin’s priority is to ensure that the market has reliable information in financial statements. - Auditors are required by legislation to submit to peer reviews and are subject to monitoring and disciplinary action by the Chamber of Auditors (Wirtschaftsprüferkammer, WPK). - The Auditor Oversight Commission (Abschlussprüferaufsichtskommission - APAK) is responsible for the public supervision of the WPK, including its oversight and disciplinary activities. - APAK operates according to published rules of procedure approved by the Federal Ministry of Economics and Labor. - APAK is also responsible for cross-border co-operation concerning statutory auditor. (See sections 57a; s61a; s66a and s66b WPO.) ### Principles for Collective Investment Schemes — Overview - Assessment: Fully implemented (Principles for Collective Investment Schemes header). - CIS activity is regulated primarily through the Investment Act (Investmentgesetz, InvG). This legislation regulates diversified, open-ended funds. - InvG covers German asset management companies and investment stock corporations, funds, investments that can be held by funds, and public offers of foreign funds in Germany. - The legislation classifies funds according to underlying asset classes, and has special provisions dealing with, among others, real estate funds and hedge funds. - Undiversified funds, or closed-end funds that do not offer redemption facilities, are not regulated through InvG. - InvG provisions are supplemented by other specific legislation: - Derivative Regulation (Derivateverordnung, DerivateV) regulates fund investment in derivatives (risk management systems, market risk assessment, stress tests and investment in structured products). - Regulations for audit of investment funds (InvPrüfbV). - Accounting and valuation for investment funds including content and presentation of annual reports (InvRBV). - Asset management companies must hold a license under the InvG. - The legislative scheme currently reflects the European UCITS III directive. Legislation to implement UCITS IV is come into effect by 30 June 2011. - BaFin has responsibility for administering this legislative framework. - The regulatory framework applies in full to retail investment funds. For non-retail funds, some aspects (approval of fund rules, prospectus provisions and some investment restrictions) do not apply, or do not apply if the investors elect to have them not apply. - BaFin issued circular 5/2010 (WA) on minimum requirements for the risk management of asset management companies and investment stock companies (Mindestanforderungen an das Risikomanagement für Investmentgesellschaften, InvMaRisk), setting out minimum requirements to identify, measure, manage and monitor all risks relevant to the funds they manage. - The funds management industry, in conjunction with BaFin, has developed model fund rules and model prospectuses for industry use. ### CIS activity subject to authorization - Marketing a CIS: - A person is exempt from needing a license under the Banking Act if they provide services only in relation to CIS units admitted for marketing in Germany and they do not hold customer funds (section 2(6) no 8 KWG and section 2a(1) no 7 WpHG). - In practice Banking Act licensing provisions apply only to persons who carry on an investment advice, investment broking or contract broking business in addition to CIS marketing activities, or who act as an agent of the CIS operator. - Intermediaries within the exception must hold an authorization under the German Industrial Code (Gewerbeordnung, GewO), involving personal integrity and financial checks, and comply with conduct regulations (BMV). Compliance is monitored by relevant State authorities, not by BaFin. - Operating a CIS: - CIS operations may be carried out through an asset management company or an investment stock corporation; operators must be authorized under InvG (section s7 InvG). - Eligibility criteria before licensing include: - a. the integrity of managers and holders of qualified participating interests (more than 10 percent of shares in the management company); - b. the professional competence of managers; - c. business organization, internal controls and risk management systems; - d. minimum initial capital (€300,000). ### International cooperation and sanctions - UCITS-compliant schemes can be marketed within the EU and EEA by the holder of a passport issued by BaFin. UCITS schemes based elsewhere in the EU can be marketed in Germany with BaFin notification. - Offering schemes in Germany from countries outside the EU can be done if BaFin is satisfied about home jurisdiction regulation and cooperation from the home regulator. - Investment legislation requires BaFin to cooperate with relevant authorities in the EU and the EEA, and empowers it to enter information sharing arrangements with third country regulators. - Sanctions for non–compliance: - BaFin has extensive powers to gather information and obtain evidence about CIS activity. - Operating a CIS without a license is a breach exposing the operator to criminal sanctions. BaFin can require immediate cessation of business activities. - BaFin can impose administrative fines (Section 143 of InvG), revoke licenses (Section 17), demand dismissal of managers (section 17a), and issue orders as authorized by Section 5 to ensure compliance. - CIS operators must act solely in the interest of investors and minimize conflicts of interest; conduct is also covered by an industry code developed with BaFin. - Outsourcing is permitted but subject to rules; operators remain accountable to BaFin for outsourced functions. ### BaFin practice and supervisory assessment (Principle 17) - In 2010: - BaFin carried out 10 on-site inspections. All were regular on-site inspections, which occur after a specific period according to the risk assessment of the investment companies. - Inspections were carried out by auditors by order of BaFin; in some cases auditors were accompanied by BaFin staff. - In three cases, the audit is not yet completed. The other seven inspections identified minor or middle organizational shortcomings. - The most severe deficiency (insufficient outsourcing controls) is being followed up by BaFin. - There were no on-the-spot inspections in 2010. - No formal sanctions (like a fine or the removal of a director) were imposed on a CIS operator. - In roughly 300 cases management companies have been asked to modify prospectuses. - There were no criminal cases arising from the activity of a CIS. - Assessment: Partly implemented. - Comments and assessor judgment: - BaFin is heavily reliant on analysis of audit reports and does not have an intensive on-site inspection program. - Benefit: audit system ensures annual review of asset managers, custodians and depositories. - Risk: heavy reliance on audit reports increases the chance undesirable conduct is not detected in a timely fashion, raising risks to market performance, investor protection, and BaFin’s reputation. - Given 73 licensed operators and over 6,000 funds (including more than 2,000 retail funds), supervisory activities directly by BaFin seem relatively few relative to industry scale. - Ongoing monitoring does not normally involve sufficient on-site inspections of entities operating CIS, given sector materiality (Key question 8 and Principles Sections 11.4, 8.2, and 8.3). - Recommendations: - a. continuing to refine its approach to assessing and scoring risk; and - b. making more frequent use of on-site inspections to monitor compliance, both on a risk score basis and for thematic issues such the selling practices of market intermediaries. - Note: This will require additional resources. It is understood that BaFin is moving in this direction. ### Fund legal form, segregation, custody and winding up (Principle 18) - Fund rules are required for each CIS, setting out legal relations between investors and operator, investor rights (including redemption rights), and fund details. - For retail funds, fund rules and any changes require BaFin approval (except rules setting fees and charges); fund rules and amendments must be published in the Federal Gazette. - Fund assets must be segregated from operator assets and held by a licensed custodian bank; appointment or replacement of custodian requires BaFin approval. - Custody function is treated as part of the custodian’s banking business. - If the CIS operator is an investment stock corporation, legislation prohibits transactions between managers and the CIS. - Transaction records must be kept; register of holders currently only applies to registered certificates (Section 33 (1) InvG) not bearer certificates—this will change under UCITS IV legislation taking effect in mid 2011. - An annual audit is required for each scheme, the CIS operator and the relevant custodian. InvPrüfV codifies these audits. - BaFin reviews all audit reports for retail CIS, including reports on management companies, individual funds and custodians. - InvG (Sections 38-40 and 44) creates a process for orderly winding up if operator ceases or through insolvency: - If operator’s right to manage ceases, fund assets pass to custodian bank, which must either liquidate assets and distribute proceeds to investors or, with BaFin’s approval, transfer management to another CIS operator. - If a fund is dissolved, the operator must prepare a dissolution report equivalent to an annual report, subject to external audit. - Assessment: Fully implemented. ### Disclosure, prospectuses, advertising and reporting (Principle 19) - Section 42 of InvG provides detailed requirements for fund prospectuses. - A prospectus for offer of funds to retail investors must be published and filed with BaFin “without undue delay” after first use. - BaFin does not approve fund prospectuses but the BaFin team responsible for the relevant CIS operator reviews it and, if defective, BaFin can order termination of marketing and take action for an administrative offence. - A simplified prospectus must be published. The simplified prospectus requirement does not apply to real estate funds, infrastructure funds and hedge funds. - The simplified prospectus is to be replaced by a 2 page Key Investor Document by July 2011 in the German legislation implementing Directive 2009/65/EC. - Both full and simplified prospectuses must contain all information material to making an informed judgment and a clear explanation of the risk profile. The full prospectus must include a profile of a typical investor. - Certain types of funds (real estate funds, infrastructure funds, hedge funds) have additional disclosure requirements. - Material information that becomes out of date must be updated in both prospectuses—see Section 42(5) of InvG. - Some information, such as fees and charges, must be set out in the fund’s rules; fund rules must be attached to the full prospectus and made available free of charge on request. - If a prospectus is defective, BaFin can order termination of marketing and take action for administrative offence: section 143(2) InvG. - Advertising: - Advertising material must refer to the prospectus and how it can be obtained. - Advertising for some types of funds (such as funds of hedge funds) must contain specified disclosures. - BaFin can prohibit advertising containing misleading material. - The legislation prohibits public marketing of hedge funds (Section 112(2) Investment Act) and funds not permitted to be offered in Germany (Part 4 of InvG). - Reports: - For each CIS fund, an annual report must be prepared and published no later than 4 months after year end. - Annual report must include a report on the CIS’s activities and any significant information enabling investors to assess its performance. - Half yearly reports are also required. Both reports must be published in the Federal Gazette. - Annual and half yearly reports contain financial information and must be made available to holders free of charge (sections 44-45 of InvG (German funds) and section 121(1) (foreign funds)). - Accounting standards: - Accounting standards used in CIS reports are set out in InvRBV, designed in accordance with the international accounting principle of fair valuation. - Assessment: Fully implemented. ### Valuation, pricing and redemption (Principle 20) - Section 36 of InvG contains detailed provisions for valuation of CIS assets: rules for valuation, timing of valuations and valuation process. - Accounting and valuation standards are those in InvRBV, including for assets without current market prices. - Unit values must be calculated on each trading day. - Exceptions: “other” funds where calculation must be at least monthly if laid down in fund rules; hedge funds and funds of hedge funds where calculation must be at least once in a quarter if provided in the fund rules. - For assets not traded on an organized market or without traded prices, valuation is based on a prudent assessment using appropriate valuation models taking into account current market conditions. - Fund value is determined on each stock exchange day by the custodian bank in conjunction with the CIS operator or by the CIS operator itself on the basis of relevant market prices less borrowings and other liabilities. - Valuation procedure uses the “four-eyes” principle divided between CIS operator and custodian bank: - If CIS operator evaluates assets, custodian bank must supervise the valuation process. - If custodian bank evaluates assets in cooperation with CIS operator, the CIS operator must verify the custodian bank's measurement approaches (Sections 36 (1) and 27 (1) Investment Act, Section 22 InvRBV). - There must be segregation between “back office” (evaluating division) and “front office” (portfolio management) to avoid conflicts of interest. - Annual external audit must verify compliance with valuation requirements of the legislation. - Legislation sets out the way the price for units on both subscription and redemption is to be calculated. *IMF staff extract from _cr11274 - Section 319ff HGB.).* ### Section 23(2) of InvG requires that the issue price must be the pro rata value of the share ### Section 23(2) of InvG requires that the issue price must be the pro rata value of the share ### Issue and redemption pricing: legal requirements and publication - Section 23(2) of InvG: the issue price must be the pro rata value of the share in the fund plus any issuance fee set out in the fund rules and the prospectus. - Redemption price: must be pro rata value of the share in the fund less any redemption fee set out in the fund rules and the prospectus. - Model fund rules (industry with BaFin) address timing of valuations and measures to ensure a deadline for receipt of issue and redemption notices. - Publication requirements: - Issue and redemption prices must be published at the time of each issue or redemption, and in any case at least twice per month. - For most public funds, this effectively requires daily publication, since rules require daily redemptions. ### Remedies for pricing errors and investor claims - BaFin powers of intervention permit issuing instructions to remedy pricing errors (see Section 5 Investment Act). - Section 28(1) empowers the custodian to assert claims on behalf of investors relating to breaches by the operator of the CIS. ### Suspension of redemptions: legal framework and operational practice - Legal provisions: - Sections 37 and 81 of InvG provide for suspension of redemptions. - Suspension may be effected by: - fund rules empowering the CIS operator to suspend redemptions if exceptional circumstances prevail and justify suspension in the interests of investors; or - order of BaFin if needed in the interests of all investors. - If the operator suspends redemptions, it must inform BaFin immediately. - Practical application (open-ended real estate funds): - In October 2008, redemptions were suspended for 12 real estate funds in the wake of the financial crisis. - Currently 13 real estate funds are affected by suspensions according to section 81; three of these have permanently stopped redemptions and are currently subject to an orderly winding up. - After suspensions, BaFin required management companies to: - present liquidity status reports and assess measures to prevent suspensions; - report regularly on progress toward “re-opening” the real estate funds; - follow guidance concerning the sale of real estate during suspension to raise liquidity, stressing investor interest to have units redeemed is to be given more consideration as time elapses. - Legal maximum suspension period: 2 years of continuous suspension. - BaFin held regular meetings with management companies that did not manage to “re-open” their real estate funds to review options for sustainable “re-opening”. - By the end of October 2010 the management companies of three real estate investment funds concluded that an orderly winding up was the only option to assure fair and equal treatment of all investors in those funds. - Changes to InvG regime: generally a 1-year-notice prior to redemptions of units in real estate funds is now mandatory to facilitate liquidity management. - BaFin is in talks with management companies of the other 10 real estate funds still suspended about prospects for sustainable “re-opening”. ### Assessment and implementation - Assessment: Fully implemented (with respect to the discussed provisions on pricing, publication, suspension powers and procedures). - Comments summarize practical supervisory activity and outcomes in the real estate fund suspensions and subsequent legal/regulatory adjustments (1-year-notice requirement). ### Related supervisory context: BaFin supervision of market intermediaries (selected points relevant to CIS context) - BaFin’s supervisory tools and practices described in adjacent sections underpin enforcement of pricing, publication, and suspension rules: - BaFin may refuse or revoke licenses and has powers to instruct licensees to cease or limit activities; demand dismissal of managers; and transfer board powers to a special commissioner (See Section 33, Section 35, Section 36, Section 46 KWG). - Reporting obligations: authorized institutions must report material changes to BaFin and the BundesBank (See Section 24 KWG and related Ordinance). - Public disclosure: BaFin must publish details of grant or withdrawal of licence including permitted activities (s32(4) KWG). - Supervision practice highlights: - Strong reliance on annual compliance audits; BaFin may participate in audits and determine key audit issues. - On-site inspections used more for higher-risk entities; BaFin uses a risk matrix and special programs for firms rated “C” or worse. - Example supervisory resource use in 2010: section supervising 147 private German and international banks — nine of these firms were rated “C”; section staff spent approximately 40 days on-site at these firms. - Recommended supervisory refinements (relevant for CIS oversight): - Continue to refine approach to assessing and scoring risk. - Make more frequent use of on-site inspections to monitor compliance, both based on risk scores and for thematic issues such as selling practices. ### Capital requirements for market intermediaries (contextual figures) - Minimum initial capital under KWG s33: - entities that do not hold client funds/assets and do not deal on their own account: €50,000 - entities that may hold client fund/assets but do not deal on their own account: €125,000 - entities that deal own account dealings (and securities trading banks): €730,000 - Indemnity insurance may be accepted as substitute in some cases. - Ongoing capital requirements governed by KWG (Section 10) and Solvabilitätsverordnung (SolvV); entities grouped for ongoing capital and liquidity tests per Section 2 SolvV. *Source: _cr11274 - Section 23(2) of InvG requires that the issue price must be the pro rata value of the share* ### section 11 of KWG (institutions must investment funds so as to ensure adequate ### _cr11274 - section 11 of KWG (institutions must investment funds so as to ensure adequate ### Capital requirements and risk quantification - Institutions subject to KWG must quantify credit/counterparty risk, operational risk and market risk and support them with own funds. - Minimum overall capital ratio: 8 percent against risk weighted assets. - Provisions apply at consolidated and individual entity levels. - Eligible own funds components are listed in Section 10 (2) to (2c) of KWG (reflecting the European Capital Requirements Directive (CRD)). - Individual risk profile considered via: - credit risk standardized approach or internal ratings based approach; - operational risks and market price risks included in capital ratio calculations. - Calculations explicitly take into account: - credit risk (including balance sheet, derivatives and off-balance sheet exposures (sections 11-14 of the Solvency Ordinance)); - market risk exposures (Section 295); - commodities positions (Section 296); - interest rate and equity price related risks (Section 298). - Unlicensed affiliates or off-balance sheet activities regulated through consolidated supervision rules or minimum capital requirements under Sections 10, 10a and 10b of KWG. ### Guarantee scheme (investor compensation and deposit protection) - Licensed financial services institutions providing investment broking, contract broking, financial portfolio management and trading for own account under KWG must secure deposits and liabilities from investment business through membership of an investor compensation scheme in accordance with the Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz, EAEG). - If compensation is payable, the creditor has a right to compensation as provided in the EAEG from the compensation scheme to which the institution belongs (Section 3 EAEG). - Securities market non-bank licensees belong to a statutory Investor Compensation Fund established by EAEG. - Bank licensees may belong to non-statutory banking industry schemes (e.g., Deposit Protection Fund of German Banks). - Compensation payable if BaFin determines institution is unable to repay deposits or meet liabilities from investment business and there is no prospect of repayment (section 1(5) EAEG). - Claim basis: amount of creditor’s deposits or liabilities resulting from investment business, taking into account set-off and counterclaims. - No claim to compensation if deposits or funds are not denominated in the currency of a state of the EEA or in Euros. - Compensation limits: 90 percent of deposits to a maximum EUR 20,000, and 90 percent of other liabilities arising from investment business to a maximum of EUR 20,000 (section 4 EAEG). - Licensed institutions must inform non-institutional investors about membership in an investor deposit guarantee scheme (Section 23a KWG). - If client claims exceed statutory Investor Compensation Fund resources, the Fund can demand additional contributions from members and can raise loans; the Fund decides on pro rata compensation and order of disbursement. - The funding base of the Statutory Fund has come under pressure in recent years due to a large number of retail investor claims resulting from the failure of a single licensed institution. ### Reporting and supervisory monitoring - Compliance monitored through: - monthly financial reports (Section 25(1) KWG); - quarterly reports on capital adequacy (Section 6 Solvency Ordinance). - Reports submitted to Deutsche Bundesbank, which analyses them and passes reports and analysis to BaFin. - Financial statements audited by an independent auditor must be submitted to BaFin and the Deutsche Bundesbank within 3 months after end of financial year (Section 26 KWG). - Under Section 7(1) Solvency Ordinance, BaFin and Deutsche Bundesbank must be immediately notified if a licensee: - falls below the minimum capital requirements; or - sustains a loss of 25 percent of the institution’s liable capital. - BaFin authorities (Sections 45 and 46 KWG) may take formal measures including: - prohibiting withdrawals by proprietors or shareholders and distribution of profits; - prohibiting or limiting lending; - requiring specific risk-reducing measures if minimum capital ratio not restored within an appropriate period. - If threat to meeting obligations to creditors exists, BaFin can: - issue instructions to management; - prohibit deposit-taking or lending; - prohibit proprietors or managers from carrying out activities; - appoint a supervising person. - Since 2009 BaFin can take these measures before an actual breach of minimum capital requirements if the institution’s financial or revenue situation indicates unsustainable ability to meet capital requirements. ### Management, internal organization, and operational conduct (Principle 23) - KWG requires proper business organization to ensure compliance and to gauge financial situation with sufficient accuracy at all times (section 25a KWG). Proper business organization includes appropriate and effective risk management. - Detailed expectations supplemented by BaFin circulars: - Circular 15/2009: Minimum Requirements for Risk Management (MaRisk), revised 14 August 2009. - Circular 4/2010 (WA) - Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency (MaComp). - Circular 22/2009 addresses remuneration systems. - Framework requirements: - all senior managers are responsible for ensuring and developing proper business organization, including outsourced activities (MaRisk AT3; MaComp AT4); - documented internal rules for identifying, assessing, treating, monitoring and communicating all material risks; - independent compliance function reporting directly to senior management and at least annually to the chairman of the supervisory board (duties detailed in MaComp); - internal audit function to monitor and assess effectiveness and appropriateness of the risk control system; - immediate reporting of any breakdown in internal controls to senior management. - Regulated institutions must implement effective, transparent processes to ensure adequate and timely processing and recording of retail client complaints (section 33 (1) no. 4 WpHG). ### Client funds and assets, custody rules - Only institutions licensed as credit institutions are permitted to hold client funds and assets; safe custody and administration of securities for the account of others is treated under s1(1) KWG as banking business. - Section 34a(1) WpHG requires financial services institutions receiving client funds in connection with an investment service to keep them separately and deposit without delay in a trustee account with an institution licensed to conduct deposit-taking business (or comparable EEA/third country institution). - Section 34a(2) WpHG applies analogous rules to client securities. - Safe Custody Act (Depotgesetz, DepotG) provides: - forms of safekeeping: collective deposit and individual safekeeping; - right to separation; - further protections such as restricting rights to pledge or retention (section 4). - For collective deposits, depositary may keep securities unsegregated from its own assets or those of third parties only with express written consent of depositor (Section 5 (1) sentence 2 DepotG); third-party entrustment commonly to a bank for central depository. - Individual safekeeping requires separate holding and externally recognizable designation of depositor (Section 2 DepotG). - Under DepotG, investment firms are not allowed to hold omnibus accounts; securities of one client cannot be affected by activities of other clients. ### Clearing, collateral segregation, and custody at clearing member level - No legal requirement for clearing houses or other central counterparties to maintain separate identification of collateral posted by an investment firm for client positions. - Eurex Clearing AG requires clearing members to transfer proprietary funds for both client and proprietary positions; clearing members must ask clients to transfer collateral equivalent to that transferred to Eurex, but no segregation of assets is required at the clearing member level. - Margin segregation requirements at clearing member level are determined by laws applicable to the clearing member and its arrangements with its clients. ### Client information, "know your client", and suitability rules - For investment advice or portfolio management, licensee must obtain necessary information on customer’s knowledge, experience, financial situation and investment objectives to recommend suitable services and instruments (Section 31 (4) WpHG). - If required information is not obtained, the licensee must not recommend investment services or instruments. - For other investment services, licensee must ask client about knowledge and experience relevant to the product/service to assess appropriateness (Section 31 (5) WpHG). - If product/service is not appropriate, intermediary must warn the customer. - If customer does not provide required information or provides insufficient information, intermediary must warn customer that appropriateness cannot be determined (Section 31 (5) WpHG). ### Client agreements, minutes of advice, and withdrawal rights - Intermediaries providing investment services other than advice must enter into a written basic agreement setting out essential rights and obligations (Section 34 (2) sentence 2 WpHG). - Agreement must be provided in paper or another durable medium and the customer informed before being bound (Section 5 (2) and (3) sentence 1 WpDVerOV). - If concluded by telephone at client request, information must be provided immediately after client is bound (Section 5 (3) sentence 2 WpDVerOV). - Licensees providing investment advice must take minutes of advice sessions, signed by the advice giver and provided to the client before any transaction resulting from the advice is concluded (Section 34(2a) WpHG). - If immediate provision of minutes is not possible (e.g., telephone), licensee may accept client order if client can withdraw after reviewing the investment advice. ### Reporting to clients, remuneration disclosure, and account statements - WpDVerOV reporting requirements include: - transaction confirmations; - periodic reports for portfolio management clients: 6 monthly or 3 monthly if requested by the client; clients may elect transaction-by-transaction reporting with prompt essential information in a durable medium; - periodic reports for holders of interests in collective investment undertakings at least 6 monthly. - Section 5(2) WpDVerOV requires licensees to inform retail clients about costs and associated charges, including: - total price to be paid including all fees, commissions, charges, expenses and taxes payable via the investment firm, or basis for calculation if exact price cannot be indicated; commissions must be separately itemized; - indication of foreign currency and applicable conversion rates and costs where relevant; - notice that other costs (including taxes) related to transactions may arise that are not paid via the investment firm; - arrangements for payment or other performance. - Depositary must issue a securities account statement; under Depot-Bek (no. 11 (2)), such statements must include: - securities entrusted individually with nominal amount or number; - exact name of security type including characteristics and form of safekeeping. ### Books, records and retention - Section 34 WpHG requires financial services institutions to keep records of investment services provided and transactions undertaken to enable BaFin monitoring. - Records must be kept for at least 5 years. - These recordkeeping requirements are additional to obligations under general commercial law and MiFID regime (EC 1287/2006). ### Customer protection, order handling, conflicts of interest and best execution - Licensed institutions must ensure clients are treated in a fair, honest and professional manner (Section 33(1) no. 3 and Section 31(1) WpHG). - Institutions must establish a conflicts of interest policy (section 13 (2) WpDVerOV) and a best execution policy (Section 33a (1) WpHG). - Securities Trading Act detailed provisions on execution of customer orders (Sections 31c and 33a): - recording of client orders; sequence of execution; circumstances and conditions for aggregation (including client and licensee orders); allocation procedures; communication with clients about orders; - prohibition of misuse by the licensee of information about client orders. *Source: Excerpt from section 11 of KWG and related provisions as presented in the provided content unit.* ### Section 31(1) of the Securities Trading Act requires financial services institutions to avoid ### _cr11274 - Section 31(1) of the Securities Trading Act requires financial services institutions to avoid ### Conflicts of interest (Section 31(1); Section 33(1) no. 3; Section 33b; MaComp) - Legal obligations: - Section 31(1) of the Securities Trading Act: financial services institutions must avoid conflicts of interest wherever possible and ensure that in the event of unavoidable conflicts customers' orders are executed with due regard to customers' interests. - General nature and/or sources of conflicts must be disclosed if they cannot be avoided. - Intermediary must identify the types of conflict of interest that arise in the course of providing investment services and whose existence may damage the interests of a client. - Section 33(1) no. 3 of the Securities Trading Act: financial services institutions must maintain permanent and effective arrangements to take all reasonable steps to identify conflicts of interest between itself (including its employees and related parties) and its clients. - Supplementary measures: - Specific provisions such as personal account dealings by employees (Section 33b of the Securities Trading Act). - MaComp guidance: role of compliance functions in monitoring conflicts, use of information restrictions and barriers (“Chinese walls”), separation of functions, and remuneration structures. - Assessment: Fully implemented ### Failure of market intermediaries; early warning and insolvency procedures (Principle 24; KWG; Insolvency Statute InsO; Restructuring Act) - Early warning requirements: - Institution that becomes insolvent, or is at risk of becoming so, must immediately report that fact to BaFin (Section 46b(1)). - Monthly and quarterly reports to the Bundesbank and BaFin provide regular information on financial and operating condition. - Institutions must notify Bundesbank and BaFin if they fall below minimum capital requirements or sustain losses amounting to more than 25 percent of their capital (as noted under Principle 22). - BaFin powers and procedures: - BaFin may file a petition for initiation of insolvency proceedings over the institution’s assets; only BaFin may file such a petition (section 46b(1) KWG). - Competent court issues decision on formal insolvency proceedings; an Administrative Officer (subject to personal liability) is selected by the competent court (section 60 InsO). - Insolvency regime focuses on returning client money and client securities to clients; client positions are liquidated and valued. - Under the Restructuring Act, client assets may be transferred from an insolvent bank to a solvent bank, with and without client consent. - In case of insolvency of a depositary, the depositor is entitled to claim segregation and the return of the securities; client securities do not form part of insolvency assets (section 47 InsO). - BaFin has powers to intervene in operation of institution (issue instructions, limit conduct, order to cease business) (sections 46 and 46a KWG). - Cross-border communication: - KWG sections 46b(2) and 46d require BaFin to notify relevant authorities in EEA jurisdictions if it files a petition for insolvency for a domestic institution. - BaFin must advise authorities if it views that an institution domiciled in their jurisdiction has insufficient liquidity (section 53b(4)). - Assessment and comment: - Assessment: Fully implemented - Comment: BaFin relies heavily on regular reporting and has adequate powers. Desirable to have a clear and complete ex ante plan for dealing with threatened failure of both bank and non-bank firms. ### Exchange establishment, governance, and authorization (Principle 25; BörsG; Banking Act) - Legal and structural framework: - Federal Exchange Act (Börsengesetz, BörsG) and state regulations govern exchanges; clearing and settlement facilities are regulated as banking activities under the Banking Act. - Exchanges are institutions established under German administrative law with public authority status; Administering and Operating entities provide trading and clearing services commercially. - Mandatory exchange bodies (BörsG requirements): - Management Board (Geschäftsleitung) - Exchange Council (Börsenrat) - Trading Surveillance Office (Handelsüberwachungsstelle, TSO) - Disciplinary Committee (Sanktionsausschuss) - Trading Surveillance Offices (TSOs): - TSOs are independent bodies located at the exchange; appointment/dismissal of the Head requires ESA consent; TSOs bound only by instructions of the relevant ESA. - TSOs act in a sovereign capacity; orders are binding and enforceable using sovereign powers. - TSOs keep and analyze complete records of all trading data, use databases and electronic monitoring systems, and have rights to demand information and enter premises. - TSOs must inform BaFin of indications of market manipulation or insider trading and may exchange data with other monitoring bodies subject to comparable confidentiality requirements. - Disciplinary powers and examples: - Disciplinary Committee can impose fines up to EUR 250,000 or suspend admission for up to 30 exchange trading days. - Calendar 2009: Disciplinary Committee of Frankfurt Stock Exchange imposed sanctions in 18 cases, with 7 cases pending; largest fine to date was EUR 208,000. - Exchange supervision and ESA roles: - ESAs (State-based Exchange Supervisory Authorities) approve exchange operations, adopt exchange rules, monitor trading participants and order book specialists, and approve appointment of exchange management board members. - ESAs have rights of access to information and documents equivalent to TSOs and may convene the Disciplinary Committee (Section 3 BörsG). - BaFin responsibilities: - BaFin monitors and enforces compliance with market abuse prohibitions (insider trading, market manipulation), listed entities’ disclosure obligations, and takeovers legislation; BaFin has sole responsibility for international information flows and cooperation for regulated markets. - Authorization criteria (Section 4 BörsG) — ESA must be satisfied about: - the business case for establishment of the exchange market - exchange resources - the integrity of senior managers and major shareholders - the ability of an applicant to comply with applicable regulation - Current authorized exchanges and facilities: - 7 authorized exchanges operate securities markets: Frankfurt, München, Berlin, Hamburg, Hannover, Düsseldorf, Stuttgart. - Eurex Deutschland (Frankfurt) operates an authorized derivatives exchange. - EEX operates an authorized energy exchange in Leipzig. - Exchange rules and ESA oversight: - Exchanges must adopt rules (subject to ESA approval) covering admission to membership, exchange organization, types of trading, members’ ability to meet obligations, and conditions for linking trading and settlement systems to external settlement systems. - ESAs can impose ongoing conditions and have powers of intervention (section 3 BörsG). - Assessment: Fully implemented ### Multilateral Trading Facilities (MTFs) and MTF regulation (WpHG; Banking Act) - Regulatory treatment: - Conducting a market as an MTF is a financial service requiring licensing as a financial services institution under the Banking Act (Section 1(1a)). - As licensees MTFs are subject to common licensee obligations and additional Securities Trading Act (WpHG) provisions. - WpHG requirements for MTFs: - Sections 31f: MTFs must have rules governing: - access by trading participants at least as stringent as those required for exchanges under BörsG; - admission to trading and orderly trading in financial instruments; - control mechanisms for monitoring and recording all trading activity; - compliance with Exchange Act provisions on price formation; - publication of information about the operation of the MTF. - Section 31g: MTFs must comply with MiFId-standard requirements for pre- and post-trade transparency. - TSOs must report suspect insider trading and other market abuses to BaFin (section 7(5) BörsG). - MTF operators must report serious contraventions of trading rules and other threats to market integrity to BaFin (Sections 10 and s31f(3) WpHG). - Licensed MTFs in practice: - BaFin has licensed 2 institutions to operate MTFs: Eurex Bonds and Eurex Repo. - Eurex Repo is a wholly owned subsidiary of Eurex Frankfurt AG (ultimately owned by SIX Swiss Exchange AG and Deutsche Börse AG). - Eurex Bonds ownership: 79 percent by Eurex Frankfurt AG, remaining 21 percent held by major financial institutions. - Supervision and enforcement: - BaFin monitors compliance of MTFs with Banking Act obligations and WpHG rules for MTFs. - Assessment: Fully implemented - Comment: - The two existing MTFs are well established and pre-date MiFID registration requirements; both operate within the Deutsche Börse Group framework. - If other MTFs are established in Germany, the current approach may be inadequate and would need a more specifically designed compliance regime. ### Ongoing supervision, monitoring, and transparency (Principles 26–27; TSOs; ESAs; BaFin) - Supervision framework: - Ongoing regulatory supervision of exchanges and trading systems is performed at three levels: - TSOs monitor trading and price formation. - ESAs examine misconduct and violations of stock exchange law. - BaFin ensures markets operate in accordance with the Securities Trading Act (WpHG). - ESAs have extensive powers under Section 3 BörsG to obtain information, intervene in market operations (including suspending trading), and issue orders for maintenance of order and conduct of business on the exchange (section 3 (5) BörsG). - Compliance monitoring specifics: - TSOs have continuous access to trading information, operate electronic surveillance systems, and conduct investigations; an ESA can demand trading information from the exchange. - If a TSO identifies irregularities, it informs the exchange management board and the ESA, which may initiate Disciplinary Committee proceedings (fines, exclusion up to 30 days). - ESAs can impose sanctions and have tasks including supervision of price formation integrity, investigations, preventive measures, supervision of proper trading, and supervision of market participants admitted to exchange trading. - Resource example (State of Hesse): - In the State of Hesse, a total of ESA 20 staff are employed in the supervision of Frankfurt Stock Exchange and Eurex; the ESA for the State of Hesse consists of 8 staff. - Routine ESA functions include: approval of new or changed market rules; case-driven examination of non-compliance; daily contact with the TSO; regular reviews of exchange activity (e.g., admission of trading participants). - ESAs have the power to revoke an exchange authorization (section s4(5) BörsG). - MTF supervision observations: - BaFin has not developed an MTF-specific compliance regime and has not carried out an on-site inspection of either licensed MTF to date. - BaFin can revoke an MTF operator license (section 33 KWG). - Transparency: - Both exchange markets and MTFs are subject to pre- and post-trade transparency in line with MiFID requirements for equities and equity options admitted to trading in an EEA market (MiFID requirements imposed for exchanges by sections 30 and 31 of BörsG; for MTFs by the Securities Trading Act (WpHG)). - Assessment: Fully implemented - Comment: - The combination of established MTFs, their ownership structure, and integration in Deutsche Börse Group reduces perceived compliance risk for these specific MTFs, but may not be adequate if additional MTFs emerge. *Source: _cr11274 - Section 31(1) of the Securities Trading Act requires financial services institutions to avoid* ### section 31g of the Securities Trading Act (WpHG). ### section 31g of the Securities Trading Act (WpHG) ### Pre-trade transparency - Pre-trade transparency requires disclosure of bid and offer prices, and volumes tradable at those prices (section 30 BörsG). - Exchange-specific regulations elaborate the rule. For Frankfurt Stock Exchange, section 30 BO FWB provides: - a. for floor traded market an estimated price must be published showing the range of bid and ask limits at or between which the exchange price can be determined; - b. for continuous trading systems, at least the aggregate order volumes of the five best price limits and order volumes for each price limit must be published; - c. for periodic auctions, either the indicative auction price or the best bid and/or offer limit including the volume at that price must be published; and - d. for the pre-call and call of an auction in a continuous trading model where specialists are used, the specialist’s indicative quote must be published. - Waivers from these requirements are available, in accordance with the MiFID requirements, for: - a. large scale orders that are large in scale as determined by MiFID; - b. some negotiated trades; - c. reference price systems, where the system executes trades at a price (or prices) generated by another system and the price is considered reliable and is widely published. - d. orders held in order management systems pending disclosure to the market (such as iceberg orders). - For MTFs, the relevant provision is section 31g of WpHG. ### Post-trade transparency - Under section 31 BörsG, exchange prices and the volume and the time of the exchange transactions have to be published without delay. - Under section 174 BO FWB, exchange prices and the volume and time at which the trades were concluded must be published immediately in real time and not later than three minutes after occurrence, subject to an exception if delayed publication appears necessary to avoid disadvantage to the parties to the transaction. - For MTFs, the relevant provision is Section 31g of WpHG. - Information must be made available without delay (exchange markets) or continuously (MTFs) on reasonable commercial terms in an easily accessible form. - An ESA (for exchange markets) and BaFin (for MTFs) can allow deferred publication if immediate publication is to the detriment of the trading parties (Section 30 BörsG; Section 31g(4) WpHG; and Articles 18-20 of the MiFID Implementing Regulation; Article 28 of MiFID Implementation Regulation). - Assessment: Broadly implemented. - Comments: - The transparency regime required by MiFID has been fully implemented for exchange markets, MTFS and systematic internalizers, so there are the required levels of transparency at each market venue. - Absence of standards for consolidation of post trade information detracts from the overall transparency of the market for trading in shares. - The assessor considers that until concerns about comparability and consolidation of post-trade data are effectively resolved, the Principle should be rated broadly implemented. ### Regulation to detect and deter manipulation and unfair trading practices (Principle 28) - The Securities Trading Act (WpHG) expressly prohibits insider trading (sections 13 and 14) and market manipulation, including the supply of misleading information, false trading and deceptive conduct generally (section 20a). - Front running of client orders is prohibited as a type of insider trading (see the definition of inside information in section 13 of WpHG). - The prohibition on insider trading extends beyond traditional securities. Section 12 of WpHG makes a variety of financial instruments subject to the prohibition, including securities, money market instruments and derivatives. For derivatives, the prohibitions apply to a financial instrument relating to a market traded instrument (even if not itself traded). For derivatives, “financial instruments” includes derivatives based on commodities and precious metals. - Sanctions: - Insider trading and some form of market manipulation are subject to sanctions as criminal offences (Section 38(1) WpHG). - Other forms of market manipulation are treated as administrative offences for which BaFin can impose substantial monetary penalties (section 39 WpHG). - Disclosure of inside information is prohibited; disclosure by a “primary insider” is a criminal offence; disclosure by a “secondary insider” constitutes an administrative offence. - Regulatory practices: - BaFin monitors compliance with market abuse provisions and has wide-ranging powers (see section 4 WpHG). - Reporting and information obligations supporting monitoring include: - a. licensees report their market transactions to BaFin each day (section 9 WpHG); - b. exchange TSOs (section 7(5) BörsG) and intermediaries including MTF operators (Section 10 WpHG) report suspect trading activity to BaFin; - c. issuers maintain insider lists (section 15b WpHG) and disclose material price sensitive information through ad hoc disclosures (section 15 WpHG). - BaFin issued detailed guidance in its 2009 Issuer Guideline. - BaFin relies on reports from intermediaries, information from ESAs and TSOs, and its own monitoring of capital market activity. - Market participants report all completed transactions to BaFin; these reports constitute a database for investigations and analysis. - Enforcement statistics: - In 2009, there were ten court convictions in respect of insider trading one of which resulted in custodial sentences for two offenders. In other cases, criminal fines were imposed. - In 2010, there were eleven court convictions for insider trading. - In 2010, BaFin commenced a total of 116 new investigations into market manipulation, found evidence of criminal breaches in 62 cases and reported 109 suspected persons to the appropriate public prosecutor. - Cross-market supervision and information exchange: - BaFin has access to cross market information through TSOs and ESAs and daily transaction reporting. - TSOs can share information with one another. BaFin is the competent authority for cooperation with authorities in other countries. - BaFin is party to the CESR MMoU on the Exchange of Information and Surveillance of Securities Activities, the IOSCO MMoU and a large number of bilateral MOUs. - Assessment: Fully implemented. ### Management of large exposures, default risk and market disruption (Principle 29) - Observations based on rules and procedures applying to the Frankfurt Stock Exchange and Eurex. - Main mechanisms to manage exposures and reduce default risk: - a. the use of central counterparty clearing; - b. requiring margins from market participants to support their ability to meet their obligations arising from trading activities; - c. for Eurex, use of the power to impose position limits; - d. monitoring by TSOs and ESAs, using their powers to access information about the trading activities of market participants and their clients. - Central counterparty clearing (CCP): - CCP is used for both Frankfurt Stock Exchange (Deutsche Börse) and Eurex; potential large exposures at clearing participant level are monitored as part of the daily clearing and settlement process. - Margin requirements: - Frankfurt Stock Exchange rules (Rules 19-24) require participants to provide margin for the total risk from their exchange transactions. - Eurex rules (Rule 4.8) require its participants to provide margins for positions. - Margins can be in the form of cash, securities, and bank guarantees. - The risk-based margining encompasses the entire process of measuring, calculating and administering the margin required for open positions. - Position limits: - Eurex rules empower its board of management to set or alter position limits (Eurex Rules 4.7.1) and oblige the Eurex TSO to monitor compliance (4.7.3). - Monitoring and remedial actions: - TSOs monitor adherence to the security limit of admitted enterprises and lead brokers and notify the management board without delay if overruns are identified. - Admitted enterprises and lead brokers must notify the management board on each trading day of any overrun on the security limit by a deadline before start of trading. - If required security is not provided or no longer available, a participant may: - a. be suspended for a maximum period of six months; - b. have its brokerage activities restricted; or - c. have its rights to enter into exchange transactions suspended for as long as the admission of the enterprise for which such person enters into transactions is suspended. - Management board measures for default include those under Sections 21 to 24 FWB BO (increase in the risk amount; completion of pending trades; restriction to brokerage operation; suspension of admission; suspension of admission to stock exchange trading; withdrawal of entitlement to take part in block trading). - Admitted enterprises and lead brokers must notify the management board without delay if they cannot meet obligations; they are to receive a hearing before measures are adopted, except where circumstances do not warrant it (section 30 (2) FWB BO). - The management board may disclose measures taken to other trading participants insofar as this does not conflict with overriding interests warranting protection (Section 30 (3) FWB BO). - Access to information: - The ESA and the TSO have powers to request information of size and beneficial ownership if needed (Section 3 (4) no. 1 BörsG and Section 7 (3) BörsG). - Regulators may exchange information domestically (Section 8 BörsG) and with foreign regulators, subject to comparable confidentiality obligations. - BaFin is empowered to exchange information with foreign authorities pursuant to section 7 WpHG. - Default procedures: - For Eurex, general default circumstances set out in section 4.7 BO Eurex (default occurs if a participant exceeds position limits and is not able to reduce the position). - For Frankfurt Stock Exchange general default circumstances described in Section 29 BO FWB (default occurs if an entity or lead broker does not collateralize the reported total risk in time or does not timely fulfill any other provision). - Section 28 BO FWB states that the operator of the exchange shall, upon order of the management board, liquidate the margin provided by the company or lead broker in question if obligations are not met in their entirety. - Reference is made to the Settlement Finality Directive which has been transposed into national law in relevant provisions of the KWG and the InsO. - Consultation between market authorities: - Market authorities can consult with each other; general rules on information exchange apply. - Assessment: Fully implemented. ### Systems for clearing and settlement (Principle 30) - Assessed as part of assessment of CPSS-IOSCO standards. - (No further detail provided in this section.) - Assessment: (not specified). - Comments: (not specified). ### Appendix I — New IOSCO Principles (summary) - IOSCO added 9 new Principles in June 2010 and removed one (Principle 6). A revised Methodology is under development; new Principles not yet assessed. - New Principle 6: The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate. - New Principle 7: The Regulator should have or contribute to a process to review the perimeter of regulation, appropriate to regularly. - Observations on BaFin’s readiness: - Existing structures and practices in BaFin support a focus on systemic risk. - BaFin has a Directorate with a risk and financial markets analysis department; other directorates conduct sector-based research. - BaFin established an organization-wide risk committee with representatives from all sectors two years ago. - A new risk committee formed in late 2010 focuses on nonbank components of the securities industry with representatives from each department in the Securities Directorate. - BaFin reports regularly to the BMF and has produced special reports (example: 2009 report to BMF on problems in regulation of the “grey” capital market). - New Principle 8: The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. - Criteria yet to be developed; focus expected on conflicts arising in securitization. - Regulation of securitization is implemented EU-wide; conflicts addressed via obligations for investors in CRD, Solvency II, and AIFM; detailed conflict rules for licensed market intermediaries are in force. *Source: section 31g of the Securities Trading Act (WpHG) — _cr11274 - section 31g of the Securities Trading Act (WpHG)._ ### 49. In January 2011, a new legislative framework for securitization came into effect ### In January 2011, a new legislative framework for securitization came into effect in Germany ### Securitization framework: retention and disclosure - For new securitizations conducted after January 1, 2011 the framework introduced: - a 5 percent retention rule: a credit institution may only be exposed to the credit risk of a securitization position if the originator, sponsor or original lender of the securitization has explicitly disclosed that it will maintain a net economic interest in the securitization on an ongoing basis of not less than 5 percent. The minimum retention level will increase to 10 percent in 2015. - disclosure rules for sponsors and originators of securitizations: next to their level of retention sponsors and originators have to disclose all materially relevant data on the credit quality and performance of individual underlying exposures, cash flows and collateral supporting a securitization exposure; disclosure must also comprise information necessary to perform comprehensive and well informed stress tests on the cash flows and collateral values supporting the underlying exposures. ### Investor obligations, oversight, and sanctions - Investors must demonstrate a comprehensive and thorough understanding of their investments in securitized positions, enabling analysis of: - (i) all relevant information such as the risk characteristics of the securitized positions and the underlying exposures; - (ii) the reputation and loss experience in earlier transactions of the originators or sponsors; and - (iii) the disclosures made by the originators or sponsors, or their agents or advisers regarding their due diligence on the securitized exposures and the quality of the collateral (if applicable). - Banks investing in securitizations must implement formal policies and procedures to record, analyze, and monitor relevant information including prepayment rates and default rates of the exposures underlying the securitized positions. - Additional investor duties: - perform own stress tests; - thoroughly understand structural features with material impact (contractual waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements). - Investors must notify any breach of the requirements to the competent authorities. - Sanctions for failure to meet duties: - authorities will impose a risk weight that is at least 3.5 times higher than the risk weight which would regularly apply to this securitized position (maximum 1 250 percent). - in case of subsequent infringements the risk weight will be progressively increased by the competent authorities. ### Originators and sponsors: credit-granting and disclosure breaches - Originators and sponsors must apply the same sound and well-defined criteria for credit-granting and the same processes for amending, renewing, and refinancing credits to exposures to be securitized as they apply to exposures to be held on their book. - Originators not complying are not allowed to exclude the securitized exposures from the calculation of their capital requirements. - In case of a material breach of the disclosure requirements, competent authorities impose an increased risk weight that is at least 3.5 times higher than the risk weight regularly applied to the retention exposure held by the sponsor or originator (maximum 1250 percent). ### Compliance, audits, and BaFin supervision - Compliance with the new German regulation will be part of the banks’ annual audit. - German securitization transactions usually consist of credits from the bank balance sheet that have gone through a credit origination process where the sales force does not know which credit is going to be securitized later on. - Assessment of conflicts of interest and misalignment of incentives is part of ongoing supervision through: - supervisory interviews and participation in auditors' on-site examinations; - analysis of auditors' reports (reports according to the Banking Act in conjunction with Deutsche Bundesbank); - requests for information and document exchange; and - exchange of information in national and international bodies. - BaFin has adopted and published a Circular on the Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency pursuant to Sections 31 et seq. of the Securities Trading Act (MaComp), strengthening the compliance function and promoting measures to detect and resolve conflicts of interest. - Recent legislative actions include: minutes when investment advice is given, a register for investment advisors, and the "key investor document" (Produktinformationsblatt) pursuant to the Securities Trading Act which will be mandatory from July, 1 2011. - BaFin will conduct a market survey in summer to assess the quality and comparability of the new key investor documents and acts proactively within its delegated powers. ### Auditor oversight - New Principles referenced: Principle 19 (auditor oversight), Principle 20 (auditor independence), Principle 21 (audit standards quality). - Assessment found full compliance with Principle 16 (accounting and auditing standards). - Auditors are subject to public oversight by: - supervision by the Chamber of Auditors (Wirtschaftsprüferkammer, WPK), a professional body with public law responsibilities that conducts examinations and reviews and subjects auditors to peer reviews, monitoring and disciplinary action; - the Auditor Oversight Commission (Abschlussprüferaufsichtskommission, APAK) supervising the WPK, with most senior roles held by independent non-practitioners and operating according to published rules of procedure approved by the Federal Ministry of Economics and Labor; APAK is also responsible for cross-border co-operation concerning statutory auditors. - Independence standards are specified in the Commercial Code, including a requirement for auditor rotation after 7 years. - The Banking Act allows BaFin to require rotation of an audit partner or at any time. - The Commercial Code provides that audit standards adopted by the European Commission apply to statutory audits; to date there are no such standards and the audit standards in use are those issued by the Institute of Auditors (IDW). - Audit standards are largely in line with international audit standards (ISAs). ### Credit rating agencies (CRAs): regulation and requirements - A comparatively large number of locally based CRAs (8), as well as the three global CRAs, are active in Germany. - Regulation of CRAs is set at the EU level (EC 1060/2009); there is no separate German national regime. The Regulation addresses conflicts of interest, procedures, internal organization, transparency and presentation of ratings, reflecting the IOSCO code of conduct for CRAs. - Current oversight uses an integrated oversight model involving supervisory colleges for the “Big 3” CRAs, consisting of 10-15 authorities; applications require unanimous decision but current applications have not yet reached decision stage. - A specialist team within BaFin examines applications for locally based CRAs and cooperates with existing colleges. - From mid 2011 the European Securities and Markets Authority (ESMA) will assume responsibility for CRA regulation; future assessments will need to determine ESMA’s adequacy in this role. - Under the European Regulation CRAs must declare adherence to any Codes of Conduct, including the IOSCO Code of Conduct; while not obliged to adhere to IOSCO, the Regulation mirrors IOSCO conditions. - Independence and conflict-management requirements include: - sound internal controls and reporting lines, separation of rating function from business incentives, independent non-executive board members with specific control tasks (Article 5 and Annex I, Section A, Point 2). - prevention or adequate management of conflicts of interest, disclosure of conflicts in a complete, timely, clear, concise, specific and prominent manner, and recording of significant threats to independence with applied safeguards; limitation to credit rating and related operations excluding consultancy or advisory services (Article 5 and Annex I, Section B). - adequate internal policies and procedures to insulate rating employees from conflicts and ensure quality, integrity and thoroughness; allocation of sufficient qualified employees and rotation arrangements for analysts and approvers (Article 6 and Annex I, Section C). - compensation arrangements for employees involved in the rating process must be determined primarily by the quality, accuracy, thoroughness and integrity of their work (Article 6(6)). - Disclosure requirements: - disclose ratings on a non-selective basis and in a timely manner (unless distributed only by subscription); distinguish structured products from traditional products via different rating categories or additional information; specific disclosure rules for unsolicited ratings (Article 8). - publicly disclose information on conflicts of interest, methodologies, key rating assumptions, and general compensation policy; periodically disclose data on historical default rates of rating categories; provide competent authorities with elements such as the list of the largest 20 clients by revenue (Article 9 and Annex I, Section E). - CESR to create a publicly available central repository for standardized CRA performance data (Article 9(2)); CRAs must publish an annual transparency report and keep activity records (Article 10 and Annex I, Section E, Part III; Articles 5-7 and Annex I, Section B, Points 7-9). - Confidential information obligations for employees directly involved in the credit rating process include: - take all reasonable measures to protect property and records from fraud, theft or misuse; - not disclose information about ratings or possible future ratings except to the rated entity or its related third party; - not share confidential information with employees of any person directly or indirectly linked by control; - not use or share confidential information for trading financial instruments or any other purpose except the conduct of the credit rating agency business. ### Analysts and research providers - Approximately 400 licensed banks and financial services institutions provide forward-looking analysis to clients; about 150 “independent analysts” provide these services. - For licensed firms, research activities form part of regulated activities supervised by BaFin and are subject to MiFID and the Market Abuse Directive (MAD). BaFin conducted thematic work on research activities in 2010 focusing on conflicts of interest and use of watch lists, and will handle complaints about analysis activity. Research is part of BaFin’s risk analysis process. - Independent analysts are not required to be licensed but are subject to regulation: - they must inform BaFin of their identity and planned activities, including types of securities on which they will provide research (BaFin approval not required); - MAD provisions apply; - same disclosure requirements as analysts working for banks and financial service institutions (section 34b Securities Trading Act); - broad provisions of the Commercial Code apply, including conflicts of interest requirements. ### Hedge funds - Hedge funds are regulated in Germany under the regulation applying to collective investment schemes, subject to the same rules as other collective investment schemes and to additional hedge fund–specific rules (as described under Principle 17 and Principle 10). - Distinction between single hedge funds and funds of hedge funds: - single hedge funds are subject to few investment restrictions but are not permitted to invest in commodities (other than precious metals) or real estate. - Hedge fund–specific rules include: - disclosure rules — simplified prospectus rules do not apply to hedge funds; hedge funds are subject to additional mandated disclosures; - marketing rules — legislation prohibits public marketing of hedge funds in Germany. - BaFin monitors hedge funds more closely than most other collective investment schemes; in its risk classification hedge fund management is automatically considered high impact. - The European Directive on Alternative Investment Fund Managers (AIFM) was formally approved in late 2010, intended to come into force in early 2011 and be transposed and applied by Member States by 2013. - BaFin does not anticipate major changes will be required to the existing regime to comply with the new IOSCO Principle or the European AIFM directive. *IMF staff report content unit _cr11274 - 49.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11274.pdf_