## _cr12143 ## Source details **Canonical URL:** [_cr12143](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12143.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12143.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12143.pdf.json) --- ### Summary - High level of implementation of IOSCO Principles overall. - Robust legal framework and CNMV powers for supervision, investigation and enforcement. - Robust off-site monitoring, thematic reviews, and market surveillance. - Governance changes: new Grupo de Estabilidad Financiera; biweekly management committee meetings; annual strategic reviews. - Areas requiring strengthening: - Greater use of on-site inspections for all types of investment service providers, particularly credit institutions. - More proactive use of sanctioning powers in addition to remedial agreements. - Criminal prosecution of market abuse remains a challenge despite increased referrals. - Key mission details: - Assessment mission conducted from February 1 to 21, 2012. - Assessors: Ana Carvajal (MCM) and Malcolm Rodgers (MCM expert). - Initial IOSCO assessment conducted in 2006; new IOSCO Principles (2010) and Methodology (2011). ### Institutional structure and market composition - CNMV responsibilities: supervision of securities and derivatives markets; primary and secondary markets; issuer disclosure; provision of investment services; collective investment schemes. - Governance and authorization: - CNMV governed by a seven-member board; President and Vice President appointed by government on MEC recommendation; two ex-officio members (Secretary General of the Treasury and Financial Policy and the Deputy Governor of the BdE). - Authorization of intermediaries (except financial advisors) and market infrastructure providers (exchanges and CCPs) is responsibility of the MEC based on CNMV recommendation. - CNMV self-funded but requires government approval to hire additional staff. - Market statistics (as of 3Q11 / December 2011 / November 2011 as indicated): - Total Spanish savings and investments at 30 September 2011: € 1,758 billion. - 57 percent held in deposits with credit institutions. - 26 percent held in mutual funds or direct market investments. - Table 1 (3Q11, EUR billion) highlights: - Deposits: 240 769 1,010 57 - Mutual funds: 121 111 237 - Pension funds: 0 10 4 10 46 - Savings insurance: 26 16 21 88 11 - Direct investments: 192 142 334 19 - Fixed income: 42 50 92 5 - Equities: 150 92 242 14 - TOTAL: 470 1,288 1,758 100 - Issuers (as of December 2011): - 130 companies listed on main Spanish equities market. - Total market capitalisation: € 421 billion (approximately 39 of Spain’s GDP). - Stocks in financial companies: almost 31 percent of total market capitalization; banks account for over 90 percent of this figure. - Top ten companies represent over 60 percent of total market capitalization. - Fixed interest issuers (December 2011): - 611 issuers; 4,382 issues on AIAF; total outstanding: € 882.4 billion. - Intermediaries (December 2011): - 94 investment firms (49 broker dealers and 45 brokers). - 187 banks and other credit institutions authorized to carry out investment services. - 2,377 European firms notified to CNMV to provide investment services in Spain (36 operate through branches). - Collective Investment Schemes (December/November 2011): - 5,460 CIS vehicles: 2,341 investment funds, 3,056 SICAVs, 36 HFs, 27 FoHFs. - Almost 5 million investors in CIS. - Total assets under management at November 2011: € 156 billion ( € 132.4 billion in investment funds; € 23.6 billion in SICAVs). - Banks manage more than 90 percent of total assets under management. - Over 60 percent of fund assets in fixed income or guaranteed fixed income funds; 4 percent in mixed fixed interest funds; guaranteed equity funds ~14 percent; real estate funds € 4.8 billion (about 3 percent). ### Main findings and institutional concerns - Positive findings: - Clear CNMV mandate in LMV; robust powers to request information, inspect and sanction (administrative and referral to criminal authorities). - Robust market surveillance with real-time trading access and automated alert systems; MMU of 10 people responsible for market abuse investigations. - Comprehensive disclosure regime for issuers on RMs; prospectus and periodic reporting requirements; active review program (CNMV reviewed 78 percent of equity issuers’ reports in first two years of current four-year cycle). - Strong framework for CIS governance, valuation, depositories, and reporting (detailed CNMV Circulars and reporting M04/M05/MB2 and other forms). - Areas requiring strengthening: - Principle 2 (Regulator independence): Assessment grade PI — legal framework does not provide CNMV full independence; MEC participation on board; MEC retains responsibility for key authorizations and most serious sanctions; government approval required for hiring additional staff. - Principle 12 / Principle 31: Limited use of on-site inspections; inspection cycles can be long (some firms may be inspected as infrequently as once every ten years); assessors recommend expanding on-site coverage, especially for credit institutions and distribution channels dominated by banks. - Enforcement timeliness: sanctioning process can be lengthy; simplified procedures under Article 23 RD 1398/1993 exist but are underused; time lags (example: potential MiFID violations detected in 2009 only now in sanctioning process). - Criminal prosecutions: few convictions — over last 10 years one case settled and one conviction for insider trading one year ago; FCCO devotes ~10 percent of resources to securities market issues. - CNMV lacks direct power to access telephone and internet service providers’ data; recommendation to consider legal reform. ### Summary of assessment grades (selected Principles and key findings) - Principle 1 — Responsibilities of the Regulator: BI - Clear mandate; organizational structure limits full independence; manuals and public consultation processes in place. - Principle 2 — Operational independence and accountability: PI - Legal framework limits independence (MEC role; hire approvals); accountability mechanisms exist (annual report, review of accounts). - Principle 3 — Powers, resources and capacity: BI / Broadly Implemented - Adequate powers; revenue/expenses 2011 (Euros million): Total fees 53.0; Registration of prospectuses and market participants 9.7; Market supervision 34.8; Market participant supervision 8.5; Other revenue 3.4; TOTAL REVENUE 56.4; TOTAL EXPENSES46.2. - Staff as of 31 December 2011: total 395 (Directorate General – Entities 114; Markets 97; Legal Affairs 47; President’s Department 22; Internal Control 3; Research, Statistics and Publications 24; International Relations 9; General Secretariat 36; Information Systems 32; President’s Office 11). - Principle 4 — Regulatory processes: FI / Fully Implemented - Principle 5 — Professional standards: FI / Fully Implemented - Principle 6 — Systemic risk monitoring: FI / Fully Implemented - Principle 10 & 11 — Inspection, investigation, surveillance and enforcement powers: FI / Fully Implemented (comprehensive powers under Article 85 LMV) - Principle 12 — Implementation and effectiveness: PI / Limited on-site inspections; need to intensify inspections, especially of banks. - Principle 16–17 — Issuer disclosure and shareholder rights: FI / Fully Implemented for RMs; MAB/Latibex differences noted. - Principle 19–22 — Auditors and CRAs: BI/Broadly Implemented — ICAC implementation for PIE oversight underway; ESMA responsibility for CRAs; resources key. ### Enforcement, sanctions, and remedial outcomes (exact figures preserved) - Sanctioning process and statistics: - Total fines imposed: € 2.3 million in 2010 and € 15.4 million in 2011. - Monetary sanctions summary (selected entries): - Market Abuse: - 2009: Num. Cases = 3; Amount = 100.10 - 2010: Num. Cases = 2; Amount = 700.00 - 2011: Num. Cases = 4; Amount = 875.00 - Inside Information: - 2009: Num. Cases = 1; Amount = 31.10 - 2010: Num. Cases = 1; Amount = 610.00 - 2011: Num. Cases = 1; Amount = 240.00 - Other cases: - 2009: Num. Cases = 7; Amount = 398.00 - 2010: Num. Cases = 21; Amount = 1,645.50 - 2011: Num. Cases = 15; Amount = 14,525.00 - Totals: - 2009: Total = 10 cases; Amount = 498.10 - 2010: Total = 23 cases; Amount = 2,345.50 - 2011: Total = 19 cases; Amount = 15,400.00 - Very serious breach sanctioning parameters (as set in LMV/CIS Law): - Maximum fine for very serious breaches (LMV entities): higher of 5 times the profit obtained as a result of the breach; 5 percent of the capital of the entity; 5 percent of the funds used in carrying out the infringing conduct; or € 600,000. - Minimum fine for insider trading: € 60,000. - Directors/managers can be fined up to € 300,500; removed up to 3 years; banned up to 5 years. - Analogous CIS Law maximum fine: € 300,000; directors/managers up to € 300,000, disqualification up to 10 years. - Serious breaches max fine: higher of twice profit obtained; 2 percent of capital; 2 percent of funds used; or € 300,000. - Minor breaches: fine up to € 30,000 under LMV; under CIS operators fine up to € 60,000 or private admonition. - Criminal thresholds: - Insider trading gain/loss threshold distinguishing administrative vs criminal: € 600,000. - Market manipulation threshold: € 200,000. - Criminal penalties: - Insider information imprisonment from 1 to 4 years, fine from 1 to 3 times the benefit obtained; aggravated imprisonment 4 to 6 years in specified cases. - Market manipulation criminal law: imprisonment 6 months to two years or fine 12 to 24 months; disqualification 1 to 2 years. - Enforcement activity and remedies: - Since 2009 CNMV initiated 10 sanctioning files for breaches of conduct obligations by investment firms and credit institutions (sources: three from off-site inspections, two from thematic reviews, one from an investor complaint, four from on-site inspections). - Commitments secured: - ISPs and credit institutions: commitments to pay a total of € 34 million in compensation over the last three years. - CIS operators: commitments to pay a total of € 23 million. - Administrative files opened for very serious violations: 2010 = 35; 2011 = 23. - Serious violations files: 2010 = 9; 2011 = 9. ### CIS supervision, valuation, NAV and reporting (selected implementation details) - Confidential reporting to CNMV (Section III of Circular 3/2008): - Monthly reports include Portfolio of financial investments and cash (M04); Portfolio of derivatives (M05); Assets of each CIS/class and daily NAV (MB2); plus six other monthly statements. - Quarterly: T01 (asset allocation) and T02 (changes in assets). - Annual: P01 (balance sheet), P02 (income statement) and A01 (allocation of income). - In 2011 CNMV sent 563 requests for information to CIS operators relating to compliance issues. - On-site inspection targets and activity: - In 2011 CNMV carried out 17 on-site inspections (15 CIS operators — 14 general and one follow up; 2 depositories). - CNMV aims to inspect high risk CIS operators on a 3–4 year cycle; others over 7 years. - Inspection scope: large CIS inspections ~4 weeks with 2 inspectors; smaller ~2 weeks with 1 inspector. - Over last 5 years, on-site inspections covered 66 percent of Spanish CIS industry (by value of assets). - Valuation and NAV: - NAV calculated daily except where otherwise provided; Article 48 of CIS Regulation. - Valuation techniques for illiquid instruments per Rule 12.3.2 of Circular 3/2008. - Suspension rules: securities suspended >5 percent of fund assets not valued; redemptions/subscriptions applied pro rata; if securities exceed 80 percent of assets, operator may suspend redemptions. - Side-pockets: Article 45bis allows splitting portfolio into a new compartment to isolate affected assets. - Hedge Funds: - 23 firms authorized to manage HFs; funds: 35 HFs with AUM of 719 million EUR; 28 FoHF with 650 in AUM. - Minimum investment for HF regime: 50,000 EUR; can be marketed only to professional investors. - Monthly confidential HF statements to CNMV include positions, VaR/CVaR, indebtedness, collateral, NAV. ### Recommended action plan (selected measures preserving original wording) - Principle 1: - Seek legal reform to ensure consistent regulation between unit-linked insurance products and securities. - In the short term, CNMV should consider forming a working group with the DGSFP to coordinate regulation and supervision of look-alike products. - Principle 2: - Strengthen CNMV independence by: (i) providing authority to grant and revoke authorizations and impose sanctions for most serious violations; (ii) providing stronger financial autonomy given its self funded status; and (iii) considering removal of MEC representation on its board. - Principle 3: - (1) Pursue legal reform to provide CNMV with broader rulemaking powers. - (2) Explore mechanisms to ensure CNMV can acquire and retain needed expertise, including salaries comparable with financial sector. - Principle 11: - Consider legal reform to provide CNMV power to access telephone and internet service providers’ data. - Principle 12: - (1) Review and expand coverage of inspection program. - (2) Seek legal reform to introduce a more streamlined procedure for “objective” breaches of the law, such as late filing. - Principle 24: - (1) Keep under review the balance between off-site, thematic and on-site inspections to ensure sufficient market presence. - (2) Consider enhancing authorization process by conducting on-site inspections of newly authorized firms. - Principle 31: - Review coverage of inspection program for credit institutions and investment firms; consider systematically incorporating investment advisors into on-site inspection program. - Principle 36: - Complete implementation of cross market surveillance system as planned. ### Authorities’ response (overview of positions) - Spanish Authorities “broadly agree with the IOSCO Principles assessment” and consider FSAP “an extremely useful instrument.” - On Principle 2 (regulator independence) authorities: - Do not fully share IMF views on presence of Ministry in CNMV Board; argue MEC board presence is one vote and fosters communication; day-to-day technical matters not referred to Board. - State distribution of powers and checks and balances are part of Spanish administrative system. - On regulatory gaps and PRIPs: - Authorities agree on need to avoid regulatory gaps and support EC’s PRIP initiative. - Note market relevance limited: insurance technical reserves associated to unit-linked products invested in CIS roughly amount to 3 percent of total CIS assets. - On Principles 12, 24, 31 grade changes: - Authorities state lower grades reflect change in required standards since 2006, not weaker supervision; CNMV has strengthened supervision since 2006, notably over credit institutions. *International Monetary Fund — Monetary and Capital Markets Department — FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE: SPAIN — IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION — DETAILED ASSESSMENT OF IMPLEMENTATION — MAY 2012* ### 2012. The views expressed in this document are those of the staff team and do not necessarily reflect ### FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE — SPAIN: IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION — DETAILED ASSESSMENT OF IMPLEMENTATION — MAY 2012 ### Summary - Spain exhibits a high level of implementation of the International Organization of Securities Commissions (IOSCO) principles. - The legal framework is robust and provides the Comisión Nacional de Valores (CNMV) with broad supervisory, investigative and enforcement powers. - Arrangements for off-site monitoring of regulated entities are robust. - Thematic reviews in selected areas complement monitoring, allowing the CNMV to take a “full industry” perspective on key issues. - The CNMV has developed robust arrangements for market surveillance. - New governance arrangements enhancing systemic risk monitoring include: - a new committee (the Grupo de Estabilidad Financiera), - biweekly meetings by a management committee, - annual strategic reviews. - Areas requiring strengthening: - Greater use of on-site inspections for all types of investment service providers, particularly credit institutions given their dominant market role and conflicts of interest. - On-site activity could include spot checks on particular issues and does not imply the need for full scale inspections. - More proactive use of sanctioning powers in connection with breaches by regulated entities, in addition to remedial agreements. - Criminal prosecution of market abuse remains a challenge; CNMV has become more active in referral of cases to criminal authorities. - Governance concerns regarding CNMV independence: - Participation of a representative of the Ministerio de Economía y Competitividad (MEC) on the CNMV board. - Certain key decisions (authorizations and imposition of sanctions for the most serious breaches) remain a responsibility of the MEC. - Requirement of governmental approval to hire additional personnel. - Mitigating factors observed: - Collegial nature of the board. - The “regulated” nature of authorization and sanctioning processes, which require a recommendation from the CNMV. - Assessment mission details: - Conducted from February 1 to 21, 2012. - Assessors: Ana Carvajal (MCM) and Malcolm Rodgers (MCM expert). - An initial IOSCO assessment was conducted in 2006. - IOSCO approved a new set of Principles in 2010 and a revised Methodology in 2011. ### Introduction - Purpose: Assessment of the level of implementation of the IOSCO Principles in the Spanish securities market as part of the Financial Sector Assessment Program (FSAP). - Context: Significant changes since the 2006 IOSCO assessment—market development and regulatory upgrades; new IOSCO Principles (2010) and Methodology (2011). - Principle 38 excluded from assessment due to separate standard for securities settlement systems; a technical note on oversight of clearing and settlement delivered during the mission. ### Information and Methodology Used for the Assessment - Methodology: IOSCO Objectives and Principles (2010) and Methodology (2011). - Assessment scope: Legal/regulatory framework and implementation in practice, with particular attention to supervisory practices and effectiveness (inspection programs, cycle, scope, quality, follow-up, enforcement). - Sources relied upon: - (i) Self-assessment prepared by the CNMV; - (ii) Review of relevant laws and reports; - (iii) Review of supervisory files; - (iv) Meetings with CNMV, Banco de España (BdE), Instituto de Contabilidad y Auditoria de Cuentas (ICAC), MEC, prosecutorial authorities; - (v) Meetings with market participants (issuers, securities firms, fund managers, exchanges, external auditors, CRAs, law firms). ### Institutional Structure - CNMV responsibilities: - Supervision of securities and derivatives markets; primary securities markets (issuance); secondary markets (securities and derivatives); disclosure obligations of issuers; provision of investment services by market intermediaries; collective investment schemes (mutual funds and investment companies). - Authorization regime: - Authorization of all intermediaries, except financial advisors, and authorization of all market infrastructure providers (exchanges and CCPs) is a responsibility of the MEC, based on a recommendation of the CNMV. - Regulations can only be issued by the Government or the MEC, but the CNMV can issue binding rules (Circulares) where expressly permitted by the relevant Royal Decree or MEC order. - CNMV governance: - Public law entity with legal personality. - Governed by a board (Consejo) composed of seven members: a President and a Vice President appointed by the government on recommendation of the MEC; three members with experience in securities markets; two ex-officio members (Secretary General of the Treasury and Financial Policy and the Deputy Governor of the BdE). - The board delegates day-to-day functions to an Executive Committee composed of all but the ex-officio members. - Board-level decisions include approval of Circulares, imposition of sanctions, approval of the annual report, and annual plan of activities. - CNMV is self-funded but requires government approval to hire additional staff. - Self-Regulatory Organizations: - There are no SROs in Spain. - Exchanges (Bolsas y Mercados Españoles (BME) group) act as front line supervisors for orderly trading and have a complementary role to the CNMV on market abuse; they do not supervise securities intermediaries beyond market rules compliance nor monitor issuer disclosure broadly. - For MTFs (Latibex and MAB), the MTF operator (BME) has a more direct role in monitoring market abuse and issuer disclosure, but these markets are not of material importance at present. ### Market Structure (key statistics and composition) - Total Spanish savings and investments at 30 September 2011: € 1,758 billion. - 57 percent held in deposits with credit institutions. - 26 percent held in mutual funds or direct market investments. - Table 1 (3Q11, EUR billion) summary (as presented): - Deposits: 240 769 1,010 57 - Mutual funds: 121 111 237 - Pension funds: 0 10 4 10 46 - Savings insurance: 26 16 21 88 11 - Direct investments: 192 142 334 19 - Fixed income: 42 50 92 5 - Equities (Listed equities and investment companies shares): 150 92 242 14 - TOTAL: 470 1,288 1,758 100 - Source: BdE (Financial Accounts). - Issuers (as of December 2011): - 130 companies listed on main Spanish equities market (BME Group). - 7 issuers on the second market. - 28 issuers on the small cap open outcry market. - Total market capitalisation: € 421 billion (approximately 39 of Spain’s GDP). - Stocks in financial companies: almost 31 percent of total market capitalization; banks account for over 90 percent of this figure. - Market concentration: Top ten companies represent over 60 percent of total market capitalization. - New listings in 2011: 6 new listings and 5 de-listings. - BME MAB market: 18 companies. - Fixed interest issuers (December 2011): - 611 issuers of fixed interest products. - Total of 4,382 issues available for trading on AIAF. - Total outstanding on these issues: € 882.4 billion. - Intermediaries (December 2011): - 94 investment firms (49 broker dealers and 45 brokers). - 187 banks and other credit institutions authorized to carry out investment services. - 2,377 European firms have notified the CNMV to provide investment services in Spain: - 36 operate through branches. - Remainder operate through passport arrangements. - 6 authorized portfolio management firms and 82 authorized financial advisors (60 firms and 22 individuals). - Market share and roles: - Banks account for 72 percent of commissions earned from investment services activities. - Banks account for over 96 percent of placement and underwriting activity, 95 percent of administration and custody, and 92 percent of mutual fund marketing. - Collective Investment Schemes (CIS) (December 2011): - 5,460 CIS vehicles registered: 2,341 investment funds, 3,056 investment companies (SICAVs), 36 hedge funds (HFs), 27 fund of hedge funds. - 14 real estate funds (6 investment funds and 8 SICAVs). - Almost 5 million investors in CIS in Spain. - Total assets under management at November 2011: € 156 billion. - € 132.4 billion in investment funds. - € 23.6 billion in SICAVs. - Banks and other credit institutions manage more than 90 percent of total assets under management. - Asset allocation: - Over 60 percent of fund assets in fixed income or guaranteed fixed income funds. - 4 percent in mixed fixed interest funds. - Guaranteed equity funds account for almost 14 percent of total funds under management. - Investment in real estate funds: € 4.8 billion (about 3 percent of all funds under management). - Markets (BME Group operations): - BME Group operates all regulated markets in Spain except an olive oil futures market and the Spanish Public Debt Market. - BME equity markets use the same electronic trading platform; order driven markets. - Market makers used by Latibex and MAB to provide liquidity. - BME operates a centralised securities depository, IBERCLEAR, and a CCP for repos on Spanish public debt transactions, MEFFCLEAR. - Table 2 (Spanish Regulated Markets: BME Group) highlights: - BME (stock exchanges of Barcelona, Bilbao, Madrid and Valencia) — Official secondary market — Spanish equities, ETFs, warrants and certificates — 130 listed entities — Market capitalization: € 492 billion [November 2011] - MAB — MTF — Small cap stocks; SICAVs — 18 listed entities [3,056 SICAVs] — Market capitalization: € 444 million (small cap stocks) [December 2011] - Latibex — MTF — Latin American equities (euro denominated) — 34 listed entities - AIAF — Official secondary market — Corporate debt — 608 debt issuers — Total outstandings: € 868 billion [November 2011] - SENAF — MTF — Public debt — (listed entities not specified) - MEFF Equities — Official secondary market — Equity derivatives - MEFF Fixed Income — Official secondary market — Fixed income derivatives — No activity in 2012 ### Preconditions for Effective Securities Regulation - (Section header present in source; substantive preconditions discussed elsewhere in full document; assessment notes robust legal framework and market surveillance arrangements as preconditions met.) ### Main Findings - High level of IOSCO Principles implementation overall. - Robust legal framework and CNMV powers for supervision, investigation and enforcement. - Robust off-site monitoring and thematic reviews. - Robust market surveillance arrangements. - Need for increased on-site inspections, especially of credit institutions given market dominance and conflicts of interest. - Need for more proactive use of sanctioning powers and improved criminal prosecution of market abuse. - CNMV independence concerns due to MEC involvement in membership, authorizations, sanctioning, and hiring approvals; mitigating collegial board and required CNMV recommendations. ### Authorities’ Response - (Section header present in source; full details of authorities’ response are in later sections of the report not included in the supplied content.) *International Monetary Fund — Monetary and Capital Markets Department — FINANCIAL SECTOR ASSESSMENT PROGRAM UPDATE: SPAIN — IOSCO OBJECTIVES AND PRINCIPLES OF SECURITIES REGULATION — DETAILED ASSESSMENT OF IMPLEMENTATION — MAY 2012* ### 21. Spain has not yet seen the emergence of trading venues competing for trading ### 21. Spain has not yet seen the emergence of trading venues competing for trading ### Market structure and trading venues - Some BME listed stocks are traded on venues located elsewhere in Europe, such as Chi-X, but overall non-BME trading is estimated at less than 2 percent. - There is an Official Secondary Market for Book-Entry Public Debt run by the Bank of Spain which is in charge of its supervision and oversight. ### Specialized markets - There is also a specialized olive oil futures market authorized as an official secondary market. Trading volumes are small and appear to be in decline. ### Preconditions for effective securities regulation (paragraph 24) - The preconditions for effective regulation and supervision of securities markets appear to be in place. - Foreign issuers can tap the markets under similar conditions to domestic issuers. - The same authorization requirements apply to both domestic and foreign corporations that want to provide investment services, including CIS management, or to operate an RM or an MTF in Spain. - In practice, however operational barriers have prevented the establishment of MTFs outside of those managed by the BME. - The company law is modern, and the insolvency framework includes restructuring procedures. - The judiciary system is perceived as impartial. - Accounting and auditing standards do not have major differences with international standards. ### Main findings (paragraphs 25–30) - Principles for the regulator (25): - The CNMV has a clear mandate imbedded in the Ley del Mercado de Valores (LMV). - The organizational structure does not guarantee the CNMV full independence. - Authorization requirements in connection with the provision of regulated activities are clear and interested parties can access them through CNMV’s website. - The CNMV has developed manuals to support consistent decision making. - The development of regulations by both the CNMV and the MEC is subject to public consultation. - CNMV staff is subject to robust rules in connection with conflicts of interest, including a detailed framework for securities transactions. - The CNMV has established processes to identify and monitor systemic risk, perimeter of regulation and conflict of interest. - Principles for enforcement (26): - The CNMV has broad powers to request information and inspect regulated entities. - It also has broad powers to request information and testimony from third parties. - The CNMV has a wide set of enforcement tools at its disposal, including the imposition of money penalties for breaches to the LMV and secondary legislation. - Until recently the majority of enforcement cases concern issuers’ violations. - Since the last three years the CNMV has been more active in investigating compliance by investment firms and credit institutions that provide investment services with their conduct obligations. - Principles for issuers (27): - Issuers of public offerings and products admitted to trading on an RM are subject to robust disclosure obligations at the moment of registration and on a periodic and on-going basis. - The CNMV has developed a robust program to monitor issuers’ compliance with their disclosure obligations. - Basic rights of shareholders are imbedded in company law, and additional protections exist in connection with issuers listed in an RM, including the obligation to launch a mandatory tender offer under certain conditions. - There are notification obligations for substantial and insider holdings. - Different provisions apply to MAB and Latibex however at this time those markets are not material. - Principles for auditors, CRAs and other information service providers (28): - The ICAC is in the process of implementing a system of quality control review for auditors of public interest entities (PIEs), which include firms that audit issuers listed in a RM, whereby such auditors would be subject to inspections by ICAC on a three year cycle. - CRAs that provide services in Spain have been subject to a thorough registration process by cross-European colleges of supervisors. - European Securities Markets Authority (ESMA) is currently in the process of developing its supervisory program for CRAs. - There is a framework in place for sell-side analysts to address potential conflict of interests, which is based on disclosure obligations; and additional disclosure obligations have been imposed in other entities that provide evaluative services. - Principles for collective investment schemes (29): - CIS operators and distributors of CIS are subject to authorization requirements, which include financial, fit and proper, and organizational requirements. - The process to review applications is thorough. - The supervisory program for CIS relies on off-site monitoring and thematic reviews. - On-site inspections are conducted on a limited number of operators, which are selected under a risk-based approach. - CIS that are offered to the public are subject to similar disclosure obligations as an issuer. - Assets must be entrusted to a depository (custodian). - Depositories can be (and in practice are) of the same group, but there are legal and regulatory arrangements in place that provide additional safeguards. - Special reports are required from the compliance unit of the CIS as well as from the external auditors. - Assets must be valued at fair value. - The CNMV has developed guidance on valuation of illiquid assets. - Conditions of suspensions of redemptions must be disclosed in the offering documents. - Suspensions must be notified to the CNMV. - Principles for securities intermediaries (30): - Investment Services Providers (ISPs) are subject to authorization requirements. - Such requirements include financial resources, fit and proper,and organizational requirements. - The process to review applications is thorough. - The supervisory program for ISPs relies on off-site monitoring, and thematic/horizontal reviews. - On-site inspections are conducted on a limited number of operators, which are selected under a risk-based approach. - Minimum and ongoing capital requirements apply to ISPs. - ISPs must submit monthly and quarterly reporting of their capital adequacy as well as annual audited financial statements. - The CNMV uses an estimate of five month losses as an early warning indicator that triggers more intense monitoring. - The CNMV has developed manuals to facilitate the process of dealing with the failure of an ISP. *Source: _cr12143 - 21. Spain has not yet seen the emergence of trading venues competing for trading* ### 31. Principles for secondary markets: RMs and MTFs operators are subject to ### Principles for secondary markets: RMs and MTFs operators are subject to authorization requirements ### Market structure and surveillance - RMs and MTFs operators are subject to authorization requirements, which include financial, fit and proper, and organizational requirements. - The CNMV has developed robust arrangements for market surveillance. - The CNMV has developed both formal and informal arrangements to oversee BME and MFAO. - MEFF and Mercado de Futuros del Aceite de Oliva (MFAO) monitor clearing members’ exposures on a daily basis and each has powers to request members to post additional margin. - Default procedures are transparent. - There are reporting obligations in connection with short selling, as well as in connection with failed settlements. ### Summary implementation of the IOSCO Principles — Selected findings by principle (Principle number, Grade, Key findings) - Principle 1. The responsibilities of the Regulator should be clear and objectively stated. — BI - The CNMV has a clear mandate stemming from the LMV. - Formal and informal cooperation arrangements with the BdE and the DGSP exist. - Material differences in the regulation of like products, in particular unit-linked insurance products vis-à-vis securities products; additional cooperation needed. - Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers. — PI - Legal framework does not provide the CNMV with full independence. - The Ministry of EC is part of CNMV’s board; certain key decisions remain responsibility of the MEC; CNMV requires governmental approval to hire additional resources. - Freeze of resources in public sector is a source of concern. - Clear mechanisms of accountability exist, including an annual report and review of accounts. - Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. — BI - CNMV has adequate powers; authorization of ISPs and RMs is still a responsibility of the MEC. - Level of resources has increased but is not yet optimal. - Governance arrangements are robust. - Principle 4. The Regulator should adopt clear and consistent regulatory processes. — FI - Public consultation process for circulares; authorization requirements and public offering requirements are clear and accessible via CNMV’s website. - Manuals to ensure consistency; enforcement sanctions disclosed once final (except minor infractions); due process exists. - Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality. — FI - Duties of loyalty, fairness and confidentiality; detailed guidance on personal securities transactions; Internal Control Department monitors compliance; cooling off periods exist. - Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk. — FI - Grupo Interno de Estabilidad Financiera (GIEF) enables identification and monitoring of potential systemic risk consistent with mandate; contributes to Comité de Estabilidad Financiera (CESFI). - Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly. — FI - Front-line supervisors identify perimeter gaps; biweekly management committee meetings; top-down annual priority-setting linked to findings. - Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed. — FI - Regulated entities required to have internal controls and risk management for conflicts; disclosure obligations for issuers; securitization retention requirements; monitoring via supervisory programs. - Principle 9. Where the regulatory system makes use of SROs... — NA - There are no SROs in Spain. - Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers. — FI - CNMV has comprehensive powers to request information and conduct inspections. - Principle 11. The Regulator should have comprehensive enforcement powers. — FI - CNMV can request information and testimony from third parties (including bank records); wide set of enforcement tools including money penalties. - Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. — PI - Limited use of on-site inspections; should intensify use, especially with banks. - CNMV active in investigating market abuse; sanctions mainly for insider trading; some market abuse cases in pipeline. - More active in referring cases to criminal prosecutors, but only one conviction secured. - More sanctioning procedures opened against regulated entities; many cases still in pipeline. - Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts. — FI - CNMV empowered by the LMV to share information domestically and internationally. - Principle 14. Regulators should establish information sharing mechanisms... — FI - Formal and informal cooperation arrangements with BdE and DGSP; CNMV is signatory of the IOSCO Multilateral Memorandum of Understanding (MMoU). - Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators... — FI - CNMV regularly collects information on behalf of foreign regulators; under IOSCO MMoU no request refused. - Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions. — FI - Issuers of public offerings must submit prospectus; robust periodic and ongoing disclosure for issuers on RM. - CNMV monitors compliance; MAB disclosure broadly in line with IOSCO Principles; Latibex relies on home country disclosure, BME verifies equivalence. - Principle 17. Holders of securities in a company should be treated in a fair and equitable manner. — FI - Company Act provides framework for shareholders’ rights; additional protections for issuers on RM, including mandatory tender offer obligations under certain conditions. - Substantial and insider holdings disclosures required; MAB has different thresholds and no tender offer obligations. - Principle 18. Accounting standards used by issuers... — FI - Issuers on RM must submit consolidated statements according to IFRS. - Other issuers may use Spanish GAAP (or national accounting standards of an EEA or U.S. GAAP); Spanish GAAP largely in line with IFRS. - CNMV monitors compliance via issuer periodic information reviews. - Principle 19. Auditors should be subject to adequate levels of oversight. — BI - ICAC implementing oversight for PIE firms with direct inspections on a three year cycle; additional resources key. - Principle 20. Auditors should be independent of the issuing entity that they audit. — FI - Strong independence provisions; annual report on fees; audit committees of issuers in RM must opine on the report. - Principle 21. Audit standards should be of a high and internationally acceptable quality. — FI - Audits based on local auditing standards developed by professional bodies and approved (“homologated”) by ICAC; no material differences with IAS. - Principle 22. CRAs should be subject to adequate levels of oversight. — BI - All CRAs providing services in Spain subject to thorough registration through colleges of European regulators, including CNMV. - ESMA has conducted on-site inspections and released a public report with general findings. - Adding approved staff will be key to effectiveness of supervisory program. - Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight... — FI - LMV and secondary legislation provide framework for sell side analysts (disclosure of potential conflicts); additional disclosure for other evaluative services including sociedades tasadoras. - Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS. — BI - CIS operators subject to authorization requirements including financial resources, fit and proper and organizational requirements; authorization process thorough. - Active use of thematic reviews; limited use of on-site inspections. - Principle 25. The regulatory system should provide for rules governing the legal form and structure of CIS and the segregation and protection of client assets. — FI - CIS prospectuses detail legal form and investor rights; LMV requires CIS assets be entrusted to a depository. - No requirement that the depository be of a different group; information barriers and specific reports on segregation robustness required from compliance unit and external auditors. - Principle 26. Regulation should require disclosure necessary to evaluate the suitability of a CIS. — FI - Publicly offered CIS must submit prospectus for CNMV approval; secondary legislation detailed on prospectus content; periodic disclosure and CNMV approval/information for material changes. - Principle 27. Regulation should ensure a proper and disclosed basis for asset valuation and pricing/redemption of units in a CIS. — FI - CIS must be valued at fair value; guidance on valuation of illiquid assets; suspensions of redemptions must be notified to CNMV. - Principle 28. Regulation should ensure that HFs and/or HFs managers/advisers are subject to appropriate oversight. — FI - HF operators subject to same authorization requirements as other CIS operators; HFs themselves subject to authorization. - HF operators must submit confidential monthly reports to CNMV; HFs must prepare prospectus and periodic information for investors. - Principle 29. Regulation should provide for minimum entry standards for market intermediaries. — FI - ISPs subject to authorization requirements including financial resources, fit and proper and organizational requirements; authorization process thorough. - Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries reflecting risks. — FI - ISPs subject to minimum and ongoing capital requirements adjusted by risk. - Must submit monthly and quarterly reports of capital adequacy and annual audited financial statements. - Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance... — PI - ISPs required to put in place robust internal controls and risk management; annual report submitted to CNMV. - Robust disclosure obligations vis-à-vis clients and suitability obligations for investment advice. - CNMV makes limited use of on-site inspections; thematic reviews limited in number of topics. - Principle 32. There should be procedures for dealing with the failure of a market intermediary... — FI - CNMV uses a calculation of estimated losses over a period of five months as an early warning mechanism. - Investor compensation scheme in place. - Resolution of ISPs governed by general corporate regime; CNMV developed a manual to facilitate dealing with ISP failure. - Business model of investment firms is simple; banks dominate the market in practice. - Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. — FI - RMs and MTFs subject to authorization requirements including financial resources, fit and proper and organizational requirements. - IT incidents must be reported immediately; their regulations subject to CNMV approval. - Principle 34. Ongoing regulatory supervision of exchanges and trading systems should ensure integrity of trading. — FI - CNMV is front line supervisor for detecting market abuse; developed an automated system of alerts. - CNMV developed arrangements to oversee BME and MFAO. - Principle 35. Regulation should promote transparency of trading. — FI - Pre and post trade transparency requirements apply to equity, debt and derivatives markets managed by BME and MFAO and Public Debt Book-entry Market managed by Bank of Spain. - Spanish market has not faced challenges related to market fragmentation compared with other European markets. - Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices. — FI - Insider trading (including front-running) and market manipulation are administrative infractions and criminal offenses. - CNMV active in investigations; sanctions mainly for insider trading; market manipulation cases in pipeline. - CNMV more active in referring cases to criminal authorities; only one conviction. - Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. — FI - MEFF monitors clearing members’ positions in derivatives daily. - MEFF has position limits for members’ clients; members must notify client breaches. - MEFF and MFAO can request additional collateral when exposures are a concern. - Clear default procedures available to members. - Naked short selling is prohibited. - Notification of failed settlements to CNMV required. - Iberclear empowered to order replacement purchases at the expense of the seller. - Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements... — N/A - Not assessed. ### Recommended action plan (selected measures from Table 4) - Principle 1 - Seek legal reform to ensure consistent regulation between unit-linked insurance products and securities. - In the short term, CNMV should consider forming a working group with the DGSFP to coordinate regulation and supervision of look-alike products. - Principle 2 - Strengthen CNMV independence by: (i) providing authority to grant and revoke authorizations and impose sanctions for most serious violations; (ii) providing stronger financial autonomy given its self funded status; and (iii) considering removal of MEC representation on its board. - Principle 3 - (1) Pursue legal reform to provide CNMV with broader rulemaking powers. - (2) Explore mechanisms to ensure CNMV can acquire and retain needed expertise, including salaries comparable with financial sector. - Principle 4 - Consider making public the comments received during consultation for circulars. - Principle 6 - Broader integration of top down analysis with bottom up findings is encouraged. - Principle 7 - Consider more systematic review of perimeter of regulation. - Principle 8 - Continue to monitor conflicts of interest arising from dominance of banks in securities markets. - Principle 11 - Consider legal reform to provide CNMV power to access telephone and internet service providers’ data. - Principle 12 - (1) Review and expand coverage of inspection program. - (2) Seek legal reform to introduce a more streamlined procedure for “objective” breaches of the law, such as late filing. - Principle 16 - Continue to actively monitor disclosure by banks in issuance of financial products, particularly when placed to retail investors. - Principle 17 - Continue to monitor growth of MAB to determine whether enhancement to investors’ rights is required. - Principle 19 - ICAC should continue implementation of new approach to PIEs oversight, including hiring additional expert staff as envisioned. - Principle 24 - (1) Keep under review the balance between off-site, thematic and on-site inspections to ensure sufficient market presence. - (2) Consider enhancing authorization process by conducting on-site inspections of newly authorized firms. - Principle 29 - Consider extending competence requirements to all directors, as is the case for integrity requirements. - Principle 31 - Review coverage of inspection program for credit institutions and investment firms; consider systematically incorporating investment advisors into on-site inspection program. - Principle 32 - Consider implementing an early warning system more directly connected to solvency requirement. - Principle 36 - Complete implementation of cross market surveillance system as planned. *Source: _cr12143 - 31. Principles for secondary markets: RMs and MTFs operators are subject to authorization requirements, which include financial, fit and proper, and organizational requirements.* ### 32. The Spanish Authorities broadly agree with the IOSCO Principles assessment and ### _cr12143 - 32. The Spanish Authorities broadly agree with the IOSCO Principles assessment and ### Overview - The Spanish Authorities "broadly agree with the IOSCO Principles assessment" and "praise the IMF FSAP team for the excellent work done." - The FSAP is characterized as "an extremely useful instrument for markets and regulators" because it "provides a transparent picture of how the financial sector does work" and "encourages ways to ameliorate its functioning." ### Principle 2 — Regulator independence and Board composition - The Spanish Authorities "do not fully share the IMF’s views on the presence of the Ministry in the Board of the CNMV (Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers)." - Key points of the authorities' position: - "The distribution of regulatory competences between the Ministry and the CNMV cannot be interpreted as breaches against the independence principle." - "The presence in the Board is of just one vote, provides the best possible channel of communication between the CNMV and the Ministry and enriches the Board’s debates bringing points of view of all regulatory bodies just as the Bank of Spain is also member of the CNMV Board." - "Day-to-day technical matters are not referred to the Board and therefore the Ministry, as a member of the Board, cannot cast a vote, and legislation is clear about the scope of regulatory measures that the CNMV and the Ministry have to take." ### Principle 3 — Rulemaking powers and speed of response - The IMF view: "whereby the CNMV only has rulemaking powers in the cases that the law expressly authorize it—may constrain its ability to respond quickly." - The Spanish Authorities' response: - This limitation "is a natural consequence of our distribution of power and the checks and balances system that is applied in Spain." - "There are mechanisms that allow for swift reactions to any emerging problem in the market." - "The fact that authorization of financial entities and the imposition of sanctions is responsibility of the MEC, having taken into account the compulsory report of the CNMV is also a consequence of the Spanish administrative system, which is based on these checks and balances." - "The implication of two different authorities aims at preventing any kind of discretionary decision against the interest of the entity and at promoting financial stability." ### Principle 1 — Regulatory gaps, substitutability, and PRIPs - The authorities "agree about the need to avoid regulatory gaps between products with potential substitutability properties" and "commit themselves to make all the necessary efforts to improve the cooperation between the competent domestic supervisory authorities in this area." - Support for EU-level harmonization: - The authorities "support the current European Commission (EC)’s Packaged Retail Investment Products (PRIP) initiative, which is expected to produce harmonized legislation at European level on investment-like products sold to retail investors in the near future." - Market relevance statement: - The material relevance of the issue raised is "limited in practice, given the small size of the market for the relevant unit-linked insurance products in comparison with the segment of the securities markets that would be a close substitute for them." - Numeric note: "insurance technical reserves associated to unit-linked products and invested in CIS roughly amount to 3 percent of total CIS assets." ### Principles 12, 24, and 31 — Assessment grade changes and supervision since 2006 - Observation: "these principles have been assigned a lower grade in comparison with the equivalent principles in the 2006 FSAP." - Clarification by the authorities: - "The current assessment is based on a change of the required standards. It should therefore not be interpreted as an indication that the supervisory framework exhibits a lower level of observance compared to the 2006 FSAP." - "On the contrary, supervision has been strengthened over the last years." - Specific development: "the CNMV has carried out new relevant supervisory tasks from 2006 on, mainly in connection with the activities performed by credit institutions." *Source: IMF staff report text provided in the content unit.* ### 37. Regarding the supervision of ISPs and concerning the conduct of business rules ### 37. Regarding the supervision of ISPs and concerning the conduct of business rules ### Supervision of ISPs and conduct-of-business inspections - The IMF recommends the use of more on-site inspections for supervision of ISPs and conduct-of-business rules. - Authorities emphasize a different balance is required between on-site inspections and off-site reviews for supervision of business rules versus prudential supervision. - On-site inspections carried out by the CNMV have reached 75 percent of the total number of clients in the last three years (considering as inspected, in equivalent terms, one big credit institution which has been subject to three thorough and specific off-site reviews). ### Regulatory structure and responsibilities (Principle 1) - Regulation organized along sectoral lines: - securities sector— the CNMV; - banking sector— the BdE; and - insurance and pension funds sectors—the DGSFP. - MEC has formal responsibility for authorization of market intermediaries (other than financial advisers) and collective investment scheme operators, and imposition of administrative sanctions for the most serious breaches of securities laws; also responsible for authorization of official secondary markets and some other market approvals/interventions. - Autonomous Regions have limited securities market responsibilities for securities listed only on markets within their territory. - Specialist regulatory authority ICAC responsible for accounting and audit standards and oversight of the audit profession. - CNMV responsibilities: supervision of primary securities markets (issuance); secondary markets (securities and derivatives); issuer disclosure obligations; provision of investment services by market intermediaries; and collective investment schemes. - Legal basis: Securities Market Law, Ley 24/1988 (LMV); Collective Investments Law—Ley 35/2003 (CIS Law); supplemented by Royal Decrees and MEC executive orders. - CNMV power to issue binding rules (Circulares) under Article 15 LMV where expressly permitted; CNMV is a public law entity (Article 14 LMV). Key findings and numeric comparisons (as of December/September 2011): - Total assets in guaranteed funds (guaranteed equity and guaranteed fixed-income funds): a little over € 53 billion. - Technical reserves associated to unit linked insurance products invested in CIS: 4.4 billion. - CIS assets as of September 2011: € 165.5 billion compared to € 4.4 billion for technical reserves of unit linked products invested in CIS. - Total insurance premiums collected in unit linked and invested in CIS in 2011: around € 1.5 billion. - Total CIS inflows (gross subscriptions) in 2011: 58.1 billion. - Assessment for Principle 1: Broadly Implemented. Policy implication: - Desirable to harmonize regulation and supervision between CIS products and unit linked insurance products to ensure like investment products are subject to like regulation and supervision; calls for closer cooperation between CNMV and DGSFP. ### Operational independence, governance and accountability (Principle 2) - CNMV is a public law entity with autonomy protected by Article 14.6 LMV. - Governing body: Commission of seven persons (President, Vice President, Secretary General of the Treasury and Financial Policy, Deputy Governor of the BdE, and three MEC-appointed persons). - Terms: President, Vice President and the three MEC appointees serve four years, renewable once (Article 19). Removal only for specified causes (Article 20). - CNMV Commission meets monthly; executive committee meets weekly. - Consultative Committee (Comité Consultivo) established under Article 22 LMV: 17 sector representatives plus Autonomous Region members; meets at least quarterly and in practice monthly. - Interaction with government: some decisions reserved to the Minister (authorization of official secondary markets, authorization of ISPs, authorization of collective investment management companies, removal of authorizations, imposition of administrative penalties for the most serious offences). In practice MEC has not deviated from CNMV proposals. - Prior notice to BdE required before CNMV adopts certain measures against credit institutions (Article 85.2 LMV); BdE report required before imposing serious/very serious penalties on a credit institution (Article 97.1.c LMV). - CNMV self-financed by fees (Article 24 LMV); Government sets fees; budget law sets maximum number of employees annually. - Legal and procedural safeguards: administrative appeals, recurso de reposicion followed by judicial review; special appeal mechanism to Minister for sanctions (Articles 98 and 107 LMV). - Assessment for Principle 2: Partly implemented. Key governance concerns: - CNMV does not make all decisions a fully independent regulator might (some reserved to MEC). - Participation of Ministry in CNMV board raises questions about independence de jure, though de facto CNMV largely functions independently. - Governmental approval requirement for staff numbers limits operational and financial autonomy; recruitment freeze creates uncertainty about hiring needed additional personnel. ### Powers, resources and capacity (Principle 3) - LMV, CIS Law and secondary legislation give CNMV extensive powers for information gathering, inspections, investigations and sanctions (see Principles 10 and 11). - CNMV can make binding circulars only where law expressly permits. - Funding and 2011 financials (Euros million): - Total fees 53.0 - Registration of prospectuses and market participants 9.7 - Market supervision 34.8 - Market participant supervision 8.5 - Other revenue 3.4 - TOTAL REVENUE 56.4 - TOTAL EXPENSES46.2 - Staff resources (as of 31 December 2011): total 395 staff members distributed as: - Directorate General – Entities 114 - Directorate General – Markets 97 - Directorate General – Legal Affairs 47 - President’s Department 22 - Internal Control 3 - Research, Statistics and Publications 24 - International Relations 9 - General Secretariat 36 - Information Systems 32 - President’s Office 11 - Qualifications: majority with at least a five year degree; around two thirds with five year degree; dominant disciplines: business management ~70 percent; lawyers 20 percent; economics ~10 percent; over 60 percent of staff have more than one qualification. - Turnover low; over half of senior managers and almost 70 percent of professional staff have market experience. - CNMV identified need to hire 80 additional staff; had hired 40; further hires require governmental approval. - Internal control: Internal Control Department (3 staff) oversees procedures and certifies governance decisions. - Training and investor education programs in place. - Assessment for Principle 3: Broadly Implemented. Key capacity notes: - Public sector salary framework and recruitment limits may hinder attraction/retention of market-level expertise, particularly for financial stability analysis roles. - Lack of CNMV power to authorize ISPs and RMs may constrain responsiveness. ### Regulatory processes, consultation and transparency (Principle 4) - CNMV must act in accordance with LMV and CIS Law and public administration legislation (RJAPPAC, Law 6/1997, Law 47/2003, Law 30/2007). - Circulars preparation: public consultation on website, consultation with industry associations, Consultative Committee review; technical analysis often contains an industry impact analysis but no separate formal cost-benefit analysis is routinely published. - Comments received in consultation are not displayed on website; no general public feedback on acceptance/rejection of proposals. - Information about ongoing investigations is not made public. - Procedural fairness: Article 54 RJAPPAC and Article 42 require reasoned written decisions and rights of access to documents; appeals available. - Assessment for Principle 4: Fully Implemented. - Recommendation: strengthen consultation transparency by disclosing comments received and provide summary of their impact. ### Professional standards, conflicts of interest and confidentiality (Principle 5) - Conduct governed by Law 53/1984 on incompatibilities, CNMV Internal Regulation Regime and Code of Conduct (CoC). - Rules on conflicts of interest, abstention and reporting to superiors; post-intervention two-year restriction on private activity with affected persons (Article 50 Internal Regulation). - Members of Commission and Directors General must manage securities via blind trust within three months of appointment. - Staff trading rules: advance notice to General Secretariat, confirmation within seven days, prohibition to dispose of designated securities for at least 11 months (Article 53 Internal Regime Regulation), with limited authorization exceptions. - Legal sanctions for misuse of inside information: Article 442 Criminal Code; criminal penalties for misuse of secrets and inside information. - Confidentiality: Article 90 LMV requires professional secrecy; Article 51 Internal Regime Regulation extends secrecy after leaving CNMV; criminal and disciplinary liabilities for breaches. - Assessment for Principle 5: Fully Implemented. ### Monitoring, mitigation and management of systemic risk (Principle 6) - CNMV is not a systemic regulator but supervises securities markets and activities (Article 13 LMV). - Bottom-up: supervisory programs (off-site and on-site) identify individual-entity risks. - Top-down: produces "Securities markets and their agents: Situation and Outlook" (biannual) and Annual Report (Chapters 1 and 2) analyzing macro-financial developments and contagion risks. - GIEF (established late 2006) chaired by Vice-president, includes managing directors and heads of Research, International Relations and President's Office; Research Department provides analytical support. - GIEF supports CNMV participation in CESFI and provides top-down analysis and ad-hoc analysis (e.g., ban on short selling, Greek default scenarios). - Contribution to financial stability: CNMV member of CESFI (financial stability coordination forum created by agreement in 2006); CESFI membership: State Secretary for Economic Affairs (chair), BdE Deputy Governor, CNMV Vice-president, Director-General of DGSFP, Secretary-General of the Treasury and Financial Policy. - CNMV participates in ESMA CEMA, ESRB (Vice-president non-voting member of General Board), IOSCO standing committees on risk and research. - CNMV hired three experts for Research Department; further hiring has been challenging. - Assessment for Principle 6: Fully Implemented. - Comment: GIEF role evolving; better integration of supervisory findings into top-down analysis and more systematic market intelligence recommended. ### Reviewing the perimeter of regulation (Principle 7) - No special dedicated process solely for perimeter assessment; perimeter issues identified bottom-up via supervisory programs and escalated through departmental directors to management committee (Comite de Direccion). - Management committee meets twice weekly and can escalate matters to Executive Committee and Board; contributes to Annual Plan of Activities. - Examples of regulatory actions prompted by emerging risks: - requirement for independent valuation reports for preferential shares placed by banks to retail investors; - modification of CIS Law to allow side-pockets; - guidance to ISPs on investment advice, complex/non-complex instruments, appropriateness and suitability reviews. - CNMV engages in working groups and regular meetings with market infrastructure providers and auditors to gather intelligence. - Participation in ESMA committees (Committee on Financial Innovation) to assess innovations and vulnerabilities at EU level. - Assessment for Principle 7: Fully Implemented. ### Managing conflicts of interest and incentives (Principle 8) - Regulatory framework requires mechanisms to identify, monitor and mitigate conflicts of interest (mix of bans, controls, and disclosure). - Supervision of conflicts mainly via on-site inspections and thematic off-site reviews. - Examples of supervisory outcomes: - requirement for independent valuation for financial institutions placing their own preferential shares to retail investors; - enhanced disclosure for CIS regarding winding up of funds and illiquid assets. - Issuer-related measures: mandatory disclosure reforms for directors’ remuneration to be implemented in 2012 (MoE change at CNMV recommendation); securitization disclosure, retention and periodic reporting requirements introduced to reduce information asymmetries and identify conflicts across the securitization chain. - Assessment for Principle 8: Fully Implemented. ### Inspection, investigation, surveillance powers (Principles 10 and 11) - Article 85 LMV grants CNMV broad powers to access documents, require information, summon statements, carry out on-site inspections (including surprise), require telephone and data traffic records, and seek information from auditors. - CNMV can exercise powers at any time, for routine supervision or investigations; powers extend to operators of official secondary markets, MTFs, clearing/settlement operators, issuers, ISPs, CIS operators and depositories. - CNMV has real-time access to trading screens of electronic markets operated by BME and detailed transaction reports the day after trading. - Record keeping requirements: exchanges/clearing/settlement records 6 years; ISPs records minimum 5 years (Article 32 RESI); CIS operators similar under Article 65 CIS regulation. - Customer identity checks required by Rule 14 of CNMV Circular 1/1996 and Law 10/2010 on AML/CTF (identity of formal and beneficial holders). - CNMV must exercise its own powers; outsourcing not permitted. - Assessment for Principle 10: Fully Implemented. Enforcement powers and sanctions (Principle 11): - CNMV investigative powers under Article 85 LMV support administrative and criminal proceedings; CNMV obliged to refer potential criminal conduct to Public Prosecutor. - CNMV lacks direct power to seek information from telecommunication providers; only prosecutorial authorities can exercise those powers. - Regulatory intervention powers include cease practices, seek court asset freezing, temporary professional bans, adopt measures to ensure compliance, suspend/limit market activities, suspend or prohibit trading on official markets or MTFs, refer for criminal prosecution, and authorize auditors/experts to verify matters relevant to EU requests. - Suspension and exclusion powers: Articles 33 and 34 LMV and Article 85.k LMV. - Sanctioning regime: detailed classifications and penalties in LMV and CIS Law; 2007 and 2011 reforms strengthened sanctioning and close loopholes. - Sanction amounts and measures (selected exact figures as set out in LMV/CIS Law): - Very serious breaches (LMV entities): maximum fine of the higher of: 5 times the profit obtained as a result of the breach; 5 percent of the capital of the entity; 5 percent of the funds used in carrying out the infringing conduct; or € 600,000; suspension/removal up to 5 years; revocation of authorization; disqualification up to 5 years; limitation on type/volume of business. - Minimum fine for insider trading: € 60,000. - Directors/managers can be fined up to € 300,500; removed up to 3 years; banned up to 5 years. - Analogous CIS Law maximum fine: € 300,000; directors/managers up to € 300,000, disqualification up to 10 years. - Serious breaches (LMV entities): maximum fine higher of twice profit obtained; 2 percent of capital; 2 percent of funds used; or € 300,000; suspension/removal up to 1 year; disqualification up to 1 year. - Directors/managers fined up to € 150,250; removed up to 1 year. - Minor breaches: fine up to € 30,000 under LMV; under CIS operators fine up to € 60,000 or private admonition. - Criminal thresholds: insider trading gain/loss threshold distinguishing administrative vs criminal: € 600,000; market manipulation threshold: € 200,000. - Criminal penalties: insider information imprisonment from 1 to 4 years, fine from 1 to 3 times the benefit obtained, special disqualification 2 to 5 years; aggravated penalties (imprisonment 4 to 6 years) where habitual practice, notorious benefit, or serious damage to general interest. Market manipulation criminal law: imprisonment 6 months to two years or fine 12 to 24 months; disqualification 1 to 2 years. - Private rights of action and class actions available to investors. - Assessment for Principle 11: Fully Implemented. - Comment: consider legal reform to permit CNMV direct access to telephone and internet service provider data. ### Inspection, surveillance, thematic reviews and enforcement implementation (Principle 12) - CNMV publishes Annual Plan; each department has an internal plan identifying on-site inspections and thematic/off-site work. - Risk-based approaches used for issuer accounting obligations, CIS operators and investment firms; new reporting obligations under CNMV Circular 1/2010 for investment firms and credit institutions providing investment services improve data for risk analysis. - Off-site supervision: routine review of prospectuses, issuer periodic disclosures, accounting standards via rotation and risk-based systems. CIS and investment services emphasize off-site quantitative monitoring via electronic systems. - Thematic reviews: CIS operators (valuation, related party transactions); investment firms (capital and solvency); horizontal reviews of credit institutions focusing on commercialization and conflicts of interest (example: preferential shares distribution review used sample of 27 firms accounting for 95 percent of the market). - On-site inspections: relatively low proportion of firms inspected annually. Table of inspections (as presented): - Investment firms (except advisers): Number of entities 95; on-site inspections 2010 = 10; 2011 = 9. - Credit institutions providing investment services: Number of entities 189; on-site inspections 2010 = 5 (1 large); 2011 = 4 (1 large). - Advisers: Number of entities 80; on-site inspections 2011 = 1. - CIS operators: Number of entities 114; on-site inspections 2010 = 17 (12 general and 5 thematic); 2011 = 15 (14 general and one follow up). - Depositories: Number of entities 94*; on-site inspections 2010 = 2; 2011 = 2. - *In practice, only 56 firms offer the service. - Mechanisms to detect insider trading and market abuse: CNMV supervises RMs, has real-time market access and post-trade detailed transaction reports; investigation powers as described. - Assessment for Principle 12: (process described; emphasis on need to increase on-site inspections) — the source highlights relatively low proportion of firms subject to on-site inspections and recommends increased on-site oversight. *Italic: IMF staff report excerpt summarizing CNMV regulatory framework, supervisory practices, assessments and recommendations.* ### 36. The CNMV’s real time access to trading on the markets, the information it receives ### 36. The CNMV’s real time access to trading on the markets, the information it receives ### Market monitoring, investigation capacity, and unregulated entities - Daily transaction data, weekly reports from market operators, and CNMV’s analysis and alert systems enable analysis of unusual market activity potentially indicating market abuse, including insider trading. - Market Monitoring Unit (MMU) within the Market Directorate: - Responsible for evidence gathering and investigation in suspected market abuse or insider trading cases. - Consists of 10 people. - Current cross-market capacity limited because different systems are used for cash markets (equities and fixed income) and derivatives markets. - A new integrated system is being designed with the intention that it be fully implemented by 2014. - Unregulated entities: - CNMV participates actively in ESMA and IOSCO mechanisms for monitoring and addressing investment services by unregulated entities. - Practice: when CNMV detects unregulated activity and has reliable evidence, it issues a public warning and forwards information to ESMA and IOSCO, continues investigations, and initiates sanctioning or refers to criminal prosecution authorities. - Some larger fines have been imposed for unregulated activity, but in practice there seem to be few cases. - CNMV powers introduced in 2011: ask a court to freeze assets and directly issue cease and desist orders as precautionary measures — these powers have not yet been used. ### Investor complaints - Unit within the investor department (Legal Affairs Directorate) handles investor complaints. - Complaints received: 2,296 in 2010; 2,005 in 2011. - After initial review many complaints are referred to the relevant regulatory department; may result in direct action such as inspections. - Complaints feed CNMV scoring mechanisms for CIS and investment firms. ### Enforcement process — organizational structure and procedures - Separation of investigation and sanction decision functions: - Investigation by relevant regulatory department; sanctioning process by the Litigation and Enforcement Department within the Directorate of Legal Affairs. - Litigation and legal department composition: a director, three deputy directors and 8 other professional staff. - Information-gathering powers used per Principle 10, including compelling information and summoning persons for statements (interview statements signed by interviewee). - Sanctioning procedure overview: - Investigating staff prepare a report for the Executive Committee with proposal whether to open a sanction procedure. - If Executive Committee decides to proceed, it requests a legal report from the Legal Department on whether facts amount to legal breach and whether conduct is sanctionable. - If concluded sanctionable, the Executive Committee formally opens a sanctioning file; case assigned to two “instructors” who review/manage the file. - Affected party is notified in writing, given access to file information, advised of rights, and has 20 days to respond and produce further evidence (including third-party testimony) or request CNMV gather evidence. - Instructors may refuse requests for information but must give written reasons. - Instructors prepare recommendation on sanction; affected party notified of proposed sanction and may submit evidence or submissions on penalty. - Executive Committee decides on facts and sanction on a preponderance of evidence (does not require direct proof or proof of intention). - For most serious violations where Minister of Economy and Competitiveness is decision maker: Executive Committee makes proposal to CNMV Board; Board’s proposal sent to the Minister. - Timelines and practical issues: - Once a sanctioning file is opened, process must be completed within one year (instructor can extend up to six months). - Time between infringing conduct and opening a sanction file can be lengthy because time limits run from the formal decision to open the file. - Example: potential MiFID violations detected in 2009 are only now going through sanctioning process — potential to undermine deterrence. - Simplified procedure (Article 23 of RD 1398/1993) exists for minor sanctions, but in practice there is little differentiation and significant resources are used on relatively minor matters. ### Administrative sanctions — activity and statistics - Trend and focus: - Until recently majority of files opened related to issuers’ violations; less emphasis on sanctioning ISPs (including credit institutions) and CIS operators. - Relatively small number of insider trading cases have been subject to sanctions. - Very serious violations — files opened: - Significant shareholding—failure to disclose/incorrect disclosure: 2010 = 14; 2011 = 12 - Material event disclosure—failure to disclose/providing misleading or incorrect information/significant omissions: 2010 = 2; 2011 = - - Breach of issuers’ periodic disclosure obligations: 2010 = 4; 2011 = 4 - Breach of takeover rules: 2010 = 4; 2011 = - - Market manipulation: 2010 = 1; 2011 = - - Insider dealing: 2010 = 7; 2011 = 1 - Breach of capital ratios: 2010 = -; 2011 = 1 - Breach of investment firms general obligations: 2010 = 2; 2011 = 1 - Breach of conduct of business rules: 2010 = -; 2011 = 4 - Breach of CIS obligations: 2010 = 1; 2011 = - - Total files opened for very serious violations: 2010 = 35; 2011 = 23 - Serious violations — files opened: - Corporate governance breaches: 2010 = 2; 2011 = 1 - Market abuse breaches: 2010 = 1; 2011 = 1 - Insider dealing: 2010 = 1; 2011 = - - Market manipulation: 2010 = -; 2011 = 1 - Breach of capital ratios: 2010 = -; 2011 = 2 - Breach of investment firms general obligations: 2010 = 1; 2011 = - - Breach of conduct of business rules: 2010 = -; 2011 = 2 - Breach of CIS obligations: 2010 = -; 2011 = 2 - Failure to prepare/publish/file mandatory reports: 2010 = 4 (3 for regulated entities and 1 issuer); 2011 = - - Total files opened for serious violations: 2010 = 9; 2011 = 9 - Minor sanction files: 2010 = 1; 2011 = 0 - Monetary sanctions — summary (number of cases and amounts) - Overall: Total fines of € 2.3 million were imposed in 2010 and € 15.4 million in 2011. - By type and year: - Market Abuse: - 2009: Num. Cases = 3; Amount = 100.10 - 2010: Num. Cases = 2; Amount = 700.00 - 2011: Num. Cases = 4; Amount = 875.00 - Inside Information: - 2009: Num. Cases = 1; Amount = 31.10 - 2010: Num. Cases = 1; Amount = 610.00 - 2011: Num. Cases = 1; Amount = 240.00 - Market Manipulation: - 2009: Num. Cases = -; Amount = - - 2010: Num. Cases = -; Amount = - - 2011: Num. Cases = 1; Amount = 360.00 - Other market abuse related topics: - 2009: Num. Cases = 2; Amount = 69.00 - 2010: Num. Cases = 1; Amount = 90.00 - 2011: Num. Cases = 2; Amount = 275.00 - Other cases: - 2009: Num. Cases = 7; Amount = 398.00 - 2010: Num. Cases = 21; Amount = 1,645.50 - 2011: Num. Cases = 15; Amount = 14,525.00 - Totals: - 2009: Total = 10 cases; Amount = 498.10 - 2010: Total = 23 cases; Amount = 2,345.50 - 2011: Total = 19 cases; Amount = 15,400.00 - Use of sanctioning process for investment firms and credit institutions: - Since 2009 CNMV initiated 10 sanctioning files for breaches of conduct obligations by investment firms and credit institutions. - Sources: three from off-site inspections (two on banks and one on a CIS), two from thematic reviews (one on a CIS and one on a credit institution), one from an investor complaint, four from on-site inspections. - Additionally 8 cases currently in the pipeline on market manipulation. - Compensation commitments (remedial outcomes): - Commitments secured from ISPs and credit institutions to pay a total of € 34 million in compensation over the last three years. - Commitments from CIS operators to pay a total of € 23 million. - Where compensation agreements reached, CNMV requires firms to make public announcements about the infringing practice and compensation paid. - Compensation agreements are considered when determining sanctions but are not substitutes for formal sanctions. ### Criminal actions and referrals - Prosecution responsibility: - Special Prosecution Office Against Corruption and Organised Crime (Fiscalía contra Corrupción y Criminalidad Organizada, FCCO) primarily responsible for prosecuting securities regulation criminal offences; regional prosecution offices also have specialists for economic crime. - FCCO staffing and focus: - 15 prosecutors based in Madrid and approximately 15 prosecutors throughout Spain (and other staff in specialist units). - Main focus on corruption and organized crime; authorities estimate approximately 10 percent of their resources are committed to securities market issues. - Interaction with CNMV: - Criminal actions usually commence by CNMV referral to FCCO (one example where FCCO initiated investigation). - FCCO relies on evidence gathered by CNMV and uses CNMV staff as expert witnesses; FCCO may ask CNMV to gather further evidence, but this rarely occurs in practice. - Case counts and pipeline: - Currently 6 cases at various stages of the criminal process. - Referred for criminal action: - Market manipulation: 2010 = 0; 2011 = 0 - Insider trading: 2010 = 3; 2011 = 0 - Other market abuse: 2010 = 0; 2011 = 0 - Other breaches of securities regulation—e.g., unregulated activities: 2010 = 0; 2011 = 0 - Observations on criminal enforcement: - Criminal process is complex and lengthy (no specialized economic crime courts; appeals common), so time between misconduct and final conviction can be lengthy. - Over the last 10 years: one case settled in connection with market abuse and one conviction for insider trading one year ago. - Assessors note increasing number of criminal cases against a background of low use over past decade; prosecutorial authorities appear willing and resourced but depend on CNMV referrals. - “Credible” threat of jail considered powerful deterrent for most serious breaches. ### On-site inspections — coverage, thematic reviews, and assessments - Coverage concerns: - CNMV does not appear to have an intensive program of on-site inspections; coverage means some firms may be inspected as infrequently as once every ten years. - Risk-based criteria shorten cycles for high-risk firms, but even high-risk firms may be inspected only every four years. - CNMV argument and assessors’ view: - CNMV contends robust off-site supervision, complaint investigation, and thematic reviews yield better coverage. - Assessors acknowledge thematic reviews are powerful for market-wide conduct problems if they go beyond process review, and CNMV has made impressive use of thematic reviews (example: selling of complex products by banks). - However, for investment firms thematic reviews have not covered conduct obligations; for credit institutions reviews focused on few topics despite their market dominance. - Assessors remain concerned that low on-site coverage undermines ability to assess practical effectiveness of compliance procedures and internal controls. - CIS operators: - Situation somewhat different: CIS operators in Spain usually not involved in selling/distribution to retail clients; obligations often relate to subscription/redemption, investment mandate compliance, valuation, NAV, and periodic reporting—these can be detected by review/analysis of periodic reports. - Depositories have obligation to monitor CIS operator compliance with obligations. - CNMV evidence of thematic reviews of CIS operators and depositories; need for intensive on-site program may be less pressing for CIS operators, but on-site inspections remain valuable. - Coverage metrics provided by CNMV: - Over last 5 years, on-site inspections covered 66 percent of the Spanish CIS industry (measured by value of assets). - During 2009–2011: - 29 inspections on investment firms conducted (amounting to 42 percent of the retail clients of the sector and 45 percent of the value of assets under management). - 13 inspections on credit institutions conducted (representing 46 percent of retail clients, and 86 percent of the amount of assets under management in the sector, and 45 percent of the assets held in custody). - Assessors’ emphasis: - On-site inspections are critical for active market presence and detection of poor conduct; sanctioning procedures are more likely to result from on-site inspections than from other reviews. ### Sanctioning and enforcement effectiveness — assessors’ findings and recommendations - Findings: - When material misconduct is detected CNMV staff are thorough in investigations and evidence gathering; market participants corroborate this perception. - Growing trend to use sanctions for non-compliance by investment service providers and increased use in connection with market manipulation; results of new approach not yet fully evident. - Use of sanctioning power is critical to maximize deterrent effect and signal regulator’s willingness to pursue breaches. - Sanctioning process complexity and uniformity (same process used for serious and minor breaches) consumes significant resources and time. - Time lags between offending behavior and public sanction announcements undermine deterrence; assessors recommend streamlining sanctioning process for minor violations. - Summary assessment: - Positive changes in administrative and criminal enforcement noted; consolidation of changes should translate into an effective enforcement program. ### Information sharing and international cooperation (Principles 13–15) - Principle 13 — authority to share public and non-public information: - Article 90 LMV allows CNMV to share with domestic authorities any information needed to perform their functions; domestic authorities include bank, money-laundering and insurance regulators; Autonomous Communities with stock market supervision responsibilities; Spanish energy sector supervisors; governing companies of official secondary markets. - Articles 91 to 91(4) LMV deal with cooperation with foreign competent authorities (EU and non-EU). - Articles 91 bis and 91 tris (EU country cooperation) establish obligation to cooperate and exchange information, collaborate in investigative and supervisory activities; CNMV can use powers even if conduct is not a breach under Spanish law; no external approval required; no limit on information shared. - Article 91 tris allows CNMV to refuse cooperation where: - cooperation may damage sovereignty, security or public order; - legal proceedings have been brought before Spanish authorities for same events and persons; - a final judgment has been made on same events and persons. - Article 91 quater (non-EU cooperation) allows CNMV to enter cooperation arrangements provided (i) reciprocity, (ii) foreign regulator bound by comparable professional secrecy obligations, and (iii) information requested relates to foreign authority functions. - Bank account beneficial ownership information can be provided pursuant to Articles 91 to 91(4). - Confidentiality: CNMV verifies foreign regulator confidentiality regime before agreements; if no agreement, requires declaration that information will be used only for supervision/inspection and not provided to other authorities without CNMV consent. - Assessment: Fully Implemented. - Principle 14 — mechanisms and agreements governing information sharing: - Authority to enter into agreements: - No explicit provision authorizing CNMV to enter into domestic information sharing agreements, but authorities state authority is implicit in Article 90 LMV. - For EU authorities, cooperation authority derives from EU Directives; Article 91 quater explicitly authorizes cooperation arrangements with non-EU competent authorities. - CNMV has entered collaboration/information sharing agreements with BdE, DGFSP and money laundering authority (SEPBLAC). - CNMV signatory to IOSCO MMoU since 2003; has entered 18 bilateral MoUs with foreign regulators; consultation and technical assistance agreements with most Latin-American countries. - Article 91 bis prohibits CNMV from transmitting information received from an EU competent authority to other authorities without consent except in exceptional situations (must inform authority immediately). - Article 91 quater prohibits transmitting information received from non-EU competent authority to other authorities except with consent of foreign authority and for purposes indicated. - Practice: CNMV provided examples of domestic sharing e.g., with BdE including unsolicited information and sharing supervision plans. - 2011 activity: CNMV received and acted on 35 requests from non-Spanish authorities for information relating to market abuse or unlicensed activities and responded to all requests. - Assessment: Fully Implemented. - Principle 15 — assistance to foreign regulators - Records and powers: - Article 85 LMV provides CNMV broad power to obtain any document and request any information necessary, covering securities and derivatives transactions; bank and brokerage accounts; client identity and ultimate holders. - Articles 91 to 91 quater enable CNMV to share all information and documents with foreign regulators. - Operational arrangements: - Department for International Relationships and a unit within the Department of Enforcement handle requests and provide assistance in accordance with IOSCO and ESMA “best practices”. - Average response time to requesting authority is around 30 days; complex cases can be longer; urgent matters can be expedited. - Scope of assistance: - CNMV can seek information/documents relating to market abuse, issue of securities, market intermediaries, markets, exchanges, clearing and settlement facilities. - No requirement that CNMV have an independent interest in the matter for assistance; test is that information is required for foreign regulator to carry out its functions. - CNMV can provide information about regulatory processes, including authorization, investigations in progress and sanctions imposed. - CNMV can facilitate contact between domestic authorities and foreign regulators if information is held by other domestic authorities (on voluntary basis). - CNMV can use Article 85 powers to summon persons and take statements; as an administrative body it cannot compel statements under oath (this power belongs to judiciary). - Spanish legislation does not permit CNMV to act formally on behalf of another regulator in judicial proceedings except where conditions for legal representation are met (not occurred in practice). - Financial conglomerates: - Using Article 85, CNMV can seek documents on group structure, capital requirements, cross investments, intra-group exposures, shareholder relationships, management responsibility and governance. - Use limitations: - Articles 91 to 91 quater require shared information be used for performing tasks entrusted to competent authorities. - Assessment: Fully Implemented. ### Issuers — disclosure and shareholder rights (Principles 16–17) - Market structure: - Four equity RMs in Spain (Madrid, Barcelona, Bilbao and Valencia) and one fixed-income RM (AIAF), all part of BME Group. - Official equity secondary markets have two compartments: first market (almost all listed companies) and Segundo Mercado (20 companies listed). - Two equity MTFs administered by BME: - MAB: over 3,000 listed entities (most are SICAVs) and 18 small cap issuers; disclosure rules set by market and monitored by market operator. - Latibex: market for Latin American securities denominated in euros; at June 2011 there were 29 issuers on the market; home jurisdiction disclosure rules apply; compliance monitored by market operator. - Comprehensive issuer disclosure regime for RMs (LMV and related regulation): - Requirements include prospectus for public offerings, annual reports, half-yearly reports, and material event disclosures. - Prospectus and offering regime: - Prospectus must be approved by CNMV; Article 16 Royal Decree requires prospectus to contain all information necessary for investor assessment. - Regulation 809/2004 (Prospectus Directive) applies. - Summary of prospectus required when securities have par value less than € 50,000. - Prospectus annual financial information cannot be older than 18 months from prospectus date. - Supplement required if new significant factor or inaccuracy arises between approval and subscription/trading start. - Periodic reporting: - Annual reports: Article 35.1 LMV requires annual audited financial statements and management report including detailed corporate governance report; public and lodged with CNMV within four months of financial year close. - Consolidated accounts prepared in accordance with IFRS where group; otherwise domestic accounting standards. - Half-yearly reports and quarterly management reports: - Article 35.2 LMV requires half-yearly financial information within two months of period close (IFRS IAS 34 if consolidated; domestic otherwise). - Article 35.3 requires issuers of shares/equity instruments to publish quarterly management report describing significant business operations and financial situation. - Material event disclosure: - Article 82 LMV requires immediate publication and dissemination of relevant information that may influence investor decisions or market price. - Issuers must send information to CNMV which automatically makes it public via official register (Article 92 LMV). - Communication to CNMV must be at same time as other dissemination and as soon as relevant fact is known or decision adopted. - Content must be accurate, clear, comprehensive and quantified when required. - Issuers must also disseminate information on their websites; where information may negatively affect normal trading and pose investor protection risk, issuer must communicate to CNMV prior to publication and CNMV must disseminate immediately. - Prospectus and advertising controls: - Article 28 Royal Decree 1310/2005 requires advertising for admission to trading or public offerings to be clearly recognizable and not misleading; when prospectus required, advertising must indicate where prospectus can be obtained and be consistent with prospectus. - Responsibility and liability for prospectus content: - Article 28 LMV and Chapter IV Royal Decree 1310/2005 make issuer/offeror, directors, persons named as accepting responsibility, and persons authorizing content liable civilly and administratively. - Civil liability: damages claims must be made within 3 years of holder becoming aware of defect. - Derogations and specific disclosure rules: - Article 82.4 LMV permits issuer at its discretion to delay publication where disclosure damages legitimate interests provided omission not likely to confuse public and issuer can guarantee confidentiality; issuer must immediately inform CNMV. No issuer has used this possibility so far. - Article 83(2).1.f LMV requires issuer to disseminate significant event report during preliminary/negotiation stages if abnormal trading or signs of premature/distorted dissemination. - Supervisory measures (CNMV powers): - Article 85.5 LMV: CNMV can require persons/entities to publish information it considers pertinent; if they do not CNMV must publish it. - Article 33 LMV: CNMV can suspend trading on official Spanish secondary markets when special circumstances may distort transactions or for investor protection; suspension decision must be made public and other Member State authorities informed. - Article 85 LMV and sanction regime: failure to comply with inside information rules treated as very serious breach; sanctions include suspension/limitation of transactions/activities for up to five years (Article 102b LMV). - Annual corporate governance reports: relevant omissions or false/misleading data treated as serious breach. - CNMV supervisory practice and metrics: - Prospectus reviews: all prospectuses reviewed by CNMV analysts; emphasis on corporate governance disclosure and reliability of financial information. Approval process includes director sign-off, legal review, head of Directorate General of Markets review, and final decision by CNMV President or Vice President. Rare for prospectus to be refused. - Recent initiative: for preference shares and other long-term fixed income securities offered to retail investors by banks, CNMV required independent expert valuation included in prospectus; later extended to all fixed income securities irrespective of issuer. - Material event disclosures: CNMV reviews all material event disclosures after publication and can request additional information; monitors local/international press for non-compliance. - Review of periodic reporting: - Annual reports sent electronically (annual report voluntary); subject to formal and substantive review. - Formal review: check timeliness and completeness. - Substantive review: detailed compliance with accounting standards; if material non-compliance identified CNMV may request restatement next year or immediate reformulation; serious cases may lead to sanctions; audit inadequacies can be referred to audit regulator ICAC. - Report selection for substantive review based on risk criteria and cycle criteria: CNMV aims to review equity issuers over a four year cycle. - In practice CNMV reviewed 78 percent of equity issuers’ reports in first two years of current cycle. - Each year CNMV publishes list of most common problems identified and announces focus areas. - 2011: number of persons sanctioned for late filing amounted to 4 listed companies (one of them included 4 Members of the Board). - 2011: of 75 substantive reviews of issuers reports, 81 percent resulted in a request for issuer to clarify or explain an aspect of the report. - 2011: Four issuers were asked for immediate reformulation. One issuer is subject to an administrative sanctioning proceeding. - Corporate Governance (CG) reports: - CNMV has a team of three staff dedicated to CG report review. - For 2011 less than 1 percent of issuers filed CG reports late; CNMV has imposed sanctions for late filing. - CNMV publishes annual report on CG practices. - Cross-border issuer matters: - Disclosure requirements for non-resident issuers same as EU issuers per EC Regulation 809/2004. - Non-resident issuers may prepare prospectus in accordance with home country law if it meets IOSCO standards and content equivalent to Regulation. - Assessors’ conclusion on disclosure (Principle 16): - For securities traded on official secondary markets (RMs), regulatory regime and CNMV supervision are robust. - Deadline for submission of annual reports (four months) appears long compared with international best practice but stems from European Directives. - CNMV emphasizes semiannual report within two months provides earlier market information. - Disclosure requirements for MAB are less stringent but broadly in line with IOSCO Principles; BME appears to supervise compliance and CNMV oversight exists. - Latibex subject to home jurisdiction requirements; BME conducts due diligence for equivalence to Spanish protections. - Assessors note emergence of more complex products offered to retail investors (e.g., preferred shares) and importance of close monitoring and measures to ensure adequate disclosure. - Shareholder rights and equitable treatment (Principle 17): - Legal framework: - Capital Companies Act (CCA), amended 2011, provides basic shareholder rights; Title XIV (Articles 495 to 539) strengthens rights for companies listed on RM. - Article 93 CCA enumerates shareholder rights: share in profit and liquidation proceeds; preferential rights in new share creation; attend/vote at general meetings and challenge agreements; right to information. - Voting and governance: - Article 514 CCA requires equitable treatment for shareholders in same position regarding information, participation and voting. - Appointment of directors is prerogative of shareholders in general meeting (Article 160 CCA). - General meeting has sole power to approve fundamental corporate changes per Article 160 CCA. - Related party transactions and conflicts: - No requirement for shareholder approval of related party transactions, even potentially material ones; disclosure of material transactions required by accounting standards. - Listed companies must disclose in Annual Report transactions with significant shareholders, managers and board members and intra-group transactions material to understanding financial statements. - Article 229 CCA requires managers to inform the board of conflicts and abstain from decisions where conflict exists. - General meeting notice and shareholder information: - Title XIV Section II Chapter VI of CCA requires advance information via issuer website (free of charge), facility to send agenda suggestions, voting results publication. - Notice of meeting must be published in BORME or major newspaper and on CNMV website (Article 516), posted on issuer website until meeting (Article 518) and include specified documents and information. - Proxy voting permitted (Article 522); remote voting may be allowed (Article 521). - Article 524 CCA allows an investment services company to exercise client voting rights when authorized by client, potentially voting differently for different clients. - Ownership registration and dividends: - Detailed registration and transfer rules in Title IV CCA and LMV book-entry provisions. - Article 93 CCA entitles shareholders to share in profits and liquidation proceeds in proportion to capital. - Takeovers: - Chapter V Title IV LMV and Royal Decree 1066/2007 regulate takeovers for issuers in RMs. - Mandatory offer triggered by acquisition of 30 percent or more of voting rights (or ability to appoint more than half directors). - Price fairness rule: Article 9 Royal Decree requires price not less than highest price paid by bidder (or concert parties) in prior 12 months, with CNMV able to vary price in specified circumstances; exception decisions must be public. - Acceptance period for mandatory bid: not less than fifteen nor more than seventy calendar days from trading day following first announcement after CNMV authorization; competing bids acceptance period rules specified. - Scrip bids and extensions: acceptance period extended to ensure 15 calendar days between general meeting approving issuance and last acceptance day. - CNMV can extend acceptance period if bidder adds to prospectus, modifies bid, or needs more time for successful bid. *Source: IMF staff summary of chapter “36. The CNMV’s real time access to trading on the markets, the information it receives.”* ### conclusion of the bid and the due protection of target shareholders. ### conclusion of the bid and the due protection of target shareholders ### Prospectus, supplements, and CNMV approval - The bidder must prepare an explanatory prospectus on the bid, which is subject to approval by the CNMV. - The prospectus must contain all the information needed to enable the persons to whom the bid is addressed to arrive at an informed decision. - The prospectus must be drafted to enable the easy analysis and understanding of its contents (Article 18 of Royal Decree 1066/2007). - The Decree contains an appendix detailing the minimum information to be included in a prospectus; the offeror may add any other information to enable the recipients to arrive at an informed conclusion thereon. - The CNMV may include in the prospectus notes and comments to assist in the analysis and understanding thereof. - If, following the publication of the prospectus, circumstances arise that require the addition of other data, the offeror may provide such data by means of a supplement. ### Target company board obligations and defensive measures - Article 24 of the Royal Decree requires the governing body of the target company to publish, within ten calendar days from the start date of the acceptance period, a detailed and reasoned report on the takeover bid, which must contain, among other data, its comments in favour or against the bid being presented. - Boards must not, without the approval of a general meeting, take action to frustrate an offer (other than by soliciting rival bids). Article 60(2). ### Other mandatory offers and mergers - Other mandatory offers are delisting offers and the offers when a company wishes to reduce its capital by acquiring its own shares for redemption. - A merger must be approved by shareholders meeting, and requires an extraordinary majority. - In certain cases a merger would trigger the need for a mandatory tender offer. ### Holding company and directors’ liability - Chapter V of Title VI of the CCA makes directors (both de jure and de facto) liable to the company, and to shareholders and company creditors, for damages caused by actions or omissions which breach the legislation or the articles of association or are carried out in breach of the duties inherent in their office. - The fact that the act resulting in damage has been authorised or ratified by the general meeting does not excuse directors from liability. - All members of the governing body that reached the agreement or carried out the harmful act are held jointly liable, except for those who can prove that, having not intervened in the reaching and execution of the relevant decision, had no knowledge of it or had knowledge but took all appropriate measures to prevent the damage or, at least, expressly stated their objection. ### Bankruptcy, insolvency, and liquidation rights - The CCA and the Bankruptcy Act are based on the principle of equitable treatment of all shareholders in situations of insolvency and liquidation of the company. - Shareholders have the right to be informed by the administrators of the status of the liquidation and, unless otherwise established in the articles of association, the liquidation share of each shareholder shall be in proportion to the share held in the share capital. ### Substantial holdings of voting securities and disclosure thresholds - Securities issuers must in their prospectuses identify persons who hold, either directly or indirectly, an interest in the capital of the issuer or in the voting rights thereof that must be disclosed in accordance with the legislation applicable to the issuer, along with the amount of the interest. If no such persons exist, a negative statement must be included. - Article 53 of the LMV and Royal Decree 1362/2007 which develops it requires shareholders with shares over 3 percent of the voting rights of a company admitted to trading in a RM to send the CNMV a notice within 4 days after reaching the ownership threshold. - For shareholders resident in tax havens, the minimum threshold for notification is 1 percent. - Additional notifications are required when ownership reaches 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 35 percent, 40 percent, 45 percent, 50 percent, 60 percent, 70 percent, 75 percent, 80 percent, and 90 percent. (Article 23 of Royal Decree 1362/2007). - Notifications are required for both increases above and decreases below the specified thresholds. - Notification requirements apply also to persons acting in concert and to holders of instruments giving them the right to acquire voting rights (such as holders of call options). See Article 24 of Royal Decree 1362/2007. - The CNMV keeps a public register of shareholders with significant shareholdings in listed companies, the unrestricted access to which is free of charge via the website. - The CNMV keeps a public register of shareholders acting in a concerted fashion in a company admitted to trading on a RM which is publicly available free of charge. ### Annual Corporate Governance Report and MAB-specific rules - The Annual Corporate Governance Report required by Article 61(2) of the LMV must disclose details about significant shareholdings. This report is mandatory for all companies admitted to trading on a RM. The CNMV keeps a public register of such reports. - In the case of MAB, the listing rules require issuers to include provisions in the charter of incorporation whereby shareholders are required to notify holdings when they exceed 10 percent, and then in multiples thereof. ### Holdings and transaction reporting by directors and senior management - Directors of companies admitted to trading on a RM must report their holdings of voting rights, and any shareholding or transaction they carry out in shares or financial instruments related to shares of the company in which they hold office. - Senior managers must also report any shareholdings or transactions that they carry out on shares or financial instruments on the shares in the company wherein they hold office. - The period for communication of such transactions is 5 days. (Regulated in Article 53 of the LMV, in Articles 31 and 35 of the Royal Decree 1362/2007 and in Article 9 of the Royal Decree 1333/2005). - The CNMV keeps a public register of director and senior manager transactions in listed companies. - In the case of MAB, the listing rules require issuers to include provisions in the charter of incorporation whereby directors and executives are required to notify transactions with a threshold of 1 percent. ### CNMV oversight and resourcing - The CNMV’s jurisdiction is confined to the LMV and the corresponding regulations. Obligations and rights created by the CCA are enforceable only by private litigation. - A team of 5 CNMV staff members is responsible for supervising compliance with obligations concerning tender offer obligations. - The process for reviewing documents and for decision making is similar to that for prospectus reviews, except that for tender offers the decision to approve the making of a bid is by the Board of the CNMV. - It is usually the case that the CNMV requires clarifications and additional information through the review process. - There is a dedicated team of three staff for the review of notifications of significant shareholdings, as well as notifications of transactions by insiders. - The CNMV receives an average of 4.000 notifications per year. - CNMV staff indicated that late submission of notifications is a problem, although it is decreasing over time. In 2011 the 16 percent of notifications received did not meet the regulatory deadline (17.5 percent in 2009, 70). *Source: conclusion of the bid and the due protection of target shareholders.* ### 16.6 percent in 2010). The CNMV has opened files against both significant shareholders ### _cr12143 - 16.6 percent in 2010). The CNMV has opened files against both significant shareholders ### Cross-border shareholder rights and listing requirements - Shareholder rights granted by the CCA are only applicable to companies incorporated under Spanish law. - Issuers who do not reside within the EU must include in their prospectuses: - A statement on whether or not the issuer complies with the system of corporate governance of its country of origin and general information about the system that applies. - If the issuer does not comply, a statement expressing the non-compliance and an explanation for it. - To be listed on a Spanish market, issuers whose home jurisdiction is outside the EU must be bound by duties of periodic disclosure of public information equivalent to those applying in Spain. Article 21 of Royal Decree 1362/2007 sets out the tests for such equivalence. - Issuers from other EU jurisdictions are considered to be subject to an equivalent regime. - Assessment: Fully Implemented. - Comment: Some minority protections apply only to official markets; MAB and Latibex have differences in rules (notification thresholds, takeover bid protections) that should be addressed if MAB grows significantly so investors receive equivalent protections. ### Principle 18 — Accounting standards used by issuers - Audited financial statements: - Must be lodged with the CNMV before an issuer can make a public offer of securities or have its securities admitted to trading on an official secondary market (Article 26.1.b of the LMV and Article 12 of Royal Decree 1310/2005). - Both individual and consolidated annual financial statements must be provided. - Financial statements must include at least the last three years for participatory securities and the last two years in other cases. The prospectus must include these statements (EC Regulation 809/2004). - Annual report requirements (Article 35 of the LMV): - Financial statements must include balance sheet, a statement of results, cash flow statement, the notes and the management report as well as changes in ownership. - Half yearly financial reports: - Not required to be audited but must be prepared in accordance with applicable accounting standards. - Accounting standards: - For issuers traded on an official secondary market: consolidated statements must follow IFRS; individual financial statements must follow domestic Spanish standards. - Domestic Spanish standards are almost fully assimilated to IFRS, with differences only in two standards: - Spanish standards allow capitalization of research expenses. - Spanish standards do not provide the options available under IFRS in connection with the valuation of certain assets (mainly real state and intangible assets). - Oversight, interpretation and independence: - ICAC is responsible for setting Spanish accounting standards and providing interpretation and guidance; it is a government entity attached to the Ministry of EC. - Any proposal to change accounting standards must be consulted with the Consultative Committee on Accounting Standards of ICAC (participants include CNMV, BdE, DGSF, professional bodies, issuers, investors). Final decision belongs to the Accounting Council of ICAC (President of ICAC and representatives from CNMV, BdE, DGSP). - Review of compliance: - CNMV has responsibility for monitoring issuers’ compliance with financial reporting obligations and can require additional information, corrective notes or restatements. - Assessment: Fully Implemented. ### Principle 19 — Auditors: oversight, qualifications, quality control, enforcement, and CNMV-ICAC collaboration - ICAC responsibilities: - Approving accounting standards and interpretations. - Approving (“homologating”) auditing standards. - Administering auditor registration system. - Overseeing quality of auditors. - ICAC governance: - President proposed by the MEC and appointed by the Government; President homologates auditing standards and can impose disciplinary measures. - Accounting Board: President of ICAC and one representative each from CNMV, BdE, DGSP. - Consultative Committee of Accounting: includes MoJ, MEC through ICAC, DGSP, CNMV, BdE, associations of issuers and investors. - Consultative Committee on Auditing: President + up to 13 members including representatives from CNMV, DGSP, Tribunal de Cuentas, professional bodies, BdE, government lawyer, academic, investment analyst and expert on accounting/auditing. - ICAC powers and funding: - Article 28 authorizes ICAC to request any information from audit firms and auditors. - ICAC funded by a levy on audit firms; levy level updated yearly in the budget law. - Auditors’ qualifications: - Must register with ICAC and meet requirements: - A corresponding university degree. - Approval of an exam administered by the ICAC. - Practical training of three years. - 120 hours of continuous education (including at least 30 hours a year on auditing). - There are currently 19,657 individual auditors and 1,369 audit firms authorized in Spain. - Roughly 214 auditors and audit firms perform audits for PIE firms. - The big four firms audit roughly 90 percent of listed issuers (47 percent of IBEX; Deloitte audits 35 or 50 percent of blue chips—text states both numbers in context). - Quality control: - System changed in 2010: ICAC directly conducts examinations of auditors that audit PIE firms; external reviewers (professional bodies) used for non-PIE firms. - Quality control reviews include field reviews (internal controls/procedures) and file reviews (engagement-level procedures). - Investigations program complements quality control; over half of investigations originate from whistleblowers; referrals by financial regulators (mainly CNMV, DGSP, BdE) are the second source. - Technical Directorate conducts examinations and investigations; composed of 19 staff, including 12 inspectors; plans to add 30 inspectors with a three-year recruitment plan and process to hire 10 underway (hiring dependent on fee increases through annual budget). - PIE firms: quality control reviews on a three-year cycle; non-PIE firms on a six-year cycle; ICAC objective to review big four every year and add a risk-based rotation component. - In 2011, ICAC finalized review of two of the big four firms and 30 reviews on other PIE firms. - ICAC conducted 82 investigations related to audit works and 53 investigations related to auditors’ independence in a recent period. - Enforcement: - Article 30 of the LAC: ICAC can impose sanctions (minor, medium, serious) including money penalties; medium and serious infractions can carry suspensions. - Sanctions can arise from reviews or investigations. - During 2011 ICAC imposed 42 money penalties to auditors and audit firms, out of which six were PIE firms. - Money penalties were imposed in previous years, including on each of the big four in connection with investigations. - CNMV-ICAC collaboration: - CNMV participates in the Accounting Board and consultative committees and has been an active source of referrals to ICAC. - Assessment: Broadly Implemented. - Comment: New ICAC approach for PIE quality control should strengthen oversight but enhancing ICAC resources is key; arrangements are at an early stage. ### Principle 20 — Auditor independence - Legal framework: - LAC Article 12: auditors must be independent; not take part in decision-making; adopt measures to identify threats (self-review, advocacy, self interest, family or trust or intimidation); apply safeguards to mitigate or eliminate threats; abstain where appropriate. - Article 13: specific prohibitions include engagements where: - Lead partner previously held director/management position. - Financial interest (direct or indirect) in audited firm when material. - Marriage or blood relationship with management team. - Provision of certain services: (i) preparation of financial statements or other accounting documents, (ii) valuation, (iii) internal audit, (iv) legal advice, development and implementation of IT related to financial information. - Non-audit services when they constitute a significant proportion of audit firm remuneration for the last three years. - Strengthening independence: - Time period: incompatibilities present from beginning of the first year prior to audit period also compromise independence. - By subject: independence compromised when incompatibilities occur in linked entities, close relatives of lead auditor, persons directly related to auditor or audit firm network or entities in auditors’ network for non-audit work (Articles 15–18). - Article 19: rotation requirement of lead engagement partner for PIE firms after seven years, with two-year cooling-off period. - Compliance mechanisms: - Auditors required to establish internal controls to identify threats; NIIC-1 implementation required by 2012. - Audit committees’ responsibilities strengthened (LAC 2010 reforms): audit firms must publish a “transparency” report on their websites (description of quality control systems; summary of PIE firms served; procedures to ensure independence; internal reviews; continuous training policy; total remuneration with breakdown of audit and non-audit services; remuneration of partners). Audit committees must submit a report/opinion to the board on such transparency reports and include at least one independent member expert in accounting and/or auditing. - ICAC quality control reviews and investigations are critical to ensure independence; in 2011 ICAC carried out 53 investigations related to independence and Article 21 requires auditors to inform ICAC annually of remuneration from each audited company with a breakdown of audit and non-audit services. - Assessment: Fully Implemented. - Comment: Authorities should consider extending audit committee requirements to issuers admitted to trading in MAB. ### Principle 21 — Audit standards quality and compliance - Framework: - Article 6 of the LAC: audits must be conducted in accordance with the Spanish auditing standards. - Standards developed by the three professional bodies; proposals subject to public consultation and Consultative Committee on Auditing. President of ICAC homologates standards via resolution and publishes them in the Official Bulletin of ICAC. - Convergence with ISAs: - Experts report no major differences between Spanish Standards and ISA; professional bodies and ICAC adapted standards during transposition of the EU Directive on Audit. - Compliance mechanisms: - Internal controls by auditors, ICAC reviews, and CNMV referrals ensure compliance. - ICAC issues guidance enhancing compliance. - Assessment: Fully Implemented. ### Principle 22 — Oversight of Credit Rating Agencies (CRAs) under EU CRA Regulation - Regulatory context: - Since 7 September 2010, CRAs in Europe required to comply with Regulation (EC) No 1060/2009 as amended by Regulation (EU) No 513/2011 (CRA1 and CRA2), consolidated as the EU CRA Regulation, which entered into force on June 1, 2011. - As of July 1, 2011 ESMA took responsibility for direct supervision of all registered CRAs issuing credit ratings in Europe and assesses new CRA registration applications. - The largest 3 global CRAs (Standard & Poor’s, Moody’s Investor Service, Fitch Ratings) and DBRS have been registered in the EU and under ESMA supervision since October 31, 2011. - Use of ratings for regulatory purposes: - Ratings used for regulatory purposes may only be used if issued by CRAs established in the Union and registered under the Regulation. - Spain uses ratings for regulatory purposes in connection with capital framework and frameworks for CIS and pension funds. - The Regulation allows use of third-country ratings via endorsement or certification under specified conditions. - Registration requirements and application content: - ESMA can obtain information to determine registration compliance; applicants must provide detailed policies and procedures across seven areas: (i) General Organization and Governance; (ii) Internal Controls; (iii) Business Activities and Resources; (iv) Conflicts of Interest; (v) Rating Process and Methodology; (vi) Disclosures; (vii) Endorsement. - Quality and integrity of ratings: - CRAs required to use methodologies that are “rigorous, systematic, continuous and subject to validation based on historical experience, including back-testing.” - Requirements for permanent monitoring and regular updates; establishment of a review function for methodologies, models and key rating assumptions. - Record keeping: - CRAs must maintain internal records of rating activities and retain them for six years or the duration of the rated instrument. - Sufficiency of resources: - Requirement for sufficient resources; Annex 2 specifies information to demonstrate “financial resources to perform credit rating activities,” “staffing… and expertise,” and outsourcing arrangements. - Conflicts of interest and organizational/operational requirements: - CRAs must identify, eliminate or manage and disclose conflicts of interest; administrative/supervisory board and independent board members required to monitor effectiveness. - Operational prohibitions include issuing ratings when CRA owns financial instruments of rated entity, providing consultancy/advisory services to rated entity on corporate/legal structure or assets (ancillary services allowed). - Rules on analysts include prohibitions on fee negotiations, trading securities, analysts rotations, and constraints on remuneration. - Specific disclosures: - Disclosure of rated entities and related parties from which a CRA receives more than five percent of annual revenue. - Disclosure of largest 20 clients by revenue, clients whose contribution to revenue growth exceeded total revenue growth by more than 1.5 times (with thresholds), and list of all ratings including proportion of unsolicited ratings. - Transparency, timeliness and information on ratings: - CRAs must ensure timely non-selective disclosure of ratings and decisions to discontinue ratings with reasons. - Publication requirements for procedures, methodologies, models and key rating assumptions; immediate disclosure of scope of ratings affected by methodology changes. - CRA must explain key elements underlying credit ratings in press releases/reports. - Historical defaults: - Obligation to disclose historical performance to CEREP (ESMA) and periodic disclosure every six months of historical default rates by rating categories, by geographical area and changes over time. - Confidentiality: - Obligation not to use or share confidential information other than for credit rating activities. - Enforcement powers: - ESMA can impose fines, periodic penalty payments, withdraw registration, prohibit CRA from issuing ratings across the Union, suspend use for regulatory purposes, require corrective actions, and issue public notices. - Registration and supervision experience: - As of January 2011: 16 CRA groups involving 28 legal entities and one certified entity registered under transitional provisions. - Colleges of supervisors reviewed global CRA applications, with CNMV participation for CRAs present in Spain. - Registration process had two stages (document completeness and substantive requirements) and took roughly one year; led to organizational and procedural changes in some CRAs. - ESMA supervision: - ESMA created a specialized unit composed of 12 staff with capacity to increase to up to 20; functions: policy, supervision and risk identification. - Inspections program to be risk-signal driven (previous inspections, complaints, signals from local authorities). - ESMA conducted on-site inspections on the three global firms since October 2011; inspected three ratings each in sovereign, banking and covered bonds; inspections lasted roughly four weeks with teams of two-three persons; individual reports were sent to each CRA and a general findings report was released in March (year in text context). - Assessment: Broadly implemented. - Comment: Registration process by colleges was thorough; supervisory approach is at an early stage; effective allocation of approved resources will be key to robust supervision. ### Principle 23 — Oversight of other information providers (sell-side analysts, valuation companies) - Sell-side analysts and research: - Analysis or research can be provided as an auxiliary activity by ISPs; separate authorization not needed but must be indicated in program of activities. - “Independent” analysts allowed in law but in practice research is carried out by big financial groups. - Article 70 of the LMV: ISPs must establish administrative and organizational measures to prevent conflicts of interest detrimental to clients. - Article 83 of the LMV: entities must separate proprietary trading, portfolio management and analysis into separate units; when publishing reports, must disclose relevant relationships and stable shareholdings and state document is not an offer. - Royal Decree 1333/2005 Article 12.1: any person making a recommendation must disclose circumstances that may reasonably endanger objectivity, including relevant financial interests or conflicts of interest; extends to legal persons’ responsible personnel. - Articles 12 and 13 of the Royal Decree require disclosure of interests/conflicts of the legal person, those known by persons with access prior to disclosure, and details if research is contracted out (including whether remuneration is related to investment banking operations and whether contractors would receive or acquire shares from issuers prior to public offering). - Royal Decree 217/2008 Articles 45.3 and 47.1: disclosure of conflicts of interest in durable medium when research is disseminated to clients; Article 47.2 a) prohibits analysts and involved ISPs trading for their own account or for others regarding evaluated securities when research is released. - Supervision: - CNMV has not conducted thematic reviews but monitors compliance via: - Market Department review of research in important public offerings. - On-site inspections of ISPs and credit institutions to review conflict-of-interest procedures and trading restrictions. - Valuation companies (real state): - Only valuation companies (sociedades tasadoras) regulated and supervised by BdE may value real state. - 2008 CNMV recommendations for real estate companies and valuation experts include requirements for internal CoC, information barriers, mitigation of income concentration, compliance officer, mechanisms to ensure expertise and quality, liability policies, remuneration independence from value of real estate, minimum expertise, application of international valuation standards, and follow-up of internal-use reports. - Recommendations for companies admitted to trading: - Implement internal mechanisms for selection of valuation experts to check independence, absence of conflicts, and reasonability of methodology. - Verify compliance with international standards; internal review of valuations; avoid excessive concentration of valuation services; provide appropriate disclosure including NIC 40; involve audit committees in selection and conflict identification. - Assessment: Fully Implemented. - Comment: Remuneration of analysts can be linked to investment services operations but must be disclosed; CNMV may consider a thematic review to assess the extent and impact. ### Principles for Collective Investment Schemes (Principle 24) — eligibility, governance, organization, operational conduct - Legal framework: - Main legislation: Law 35/2003 of November 4 on CIS Act, as amended by Act 31/2011; Regulation implementing the Act approved by Royal Decree 1309/2005 (CIS Regulation). - CIS forms: investment fund (fondo de inversión) or investment company (sociedad de inversión). - Authorization: - Authorization required for both marketing and operation of a CIS. Formal authorization by the Minister of Economics and Finance on proposal by CNMV (Article 41.1 of the CIS Act). - Marketing permitted by CIS operators or firms authorized to provide investment services (investment firms and credit institutions, Article 63 of the LMV). - Only CIS operators can establish and manage a CIS (Article 40.6). - Eligibility criteria and fit-and-proper: - Title IV sets regime for CIS operator authorization. - Article 41.2 requires evidence of integrity and professional competence of directors and managers via CNMV questionnaire. - Significant shareholders defined as those holding more than 10 percent or exercising significant influence (Article 45). - Financial capacity and minimum capital (Article 70 of CIS Regulation): - Minimum share capital: € 300,000. - Additional capital related to assets under management: - 0.5 percent the cash value of the CIS assets under management up to € 60; - 0.33 percent of the amount in excess of € 60 million up to € 600; - 0.2 percent of the amount in excess of € 600 million up to € 3 billion; - 0.1 percent of the amount in excess of € 3 billion up to € 6 billion; and - 0.05 percent of the amount in excess of € 6 billion. - Internal management structure and required documentation: - Application must include detailed organizational structure, list of activities, technical and human resources, and demonstrate compliance with internal control and risk management (Article 43.1.j), CNMV Circular 6/2009 requirements (dedicated independent risk management unit), and compliance function (Rule 3 and Rule 5 of Circular 6/2009). - Depositories: - All CIS must have a depository authorized under Title V of the CIS Act; depository holds assets and oversees operator compliance (Articles 57 and 60). - Credit institutions, dealers and broker dealers may be depositories if members of clearing/settlement systems; depository may provide custody services directly or through a market member (Order EHA/596/2008 Article 5.2). - Depository must establish oversight mechanisms to ensure assets disposed only with its authorization. - Record keeping: - CIS operator responsible for records of shares and all transactions (Article 40.11). - Article 73 of CIS Regulation and Rule 3.4.d of CNMV Circular require internal control policies to ensure each transaction can be fully reconstructed. - Rule 3.4.a requires administrative and accounting procedures to ensure proper registration of subscription/redemption applications and unit-holder/shareholder records. - Rule 10 requires internal manuals detailing internal control policies and procedures. - Conflicts of interest and related-party transactions: - Article 46: general obligation to act in interest of holders. - Article 67 of CIS Act and Article 99 of CIS Regulation govern related-party transactions; internal procedures required to ensure transactions are in CIS interests and at market-equivalent terms; independent unit confirms compliance; “material” transactions require pre-approval. - Documentation for authorization must include oversight procedure for related-party transactions. - Related-party transactions require disclosure in prospectus and periodic reports. - Related depositaries: - Where depositary belongs to same group as operator, specific internal rules of separation required (Article 68) and additional safeguards (see Principle 25). - Conduct of business and best execution: - Article 98 of CIS Regulation: written binding internal rules of conduct reflecting LMV conduct rules. - Operators must ensure investment decisions adopted prior to order transmission; pre-established allocation criteria for multiple CIS clients to ensure fairness. - Article 66: CIS must enter into transactions at market prices and conditions except where more favorable for CIS. - Rule 3.4.e of Circular 6/2009: policies for selecting financial intermediaries considering price, costs, speed, execution likelihood, settlement, volume, nature, and other relevant factors; reviewed by risk management unit. - Churning and monitoring: - Article 46.2 and related party controls designed to prevent churning. - CNMV analyses purchase and sale activity to detect churning; active trading must be stated in prospectus; semi-annual report includes index of portfolio rotation for preceding six-month period. - Underwriting and investment due diligence: - Related party transaction rules refer to securities issued or guaranteed by related parties. - Rule 4.1 of CNMV Circular 6/2009 requires risk control unit to perform pre- and post-investment checks to verify conformity with investment policy and assess risks and contribution to overall CIS risk profile. - Fees, expenses and soft commissions: - Article 17 of CIS Act and Article 22 of CIS Regulation require disclosure of costs and expenses in prospectus. - Article 5 of CIS Regulation prescribes maximum fee percentages for management, depository, subscription and redemption fees; other expenses must be for services actually rendered (Article 5.11). - Rebate arrangements must be disclosed in prospectus (criteria governing repayments). - Soft commissions permitted if disclosed in prospectus and Article 5.12 conditions on payment for investment analyst services met. - Fee payment for research permitted only if services enhance investment decisions and mechanisms exist to prevent/detect/correct conflicts in broker selection (Rule 3.4.e). - Compliance unit (Rule 5) monitors operator compliance with fees and commissions obligations. - Delegation: - Article 68 CIS Regulation regulates delegation: - Operator retains full liability. - Delegation must not render operator a mere shell. - Delegates subject to same related-party rules. - Measures to ensure termination of delegation without detriment to continuity/quality. - Prospectus must disclose delegations and scope. - CNMV must be notified before delegation of internal audit, compliance and risk management; asset management delegation requires CNMV authorization. - Delegation contracts must commit delegate to facilitate CNMV monitoring; operator must make information available to CNMV on request. - CNMV Circular 6/2009 Rules 7 and 8 impose requirements for delegation of compliance, risk management and internal audit; Rule 9 requires human/technical resources to monitor delegated functions and oversight by an independent committee or senior manager. - International cooperation and cross-border marketing: - Article 15 of CIS Act regulates marketing in Spain of CIS authorized in other states; EU passport regime under Directive 65/2009/EC with notification between home and host authorities. - Article 41: authorization of CIS operator affiliated with entity in another Member State must be cross-checked with relevant supervisory authority. - Article 10: possibility for a CIS authorized in Spain to be managed by CIS operator authorized in another EU Member State. - Article 71(3): regime for cross-border cooperation between competent EU authorities. - Article 68.7: delegation to a foreign entity requires bilateral cooperation agreement between CNMV and authority in state of delegate. - Article 58: CIS depositories must have legal base or branch in Spain. - Supervision and ongoing monitoring: - Minister of Economy and Competitiveness authorizes CIS operators based on CNMV proposal (Article 41). - CNMV is competent for authorizing and registering individual CIS funds (Article 10). - CNMV responsible for inspecting CIS operators and overseeing compliance (Article 70). - Supervision and inspection regime applies to CIS, Spanish CIS operators, depositaries, delegates and other persons covered by Act and regulations (Article 69). - Articles 72–76: CNMV can intervene or temporarily replace administrative/management bodies by sending reasoned report to the Minister when CIS/CIS operator in exceptionally serious situation gravely endangers solvency, stability of financial system or public interest. - Article 92: CNMV commences investigations and disciplinary proceedings; CNMV imposes sanctions for serious and minor violations; Minister imposes sanctions for very serious violations (based on CNMV proposal), with revocation of licence determined by Cabinet. - Articles 80–82 classify offences into three categories. - Authorization process and CNMV practice: - Applications for CIS operator authorization lodged electronically using CNMV manual currently under review with attachments. - Review conducted by a unit within the Entities Department composed of 6 persons; analysis is thorough with attention to CVs, capital requirements, IT, internal controls and risk management; CNMV may require capital remediation before authorization. - CNMV often encourages entities to triple minimum capital required by law in practice. - Lack of on-site inspections at authorization stage is a factor in CNMV risk scoring; when CNMV raises serious objections applicants often withdraw (last formal rejection in 2008). - New fund applications also electronic; CNMV examines fund constitution and prospectus with detailed focus on Key Investor Information (KII). Review for “simple” funds takes roughly a week. - Formal decision by CNMV President or Vice President. - Ongoing monitoring: - Supervision by CIS supervision department within Directorate General of Entities; annual supervision plan approved by CNMV’s Executive Committee. - Two layers of supervision: off-site (distance supervision) and on-site (text cut off before details). *Italicized source: IMF staff report content (PDF content unit).* ### Section III of CNMV Circular 3/2008 (accounting standards, annual accounts and ### Section III of CNMV Circular 3/2008 (accounting standards, annual accounts and confidential information of CIS) ### Confidential reporting and supervisory data flows - Three types of confidential reports required to be filed with the CNMV for each fund: - Monthly: Portfolio of financial investments and cash (M04); Portfolio of derivatives (M05); Assets of each CIS/class of shares and daily net asset value (NAV) (MB2); plus six other monthly statements covering fees paid by the CIS, volume of assets held by individual investors and by different types of qualified investors, and investment diversification coefficients. - Quarterly: statement of asset allocation (T01) and statement of changes in assets (T02). - Annually: balance sheet (P01), income statement (P02) and statement of allocation of income for the year (A01). - Additional confidential reporting imposed by other CNMV Circulars: - CNMV Circular 7/2008: semi-annual reports from CIS operators including balance sheet, income statement, proprietary investments of the CIS operator, information on individual CIS under management and other assets under management. - CNMV Circular 3/2009: semi-annual reports from depositories for each CIS with deposited assets covering valuation of assets (D01), reconciliation of securities and balances (D02), incidents in the NAV (D03), coefficients and legal limits (D04), and a report containing supplementary information (D05). - Off-site supervision: - Monthly reports received electronically enabling cross-manager analysis; used to monitor compliance with investment policies and to identify unusual trading patterns. - Quarterly and semi-annual reports provide more detailed analyzable information. - IT tools allow comparison of NAV of different funds against benchmarks to detect deviations. - CNMV routinely sends letters requesting explanations when problems are found. - In 2011, CNMV sent 563 requests for information to CIS operators relating to compliance issues. - Semi-annual reports of CIS operators’ financial position are reviewed and a report is produced for the CNMV’s Executive Committee. ### On-site inspections and risk-based targeting - Risk scoring system classifies CIS operators as low, medium or high risk using inputs: - corporate profile (e.g., stand-alone independent firms treated as high risk), - business profile (quantitative factors such as market share; qualitative factors such as other lines of business), - financial situation of the operator (solvency margin, losses etc), - errors or mistakes identified through the off-site supervision process, - risks identified from previous on-site inspections (including time since last inspection). - Higher weightings are given to the last two inputs (errors from off-site supervision and prior on-site findings). - Using this methodology, around 15 percent of CIS operators are classified high risk. - On-site inspection activity and targets: - In 2011, CNMV carried out 17 on-site inspections (15 inspections to CIS operators, of which 14 were general and one a follow up inspection, and 2 inspections to depositories). - CNMV aims to inspect high risk firms on a 3–4 year cycle; other firms over a 7 year period. - Industry concentration: 4 CIS concentrate approximately 50 percent of the activity; over the last three years CNMV conducted 13 inspections on CIS, which included 3 of the 4 largest CIS. These CIS accounted for 46 percent of the sector retail clients, 86 percent of assets under management and 45 percent of the safekept total assets. - Typical inspection scope and duration: - Inspections of large CIS take approximately 4 weeks and involve 2 inspectors. - Inspections of smaller CIS operators take approximately two weeks and might be conducted by one inspector. - Representative samples of funds under management reviewed; examples where sample amounted to 45 percent of AUM and 80 percent of AUM. - Inspection process and follow-up: - Inspection reports reviewed by Deputy Director and Director, then sent to the CIS operator board. - Board must convene to discuss the report and propose a plan of action to correct deficiencies. - Relevant staff prepare a proposal on (i) whether to accept the plan as is or request additional actions and (ii) whether an administrative proceeding is warranted; proposal reviewed by Director and submitted to Executive Committee. - If material deficiencies are found during inspection, they are dealt with immediately; Director may send a letter requesting immediate action. ### Thematic reviews - CNMV conducts thematic work, usually off-site by requesting and reviewing information and documents. - Most thematic reviews cover the whole sector. - A focus for 2012 is related party transactions of CIS management companies. ### Sanctions, remedial actions and enforcement posture - Sanction regime for CIS is set out in Chapter IV of the CIS Act; breaches classified as minor (infracciones leves), serious (infracciones graves) and very serious (infracciones muy graves) with conduct definitions in Arts 80–82. - CNMV emphasis appears to be on remedying compliance deficiencies rather than pursuing sanctions. - In 2010, CNMV sent 2,196 deficiency letters to CIS operators: 1,954 from off-site supervision and 242 from on-site inspections. - In 2011, CNMV sent 1,698 deficiency letters to CIS operators. - CNMV has entered into remedial agreements with CIS operators in a few cases; such agreements are disclosed to the public. - Sanctions imposed during 2008–2011: total of 15 sanctions comprising: - One for violation of the rules on trading in own shares by an open-end SICAV. - Two for violations of the rules on CIS operator equity. - Two for mortgaging assets comprising the CIS operator's equity. - Nine for failure to present auditors’ report and annual financial statements. - One for violation of the rules on expenses that can be charged to a CIS. - The 17 on-site inspections in 2011 resulted in 3 proposals for sanctions. ### Legal form, investor rights and segregation of assets (Principle 25) - Legal forms allowed under the CIS Act: - Investment funds: separate estates without legal personality managed and represented by a managing company with a depository (Article 3); Article 5.3 sets out rights of fund participants. - Investment companies: CIS that adopt the form of a corporation (Article 9). - Two types of CIS: - Financial: mutual fund or open-end SICAV investing in financial assets and instruments. - Non-financial: real estate and non-classified CIS; to date the only regulated non-financial CIS is real estate CIS. - Disclosure obligations: - Prospectus must include constitutional documents, management regulations or articles of association. - CIS operators must provide annual and half-yearly reports (Article 18). - CNMV responsibilities: - Title II of the CIS Act: CNMV authorises creation of a new CIS. - Article 70: CNMV responsible for supervision of funds' compliance with legislative requirements on an ongoing basis. - Changes to investor rights: - Material changes to a mutual fund's regulation generally must be authorised by CNMV and immediately disclosed to investors (Article 12). - Certain changes do not require authorization but must be entered into CNMV’s public register (change of domicile; change of name; additions required by operation of law; capital increases out of reserves of investment companies). - Investors must be notified at least one month before changes affecting investment policy, earnings distribution policy, replacement of operator or depository by an entity of a different group, delegation of portfolio management, change of control of the operator, merger/change of form/splitting of the fund, establishment or increase of fees, and other cases determined by regulation. - If there is any back-end fee or associated expense or discount in such changes, the investor is entitled to withdraw without charge. - Separation of assets and depository duties: - Securities, cash and other assets of a CIS must be held by a depository registered with the CNMV (Article 57). - Each CIS must have only one depository; no entity may simultaneously be operator and depository of the same institution (Article 58.2). - Article 68: no entity may be a depository of a CIS managed by a company belonging to the same group except where specific procedures to avoid conflicts of interest exist; an independent unit of the CIS operator must verify compliance and prepare a report to the board. - In practice custody is often provided by entities belonging to the same group; conflict mitigation procedures include information barriers, disclosure of related party transactions, and checks that transactions are at market price. - External auditors must prepare an annual specific report on adequacy of segregation; Circular 5/2009 provides guidance and requires sampling. - CNMV performs conciliations of positions reported by depositories versus positions in Iberclear during on-site inspections. - Order EHA/596/2008 Article 5: depository obligation on custody allows custody directly or via a third entity that is a member of clearing/settlement/recordkeeping systems in markets where the CIS trades, while depositary maintains liability at all times for proper custodial duties. - CIS Regulation Article 92.2: where securities are deposited outside Spain, assurance must be given that the CIS holds full and free ownership and control and is free to dispose of the assets at any time. - For investment funds the operator exercises ownership functions but does not own assets; Article 6 states assets of CIS funds are not liable for debts of investors, the CIS operator or depositories. - Article 60: the depository must safeguard securities belonging to the CIS, monitor compliance with investment policies and will be liable even if it does not discharge those duties directly; in outsourcing custody the depository remains liable but may raise a due diligence defence if sued. - Article 92 requires CIS operator and depository to establish adequate mechanisms and procedures to guarantee assets of the CIS are not disposed of without CIS consent and authorization. - Winding up: - Dissolution and liquidation regulated in Article 24 of the CIS Act and Article 33 of the CIS Regulation. - For CIS that are companies, dissolution and liquidation comply with general corporate rules notwithstanding specific CIS rules. ### Disclosure standards and investor information (Principle 26) - Article 17 requires CIS operator to publish for distribution among shareholders, investors and the general public for each fund: - a prospectus; - a KII document; - annual, half-yearly and quarterly reports. - Article 19 requires public disclosure of significant events; CNMV maintains public registers of prospectuses, periodic reports, annual reports, CIS audits and significant event disclosures. - Standardized formats: - Article 17.6 requires CNMV to draft standardized formats for all disclosure documents a CIS operator must make public. - Prospectus and KII: - Prospectus must meet the same standard as a prospectus for the issue of securities under Article 27 of the LMV. - Article 22 of the CIS Regulation lists required prospectus contents including date of issue; management regulations or articles of association; identity of CIS operator and persons responsible for prospectus content; valuation methodology if different from legislation; procedures for subscriptions and redemptions and NAV applied; name and group of the depository and sub-custodians; investment policy; risks inherent in the investments; existence of delegations; all costs and fees including maximum fees permitted by law and fees applied for each item. - CNMV Circular 3/2006 establishes prospectus forms; prospectuses must be sent electronically to CNMV and are accessible on CNMV website once entered in registers. - KII must be concise, non-technical, and in a common format, delivered prior to subscription to enable average investor to understand essential characteristics, nature and risks. - Periodic and immediate reports: - Article 18: annual and half–yearly reports must be sent to investors unless they expressly ask not to receive them; half-yearly reports must include the total expense ratio defined as the sum of all operating costs in the period divided by the fund's assets. - Quarterly reports sent to investors who ask to receive them; content and format set out in CNMV Circular 4/2008 (as amended by Circular 6/2010 and Circular 4/2011). - Article 28: events requiring immediate disclosure include reduction of more than 20 percent of the assets of a fund, replacement of a manager or depository, incurring debts to third parties amounting to more than 5 percent of the fund’s assets, or any decisions requiring updating of essential parts of the prospectus. - Advertising: - All advertising inviting subscription must state existence of prospectus and KII and where they may be obtained; advertising may not contradict or downplay prospectus/KII information (Article 18.3). - Article 94 of the LMV allows CNMV to intervene to ensure termination or rectification of inappropriate advertising. ### Accounting, audit and regulatory verification - CNMV Circular 3/2008 contains requirements for accounting for CIS, incorporating fair value standards from the Spanish Commercial Code, LMV and the General Accounting Plan based on international standards. - Entities with more than 150 unit-holders are treated as institutions of public interest under Law 12/2010; audits subject to stricter requirements including rotation of the lead engagement partner. - Depositories and automated monitoring: - Depositories perform oversight on compliance with investment policies. - Two companies have developed IT software for automated monitoring of investment objectives; depositories have acquired such software and inform CNMV immediately upon detection of breaches. - Depositories required to submit an annual report to CNMV. - CNMV verifies CIS are following investment policies using monthly portfolio submissions and daily NAV analysis against representative benchmark indices. - CNMV Circulars and controls: - CNMV Circular 3/2008 and Circular 4/1997 set valuation criteria for different asset types and unlisted securities. - Circular 5/2009 requires external auditors to produce a specific annual report on segregation adequacy and to perform sampling. - As part of on-site inspections CNMV conducts conciliations with Iberclear. ### Valuation, NAV determination and pricing (Principle 27) - Governing instruments: - CNMV Circular 3/2008 (accounting rules, financial statements and confidential information by CIS) and Circular 6/2008 (NAV determination and operating aspects of CIS) establish the regime for asset valuation for CIS. - Circular 3/2008 describes specific valuation criteria per asset class (fixed-income securities, equities, CIS and derivative financial instruments, and real estate). - NAV and valuation principles: - NAV for an interest in a CIS is established by subtracting accounts payable from the fund’s total assets. - Article 7 of Circular 3/2008 sets basic accounting principles including the principle of uniformity requiring standardised criteria maintained over time. - Circular incorporates the General Accounting Plan approved by Royal Decree 1514/2007 aiming convergence with international financial information rules. - Timing: - Article 48 of the CIS Regulation requires NAV to be calculated daily except where otherwise provided in management regulation or where required for the CIS’s investments NAV is calculated at least once per fortnight. - Valuation when market prices unavailable: - Rule 12.3.2 of Circular 3/2008: where no market exists for a specific fixed-income security, generally-accepted valuation techniques applied using observable market data where possible, especially current interest rates and issuer credit risk. - Derivative instruments without sufficiently liquid markets or not traded in organised markets valued using appropriate and accepted valuation techniques or models. - Article 48.7: securities suspended from trading may be valued at last known market price provided they do not account for more than 5 percent of the fund's assets; if they account for more than 5 percent they will not be valued and subscriptions/redemptions are performed using a NAV reflecting only the portion of the portfolio susceptible to valuation, with an obligation to settle differences when valuation is resumed. - Independent audit: - Article 21: CIS must be audited. - LAC via Legislative Royal Decree 1/2011: audit report must include a technical opinion on whether financial statements provide a true and fair view; auditor must check assets are valued at market prices or that appropriate valuation criteria are used where market prices are not representative. - Pricing, redemption and internal controls: - Article 22.1.ñ of the CIS Regulation requires prospectus disclosure of redemption method and NAV applied, daily deadline for accepting orders, frequency of NAV publication and where it can be consulted. - Items for NAV calculation set out in Circular 6/2008; Circular 3/2008 details accounting rules. - CIS operator responsible for valuations (Article 40); Rule 3.4.b of Circular 6/2009 requires procedures to oversee NAV accuracy. - Depositary responsible for supervising criteria, formulas and procedures used by the CIS operator to calculate NAV (Article 60.1.e). - CNMV analyses daily yields to detect atypical yields (mostly NAV calculation errors) and requires strengthening of internal control systems when significant errors detected; for especially serious or repeated errors, CNMV analyses valuation mechanisms and urges pre-execution NAV oversight mechanisms. - Disclosure and access: - Article 4.8 of the CIS Regulation requires CIS operators to provide information on NAV, assets and number of investors free of charge with reliable, quick and non-discriminatory access via securities market bulletins, CIS operator websites and other CNMV approved methods. - Pricing errors and incident management: - Article 46: CIS operator responsible for losses incurred by investors due to non-compliance with legal obligations. - Rule 3 of Circular 6/2009 requires mechanisms to identify, evaluate and resolve incidents/errors/breaches impacting NAV as quickly as possible; operators must establish tolerance limits and indemnification/information procedures in internal manuals. - Suspension/deferral rules: - Article 48.7: when trading halted in listed securities accounting for 5 percent or more of a mutual fund's assets, subscriptions and redemptions proceed in cash for the part not corresponding to suspended securities and the remainder at trading price when trading resumes. - If securities affected by suspension exceed 80 percent of the fund's assets, the CIS operator may suspend redemptions and subscriptions until causes are rectified. - Article 45bis: when exceptional circumstances affect instruments accounting for more than 5 percent of CIS assets, operator (with depositary knowledge) may split original CIS and transfer affected assets to a new CIS compartment (a “side pocket”); investors receive units/shares of the special-purpose compartment proportionally; new compartments cannot issue new units; objective is to sell assets diligently as situation resolves and distribute proceeds to investors. - Article 45bis was introduced recently to help resolve problems with real estate funds that had become illiquid due to adverse real estate value movements. *Source: _cr12143 - Section III of CNMV Circular 3/2008 (accounting standards, annual accounts and confidential information of CIS).* ### introduction of these measures appears to have been successful. ### _cr12143 - introduction of these measures appears to have been successful. ### Reporting to regulator and regulator’s powers of intervention - Suspension or deferral of redemption rights, or the splitting of an existing fund under Article 45(2) of the CIS Regulation, requires immediate disclosure to the CNMV under Article 28 of the CIS Regulations. - Article 72 of the CIS Act gives the CNMV powers to intervene in a CIS operator, to temporarily substitute its administrator or directors, and to substitute altogether the CIS operator that manages a specific CIS in exceptionally serious situations that endanger solvency or the assets of investors. - CNMV interventions may be taken during sanctioning proceedings or independently; the CNMV must justify its actions in a reasoned report to the Minister of Economy and Competitiveness (MEC). - Assessment: Fully Implemented. - Comment: Assessors consider these functions should be vested in the CNMV rather than requiring a report to the MEC as currently justified by the Spanish framework. ### Regulatory authority to monitor compliance (CIS supervision) - CNMV reviews information received from CIS operators and uses broad powers of inspection under Article 70 of the CIS Act to review: - asset value and daily NAV; - month-end valuation of all assets in which the CIS invests; - all securities purchases and sales in the month. - CNMV performs systematic analysis of yields on CIS NAVs to detect accounting and NAV errors and internal control weaknesses. - Assessment: Fully Implemented. - Comment: Use of side pockets by real estate funds should be kept under scrutiny. ### Hedge Funds (HFs) — Definition, authorization, disclosure and supervision - Legal and marketing framework: - Law 35/2003 and Royal Decree 1309/2005 introduced "instituciones de inversion colectiva de inversion libre" (alternative investment schemes) including HFs; not defined but exempted from certain prudential requirements. - Minimum investment to apply to this regime: 50,000 EUR; can only be marketed to professional investors. - Professional investors include financial institutions, government and international organizations, individuals meeting certain networth thresholds, institutional investors, and clients requesting professional treatment if they have relevant knowledge and experience. - Law 35/2003 also introduced funds of HFs (FoHFs) which can be marketed to retail investors under a regime similar to conventional CIS. - CNMV 1/2006 provides more detail regarding HF and FoHF regime. - Authorization and ongoing requirements for HF operators: - Authorization and registration subject to general rules for CIS operators (Article 41 of the CIS Act; Rule 2 of Circular CNMV 1/2006). - Ongoing requirements (Circular 6) apply, including adequate internal controls and specific risk control systems for leverage, unlisted or illiquid securities, and complex derivatives. - Periodic stress tests and crisis simulacra are required. - Related party transaction rules of Principle 24 apply. - HFs must have a depository supervising management activity and custody; Order EHA/596/2008 (Article 3 and Article 7) sets special depository vigilance and custody features for HFs. - HF managers must notify depositories of all prime broker contracts with certain clauses to enable depository functions. - Rule 6 of Circular 1/2006: HF operators must monitor assets assigned as collateral and over which a right of disposition has been exercised. - Rule 4 of Circular 1/2006: operators of HF and FoHF must have additional own funds of at least 4 percent of gross fee revenues from managing these CIS. - Disclosure to investors: - Article 43 of the CIS Regulation: investors must sign consent certifying they understand risks before subscribing to a HF. - Article 44: investors in funds that invest primarily in HFs must also sign prior to subscription. - HFs subject to general CIS disclosure rules with special features for prospectuses (rule 13 of Circular 1/2006) and periodic information (Rule 14 of Circular 1/2006). - Authorization statistics and AUM: - There are currently 23 firms authorized to manage HFs, 18 to manage FoHF and 7 authorized to manage both. - The funds: There were 35 HFs, with AUM of 719 million EUR., and 28 FoHF with 650 in AUM. - Off-site monitoring and reporting: - Rule 18 of Circular 1/2006: monthly confidential statements to CNMV on each HF, including individual positions, subscriptions and redemptions, types of investors, indebtedness, percentage of assets received on loan, VaR and CVaR, percentage of liquid assets, value of assets provided as collateral to a prime broker on which the right of disposition has been exercised, fees and expenses, and NAV on the last day of the month. - CNMV has the same powers over HF operators as other CIS operators and can request and share information. - On-site inspections: - In principle HF operators can be subject to on-site inspections; in practice, CIS operators who only manage HFs are not inspected by the CNMV. - Assessment: Fully Implemented. - Comments: (none specified beyond the above) ### Principles for Market Intermediaries — Regulatory framework and industry background - Authorization under LMV for entities providing professional investment services (ISPs); distinction between investment services and auxiliary services (Article 63). - Investment services (Article 63) include: receipt and transmission of orders; execution on behalf of clients; proprietary trading; portfolio management; placement; underwriting; investment advisory; management of MTF. - Auxiliary services include custody and administration; granting credit for securities trading; corporate advisory; auxiliary services for underwriting; preparation of investment reports; currency exchange services related to investment services; other investment or auxiliary services on underlyings of derivatives linked to investment or auxiliary services. - Article 64 creates four ISP categories: broker dealers (Las sociedades de valores); brokers (Las agencias de valores); portfolio management firms (Las sociedades gestoras de carteras); financial advice firms (Las empresas de asesoramiento financiero). - Credit institutions can perform activities directly if authorized by BdE; MEC responsible for authorization of credit institutions based on BdE proposal, with mandatory CNMV report when request includes investment/auxiliary services. - Assessment: Fully Implemented. ### Firms registered with the CNMV (as at November 10, 2011) - Spanish investment firms: - Broker-dealers: 50 - Brokers: 45 - Portfolio management companies: 6 - Financial advisory firms: 80 - European investment firms: 2,371 - Investment firm branch: 38 - Investment firm under free provision of services regime (passported into the Spanish market): 2.333 - Credit institutions registered with the CNMV and authorized to provide investment services: 177 - Agents: 7,193 - Note: About 50 percent of the agents represent one large insurance company/investment service provider. - Comment: Less than 50 percent of registered firms are independent of banks and insurance companies; distribution of financial products dominated by banks. Investment advisers mostly independent with 80 firms having about 3,000 advice clients. ### Authorization requirements for ISPs (integrity, competence, internal controls) - Integrity: - Article 67.2.f LMV: directors and senior managers must have recognized business or professional standing; assessed via questionnaire and CVs. - Unsuitable if criminal record for fraudulent offences, banned from public office or from administration/management positions in financial entities, or undischarged bankrupt. - Agents must meet business and professional standing standards (Article 65(2)2 LMV). - Significant shareholder suitability test applies (Article 69.1); significant participation defined as 10 percent of capital or voting rights (Article 69.1). - Competence: - Article 67.2.g: majority (and at least three) of board members and all senior managers must have suitable knowledge and experience of the securities market. - Current regime does not require registration or exams for individuals carrying out specific functions beyond board and senior management; board responsible for staff competence. - Internal controls: - Article 67.2.h requires procedures, measures and resources necessary to meet organization requirements in Article 70(3) of LMV, including organizational structure, compliance systems, information systems, protection of client funds and assets, risk control and internal audit, continuity of service, managing outsourcing risk, and remuneration policies compatible with sound capital base. - Firms must have an internal CoC, appropriate control and security mechanisms for information systems, internal control procedures, and a regime for personal transactions. - Authority of the CNMV in authorization: - Authorization may be refused for failure to meet standards, unsuitability of shareholders, lack of transparency in group structure, or other factors impeding effective supervision. - Formal authorization granted by MEC on CNMV recommendation; CNMV’s authorization department has 14 staff dedicated to ISP authorizations. - CNMV does not conduct on-site visits as part of authorization but uses risk scoring that includes lack of inspections as a risk factor. - In 2011 CNMV dealt with around 30 applications for authorization as an investment adviser, and 2 applications for other types. - Revocation and changes: - Article 73 LMV: circumstances for revocation include failure to comply with authorization requirements. - Article 74 LMV: CNMV initiates and investigates revocation proceedings; final determination by MEC following CNMV proposal (CNMV can decide directly for financial advisers). - Article 69: changes in shareholder control subject to CNMV verification; CNMV has maximum of 60 business days to object. - Public registers: - Article 92 LMV requires CNMV to maintain public registers of investment firms, directors, senior management, agents, and investment services authorized. - Assessment: Fully Implemented. - Comment: Authorities should explore extending competence requirement to all directors. ### Capital, liquidity, reporting and regulatory intervention for ISPs (Principle 30) - Initial capital requirements: - Broker dealers: € 2 million - Brokers: - members of secondary markets or with custody/transitory credit accounts: € 500,000 - other brokers: € 300,000 - receiving and transmitting orders only (without holding funds/instruments): € 120,000 or professional civil liability insurance or equivalent with minimum coverage of € 2.5 million per claim and € 3.5 million annually, or combination with equivalent coverage - Portfolio management companies: € 100,000 - Financial advisory firms: - corporations: € 50,000 or professional civil liability insurance covering EU with minimum coverage of € 1.0 million per claim and € 1.5 million annually, or combination - natural persons: must comply with the insurance requirement - Ongoing capital requirements: - Article 7 of CNMV Circular 12/2008: firms (except financial advisors?) must hold own resources equal to or greater than the highest of: - sum of requirements for trading book risks, counterparty credit risk and settlement risk; requirements for exchange rate and commodity risk; 8 percent of credit risk weighted positions; requirements for operational risk; - Requirements depending on level of activity: 25 percent of fixed expenses; - Two thirds of the minimum capital; - 0.5 percent of the value of assets held in managed portfolios. - Circular 12/2008 details calculation methods. - Some firms may be released from requirements subject to CNMV approval in specific cases associated with activity limitations. - Liquidity requirements: - Investment firms (not solely advisors) must maintain minimum investment volumes in specified low-risk liquid assets (Article 70.1.b LMV). - Client funds must be fully held in liquid, low risk assets (Circular 7/2008, rule number 60). - Orderly winding down: - Article 21 of Directive 2006/49 transposed in Article 94 Royal Decree 216/2008: firms (excluding financial advisors not holding funds) must maintain capital above 25 percent of structural fixed costs of preceding financial year to enable operation for one quarter without revenue for orderly liquidation. - Reporting and audit: - Article 70 LMV: firms must inform CNMV about capital requirement calculations. - Article 147 Circular 12/2008: firms must have procedures to identify, manage and report risks. - Article 155 Circular 12/2008: schedule and content for monthly, quarterly and six monthly reports; CNMV may require more frequent reports. - Article 86 LMV: annual audit of individual and consolidated accounts; Rule 6 of Circular 7/2008: CNMV makes accounts available to public. - Monitoring and intervention: - Capital compliance reviewed monthly (RP10) and quarterly with exhaustive reviews; Supervision Department prepares formal reports every two months for ISPs and every six months for consolidated groups. - When minimum capital requirements not met, CNMV can require higher capital, strengthen procedures, apply policies for provisions/dividends/asset treatment, restrict operations, limit dividend payments. - Article 113 Royal Decree 216/2008: firm falling below minimum must immediately notify CNMV and present a rectification program including reasons, plan, limiting high risk activities, raising capital, and timelines. - Corrective action examples in 2010: - 1 requirement for failure to comply with liquidity ratio. - 15 requirements relating to the limits to major risks. - 3 requirements relating to the asset position. - Assessment: Fully Implemented. ### Internal functions, organization and client protection (Principle 31) - Organizational requirements: - Article 70(3) LMV: structure appropriate to nature, scale and complexity; adequate procedures for compliance; well-defined lines of responsibility; information systems; conflict of interest measures; business continuity; administrative accounting; operational risk measures for outsourcing. - Article 37 RESI: detailed outsourcing requirements including competence of third-party, emergency data recovery plans, IT security verification. - Rule 6 CNMV Circular 1/1998: when third parties carry out risky activities, authorized firm must ensure professionalism and apply own procedures to subcontracted services. - Internal controls / compliance / internal audit: - Article 70(3).1.b LMV: independent compliance unit required. - Article 70(3).2.a LMV: internal audit function and systems for risk identification and management required. - RESI Articles 28–30 set detailed requirements for compliance, risk management and internal audit functions. - Rule 15 CNMV Circular 1/1998: internal control function must prepare report on compliance and incidents; board or audit committee must approve and send to CNMV. - Senior management responsibility: - Article 31 RESI: senior management must ensure firm meets obligations and evaluate effectiveness of policies at least annually; receive periodic written reports on compliance, risk management and internal audit. - Circular 12/2008 Articles 146–147: require clear organizational structure and directors to approve internal control strategies and receive periodic reports. - Internal systems and segregation: - Article 27 RESI: maintain register of activity and internal organization; Article 33 RESI and EU Regulation 1287/2006: register of orders and transactions. - Rule 6 CNMV Circular 1/1998: segregation between functions with higher operational risk. - Conflicts of interest: - Article 70(4) LMV and RESI Articles 44 ff.: firms must detect and manage conflicts; if measures insufficient, prior notice to client required. - Direct electronic access (DEA): - No specific provisions in LMV; general internal control obligations apply. CNMV to comply with ESMA guidelines; BME market rules govern member filters and volume limits. - Client protection — duties and reporting: - Article 79 LMV: diligence and transparency; RESI Article 59: disclosure of incentives. - Article 70(3).f LMV and Title II Chapter I Section 5 RESI: protect client funds and instruments, prevent improper use, maintain separation of own and client instruments, internal registers enabling knowledge of client positions. - Winding up: CNMV can require transfer of client assets to another authorized firm. - Investor complaints and client information: - Law 44/2002: customer service department and complaint logs; CNMV publishes head of customer service contacts. - Article 79(2) LMV: information requirements for clients and pre-contractual information set out in RESI Articles 62–64. - Reporting to clients: Article 68 RESI (orders), Article 69 RESI (portfolio management periodic statements: retail clients half yearly unless quarterly or monthly for leveraged portfolios), Article 70 RESI (annual statement of holdings). - Fees disclosure: Article 66 LMV and RESI Articles 68/69: itemised fees and cost reporting. - Know-your-client and suitability: - Rule 14 Circular 1/1996 and Law 10/2010: identity checks and AML requirements for natural and legal persons; beneficial owner checks. - Article 79(2) LMV: suitability (‘test de idoneidad’) for advisory and portfolio management—must obtain knowledge/experience and financial situation and investment goals; “test de conveniencia” for other services. - Execution-only exemptions apply under specified conditions. - Books and records: - Article 32 RESI: keep registers for at least five years; CNMV can require longer in exceptional circumstances; registers must be kept on accessible media and be reconstructible. - Regulatory oversight: - Investment firms supervision department: 36 people, three teams (off-site, on-site credit institutions, on-site investment firms). - Annual supervision plan approved by CNMV Executive Committee. - Off-site monitoring: monthly reports on capital/solvency; bimonthly reports for director; average of 6 follow-up requests per month. - On-site inspections: risk-based cycles—high risk every four years, medium-high/medium-low every 6–7 years, low up to ten years; CNMV aims to inspect high risk firms more frequently and performed 10 on-site inspections of investment firms in 2010 and 9 in 2011. - Thematic reviews conducted off-site using samples; example: 2011 review on selling practices relating to preference shares covering 27 firms representing 95 percent of the market. - Enforcement: - CNMV uses recommendations on bad practices and increased sanctions for breaches to conduct obligations. - Assessment: Partly Implemented. - Comments: Main concern is low coverage of on-site inspection program, especially for banks concentrating commercialization activities; CNMV should increase targeted on-site inspections and integrate new reporting requirements to refine risk analysis. Also integrate financial advisers more fully into supervisory program; consider extending competence requirement to all directors. ### Dealing with failure of a market intermediary (Principle 32) - Crisis arrangements: - CNMV has a manual for crisis situations in investment firms, including interventions and substitutions of CIS operators with detailed procedures and resolution templates. - Investor protection fund (FOGAIN): - Title VI LMV establishes Fondo de Garantía de Inversiones (FOGAIN) providing compensation up to € 100,000 when investors cannot obtain reimbursement of money, securities or financial instruments from an investment firm. - Membership mandatory for all ISPs except financial advisory firms and those who only manage an MTF (Article 3 Royal Decree 948/2001). - At the end of 2011 FOGAIN membership included 45 brokers, 50 dealers, 6 portfolio management companies, 47 UCITS management companies, and 0 foreign investment companies. - Client cash balances and financial instruments held by credit institutions are covered by deposit guarantee arrangements; HFs are not covered. - FOGAIN is pre-funded; at December 31, 2011 the amount held was € 55 million. - Claims history: small number of events; March 2010 major broker dealer failure led to compensation of approximately € 1 million. - Early warning systems and intervention: - CNMV receives monthly capital and solvency information with one month lag; uses estimate of five months of losses as internal threshold to trigger regulatory action and intense monitoring. - CNMV powers include taking control of a firm or temporarily replacing management (Article 107 LMV), suspending authorization partially or totally (Article 76 LMV), and revoking authorization (Article 74 LMV). - Revocation may be followed by measures to protect investors and market functioning: transferring client cash and positions; requiring guarantees from administrators; appointing administrators or intervening in winding up. - Communication/cooperation: - CNMV keeps regular contact with BdE for supervision of credit institutions providing investment services. - Assessment: Fully Implemented. - Comments: Tools effective in protecting client funds and assets; early warning system is non-traditional but has served CNMV well; CNMV could explore pros/cons vs. traditional early warning thresholds. ### Secondary markets, trading systems and oversight (Principles 33–35) - BME group market structure: - BME group operates 4 stock exchanges (Barcelona, Bilbao, Madrid, Valencia), 2 futures markets (MEFF Productos Derivados; MEFF Renta Fija), AIAF Mercado de Renta Fija (corporate debt), 3 MTFs (MAB; Latibex; SENAF), Iberclear (CSD), and MEFFCLEAR (CCP for repo transactions on Spanish public debt). - Sociedad de Bolsas manages SIBE electronic platform; SIBE provides single electronic platform for approximately 172 issuers listed on at least two exchanges. - MAB and Latibex use SIBE; Latibex trades 34 Latin American stocks; MAB trades 18 small cap stocks and interests in approx. 3,000 SICAVs. - Authorization and ongoing conditions: - Official secondary markets require MEC authorization on CNMV recommendation (Article 31bis LMV); markets operating in one autonomous region authorized by that region. - MTFs subject to prior verification and supervision by CNMV (Article 119 LMV); general regulation for MTF subject to CNMV approval and publication (Article 120 LMV). - Market rules must cover tradable instruments, members, margin systems, trading, record keeping, clearing/settlement, market supervision/discipline and governance. - Changes to by-laws or market regulations require CNMV prior approval (Article 31(2).3; Article 51.5; Article 120.1). - Clearing and settlement: - Iberclear recognized under Article 44 bis LMV as CSD; MEFFCLEAR acts as CCP for repo transactions; derivatives clearing through MEFF CCPs; clearing/settlement rules approved by CNMV. - Supervision and market surveillance: - Market management companies must have supervision departments for real-time trading surveillance (Articles cited for RMs/derivatives/MTFs). - CNMV Secondary Markets Department: 23 of 31 staff perform market supervision in three teams (equities, fixed income, derivatives). - CNMV has vendor feed with real time market access and full download of daily transactions; since 2009 market participants must provide daily list of beneficial owners of prior day transactions. - CNMV monitoring/alert system creates alerts for abnormal trading and cross-market issues; CNMV receives weekly BME statistical reports and meets monthly with BME compliance. - BME has 15 staff dedicated to surveillance with automated systems and intraday triggers. - Powers of intervention: - CNMV can suspend application of any rule issued by a management company that breaches legislation or impairs price formation (Article 15.2 Royal Decree 726/1989; Article 19 Royal Decree 1282/2010); can require amendments to market rules and suspend trading in securities under Article 33 LMV. - Assessment: Fully Implemented. ### Transparency of trading and pre/post-trade regimes (Principle 35) - Equity markets — pre-trade transparency: - Display of five best bid and offer prices and volumes at those prices via market facilities or third-party vendors. - Exceptions/waivers per MiFID available; about 35 percent by value of transactions occur with waivers. - Block trade parameters: - Ibex-35 securities: price within +/- 1 percent of mid-point of best bid/offer on continuous market; volume must be higher than € 600,000 and at least 2.5 percent of average daily turnover in the last calendar quarter. - Other securities: price may deviate up to 15 percent from static price; volume must be more than € 1,200,000 and at least 5 percent of average daily turnover in the last calendar quarter. - Iceberg orders: only displayed part is pre-trade transparent; visible part executed prior to undisplayed tranches. - Trades outside normal hours — special transactions: - FUERA DE HORA: price within ±5 percent of vwap or closing price; minimum trade value € 300.000 and at least 20 percent of daily average traded in last quarter; buyer and seller must be individual beneficial owners. - AUTORIZADAS: require advance authorization; minimum volume € 1.500.000 and at least 40 percent of daily average traded in last quarter. - TOMAS DE RAZON: trades agreed by two non-market members; trades under € 300.000 or 20 percent of daily average require authorization. - Special transactions ~2 percent of aggregate exchange volume. - Post-trade transparency: - Price and volume of all trades are made public with details (trading day, time, price, volume, instrument ID, identities of investment firms) disseminated in real time via market vendor feeds or third-party vendors; BME publishes free data with 20 minute delay. - Deferral exceptions exist under MiFID but BME exchanges currently do not use them. - Special out-of-hours transactions (up to 20:00) must be reported before next opening. - Fixed-income and derivatives: - AIAF SEND electronic segment provides order book price/nominal sums and matched transaction info in real time. - MEFF requires dissemination of best bid/offer and volumes, last transaction price, cumulative transactions, open positions and settlement prices; MEFF provides best bid/ask with 15 minutes delay on website. - MFAO provides complete pre- and post-trade transparency in real time free of charge for three best bid/ask positions. - Dark trading: - Dark trading limited to iceberg orders within official secondary markets; CNMV and market operator have same information as participants. - Assessment: Fully Implemented. - Comments: Minimal fragmentation of trading in BME stocks currently; consolidation not required in practice. ### Market abuse detection and enforcement (Principle 36) - Legal prohibitions and enforcement routes: - Criminal Code Articles 284–285 criminalize dissemination of false news to change prices and misuse of confidential price-relevant information; prosecutions pursued by Prosecutor’s Office; criminal penalties including imprisonment. - LMV administrative offences: use/dissemination of inside information (Article 81.2 and Article 99.o); practices affecting price formation such as misleading transactions, maintaining artificial prices, fictitious devices, dissemination of false information (Article 83 ter and Article 99.i). CNMV can specify other abusive practices. - Sanctions for administrative breaches described under Principle 11. - CNMV investigative process: - Market supervision identifies suspicious trading and refers to Market Misconduct Unit (MMU). - MMU gathers information using CNMV powers; if actionable breach identified, matter referred for sanctioning or criminal prosecution. - CNMV has imposed sanctions for insider trading and has pipeline market manipulation cases; several referrals to prosecution in recent years but few criminal convictions to date. - Cross-market supervision and information sharing: - CNMV monitoring system includes cross-market alerts and the CNMV is developing a more integrated system combining market data and price-sensitive disclosures. - For foreign linkages, CNMV uses MMoU and ESMA-POL network to request information from other regulators. - Commodity markets: - Only commodity futures market MFAO with very small activity; no regulatory authority for underlying physical market. - Assessment: Fully Implemented. - Comment: CNMV active in investigations and referrals to prosecutors; limited criminal convictions so far. ### Market integrity, large exposures and settlement risk (Principle 37) - Monitoring of large positions: - Settlement and clearing systems (IBERCLEAR, MEFF, MEFFCLEAR, MFAO) include quantitative and qualitative triggers to monitor large positions. - IBERCLEAR: - Collateral based triggers; Royal Decree 116/92 and Iberclear rules calculate daily risk; market collateral guarantees initially set at 80 percent of average daily risk for previous 3 months; additional guarantees required if transaction risks exceed collateral cover. - CNMV receives daily collateral cover information. - MEFF / MEFFCLEAR / MFAO: - Initial margins and real-time monitoring; position limits for participants and clients based on equity and market share; operator issues warnings and prevents transactions exceeding limits. - Regulator access to information: - System operators and CNMV have access to risk positions; Iberclear records aggregate client positions but can require ownership details; MEFF and MFAO do not permit omnibus client accounts so client positions are separately held at clearing house. - CNMV can use information gathering powers to identify ultimate holders. - Failure to supply client position information breaches system rules and must be reported to CNMV. - Default procedures and settlement finality: - Market and clearing facility regulations set default procedures. - Law 41/1999 recognizes Iberclear, MEFF, MEFFCLEAR, and MFAO as clearing/settlement systems; settlement finality determined under market rules; client assets protected from participant insolvency and transferable to another participant (Articles 12 bis LMV, Article 44(ter) LMV, Article 59 LMV). - Short selling and reporting: - Naked short selling banned. - Short position reporting model (2010) based on CESR/ESMA: - Positions ≥ 0.2 percent of issuer's share capital must be notified to CNMV (not published); increases/decreases > 0.1 percent treated similarly. - Positions ≥ 0.5 percent must be notified to CNMV and individually reported to market. - CNMV publishes aggregate short positions in each security at least fortnightly. - CNMV treats concealment of short positions or false information about availability of securities as market manipulation. - Failed trades: - Market operators report failed transactions daily; failed trades ~0.2 percent by volume. - Iberclear empowered to order replacement purchases at seller’s expense and penalties apply for settlement delays; CNMV monitors settlement daily. - Assessment: Fully Implemented. ### Clearing and settlement supervisory assessment - Principle 38: Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements. - Assessment: Not assessed. *Source: _cr12143 - introduction of these measures appears to have been successful.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12143.pdf_