## Annex 1. Detailed Analysis of the Assessment Data

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### Introduction: role and significance of securities markets
- Securities markets transform savings into financing for the real sector and constitute an alternative to bank financing.
- Markets provide asset pricing, risk transfer and diversification, allowing firms to unlock capital for new investments.
- Risk transfer and pricing mechanisms help financial institutions manage risk and can act as a buffer for banking-system disruption, contributing to financial stability.
- Emerging market and developing countries:
  - Securities markets are growing in importance as a source of financing for the corporate sector, often initially for larger corporate players.
  - Collective investment schemes, private and public pension funds have become important players, driving demand for suitable investments.
- Gaps in academic study and policy:
  - The systemic importance of securities regulation has been neglected as a topic of academic study.
  - Few attempts have examined the effects of securities regulation, or regulatory weaknesses, on stability and growth.
  - The paper examines strengths and weaknesses of securities regulatory systems worldwide using data from IMF and World Bank FSAP assessments.
- Key finding headline:
  - Securities regulatory systems suffer from persistent weaknesses in a number of countries and there is an urgent need for improvement.
  - A consistent theme is the lack of ability of regulators in many countries to effectively enforce compliance with existing rules and regulation.
  - Contributing factors include lack of power and authority, lack of resources and skill, and lack of political will—especially problematic in areas of increased complexity (valuation of assets, risk management practices, internal controls for market participants and trading systems).

### What is securities regulation? — scope and objectives
- Scope comprises regulation of:
  - public issuers of securities;
  - secondary markets;
  - asset management products;
  - market intermediaries.
- Primary regulatory goals:
  - Address asymmetries of information between issuers and investors, clients and financial intermediaries, and counterparties to transactions.
  - Ensure smooth functioning of trading, clearing, and settlement mechanisms to prevent market disruption and foster investor confidence.
- Main components summarized:
  - Regulation of public issuers: full, timely and accurate disclosure; continuous disclosure; corporate governance emphasis.
  - Regulation of market intermediaries: licensing requirements, prudential requirements, market and business conduct obligations.
  - Regulation of asset management: disclosure and professional management of collective investment schemes; operators and managers regulated similarly to intermediaries.
  - Regulation of secondary markets: smooth market functioning, fair access, adequate price formation; standards for clearing, settlement and risk management.
- Regulator structure and SROs:
  - Responsibility typically assigned to a public agency; structure varies.
  - Framework should ensure regulator independence, powers, and resources.
  - Self-regulatory organizations (SROs) often carry out part of the regulatory function and should be subject to public regulator oversight.

### Data and methodology used for assessment
- Coverage and timing:
  - IOSCO principles assessments for 74 countries, completed between 1999 and September 2007.
  - Assessments carried out through the FSAP and the OFC program using the IOSCO Principles and the IOSCO Methodology.
- Assessment grading:
  - Each principle graded: fully implemented, broadly implemented, partly implemented, or not implemented.
  - Grades and detailed assessor commentary collated in an IMF database.
- Assessors and scope:
  - Assessments were carried out by one person; a total of 46 different assessors were used.
  - Most assessments are one-time measurements; Mexico assessed in 2001 and again in 2006.
- Limitations:
  - IOSCO principles are broadly worded and were not initially designed as a measurement tool.
  - Assessments remain subjective and require significant exercise of judgment by individual assessors.
  - Consistency and quality of assessments are somewhat mixed.
  - Most assessments are confidential; analysis uses data on a no-name, aggregate basis.

### Aggregate consistency and income correlation
- Aggregate consistency:
  - Assessments produced with the Methodology did not differ significantly from those before it was adopted.
  - Data were consistent with field work and with World Bank and development agency understanding.
- Implementation by principle summary:
  - Only four principles (1, 4, 5, and 21) show levels of full implementation equal or above 80 percent.
  - Four principles (2, 3, 10, and 24) show levels of implementation below 50 percent.
- Income correlation of implementation levels:
  - Low-income jurisdictions show levels of implementation below 50 percent.
  - Lower-middle income jurisdictions show levels of implementation around 50 percent.
  - Upper-middle income jurisdictions show levels of implementation around 60 percent.
  - High-income countries show levels of implementation above 70 percent.
- Regional variation (correlated with income):
  - Europe and Asia exhibit the highest levels of implementation.
  - Western Hemisphere ranks in the middle.
  - Middle East and Central Asia and Africa exhibit the lowest levels of implementation.

### IOSCO category averages by income groups (average percentage share of Fully and Broadly implemented)
- Low-income
  - Regulator: 49
  - SRO: 47
  - Enforcement: 50
  - Cooperation: 32
  - Issuers: 43
  - CIS: 67
  - Market Intermediaries: 37
  - Secondary Mkt.: 48
- Lower Middle-income
  - Regulator: 66
  - SRO: 54
  - Enforcement: 49
  - Cooperation: 38
  - Issuers: 47
  - CIS: 57
  - Market Intermediaries: 63
  - Secondary Mkt.: 53
- Upper Middle-income
  - Regulator: 61
  - SRO: 62
  - Enforcement: 36
  - Cooperation: 48
  - Issuers: 56
  - CIS: 72
  - Market Intermediaries: 42
  - Secondary Mkt.: 59
- High-income OECD
  - Regulator: 85
  - SRO: 91
  - Enforcement: 85
  - Cooperation: 79
  - Issuers: 83
  - CIS: 86
  - Market Intermediaries: 83
  - Secondary Mkt.: 91
- High-income Non-OECD
  - Regulator: 73
  - SRO: 67
  - Enforcement: 77
  - Cooperation: 77
  - Issuers: 79
  - CIS: 75
  - Market Intermediaries: 70
  - Secondary Mkt.: 76

### IOSCO category averages by region (average percentage share of Fully and Broadly implemented)
- Africa
  - Regulator: 50
  - SRO: 56
  - Enforcement: 62
  - Cooperation: 46
  - Issuers: 67
  - CIS: 72
  - Market Intermed.: 39
  - Secondary Market: 46
- Asia and Pacific
  - Regulator: 82
  - SRO: 68
  - Enforcement: 67
  - Cooperation: 63
  - Issuers: 77
  - CIS: 68
  - Market Intermed.: 64
  - Secondary Market: 72
- Europe
  - Regulator: 74
  - SRO: 81
  - Enforcement: 72
  - Cooperation: 77
  - Issuers: 68
  - CIS: 86
  - Market Intermed.: 69
  - Secondary Market: 82
- Middle East and Central Asia
  - Regulator: 59
  - SRO: 44
  - Enforcement: 36
  - Cooperation: 21
  - Issuers: 47
  - CIS: 40
  - Market Intermed.: 56
  - Secondary Market: 48
- Western Hemisphere
  - Regulator: 64
  - SRO: 50
  - Enforcement: 52
  - Cooperation: 39
  - Issuers: 61
  - CIS: 64
  - Market Intermed.: 60
  - Secondary Market: 53

### General findings on weaknesses
- Common themes:
  - Lack of independence from the government and the political process appears to be the greatest challenge to regulator strength.
  - Followed by a lack of legal authority and limited resources.
- Systemic weaknesses:
  - Regulators frequently lack sufficient powers to license—and de-license—market operators and intermediaries and to conduct enforcement actions.
  - Even when powers exist, conduct of enforcement in practice remains a challenge.
  - Where resources and authority are limited, supervision is often weak.
  - Areas needing most improvement include valuation of assets in collective investment schemes and risk management practices in markets and investment firms.
- Overall: For the majority of countries, full implementation of the IOSCO Principles remains a challenge.

### Specific findings — Quality of the regulatory structure (Principles 1–5)
- Statutory regulator
  - Existence of a public regulator is key; responsibilities must be clearly defined and the regulator given independence, legal authority, and resources.
  - Many regulators are not sufficiently independent of government and/or industry, with less than half of countries achieving a fully or broadly implemented grading.
  - Examples: some regulators cannot grant or withdraw licenses; governing bodies sometimes controlled by a government ministry.
  - Need for additional accountability measures: annual reporting, financial reporting, greater transparency of decision-making processes.
- Funding and legal authority
  - Shortage of funding and legal authority is common; less than half of countries meet or almost meet the IOSCO standard.
  - Many regulators lack stable and adequate funding, particularly where funding stems from the state budget.
  - Restrictions on pay (public employee pay scale) limit ability to recruit qualified personnel.
  - Shortage of personnel with necessary expertise in-country (e.g., qualified accountants and auditors).
  - Some regulators lack sufficient licensing, investigative, and enforcement powers.
- Self-regulatory organizations (SROs)
  - Widespread use of SROs to carry out regulatory functions.
  - Oversight weaknesses are widespread; only a quarter of jurisdictions considered fully compliant with the standard for SRO oversight.
  - Most pervasive issue: lack of inspection programs for SROs, driven by lack of resources and capacity at the regulator.
  - Weak governance structures at SROs and conflicts of interest (e.g., self-listing at an exchange) raise concerns.

### Specific findings — Effectiveness of enforcement (Principles 8–10)
- Definition: enforcement = agency’s ability to affect compliance (through active supervision) and to bring actions against violators.
- Key enforcement weaknesses:
  - Lack of comprehensive investigative and enforcement powers in some jurisdictions (e.g., inability to enter premises or compel testimony).
  - Many regulators lack authority to impose administrative sanctions and must rely on criminal authorities.
  - Main problem is capacity: inability to implement adequate supervisory programs and to use disciplinary powers appropriately.
  - Roughly 50 percent of the countries ranked either partly and not implemented in an assessment of the use of their enforcement powers.
  - On-site inspections are often not a regular part of supervisory programs, particularly concerning exchanges.
  - In some countries supervisory programs exist but disciplinary powers are used very scarcely, hindering regulator credibility.
  - Lack of skilled personnel to conduct supervisory and enforcement actions was a consistent problem noted by assessors.
- Legal authority details:
  - Roughly a third of the countries assessed still exhibit significant deficiencies in their regulatory frameworks.
  - Specific deficiencies include lack of authority to obtain information through inspections or to subpoena third parties.
  - Where administrative sanctions exist, range often inadequate: (i) fines too low to deter; or (ii) sanctions too severe (e.g., only delicensing).
- Enforcement capacity (Principle 10)
  - Less than half of assessments found Principle 10 implemented or broadly implemented.
  - Approximately 40 percent were partly implemented, and over 13 percent were not implemented.
  - Fragmentation of regulatory authority leads to gaps (e.g., supervision of credit institutions’ investment services activities).
  - Outsourcing inspections to external auditors common but often insufficiently supervised.
  - Poor quality and ineffectiveness of judiciary systems negatively impact enforcement; fair and impartial judiciary seen as a pre-condition for effective securities regulation.

### Cooperation (Principles 11–13)
- In globalization, regulators must share public and non-public information.
- Assessments show roughly 40 percent of jurisdictions encounter problems sharing public and non public information with domestic and foreign counterparties.
- Domestic sharing issues: absence of clear provisions or formal MOUs; coordination often ad-hoc.
- Cross-border sharing obstacles:
  - (i) lack of authority to share confidential information, including banking information;
  - (ii) requirement of “dual illegality” (misconduct must be illegal in both jurisdictions);
  - (iii) lack of authority to share information relating to criminal matters.
- Only a third of IOSCO members have been able to sign the IOSCO MOU.

### Regulation of Public Issuers (Principles 14–16)
- Key elements for market credibility: disclosure quality, fair treatment of minority shareholders, timely and equal accessibility of financial information.
- Findings:
  - Few countries received a failing grade on disclosure regimes; most jurisdictions require a prospectus with audited financial statements for initial offerings.
  - Many countries lack proper review of prospectus disclosure by regulator/exchange staff and lack regulatory skill to ensure disclosure is meaningful.
  - Continuous disclosure requirements are absent or poorly enforced in many developing countries, especially for companies not trading on an exchange.
  - Insider transactions often not reported with sufficient speed or made public.
- Principle-specific notes:
  - Principle 14: No country received a ‘not implemented’ rating; less than fifty percent are fully implemented.
  - Principle 15: Basic shareholder provisions common, but many lack rules on changes of control and related party transactions; insider reporting weaknesses persist.
  - Principle 16: Most countries apply some accounting standards; some do not meet international standards; IFRS adoption expected to aid assessment.

### Regulation of Collective Investment Schemes (Principles 17–20)
- Overall: Data show a high level of implementation of IOSCO standards for CIS, but assessors identify important weaknesses in legal/regulatory frameworks and supervisory arrangements.
- Licensing (Principle 17)
  - Comprehensive licensing requirements applicable to CIS managers are in place only in around half of the jurisdictions assessed.
  - Some emerging and developing markets lack a licensing regime for CIS managers.
  - Authorization requirements often incomplete: minimum capital usually present; verification of technical and operational capacity often absent.
  - Many jurisdictions lack fit and proper requirements for certain controlled functions.
  - Many jurisdictions lack comprehensive market conduct rules for CIS managers; bank personnel marketing CIS sometimes not subject to same rules.
- Oversight and authorization
  - Authorization often not based on thorough examination of technical and operational capabilities; on-site visits frequently absent.
  - Prospectus review limited in some jurisdictions.
  - On-site inspections often not part of ongoing supervisory programs.
  - Regulators sometimes rely on depositories; depositories often do not adequately fulfill oversight role.
- Investors’ assets protection (Principle 18)
  - Weaknesses in separation of investors’ assets from CIS managers’ assets; many countries lack rules requiring separation.
  - Custodians often banks part of the same group as the fund manager, weakening protection.
- Disclosure obligations (Principle 19)
  - Most countries require prospectuses, but assessors expressed concerns about the “quality” of disclosure—insufficient risk analysis and investor-unfriendly language/format.
  - Many jurisdictions do not require prospectuses to be kept up-to-date or disclosure of material events.
  - Regulatory arbitrage persists between different CIS types and similar insurance products.
- Asset valuation (Principle 20)
  - Valuation of illiquid assets is the key challenge.
  - Problem acute in developing markets where most securities are illiquid and market trades may not reflect true value.
  - Practice responses: third party validation and market-wide valuation methodology with regulator involvement.
  - Many assessors noted lack of clear rules on pricing errors; some jurisdictions require notification and investor compensation thresholds, many are silent.

### Regulation of Market Intermediaries (Principles 21–24)
- Objectives: protect client assets, guard against defaults and market disruption, ensure intermediaries act fairly and diligently.
- Licensing (Principle 21)
  - Generally countries have adequate licensing criteria and processes; ratings under Principle 21 are relatively high.
  - Some intermediaries fall outside the regulatory net or are effectively unregulated.
  - Inability to remove a license in some countries (power to de-license with government ministry) constrains regulators.
- Capital adequacy
  - Implementing appropriate capital requirements is an unmet challenge in many jurisdictions.
  - Principle 21 had one of the highest levels of “not implemented” grades.
  - Less than a third of countries received a “fully implemented” rating for capital adequacy.
  - Problems: flat capital levels, inadequate reflection of intermediary risks, inadequate financial reporting, absence of early warning systems, lack of liquidity component.
- Risk management (Principle 23)
  - Principle 23 had a relatively high “not implemented” ratio.
  - Weak requirements for internal controls and risk management; limited assessment of effectiveness; lack of meaningful enforcement due to resource constraints.
  - Where SROs regulate this area, non-members may not be subject to requirements.
- Failure of an intermediary (Principle 24)
  - Many regulators have no contingency plan for intermediary insolvency; Principle 24 has the highest level of non-implementation.
  - Problems: inability to appoint a monitor or administrator for a failing firm; lack of authority to deal with insolvencies in emerging markets.

### Regulation of Secondary Markets (Principles 25–30)
- Purpose: ensure efficiency and credibility of markets for pricing and transfer of securities.
- Overview findings:
  - Most jurisdictions have licensing regimes for stock exchanges, though many exchanges pre-date the regulator and have not undergone a licensing process.
  - Oversight of exchanges (Principle 26) requires strengthening; on-site inspections often lacking.
  - Regulators lack real-time market monitoring, surveillance skills, and resources.
  - In a number of jurisdictions there was a lack of sanctioning authority vis-à-vis exchanges.
- Licensing regime for market operators (Principle 25)
  - Most jurisdictions have a licensing regime for stock exchanges, contributing to a high level of implementation.
- Transparency (Principle 27)
  - Most countries meet minimum standards for transparency on exchanges (equal access to pre-trade bids and offers and immediate post-trade reporting).
  - Some emerging markets lack basic transparency; many bond markets are opaque with no trade reporting requirements.
- Market abuse (Principle 28)
  - Implementation of market abuse rules remains challenging with relatively high non-implementation.
  - Causes: legislative weaknesses, inadequate enforcement, weak surveillance for unlisted shares, lack of coordination, weak sanctions.
- Risk management (Principle 29)
  - Implementation is a significant challenge.
  - Problems: monitoring large exposures requires market-activity understanding and access to information often lacking; poor coordination between agencies; absence of aggregation of exposure data; missing early warning systems.
- Note: Discussion of clearing and settlement systems and Principle 30 is not included because the CPSS/IOSCO Recommendations for Securities Settlement Systems superseded that Principle; IOSCO assessments have not included Principle 30 since those recommendations.

### Conclusion — key findings, uses, and policy priorities
- Scope and consistency:
  - IOSCO assessments in 74 countries provide a consistent picture of strengths and weaknesses.
- Four main systemic concerns:
  - (a) weaknesses in supervisory practices, including inspections;
  - (b) weaknesses in enforcement;
  - (c) poor valuation rules for investment funds; and
  - (d) lack of understanding and oversight of risk management and internal control practices in market participants.
- Enforcement and independence:
  - Enforcement of compliance emerged as the overriding weakness.
  - Chronic lack of skill and knowledge in inspections and reporting tools; lack of resources, skill and legal authority for investigations and enforcement actions undermine market confidence.
  - Weak enforcement may be related to insufficient independence of regulators; fully-independent and independently-funded securities regulators are recent and not universal.
- Valuation and risk management:
  - Valuation rules for investment funds require serious attention, especially where funds hold significant illiquid securities.
  - Risk management and internal controls are technical areas where many regulators lack sufficiently skilled staff to set standards or evaluate firm practices.
- Uses and recommendations:
  - Findings will guide IMF, World Bank and others in financial sector surveillance and prioritizing technical assistance.
  - Recommended IMF technical assistance focus: enforcement and inspections; technical areas of risk management and valuation of portfolios in investment funds.
  - Future research priorities: connect weaknesses in securities markets regulation to crisis events; better understand value of institutional/regulatory strengthening given increased cross-border trading and capital flows.

*Annex 1. Detailed Analysis of the Assessment Data — source PDF content (content unit _wp07259).*

### Annex 1. Detailed Analysis of the Assessment Data...............................................................31

### Annex 1. Detailed Analysis of the Assessment Data

### Introduction: role and significance of securities markets
- Securities markets transform savings into financing for the real sector and constitute an alternative to bank financing.
- Markets provide a mechanism for asset pricing and for risk transfer and diversification, allowing firms to unlock capital for new investments.
- Risk transfer and pricing mechanisms help financial institutions (such as banks and insurance companies) manage risk more efficiently and can act as a buffer for disruption of the banking system, contributing to financial stability.
- The more efficient markets are, the greater their contribution to the economy.

- Emerging market and developing countries:
  - Securities markets are growing in importance as a source of financing for the corporate sector, often initially for larger corporate players.
  - Collective investment schemes, along with private and public pension funds, have become important players, driving demand for suitable investments.

- Gaps in academic study and policy:
  - The systemic importance of securities regulation has been neglected as a topic of academic study.
  - Few attempts have examined the effects of securities regulation, or regulatory weaknesses, on stability and growth.
  - The paper aims to examine strengths and weaknesses of securities regulatory systems worldwide to identify common problems and areas of global concern.
  - Analysis uses data from IMF and World Bank Financial Sector Assessment Program (FSAP) assessments.

- Key finding headline:
  - Securities regulatory systems suffer from persistent weaknesses in a number of countries and there is an urgent need for improvement.
  - A consistent theme is the lack of ability of regulators in many countries to effectively enforce compliance with existing rules and regulation.
  - Contributing factors include lack of power and authority, lack of resources and skill, and lack of political will—especially problematic in areas of increased complexity (valuation of assets, risk management practices, internal controls for market participants and trading systems).

### What is securities regulation? — scope and objectives
- Securities regulation comprises regulation of:
  - public issuers of securities,
  - secondary markets,
  - asset management products,
  - market intermediaries.

- Primary regulatory goals:
  - Address asymmetries of information between issuers and investors, clients and financial intermediaries, and counterparties to transactions.
  - Ensure smooth functioning of trading, clearing, and settlement mechanisms to prevent market disruption and foster investor confidence.

- Regulation of public issuers:
  - Based on full, timely and accurate disclosure of relevant information to investors.
  - Regulatory regimes have generally moved from merit-based to disclosure-based approaches.
  - Disclosure obligations apply at authorization for public offering and on a continuous basis.
  - Mechanisms are in place to ensure reliability of information provided by issuers.
  - Recent emphasis on adequate corporate governance to ensure management and board accountability to shareholders.

- Regulation of market intermediaries:
  - Ensures intermediaries (brokers, dealers, advisers) enter and exit without disruption, conduct business with due care, and trade fairly.
  - Main tools: licensing requirements (including prudential requirements) and market and business conduct obligations.

- Regulation of asset management:
  - Ensures professional management and adequate disclosure of investments to investors.
  - Focuses on collective investment schemes, typically mutual funds or unit trust funds.
  - Units of collective investment schemes are subject to the same full, timely, and accurate disclosure principles as issuers.
  - Operators and investment managers are regulated similarly to other intermediaries.

- Regulation of secondary markets:
  - Aims for smooth market functioning, fair access, and adequate price formation.
  - Limits disruptive effects of intermediary failures via regulation of clearing and settlement and standards for risk management.

- Regulator structure and SROs:
  - Responsibility for framework development and supervision typically assigned to a public agency.
  - Regulator structure varies from single-agency securities regulator to unified multi-sector regulator.
  - Framework should ensure regulator independence, powers, and resources.
  - Self-regulatory organizations (SROs), such as exchanges and industry associations, often carry out part of the regulatory function and should be subject to public regulator oversight.

### Data and methodology used for assessment
- Assessment framework:
  - Uses the IOSCO Objectives and Principles of Securities Regulation to evaluate regulatory strengths and weaknesses.
  - Principles cover regulatory issues divided into eight categories:
    - Principles 1–5: structure and effectiveness of the regulator.
    - Principles 6–7: role and structure of self regulatory organizations.
    - Principles 8–10: enforcement program and activities of the regulator.
    - Principles 11–13: regulator’s cooperation with domestic and international counterparts.
    - Principles 14–16: regulatory regime for issuers.
    - Principles 17–20: regulatory regime for collective investment schemes.
    - Principles 21–24: regulation of market intermediaries.
    - Principles 25–30: regulation of the secondary markets.
  - The principles were originally published in 1998 and a methodology to assess their implementation was approved in 2003.

### Box 1 — IOSCO Objectives and Principles of Securities Regulation
- Objectives (three core objectives):
  - the protection of investors;
  - ensuring that markets are fair, efficient and transparent;
  - the reduction of systemic risk.

- Principles Relating to the Regulator
  1. The responsibilities of the regulator should be clear and objectively stated.
  2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
  3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
  4. The regulator should adopt clear and consistent regulatory processes.
  5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

- Principles of Self-Regulation
  6. The regulatory regime should make appropriate use of self-regulatory organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.
  7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

- Principles for the Enforcement of Securities Regulation
  8. The regulator should have comprehensive inspection, investigation and surveillance powers.
  9. The regulator should have comprehensive enforcement powers.
  10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

- Principles for Cooperation in Regulation
  11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
  12. Regulators should institute information sharing mechanisms that establish when and how they will share both public and non-public information with their domestic and foreign counterparts.
  13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make enquiries in the discharge of their functions and exercise of their powers.

- Principles for Issuers
  14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.
  15. Holders of securities in a company should be treated in a fair and equitable manner.
  16. Accounting and auditing standards should be of a high and internationally acceptable quality.

- Principles for Collective Investment Schemes
  17. The regulatory system should set standards for the licensing and the regulation of those who wish to market or operate a collective investment scheme.
  18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
  19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.
  20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and pricing and the redemption of units in a collective investment scheme.

- Principles for Market Intermediaries
  21. Regulation should provide for minimum entry standards for market intermediaries.
  22. There should be initial and ongoing capital and other prudential requirements for market intermediaries.
  23. Market intermediaries should be required to comply with standards for internal organization and operation conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
  24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

- Principles for the Secondary Market
  25. The establishment of trading systems, including securities exchanges, should be subject to regulatory authorization and oversight.
  26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
  27. Regulation should promote transparency of trading.
  28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
  29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
  30. The system for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that it is fair, effective and efficient and that it reduces systemic risk.

*Annex 1. Detailed Analysis of the Assessment Data — source PDF content.*

### 14.      We examined the IOSCO principles assessments for 74 countries, completed between

### _wp07259 - 14. We examined the IOSCO principles assessments for 74 countries, completed between

### Dataset and methodology
- We examined the IOSCO principles assessments for 74 countries, completed between 1999 and September 2007.
- Assessments were carried out through the FSAP and the Offshore Financial Center (OFC) program using the IOSCO Principles and the IOSCO Methodology.
- Each principle was graded: fully implemented, broadly implemented, partly implemented, or not implemented.
- The grades and detailed assessor commentary were collated in a database at the IMF.
- Assessments were carried out by one person; a total of 46 different assessors were used.
- Most assessments are one-time measurements; the exception noted is Mexico, which was assessed in 2001 and again in 2006.
- Limitations noted:
  - The IOSCO principles are broadly worded and were not initially designed as a measurement tool.
  - Assessments remain subjective and require significant exercise of judgment by individual assessors.
  - Consistency and quality of assessments are somewhat mixed.
  - Most assessments are confidential; analysis uses data on a no-name, aggregate basis.

### Aggregate consistency and income correlation
- Despite limitations, aggregate data showed a great deal of consistency.
  - Assessments produced with the Methodology did not differ significantly from those before it was adopted.
  - Data were consistent with field work and with World Bank and development agency understanding.
- Implementation by principle:
  - Only four principles (1, 4, 5, and 21) show levels of full implementation equal or above 80 percent.
  - Four principles (2, 3, 10, and 24) show levels of implementation below 50 percent.
- Income correlation of implementation levels:
  - Low-income jurisdictions show levels of implementation below 50 percent.
  - Lower-middle income jurisdictions show levels of implementation around 50 percent.
  - Upper-middle income jurisdictions show levels of implementation around 60 percent.
  - High-income countries show levels of implementation above 70 percent.
- Regional variation (noted correlation with income):
  - Europe and Asia exhibit the highest levels of implementation.
  - Western Hemisphere ranks in the middle.
  - Middle East and Central Asia and Africa exhibit the lowest levels of implementation.

### IOSCO category averages by income groups (Table 1 numbers)
- Numbers represent the average percentage share of the applicable and assessed principles for all countries grouped in the Fully and Broadly implementation levels.
- Low-income
  - Regulator: 49
  - SRO: 47
  - Enforcement: 50
  - Cooperation: 32
  - Issuers: 43
  - CIS: 67
  - Market Intermediaries: 37
  - Secondary Mkt.: 48
- Lower Middle-income
  - Regulator: 66
  - SRO: 54
  - Enforcement: 49
  - Cooperation: 38
  - Issuers: 47
  - CIS: 57
  - Market Intermediaries: 63
  - Secondary Mkt.: 53
- Upper Middle-income
  - Regulator: 61
  - SRO: 62
  - Enforcement: 36
  - Cooperation: 48
  - Issuers: 56
  - CIS: 72
  - Market Intermediaries: 42
  - Secondary Mkt.: 59
- High-income OECD
  - Regulator: 85
  - SRO: 91
  - Enforcement: 85
  - Cooperation: 79
  - Issuers: 83
  - CIS: 86
  - Market Intermediaries: 83
  - Secondary Mkt.: 91
- High-income Non-OECD
  - Regulator: 73
  - SRO: 67
  - Enforcement: 77
  - Cooperation: 77
  - Issuers: 79
  - CIS: 75
  - Market Intermediaries: 70
  - Secondary Mkt.: 76

### IOSCO category averages by region (Table 2 numbers)
- Numbers represent the average percentage share of the applicable and assessed principles for all countries grouped in the Fully and Broadly Implemented levels.
- Africa
  - Regulator: 50
  - SRO: 56
  - Enforcement: 62
  - Cooperation: 46
  - Issuers: 67
  - CIS: 72
  - Market Intermed.: 39
  - Secondary Market: 46
- Asia and Pacific
  - Regulator: 82
  - SRO: 68
  - Enforcement: 67
  - Cooperation: 63
  - Issuers: 77
  - CIS: 68
  - Market Intermed.: 64
  - Secondary Market: 72
- Europe
  - Regulator: 74
  - SRO: 81
  - Enforcement: 72
  - Cooperation: 77
  - Issuers: 68
  - CIS: 86
  - Market Intermed.: 69
  - Secondary Market: 82
- Middle East and Central Asia
  - Regulator: 59
  - SRO: 44
  - Enforcement: 36
  - Cooperation: 21
  - Issuers: 47
  - CIS: 40
  - Market Intermed.: 56
  - Secondary Market: 48
- Western Hemisphere
  - Regulator: 64
  - SRO: 50
  - Enforcement: 52
  - Cooperation: 39
  - Issuers: 61
  - CIS: 64
  - Market Intermed.: 60
  - Secondary Market: 53

### General findings on weaknesses
- Common themes across assessments:
  - The lack of independence from the government and the political process appears to be the greatest challenge to regulator strength.
  - Followed by a lack of legal authority and limited resources.
- Specific systemic weaknesses:
  - Regulators frequently lack sufficient powers to license—and de-license—market operators and intermediaries and to conduct enforcement actions.
  - Even when powers exist, conduct of enforcement in practice remains a challenge.
  - Where resources and authority are limited, supervision is often weak.
  - Areas needing most improvement include valuation of assets in collective investment schemes and risk management practices in markets and investment firms.
- Overall implementation status:
  - For the majority of countries, full implementation of the IOSCO Principles remains a challenge.

### Specific findings — Quality of the regulatory structure
- Statutory regulator
  - Existence of a public regulator is key; responsibilities must be clearly defined and the regulator given independence, legal authority, and resources.
  - Assessments show many regulators are not sufficiently independent of government and/or industry, with less than half of countries achieving a fully or broadly implemented grading.
  - Examples of interference or inadequate structures:
    - Some regulators cannot grant or withdraw licenses; that power remains with the Ministry of Finance.
    - Governing bodies of regulators in some cases are controlled by a government ministry.
  - Need for additional accountability measures noted: annual reporting, financial reporting, and greater transparency of decision-making processes.
- Funding and legal authority
  - A shortage of funding and legal authority is common; less than half of countries meet or almost meet the IOSCO standard.
  - Many regulators lack stable and adequate funding, particularly where funding stems from the state budget.
  - Restrictions on pay (public employee pay scale) limit ability to recruit qualified personnel.
  - Shortage of personnel with necessary expertise in-country (e.g., qualified accountants and auditors).
  - Some regulators lack sufficient licensing, investigative, and enforcement powers.
- Self-regulatory organizations (SROs)
  - Widespread use of SROs to carry out regulatory functions; definition includes exchanges, trade associations, private agencies, etc.
  - Oversight weaknesses are widespread; only a quarter of jurisdictions were considered fully compliant with the standard for SRO oversight.
  - Most pervasive issue: lack of inspection programs for SROs, driven by lack of resources and capacity at the regulator.
  - Weak governance structures at SROs noted; treatment of SRO conflicts of interest (e.g., self-listing at an exchange) raised concerns.

### Specific findings — Effectiveness of enforcement
- Definition: Enforcement refers to the agency’s ability to affect compliance (through active supervision) and to bring actions against violators.
- Key enforcement weaknesses:
  - Lack of comprehensive investigative and enforcement powers in some jurisdictions (e.g., inability to enter premises or compel testimony).
  - Many regulators lack authority to impose administrative sanctions and must rely on criminal authorities.
  - The main problem is capacity: inability to implement adequate supervisory programs and to use disciplinary powers appropriately.
  - Roughly 50 percent of the countries ranked either partly and not implemented in an assessment of the use of their enforcement powers.
  - On-site inspections are often not a regular part of supervisory programs, with the problem particularly acute concerning exchanges.
  - In some countries supervisory programs exist but disciplinary powers are used very scarcely, hindering regulator credibility.
  - Lack of skilled personnel to conduct supervisory and enforcement actions was a consistent problem noted by assessors.

*Source: Standards and Codes Gateway (MCM) and IMF staff assessments as summarized in the provided content.*

### 31.      The poor quality and ineffectiveness of the judiciary system also negatively impacts

### 31.      The poor quality and ineffectiveness of the judiciary system also negatively impacts

### Cooperation
- In an increasingly globalized market regulators must be able to share public and non public information with one another.
- Assessments show that roughly 40 percent of the jurisdictions still encounter problems in their ability to share public and non public information with domestic and foreign counterparties.
- Figure reference: Principles of Cooperation in Regulation reported implementation status across Principle 11–13 (Implemented / Broadly Implemented / Partially Implemented / Non-Implemented) (chart source: Standards and Codes Gateway (MCM)).

### Regulation of Public Issuers
- Key elements for market credibility:
  - Quality of disclosure by issuers to investors.
  - Fair treatment of minority shareholders.
  - Timely and equal accessibility of financial information, business plans, ownership interests, and conflicts of interest.
- Findings:
  - Few countries received a failing grade on disclosure regimes; most jurisdictions require a prospectus with audited financial statements for initial offerings.
  - Many countries lack proper review of prospectus disclosure by regulator/exchange staff and lack regulatory skill to ensure disclosure is meaningful.
  - Continuous disclosure requirements (material events, annual and quarterly reporting) are absent or poorly enforced in many developing countries, especially for companies not trading on an exchange.
  - Insider transactions in many countries are not reported with sufficient speed or are reported only to the regulator and not made public.
- Figure reference: Principles for Issuers (Principle 14–16) implementation chart (source: Standards and Codes Gateway (MCM)).

### Regulation of Collective Investment Schemes (CIS)
- Objectives: ensure adequate investor disclosure, appropriate valuation of fund units, and safeguarding of investor assets from CIS operators.
- Overall assessment:
  - Data show a high level of implementation of IOSCO standards for CIS, but assessors identify important weaknesses in legal/regulatory frameworks and supervisory arrangements.
  - Explanations include assessors’ focus on written frameworks (often new) and nascent/underdeveloped CIS industries in many developing and emerging market countries.
  - Compliance monitoring and enforcement are weak and may not be fully captured by grading data.
- Specific weaknesses:
  - "Comprehensive licensing requirements applicable to CIS managers are in place only in about half of the jurisdictions assessed" and some emerging/developing markets lack any licensing regime for CIS managers.
  - Licensing often includes minimum capital but lacks requirements to verify technical and operational capacity and lacks fit and proper requirements for controlled functions.
  - Deficiencies in CIS oversight: licenses are frequently approved without thorough examination of technical/operational capabilities; licensing processes often do not include on-site visits; on-site inspections are not regular parts of supervisory programs.
  - Regulators sometimes rely excessively on depositories for oversight; depositories often do not adequately fulfill that role.
  - Many jurisdictions lack comprehensive business and market conduct rules for CIS managers, including conflict-of-interest regulation. Bank personnel marketing CIS are often not subject to the same market conduct rules or supervision intensity as CIS manager personnel.
  - Customer asset protection weaknesses: insufficient separation of customer assets from CIS manager assets in many jurisdictions; in some cases custodians are part of the same business group as the fund manager.
  - Disclosure shortcomings: while prospectus requirements exist in the majority, assessors expressed concerns about quality—particularly insufficient risk analysis and non-investor-friendly language/format; many jurisdictions do not require prospectuses to be kept up-to-date or require disclosure of material events.
  - Regulatory arbitrage problems between different types of CIS and between CIS and similar insurance products not subject to the same standards.
  - Valuation challenges: illiquid asset valuation is a key problem, especially in developing markets where most securities are illiquid; approaches include third-party validation and market-wide valuation methodologies involving the regulator.
  - Lack of clear rules on pricing errors: some jurisdictions require notification and compensation thresholds; many are silent.
- Figure reference: Principles for Collective Investment Schemes (Principle 17–20) implementation chart (source: Standards and Codes Gateway (MCM)).

### Regulation of Market Intermediaries
- Objectives: protect client assets from firm insolvency or appropriation; guard against defaults and market disruption; ensure intermediaries act fairly and diligently.
- Regulatory tools: licensing standards, prudential standards, internal controls and risk management standards, business conduct rules.
- Findings:
  - Regulation of intermediaries identified as an area of weakness.
  - While licensing standards and supervisory frameworks may exist, many regulators lack skilled staff to oversee intermediary activity effectively or to set detailed standards for internal controls, risk management, or adequate prudential requirements.
  - This lack of in-depth understanding undermines effective inspections, examinations, and detection of potential insolvencies.
  - Regulatory practice often takes on a "form over substance" character with formal reporting and inspection programs that do not yield results.
- Figure reference: Principles for Market Intermediaries (Principle 21–24) implementation chart (source: Standards and Codes Gateway (MCM)).

### Regulation of Secondary Markets
- Purpose: ensure efficiency and credibility of markets as mechanisms for pricing and transfer of securities.
- Regulatory coverage includes licensing of exchanges/trading systems, IT and risk management standards, on-going supervision (inspections and reporting), and regulation of clearing, settlement and depository services (risk management mechanisms).
- Market abuse rules address trading on insider information, market manipulation, and misrepresentation.
- Findings:
  - IOSCO Principles related to secondary markets (Principles 26–30) show mixed levels of implementation.
  - Oversight of secondary market operations and regulatory functions remains a challenge in many jurisdictions.
  - Regulators struggle with lack of capacity to build necessary knowledge and skill to understand and monitor markets, insufficient attention to technology, and over-reliance on formal rules and reporting.
  - Assessors sometimes have limitations in understanding market operations and associated risks, undermining evaluation of oversight effectiveness.
- Figure reference: Principles for the Secondary Market (Principle 25–30) implementation chart (source: Standards and Codes Gateway (MCM)).
- Note: Discussion of clearing and settlement systems and IOSCO Principle 30 is not included because the CPSS/IOSCO Recommendations for Securities Settlement Systems superseded that Principle; IOSCO Principles assessments have not included an assessment of Principle 30 since adoption of those recommendations.

### Conclusion — key findings and systemic concerns
- Scope of analysis: IOSCO assessments in 74 countries provide a consistent picture of strengths and weaknesses.
- Four main areas of concern:
  - (a) weaknesses in supervisory practices, including inspections;
  - (b) weaknesses in enforcement;
  - (c) poor valuation rules for investment funds; and
  - (d) a lack of understanding and oversight of risk management and internal control practices in market participants.
- Enforcement:
  - Enforcement of compliance emerged as the overriding weakness.
  - Regulators rely on a continuum from routine inspections and reporting to special investigations and enforcement actions.
  - Chronic lack of skill and knowledge in inspections and reporting tools; lack of resources, skill and legal authority for investigations and enforcement actions.
  - Weak enforcement undermines the regulatory process and market confidence.
- Independence:
  - Weaknesses in enforcement may be related to insufficient independence of regulators.
  - Fully-independent and independently-funded securities regulators are recent and not universal; lack of independence can entangle regulators in political or bureaucratic considerations that impede regulation and supervision.
- Valuation and risk management:
  - Valuation rules for investment funds require serious attention, especially where funds hold significant illiquid securities and cannot rely solely on organized market prices.
  - Risk management and internal controls at market participants are technical areas where many regulators lack sufficiently skilled staff to set standards or evaluate firm practices effectively.

*Source: _wp07259 - 31.      The poor quality and ineffectiveness of the judiciary system also negatively impacts*

### 54.      These findings enhance our understanding of financial sector regulation and

### _wp07259 - 54.      These findings enhance our understanding of financial sector regulation and

### Key findings and uses
- Findings enhance understanding of financial sector regulation and challenges facing policy makers in improving conditions in local markets.
- Findings will be immediately useful as guidance to financial sector surveillance work being undertaken by the IMF, the World Bank and others, pointing in the direction of areas that require particular scrutiny.
- Findings can be used to prioritize technical assistance that the IMF provides to countries and as useful input to other technical assistance providers and IOSCO in formulating work programs.
- Recommendation for IMF technical assistance focus: practice areas of enforcement and inspections and technical areas of risk management and valuation of portfolios in investment funds.
- Future research priorities: connect weaknesses in securities markets regulation to crisis or potential crisis events; increase understanding of the value of institutional (including regulatory) strengthening given increased cross-border trading and capital flows.

### Strength of the regulator and regulatory structure (Principles 1–5)
- The IOSCO Principles cover issues related to the regulator (1–5), enforcement (8–10) and cooperation (11–13).
- Key challenge: ensuring an adequate level of independence, powers and resources remains a key challenge for most regulators, even in industrialized countries.
- Common deficiency: inadequate programs for supervision of market participants and limited credible use of enforcement powers.

Responsibilities (Principle 1)
- “The legal framework of most countries defines clearly the regulator’s responsibilities and authority”; Principle 1 has high level of implementation with 80 percent of the countries receiving implemented and broadly implemented grades.
- Coordination problems: in countries with multiple authorities sharing responsibilities, coordination and cooperation arrangements are non-existent or not effectively used, weakening the regulatory framework.

Independence and accountability (Principle 2)
- Principle 2 exhibits very low levels of implementation, with less than 50 percent of the countries in the implemented and broadly implemented categories.
- Observed ties to government: government representatives on regulator boards; discretionary appointment and removal of board members by the government; funding through the state budget; retention of certain powers by the government.
- Needed: additional protection of staff to strengthen objective and timely decision-making.

Funding, resources, and powers (Principle 3)
- Principle 3 exhibits low levels of implementation, with less than 50 percent of the countries in the categories of fully and broadly implemented.
- Common problems: lack of stable and adequate funding (especially when funding stems from the state budget); regulations limiting pay to public employee scales hindering recruitment; shortage of personnel with necessary expertise; insufficient licensing, investigative and enforcement powers.

Transparency and fair process (Principle 4)
- High level of implementation: around 80 percent of the countries are in the categories of implemented and broadly implemented.
- Remaining needs: greater transparency on regulatory measures, interpretations, explanatory notes, and publication of financial statements or other transparency on use of resources; many regulators’ websites lack this information.

Standards of staff conduct (Principle 5)
- Very high levels of implementation: around 80 percent of the countries in implemented and broadly implemented categories.
- Gaps: provisions regarding staff or board member participation in securities transactions need strengthening and codification; need for more active monitoring of compliance.

### Enforcement (Principles 8–10)
- Overall these Principles “exhibit very low levels of implementation.”

Legal authority (Principles 8 and 9)
- Roughly a third of the countries assessed still exhibit significant deficiencies in their regulatory frameworks.
- Specific deficiencies:
  - Lack of authority to obtain information through inspections; regulators in some cases unable to enter premises of regulated entities.
  - In some jurisdictions regulators unable to subpoena third parties.
  - Many regulators lack authority to impose administrative sanctions and rely on criminal authorities, hindering credibility and effectiveness.
  - Where administrative sanctions exist, the range is often inadequate: (i) fines too low to deter; or (ii) sanctions too severe (e.g., only delicensing), making them usable only in extreme situations.

Enforcement capacity (Principle 10)
- Less than half of assessments found Principle 10 implemented or broadly implemented.
- Approximately 40 percent were partly implemented, and over 13 percent were not implemented.
- Fragmentation of regulatory authority leads to gaps in supervisory and enforcement powers, e.g., supervision of credit institutions’ investment services activities.
- Many regulators do not use on-site inspections regularly; supervision of stock exchanges particularly weak.
- Outsourcing inspections to external auditors common but often insufficiently supervised by regulators.
- Discipline underused in some jurisdictions, undermining credibility.
- Chronic shortage of skilled personnel for supervisory and enforcement actions.
- Poor quality and ineffectiveness of judiciary systems in some jurisdictions negatively impact enforcement; fair and impartial judiciary seen as important pre-condition for effective securities regulation.

### Cooperation (Principles 11–13)
- Grading shows roughly 40 percent of jurisdictions still encounter problems sharing public and non-public information with domestic and foreign counterparties.
- Domestic sharing: in some countries no clear provisions allow regulators to share information domestically; coordination often ad-hoc without MOUs or formal mechanisms.
- Cross-border sharing obstacles:
  - (i) lack of authority to share confidential information, including banking information;
  - (ii) requirement of “dual illegality” (misconduct must be illegal in both jurisdictions);
  - (iii) lack of authority to share information relating to criminal matters.
- Implication: actual implementation may be lower than grades indicate; only a third of IOSCO members have been able to sign the IOSCO MOU.

### Use and oversight of self-regulatory organizations (Principles 6–7)
- Principle 6 (appropriate use of SROs): most jurisdictions deemed to make appropriate use of SROs, though assessments before the methodology varied.
- Principle 7 (oversight): weaknesses widespread; only a quarter of jurisdictions were fully implemented.
- Common issues:
  - Lack of inspection programs for SROs due to regulator resource and capacity constraints.
  - Little active oversight in several countries.
  - Concerns about SRO governance structures and handling of conflicts of interest (e.g., self-listing at exchanges, fair treatment of members).
  - Overlap of responsibilities between regulator and SROs resulting in inefficiencies.

### Regulation of public issuers (Principles 14–16)
- At least a third of countries still have deficiencies in regulation and supervision of issuers.
- Key needs: enhance dissemination and quality of price-sensitive information; better protect interests of minority shareholders; improve application of international accounting and audit standards; upgrade training and oversight of accounting and audit professions.

Disclosure (Principle 14)
- No country received a ‘not implemented’ rating for Principle 14, although less than fifty percent are fully implemented.
- Most jurisdictions have adequate disclosure for initial offerings (prospectus with audited financial statements) but lack proper review of prospectus disclosure and regulator skill to ensure meaningful investor disclosures.
- Lack of continuous disclosure requirements in many countries (immediate disclosure of material events, annual and quarterly reporting); in some developed countries continuous disclosure not enforced for non-exchange-traded companies.
- Price-sensitive information often not disclosed timely.

Minority shareholder rights (Principle 15)
- Most jurisdictions have basic shareholder meeting, notice and voting provisions, but many lack sufficient rules on changes of control (takeover bids and mergers) and related party transactions.
- Issues: insider transactions not reported timely or publicly in many countries; loose definitions of ‘insider’ permitting circumvention; weak enforcement due to insufficient regulator skill and resources.

Accounting and auditing standards (Principle 16)
- Most countries have applied accounting standards of one form or another; some do not meet international standards.
- IFRS adoption expected to aid assessment and implementation.
- Examples of shortcomings: some large markets lacking mandatory cash flow statements.
- Audit standard weaknesses: emphasis on auditor independence revealed weaknesses; shortage of quality auditing and accounting professionals undermines effective regulation.

### Regulation of Collective Investment Schemes (Principles 17–20)
- Figure 16 indicates varied implementation across Principles 17–20 with some principles reaching up to 80 percent in implemented/broadly implemented categories and others lower (figure details provided in source).
- Topic begins with “Licensing of CIS operators” (section continues beyond provided excerpt).

*Source: _wp07259 - 54.      These findings enhance our understanding of financial sector regulation and*

### 82.      Comprehensive licensing requirements, applicable to CIS managers, are in place only

### _wp07259 - 82.      Comprehensive licensing requirements, applicable to CIS managers, are in place only

### Licensing requirements for CIS managers (Principle 17)
- Finding: Comprehensive licensing requirements, applicable to CIS managers, are in place only in around half of the jurisdictions assessed, thus the medium level of implementation of Principle 17.
- Finding: Some emerging and developing markets still lack a licensing regime for CIS managers.
- Finding: Where an authorization regime exists, requirements are often incomplete: minimum capital requirements are usually present, but other requirements to verify technical and operational capacity to manage CIS are often absent.
- Finding: In many countries there are no fit and proper requirements (background checks and specific qualifications) for certain controlled functions at the manager or operator.
- Finding: Many jurisdictions lack a comprehensive set of market conduct rules for CIS managers, including regulation of conflict of interest.
- Finding: In jurisdictions where bank platforms market and place CIS, bank personnel were sometimes not subject to the same market conduct rules nor supervised with the same intensity as CIS manager personnel.

### Oversight and authorization of CIS managers
- Finding: Assessors noted significant deficiencies in CIS oversight by the securities regulator and highlighted the need to strengthen oversight mechanisms of the CIS industry.
- Finding: Deficiencies in authorization processes: in many jurisdictions the authorization is not based on a thorough examination of the CIS manager’s technical and operational capabilities and does not include an on-site visit.
- Finding: Prospectus review is in some jurisdictions very limited.
- Finding: Many regulators have not included on-site inspections as a regular part of ongoing supervisory programs.
- Finding: In some cases regulators rely on depositories to oversee CIS managers; assessors believe depositories were not adequately fulfilling this role in practice.

### Investors’ assets protection (Principle 18)
- Finding: In spite of the level of implementation of Principle 18, assessments show important weaknesses in protection of customer assets.
- Finding: Most jurisdictions have adequate regulations on the legal form and structure of the CIS.
- Finding: Weakness remains on separation of investors’ assets from CIS managers’ assets; in many countries there are still no rules that require that separation.
- Finding: Where custody by a third party is mandatory, the custodian is in most cases a bank often part of the same group as the fund manager, weakening investor protection.

### Disclosure obligations (Principle 19)
- Finding: While most countries require certain disclosure obligations for the public offering of CIS, many weaknesses remain for a full implementation of Principle 19.
- Finding: In most countries fund managers must prepare a prospectus with information on the fund manager and the CIS, but assessors expressed concern about the “quality” of that disclosure—especially insufficient analysis of risks and investor-unfriendly “language and format.”
- Finding: In many jurisdictions CIS managers were not required to keep prospectus information up-to-date or to inform the market of material events.
- Finding: Problems of regulatory arbitrage persist between different types of CIS and between CIS and insurance products similar to CIS that are not subject to the same disclosure and supervision standards.

### Asset valuation (Principle 20)
- Finding: Valuation of illiquid assets is the key challenge for the implementation of Principle 20.
- Finding: The problem is particularly acute in developing markets where the majority of securities available for investment are illiquid and market trades may not reflect true market value.
- Practice responses: Jurisdictions have used third party validation of valuation of illiquid assets and development of a market-wide valuation methodology with regulator involvement.
- Finding: Many assessors noted lack of clear rules on how to proceed when pricing errors occur.
- Finding: In some jurisdictions there are explicit provisions requiring fund managers to notify the regulator of pricing errors that reach certain thresholds and to compensate investors for losses from the error with their own capital; in many jurisdictions regulations are silent on this issue.

### Regulation of Market Intermediaries (Principles 21–24) — overview
- Reference: Figure 17. Principles for Market Intermediaries (percent distributions by implementation status presented in source).
- Finding: Generally countries have adequate licensing criteria and processes setting entry standards for a range of market participants; ratings under Principle 21 are relatively high.
- Finding: Some intermediaries (usually non-exchange or non-SRO members) fall outside the regulatory net or are effectively unregulated.
- Finding: In some jurisdictions market intermediary rules appear only in exchange or SRO rules and not in general securities legislation.
- Finding: The inability to remove a license (power to de-license remains with government ministry) was seen as an undue constraint on regulators in some countries.

### Licensing of financial intermediaries (Principle 21)
- Finding: Most jurisdictions have licensing regimes and entry standards (capital, etc.), but groups of intermediaries may be unregulated in practice.

### Capital adequacy
- Finding: Implementing appropriate capital requirements is an unmet challenge in many jurisdictions.
- Finding: Principle 21 had one of the highest levels of “not implemented” grades.
- Finding: Less than a third of countries received a “fully implemented” rating for capital adequacy.
- Problems identified:
  - Capital requirements often lack a sufficient risk component (flat capital levels, inadequate reflection of intermediary risks).
  - Risk components, where present, sometimes did not properly reflect intermediary risks.
  - Inadequate financial reporting from intermediaries and absence of early warning systems to alert regulators to falling capital or potential insolvencies.
  - In some cases capital requirements lacked a liquidity component.

### Risk management (Principle 23)
- Finding: Principle 23 resulted in a relatively high “not implemented” ratio, with varied sources of weakness across jurisdictions.
- Findings and problems:
  - Weaknesses in requirements for internal controls and risk management.
  - Limited assessment of effectiveness of these rules by assessors.
  - Lack of meaningful enforcement of compliance with these rules, generally due to resource constraints.
  - Where SROs regulate this area, non-members are not subject to the requirements.

### Addressing the failure of an intermediary (Principle 24)
- Finding: Many regulators have no contingency plan in the event of an intermediary’s insolvency; Principle 24 has the highest level of non-implementation.
- Finding: Assessors sometimes accepted an informal plan (with appropriate powers), but many regulators were judged unprepared for a financial failure even through an informal plan.
- Problems identified:
  - Inability to appoint a monitor or an administrator for a failing firm.
  - Lack of authority to deal with insolvencies of firms in a number of emerging market countries.

### Regulation of Secondary Markets (Principles 25–30) — overview
- Reference: Figure 18. Principles for the Secondary Market (percent distributions by implementation status presented in source).
- Finding: Most jurisdictions have licensing regimes for stock exchanges, though many exchanges pre-date the regulator and have not undergone a licensing process.
- Finding: Oversight of exchanges (Principle 26) requires strengthening; many jurisdictions lack on-site inspections as part of oversight.
- Finding: Lack of real-time market monitoring, surveillance skills, and resources at regulators were cited as obstacles.
- Finding: In a number of jurisdictions there was a lack of sanctioning authority vis-à-vis exchanges.

### Licensing regime for market operators (Principle 25)
- Finding: Most jurisdictions have a licensing regime for stock exchanges, contributing to a high level of implementation for Principle 25.

### Transparency (Principle 27)
- Finding: Most countries meet the minimum standard for transparency including equal access to pre-trade bids and offers and immediate post-trade reporting on an exchange.
- Finding: Some emerging market countries lack basic transparency, allowing intermediaries to trade off market and undermining exchange pricing quality.
- Finding: No consensus exists on appropriate transparency for over-the-counter markets; many bond markets are quite opaque and may lack basic trade reporting requirements.

### Market abuse (Principle 28)
- Finding: Implementation of market abuse rules remains challenging; the level of non-implementation is relatively high.
- Reasons for downgrades:
  - Weaknesses in legislation in a significant number of countries.
  - Inadequate enforcement of rules due to lack of authority or resources.
  - Surveillance and enforcement of trading in unlisted shares often virtually non-existent.
  - Lack of coordination in investigations and enforcement between SROs, exchanges, and regulators.
  - Available sanctions in some cases were deemed weak and an inadequate deterrent.

### Risk management (Principle 29)
- Finding: Implementation of Principle 29 is a significant challenge.
- Problems identified:
  - Monitoring large exposures requires market-activity understanding and access to information lacking at many regulators.
  - Coordination between agencies requires improvement in a number of countries.
  - In some jurisdictions there is no aggregation of exposure data across the system.
  - Early warning systems are not in place in some jurisdictions or require improvement.

*Source: Extracted from IMF content unit _wp07259 (paragraphs 82–94 and related sections) as provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07259.pdf_