Enacted Summary
In 2001, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of the Czech Republic. The IMF assessors, however, assessed the then existing securities market regulator, the Czech Securities Commission (CSC), which was replaced by a unified financial sector supervisor, the Czech National Bank (CNB) on April 1, 2006. In its 2001 assessment, the IMF concluded that the CSC, had sufficient powers to effectively regulate the securities market. However, a major issue concerned the CSC's lack of adequate resources and skills to effectively discharge its responsibilities in many areas in which the law appeared sound and in which the regulator had appropriate functions and powers. The IMF has not had a subsequent comprehensive assessment since the new unified financial sector supervisor started working in 2006. However, in 2007, the European Bank for Reconstruction and Development (EBRD) produced a Securities Market Legislation report that looked at the new Czech Republic securities market regulator. The questionnaire-based report reveals that the Czech Republic has most of the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulations in place.
General Overview
The Czech Republic's securities regulation practices were last assessed in 2007 by the European Bank for Reconstruction and Development (EBRD) Securities Markets Legislation Assessment. The EBRD report is a comprehensive document that provides information on each aspect of the IOSCO principles as observed by the Czech Republic. The completed questionnaire reveals that the Czech Republic has met most of the legal requirements for the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation, showing only minor weaknesses in regulatory legislation. The document does not contain compliance statements though. A 2001 International Monetary Fund’s (IMF) Financial System Stability Assessment of the Czech Republic’s then existing securities regulator, the Czech Securities Commission (CSC), whose functions have since been taking over by the Czech National Bank (CNB) as a unified supervisor, concluded that the CSC had sufficient powers to effectively regulate the securities market. However, the most important finding of the IMF's 2001 assessment was that the CSC lacked adequate resources and skills to effectively discharge its responsibilities in many areas in which the law appeared sound and in which the regulator had appropriate functions and powers. Other areas of concern included the enforceability of legal obligations through the court system, and the adequacy of insolvency laws.
According to the 2007 EBRD report, the legal framework of the Czech Republic is mainly based on the 2004 Act on Business Activities on the Capital Market, the 2004 Bonds Act, the 2004 Collective Investment Act as amended; the 1992 Securities Act as amended; and the Commercial Code. The report further states that “a new regulation of non-UCITS funds ha[d] been introduced by the amendment to the Act on Collective Investment in 2006” (p. iv). The Czech Republic’s capital market experienced a very significant regulatory change with the amendment of the Capital Market Undertakings Act, which became effective in July 2008 and transposed “Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instrument (MiFID)” (p. 27), according to the 2008 CNB annual report. The report mentions further that, the MiFID legislation introduces significant changes, amongst them “the inclusion of investment advice among the core investment services, the introduction of tied agents, new disclosure duties (pre- and post-trade transparency), additional requirements for best execution, commission disclosure, etc” (p. 27). Per the annual report, the CNB “prepared implementing regulations which took effect in July 2008” (p. 27) consisting of decrees that laid down rules for “prudent provision of investment services and rules of conduct towards clients, the method of keeping a register of investment instruments, disclosure duties of investment firms and other capital market participants and also the setting of specimen application forms and the content of their annexes pursuant to the Capital Market Undertakings Act” (p. 27) all in connection with the Capital Market Undertakings Act’s amendment. This created a need to “amend the decree on the manner of compliance with the prudential rules of investment companies and investment funds, which took effect in August 2008” (p. 27), the annual report added.
The 2008 Financial Market Supervision report states that the CNB commenced its supervisory role as a “fully functionally integrated supervisory authority" (p. 10) on January 1, 2008 with the “newly established Financial Market Regulation and Analyses Department, Licensing and Enforcement Department, and Financial Market Supervision Department”(p. 10). The 2007 EBRD report noted that the change in supervisory authority did not “materially change the concept and structure of the current capital market regulation” (p. iv). The ČNB is an ordinary member of the IOSCO, and a signatory to the IOSCO’s multilateral memorandum of understanding (MMoU). The IOSCO MMoU is based on the thirty IOSCO Objectives and Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral Memoranda of Understanding (MoUs). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU.
As reported in the IMF's 2001 FSSA, two trading systems exist in the Czech Republic, both of which were subject to licensing, inspection, and oversight of the CSC: the Prague Stock Exchange (PSE) and the RM-System (Czech Securities Exchange Operator off-exchange, or RMS). The PSE is authorized as an exchange, and the RMS as a broker. Since January 1, 2001, per the same report, the RMS is regulated in the same way as the PSE, and assumes responsibility for some regulatory matters. As a subsidiary of the PSE, the joint-stock company UNIVYC dominates the settlement of trades in securities on the Czech capital market. Furthermore, the Prague Securities Center (SCP), which was established by the MoF under the Securities Act, is responsible for the registration of securities and debt instruments with maturities of longer than one year. According to a 2009 US Department of Commerce (DoC) Doing Business report, lax regulation, fraud and scandals has marred the securities market’s reputation. The PSE has only 13 listed companies. As a result of the global financial crisis, the PSE index lost 52.7 percent of its value in 2008, per the 2009 US DoC report. The 2008 Financial Market Supervision report mentions that in 2008 the Czech Republic had 840 registered foreign non-banks with the authority to provide investment services "under the single European license" (p. 12). As at the end of 2008, there were 20 management companies operating on the collective investment market. Per the same report, Czech’s capital market was significantly affected by the global financial crisis and saw a decrease in assets of collective investment funds due to investor withdrawals and a fall in fair value. The report goes on to illustrate that “share trading on the PSE amounted to CZK 852.0 billion, down by 15.9 percent from CZK 1,013.0 billion in 2007. By contrast, bond trading rose by 26 percent to CZK 643.2 billion from CZK 508.9 billion. The CNB also increased “the frequency of the information duty for some types of entities so that it had enough information for its decision-making on potential remedial measures” (p. 25), the report added.
The Principles
II1. The responsibilities of the regulator should be clear and objectively stated.
According to the 2001 IMF's assessment of the then existing securities regulator, the CSC, this principle was implemented. Per the same report, "the responsibilities of the CSC [were] clearly defined in the laws" (p. 105). The CSC Act provided a statement of the responsibilities of the CSC, which included the licensing and supervision of securities dealers as well as the approval and supervision of exchange operators and the providers of clearing and settlement systems. Furthermore, special provisions on the CSC's responsibilities were found in the Securities Act, the Bonds Act, the Stock Exchange Act, the Investment Companies and Funds Act, and the Pension Funds Act. Procedural rules were also included in the legislation. According to the CNB’s website, the CNB took over from the CSC, and supervises all financial market sectors including the capital markets and its entities, through the authority given to it by the Act on the Czech National Bank No. 6/1993 Coll. The CNB’s role is to regulate, examine and assess the stability of the financial market, and issue penalties in cases where supervised entities are found not to comply with regulation. The 2007 EBRD assessment on the Czech Republic’s Securities Markets legislation against the IOSCO principles reveals that almost all legal requirements for this principle are in place, but falls short on one count: the ability of the CNB to exercise discretion to interpret its responsibilities based on clear and transparent criteria and process to prevent abuse of discretion. While no discretion is exercised, the CNB must perform all its responsibilities to the extent given to it by constitutional law. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
The 2001 IMF’s assessment of the Czech Republic's former securities market regulator, the CSC, concluded that this principle was only partially implemented. Per the same report, "the rules of appointment and the decision making process give the CSC a high degree of supervisory autonomy" (p. 106). Conversely, the CSC "has limited practical value of providing accountability measures through a slow court system" (p. 106). Furthermore, although secondary legislation was drafted by the CSC, it was approved and issued by the MoF, and the CSC was also entirely funded by the State budget. The IMF report noted however that the CSC's lack of regulatory and budgetary autonomy did not necessarily result in the loss of operational independence. Amendments to the CSC Act in 2001 were expected to empower the CSC in issuing secondary regulation, as well as build up technical capacity within the CSC. The issues with the court system were also to be addressed through the reform of the system of administrative judicature. According to the 2007 EBRD report, the CNB acts independently under the authority given to it in Section 9 of the Act of the Czech National Bank, No. 6/1993, as amended. Per the same report, the CNB executes its regulatory powers within the context of the authorization given it by law; and while it does present an account of its activities to the Chamber of Deputies in Parliament through its annual reports, it is not accountable to parliament regarding its regulatory duties. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
The IMF’s 2001 FSAP assessment of the former securities market regulator, concluded that this principle was only partially implemented. The IMF's 2001 assessment found that the CSC lacked adequate resources and skills to effectively discharge its responsibilities in many areas in which the law appeared sound and the regulator had appropriate functions and powers. In particular, the CSC's staff lacked qualifications, experience and resources in areas such as risk management, auditing, and accounting. Article 44 of the CNB Act authorizes the CNB to undertake decisions pertaining to its supervisory role in matters such as licensing, inspections, remedial action, enforcement, and investigation among other supervisory powers. See also Principle 2... Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II4. The regulator should adopt clear and consistent regulatory processes.
According to the IMF's 2001 FSAP assessment of the former securities market regulator, this principle was implemented. Per the same report, the CSC was transparent in its regulatory process, and "ha[d] correctly created a separate Enforcement Division to further safeguard the consistency of decision making in the use of administrative remedies, and increase[d] the credibility of the CSC" (p. 107). However, the IMF assessment noted that the division was inadequately staffed, which resulted in "a lack of depth, and the adoption of a formal approach to some of the regulatory responsibilities" (p. 107). The IMF report recommended building up the CSC's supervisory capacity in these areas. The 2007 EBRD assessment finds that the Czech Republic securities regulatory regime fulfills all legal criteria for this principle. According to the 2008 CNB annual report, the CNB works in accordance with the principles laid down in the strategic document, ‘The Mission of the Czech National Bank for the Supervision of the Czech Financial Market’. Per the ‘Mission’ document, the CNB will ensure that its supervision will be honest, fair, and will “scrupulously and consistently abide by the legal regulations and by the internal regulations of the Czech National Bank, thus ensuring impartial analysis and assessment of all relevant facts using both publicly available and confidential information” (p. 1). The document further states that the CNB will “in regulation and supervision, pursue the strategic objectives derived from its legal mandate and react flexibly to changes in the financial market and take on board new trends in regulation and supervision” (p. 2). The 2008 CNB annual report states that the CNB works closely with the MoF and other state authorities “to create a single strategy and unified rules applying to financial market regulation and supervision and on other essential topics” (p. 22) such as information sharing and crisis management within the domestic and international financial market. The CNB is also accountable on a bi-annual basis to a Financial Market Committee regarding its activities. Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle..
II5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
In its 2001 FSAP of the former securities market regulator, the IMF concluded that this principle was implemented. The CSC Act provided general provisions for the CSC's staff, including confidentiality and disclosure requirements. Furthermore, detailed obligations to be observed by the staff were included in the internal ethical code. The IMF assessment noted that the CSC was taking further legal steps to improve the professional standards. According to the 2007 EBRD assessment report, the Czech Republic’s securities regulatory regime fulfills all criteria of this principle under the Ethics Code of the Czech National Bank, Sections 45 and 50 of the Act on the Czech National Bank No. 6/1993 as amended, Sections 6 and 26 of the Act on Surveillance in the Capital Market No. 15/1998 as amended, and Sections 2 and 8 of the Act on the Code of Administrative Procedure No. 500/2004 Coll. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II6. 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.
According to the IMF's 2001 FSAP assessment of the former securities market regulator, this principle was implemented. Per the same report, the PSE and the RMS both functioned as SROs. The PSE received monthly statements on liquid assets, and balance sheets on a quarterly basis. Furthermore, it had inspection, surveillance, and sanction powers, although the latter were limited. The RMS, started its self-regulatory activities in January 2001, too recently for the 2001 FSAP to attempt an assessment. The Chamber of Auditors (Komora Auditorů České Republiky, or CACR) also had self-regulatory obligations under the Auditing Act. The 2007 EBRD assessment report finds that the Czech Republic’s current securities regulation regime satisfies the legal criteria for this principle. Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
In assessing the former securities market regulator, the IMF's 2001 assessment of the Czech Republic's, concluded that this principle was only partially implemented. The activities of the PSE were subject to the oversight of the Stock Exchange Commissioner under the CSC. Per the same report, although the function and duties of the Commissioner appeared to be effective in supervising the PSE's self-regulatory role, it lacked the capacity to conduct periodic inspections of the exchanges. The IMF advised the CSC to build its capacity to conduct periodic reviews of the PSE and the RMS. According to the 2007 EBRD assessment report, the Czech Republic securities regulation regime satisfies most legal criteria for this principle except requiring the SRO to cooperate with the regulator and other SROs in investigations and enforcing applicable laws, as well as assuring that the SRO’s rules do not create an anti-competitive environment. However, in the Czech Republic’s securities market, the PSE serves as the operator of official securities market, while the RMS is the operator of the OTC market. The above cited information does not however, directly address the Czech Republic’s compliance with this principle.
II8. The regulator should have comprehensive inspection, investigation and surveillance powers.
The IMF's 2001 FSAP assessment, of the former securities market regulator, found this principle to be implemented. Per the same report, "the CSC [was] entitled to carry out inspections, conduct investigations and take administrative proceedings in respect of breaches by market participants" (p. 109).
According to the 2007 EBRD report, the Czech Republic’s securities regulation regime satisfies the legal criteria for this principle; however prior written notice must be submitted before an inspection, except in certain cases under the Section 8 of the Act on Surveillance in the Capital Market No. 15/1998 Coll., as amended. The 2008 CNB annual report also affirms that under special legal rules, the CNB has the power to inspect entities and ensure their compliance with regulations; the CNB is authorized to inspect entities’ compliance with decrees and provisions that it has issued, and also it has the authority to collect and verify information that is needed for its supervisory duties. Regarding the inspection of investment firms, the CNB examines the extent of their compliance with the Basel II reporting duty and focuses mainly on how accurate the individual capital requirements are reported. However, the 2008 Financial Market Supervision report mentions that a new Inspection Act is underway to replace the existing Act on State Inspection No. 552/1991. According to the report, the new Inspection Act will “not only update the rules on on-site inspections conducted by public authorities, but also to set rules for off-site surveillance” (p. 21). Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II9. The regulator should have comprehensive enforcement powers.
According to the 2007 EBRD’s assessment report, the legal criteria for this principle have been observed. Per the 2008 CNB Financial Market Supervision report, the CNB has the authority under the CNB Act and special legal rules to inspect, collect and verify information from supervised entities; and impose remedial measures and penalties. Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
The IMF’s 2001 FSAP of the former securities market regulator, concluded that this principle was not implemented. The IMF report expressed doubts about the CSC's capacity "to apply adequate resources to the exercise of available powers of inspection, investigation, and enforcement" (p. 110). The CSC also lacked "the resources to collect information required for risk based inspections on an ongoing basis" (p. 110). At the time of the assessment, the dismissal of many weak intermediaries somewhat improved the compliance program, which was further expected to be strengthened once the Enforcement Division became operational. According to the 2007 EBRD assessment, the Czech Republic’s securities regulation regime satisfies the legal requirements for this principle. Per the same report, the Act on Undertaking on the Capital Market No. 256.2004 Coll. as amended, obliges “regulated entities to disclose and deliver to the CNB their financial reports. The 2008 CNB annual report also states that, the CNB has power under special legal rules to inspect entities and ensure their compliance with regulations. It is authorized to inspect entities’ compliance with decrees and provisions that it has issued, and also has the authority to collect and verify information that is needed for its supervisory duties.
Per the 2008 Financial Market Supervision report, the CNB conducts ongoing off-site inspections and “comprehensive or partial on-site inspections” (p. 10). The report explains that off-site inspections focus on monitoring the financial market, based on information gathered from reported data and assessment of risks. On the other hand, on-site inspections are conducted following the results of an off-site inspection.
The CNB applies various methods to enforce its supervisory powers to check risk and ensure compliance such as investigating petitions for administrative proceedings, and imposing fines and remedial measures that include license revocation and registration cancellations where there is non-compliance; communication with law enforcement authorities and the MoF’s Financial Analytical Unit (FAU) with respect to money laundering and terrorist financing; as well as cooperating with other international supervisory authorities especially in areas of unauthorized business in the financial market. Nevertheless, there is insufficient information publicly available regarding the Czech Republic's compliance with this principle.
EN11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
The IMF’s 2001 FSAP of the former regulator’s observance with six key international standards, found this principle to be implemented. According to the IMF's original 2001 FSSA, exchange of information on non-public information with domestic counterparts was guaranteed by law. International exchange of information was also enabled under the law upon conditionality of mutuality. MoUs ha[d] been concluded with the ČNB, the MF, and the CACR, as well as with a number of foreign supervisors. Per the IMF's 2001 FSAP assessment, an amendment to the CSC Act on January 1, 2002, was intended to set a provision for assistance to regulators of EU member states. It was also expected to widen the powers of the CSC to provide assistance to other foreign regulators upon the condition of mutuality. Furthermore, the CNB is a signatory to the MMoU and an ordinary member of the IOSCO. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13 and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts. According to the 2007 EBRD assessment report, the legal requirements for this principle are in place.
EN12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
According to the IMF's 2001 FSAP of the former securities market regulator’s observance with six key international standards, this principle was implemented. The CSC had made strong progress in a short timeframe, and included a security system that protected the exchange of information. Per the same report, the CSC had concluded MoUs with the ČNB, the MF, and the CACR. Furthermore, MoUs based on the IOSCO template had been reached with regulators from France, Germany, Austria, the Slovak Republic, Hungary, and Poland. In its 2001 assessment, the IMF encouraged the CSC to update its MoUs "to include special provisions on home country supervision for institutions using the European passport to operate in the Czech Republic" (p. 110). The IMF, in a 2002 report based on its 2001 FSSA, further highlighted increased cooperation and coordination between the CSC and the PSE. The CNB is a signatory to the MMoU and an ordinary member of the IOSCO. Being a signatory to the MMoU implies that the IOSCO screening committee considers the country's legal framework to be compliant with IOSCO Principles 11, 12, and 13 and that the country’s securities regulator has therefore the legal capacity to share supervisory information with and provide assistance to its foreign counterparts.
EN13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
According to the 2007 EBRD’s assessment, the Czech Republic’s securities regulation regime satisfies the legal requirements for this principle. See also, Principle 11.
II14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions.
The IMF's 2001 FSAP of the former securities market regulator concluded that this principle was partially implemented. Per the same report, "the formal powers of the CSC to ensure compliance with disclosure requirements appear[ed] adequate" (p. 111). The requirement for full and fair disclosure to investors was set out in the Securities Act. Per the same report, the CSC's impressive efforts to implement disclosure requirements resulted in compliance of over 90 companies with the provision on annual and semi-annual reports. However, the main challenge for the CSC, according to the IMF assessment, was to "ensure that the accounts fulfill the pre-requisites for full, accurate and timely disclosure of financial statements in terms of accounting and auditing standards of a high and internationally acceptable standard" (p. 111). Per the 2007 EBRD assessment, the Czech Republic’s securities regime satisfies most of the legal requirements for this principle, but does not require a foreign issuer to disclose additional information in its prospectus. Issuers are also not required to “prepare or distribute documents for listing purposes” (p. 32), and the CNB does not have the power to require disclosure. However, per the same report, any relevant information that the law requires should be in the prospectus. According to the 2008 Financial Market Supervision report, the CNB is to ensure the “continuous, regular and timely compliance” (p. 49) of supervised entities reporting duty. Nevertheless, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II15. Holders of securities in a company should be treated in a fair and equitable manner.
According to the IMF's 2001 FSAP of the former securities market regulator’s observance with six key international standards, this principle was partially implemented. Per the same report, basic shareholder rights had been reinforced through amendments to the Commercial Code and the Securities Act. However, implementation of these rights by companies and effective supervision by the CSC remained uncertain, particularly in the area of disclosure and shareholder participation in general meetings. The IMF recommended improving the control and quality of disclosures, as well as monitoring by the CSC. It further advised ensuring proper participation of shareholders in general meetings. The 2007 EBRD assessment report finds that the Czech Republic fulfills most of the legal criteria for this principle, but finds that “directors or other members of senior management of a company are not required to disclose compensation or personal benefits that they may receive” (p. 39). However, the report states that Czech law obliges issuers to disclose benefits and compensations, pending its approval at a general meeting. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II16. Accounting and auditing standards should be of a high and internationally acceptable quality.
The IMF's 2001 FSAP of the former securities market regulator, concluded that, this principle was partially implemented. Per the same report, "the new auditing and accounting standards appear[ed] adequate to ensure an acceptable quality of financial statements" (p. 112). Accounting standards, which are regulated under the Accounting Act as well as MoF regulations, were broadly in line with the EU directives and with the International Accounting Standards (IAS). Furthermore, auditing standards were broadly in line with International Auditing Standards. Other positive developments included the training of the PSE staff in IAS, and the CACR's increased role in investigating the misconduct of external auditors. While there were improvements in the accounting and auditing areas, the IMF assessment reported that "external auditors are not sufficiently independent, and the CACR has not been proactive in exercising its supervisory powers" (p. 112). Although the 2007 EBRD assessment finds that the Czech Republic satisfies most of the legal criteria for this principle, it notes that required audited financial statements do not include a statement of cash flow. According to the 2008 Financial Market Supervision report, the International Accounting Standards Board (IASB) amended standards for transfers between groups of financial instruments in October 2008. Per the report, the amendments allow for a reclassification of “the held-for-trading subcategory of the fair value through profit and loss category, provided that the financial instrument is no longer held for the purpose of selling or repurchasing it in the near term” (p. 26). However, the CNB is not in support of the amendment. The above cited information does not directly address the Czech Republic’s compliance with this principle.
II17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
The IMF's 2001 FSAP of the former securities market regulator concluded that, this principle was implemented. Per the same report, the legal requirements to ensure sound standards for the operators of new collective investment schemes were in place. A license from the CSC was a prerequisite for establishing either an investment company or an investment fund in the Czech Republic. Furthermore, the formalities and minimum requirements for establishing a collective investment scheme are set out under the 1992 Investment Companies and Investment Funds Act (as amended), with the primary aim of protecting investors. In its 2001 assessment, the IMF encouraged the CSC "to undertake a risk based assessment of the content of statutes governing collective investment schemes" (p. 113). According to the 2007 EBRD assessment report, the Czech Republic’s securities regulation regime fulfills almost all legal criteria for this principle; however it does find that the eligibility standards for licensing a Collective Investment Scheme do not include continual professional training key individuals of the CIS operator. Furthermore, the law does not require CISs to publicly disclose information on their organization competence, financial condition, and fitness and propriety of its key owners and management.
According to the 2008 CNB annual report, the global financial crisis resulted in greater diligence to monitoring of collective investment funds liquidity to prevent any difficulties when repurchasing investment units. The Financial Market Supervision report also states that off-site inspection in the collective investment sector in 2008 included the verification and checking of asset eligibility, asset valuation and compliance with investment limits” (p. 41), and focused on data analysis that was acquired under the disclosure duties. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II18. 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.
According to the IMF’s 2001 FSAP of the former securities market regulator, the IMF found this principle was implemented. Rules governing the legal form and structure of collective investment schemes, as well as the segregation and protection of client assets are provided for in the 1992 Investment Companies and Investment Funds Act (as amended). Per the same report, "the legal requirements for segregation and protection of client assets appear to be in place" (p. 113). Under the Investment Companies and Investment Funds Act (as amended), the activities of investment companies and investment funds are under the scrutiny of their depositories, and investors' assets are separated from the investment company's assets. Furthermore, the Act prohibits investment companies and investment funds from undertaking other types of business. The IMF assessment noted however that "the scrutiny required by depositories is not an effective safeguard, and depositories do little to protect the interests of those who hold an interest in an investment fund" (p. 113). The 2007 EBRDA assessment report finds that the Czech Republic’s securities regulation regime satisfies almost all legal criteria for this principle. According to the 2008 Financial Market Supervision report there was an increase in interest for the creation of special funds for qualified investors in the areas of investment and mutual funds in real estate. This interest, per the report is a result of the amendment of the Collective Investment Act in 2006, which removed barriers on special real estate funds and special funds for qualified investors. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II19. 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 investors interest in the scheme.
The IMF's 2001 FSAP of the former securities market regulator concluded that, this principle was implemented. Per the same report "the Investment Companies and Investment Funds Act sets out detailed requirements for disclosure by investment companies and investment funds" (p. 113). The IMF assessment noted however that "the scrutiny required by depositories is not an effective safeguard, and depositories do little to protect the interests of those who hold an interest in an investment fund" (p. 113). Furthermore, problems with risk disclosure were overlooked by the CSC. The 2007 EBRD assessment finds that the Czech Republic’s securities regulation regime fulfills most of the legal criteria for this principle. According to the CSD website, the CSD received its license in August 2009 to conduct business as a Central Depository with its activities being regulated by Article 202 of Act 256/2004 Coll., on Trading on the Capital Market. Per the website, the CSD “has initiated negotiations with the Czech MoF regarding the transfer of the files of the Czech Securities Centre”. The website further states that the CSD expects to provide issuers of investment instruments with “better availability, flexibility and a considerably more active approach,“ from the CSD in the future. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
According to the IMF's 2001 FSAP of the former securities market regulator concluded that this principle was implemented. The IMF assessment noted however that "the scrutiny required by depositories [was] not an effective safeguard, and depositories do little to protect the interests of those who hold an interest in an investment fund" (p. 113). In its 2001 assessment, the IMF recommended requiring the use of forward pricing for the valuation of funds in the Czech Republic. The 2007 EBRD report finds that, the Czech Republic’s securities regulation regime fulfills most legal criteria for this principle, but finds that (1) independent auditors are not required to check the valuation of CIS assets, (2) there are no mechanisms to address errors regarding the price of the CIS units or value of their assets, and (3) there are no rules to govern fees investors pay on purchases or redemption of shares or units of a CIS. According to the 2008 Financial Market Supervision report, off-site inspection was undertaken in the collective investment sector in 2008, which included the verification and checking of asset eligibility, asset valuation and compliance with investment limits” (p. 41) For its disclosure supervisory duties, the CNB focused on data analysis of reports submitted. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II21. Regulation should provide for minimum entry standards for market intermediaries.
The IMF's 2001 FSAP of the former securities market regulator, concluded that, this principle was implemented. Under the Securities Act, minimum entry standards for market intermediaries include fit and proper requirements, as well as a minimum required capital. In its 2001 assessment, the IMF advised rapidly issuing "investment service company licenses with different endorsements depending on the activities of the company" (p. 115) in order to adjust the fit-and-proper requirements accordingly. According to the 2007 EBRD report, the Czech Republic securities regulation regime satisfies the legal requirements for this principle. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
According to the IMF’s 2001 FSAP of the former securities market regulator concluded that, this principle is only partially implemented. In its 2001 assessment, the IMF noted that there was a need for an ongoing requirement to hold liquid assets against risk, which should be supplemented by a regular reporting requirement. Furthermore, the reporting requirement should include information about the risk of the entity. The 2007 EBRD report finds that the Czech Republic’s securities regulation regime satisfies all legal criteria for this principle. The 2008 Financial Market Supervision report states that in 2008 the CNB inspected investment firms to determine “their quality of compliance with the Basel II reporting duty, focusing mainly on the correctness of the reporting of individual capital requirements” (p. 41). Prudential requirements on disclosure under the CNB Decree on Prudential rules for banks, credit unions and investment firms were also checked. Per the same report, the CNB regularly communicated with investment firms through consolidated supervision, to identify “the structure of consolidated groups containing non-bank investment firms” (p. 41). However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II23. Market intermediaries should be required to comply with standards for internal organization and operational 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.
The IMF's 2001 FSAP of the former securities market regulator concluded that this principle was only partially implemented. Per the same report, licensed intermediaries should remain fit and proper and were subject to inspection. Although the requirements were in place, the IMF expressed concerns on "the CSC's capacity to inspect intermediaries and ensure that intermediaries have and adhere to proper systems of risk management and internal control" (p. 115). The 2007 EBRD assessment finds that, the Czech Republic’s securities regulation satisfies all legal criteria for this principle, but notes that written contracts are not required between market intermediaries and clients. According to the 2008 Financial Market Supervision report, the CNB, in 2008, examined investment intermediaries and firms internal and operational structures to determine whether they were in compliance with the MiFID legislation that was introduced into Czech law by the Capital Market Undertakings Act amendment. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II24. 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.
According to the IMF’s 2001 FSAP of the former securities market regulator, the IMF concluded that this principle was only partially implemented. The IMF assessment noted that risks of failure were augmented by the lack of requirements to hold liquid assets against risk. It further stated that bankruptcy and insolvency provisions were "inadequate" (p. 116). The 2007 EBRD report finds that the legal requirements for this principle is in place, but notes that assets held by an intermediary or third party can not be frozen or seized by on behalf of the intermediary. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
The IMF's 2001 FSAP of the former securities market regulator concluded that, this principle was implemented. The activities of the PSE were subject to the oversight of the Stock Exchange Commissioner under the CSC. Per the same report, "the role of the Stock Exchange Commissioner appear[ed] to be effective" (p. 116). Furthermore, both the PSE and the RMS were subject to disciplinary action or loss of authorization if they failed to comply with the terms of their authorization. At the time of the assessment, there was no derivative trading in the Czech capital market. Amendments to the Securities Act and other laws were expected to provide a new legal framework for the establishment of a functioning derivative market. Per the 2007 EBRD assessment, the Czech Republic satisfies most legal criteria for this principle, but the assessment notes that there is mechanism in place for the compliance with prudential and other requirements to reduce risk of non-completion of transaction such as compensation schemes and mandatory margin assessments. The report also finds that (1) persons with direct access to the system or exchange do not have the same financial capacity, integrity or performance requirements as market intermediaries and (2) there is there are no clearly disclosed standard procedures that govern the conduct of trade like front-running or trading ahead of customers. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II26. 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.
According to the IMF’s 2001 FSAP of the former securities market regulator, this principle was implemented. The activities of the PSE were subject to the oversight of the Stock Exchange Commissioner under the CSC. Per the same report, "the role of the Stock Exchange Commissioner appear[ed] to be effective" (p. 116). Furthermore, both the PSE and the RMS are subject to disciplinary action or loss of authorization if they fail to comply with the terms of their authorization. In its 2001 assessment, the IMF recommended periodic review of the work of operating divisions of the PSE and the RMS to ensure integrity of trading. Per the 2007 EBRD assessment, “the powers of the CNB to supervise the stock exchange and the off-exchange trading systems are set expressly by “ (p. 77) the Act on Undertaking on the Capital Market No. 256/2004 Coll. as amended, Section 3 of the Act on the Surveillance in the Capital Market and on Amendments to other Acts, as amended, and Section 44 of the Act on Czech National Bank No. 6/1993, as amended. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II27. Regulation should promote transparency of trading.
The IMF's 2001 FSAP of the former securities market regulator concluded that, this principle was implemented. According to the IMF's 2001 FSSA, "transparency in the stock market ha[d] improved drastically after the introduction of the System for Support of the Share and Bond Markets on the PSE and the requirements for all PSE members to report all trades to the PSE for subsequent disclosure" (p. 66). In its 2001 assessment, the IMF recommended ensuring the proper integration of the CSC's supervisory work with that of the surveillance units of the PSE and the RMS. It further encouraged focusing on compliance with reporting requirements to promote transparency. The 2007 EBRD assessment finds that the Czech Republic’s securities regulation regime mostly fulfills the legal requirements of this principle. According to the Financial Market Supervision report, compliance with the new disclosure duties that was introduced with the implementation of the MiFID was examined at the end of 2008. It further states that the “disclosure of information on transactions represents an important element for maintaining the integrity and transparency of the capital market” (p. 41), which is necessary because of market fragmentations anticipated by the MiFID legislation. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.
The IMF's 2001 FSAP of the former securities market concluded that, this principle was only partially implemented. According to the IMF's 2001 FSSA, although market manipulation and other unfair trading practices were generally prohibited, "the large number of very small tradable stocks and the low public float in many of the larger companies limits the ability of the CSC to prevent market manipulation and other unfair trading practices" (p. 66). In its 2001 assessment, the IMF recommended ensuring the proper integration of the CSC's supervisory work with that of the surveillance units of the PSE and the RMS. It further encouraged close coordination between the three market surveillance departments to prevent market manipulation. The 2007 EBRD assessment finds that the Czech Republic satisfies almost all legal criteria of this principle; however it finds that some weaknesses are notable. For instance, excessive leverage in the system, like trading on margin, is not considered a crime in Czech law. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
The IMF's 2001 FSAP of the former securities market concluded that, this principle was implemented. Per the same report, "the procedures for management of large exposures, default risk and market disruption seem adequate" (p. 118). Management of large exposures with regard to securities trading was addressed under the PSE rules as well as the SCP membership rules. The 2007 EBRD assessment finds that the legal requirement for this principle is not fully in place. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
II30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
According to the IMF's 2001 FSAP of the former securities market regulator, this principle was implemented. As a subsidiary of the PSE, the joint-stock company UNIVYC dominates settlement of trades in securities on the Czech capital market. In its 2001 assessment, the IMF stated that the UNIVYC had adequate risk management with fair and transparent processes. The 2007 EBRD assessment finds that the legal criteria for this principle have been satisfied. According to the 2008 Financial Market Supervision Report, ”Decree No. 235/2008 Coll. on information duties of settlement system administrator and central securities depository stipulates the content, dates, manner and forms of submitting information“ so as to ensure the CNB perfoms its supervisory duties effectively. However, the above cited information does not directly address the Czech Republic’s compliance with this principle.
