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Regulatory and institutional framework
Interviews with market observers and review of relevant reports suggest that the institutional environment in Estonia is considered sound, and that the court system is generally considered to be impartial and competent. A 2006 EBRD assessment concluded that legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings (eStandards Forum, 2009). In addition to this, the EBRD concluded that corporate information is seen as reliable, and statutory auditors are fairly independent from shareholders.
The main regulatory and enforcement powers covering listed companies are exercised by the Estonian Financial Supervision Authority (FSA). The FSA is an agency of the Bank of Estonia, with autonomous competence and a separate budget. The Financial Supervision Authority Act of 2001 constituted the FSA, which began operations in 2002. Prior to its existence, supervisory authorities for banking, insurance and securities were separate. A 2000 Report on the Observance of Standards and Codes (ROSC) on the observance of IOSCO objectives and principles of securities regulators had concluded that the then securities regulator, the Securities Inspectorate (SI), was weak, lacking in credibility (IMF, 2000). It acknowledged that the already planned integration of the financial sector supervisors
“should help to address some of the... weaknesses”. Some of the more specific suggestions presented in the ROSC were to “strengthen SI capabilities in the area of supervision, inspection, investigation and enforcement”. It also suggested as a first step to “attract and retain qualified staff”.
The FSA, which is also responsible for bank and insurance supervision, has two boards. The supervisory board is in charge of electing the management board members, adopting the budget and deciding on a fee structure. It is composed of six members, two of whom are members by virtue of office - the Minister of Finance and the President of the Bank of Estonia - and four who are appointed members, half of them by the Government on the proposal of the Minister of Finance and the other half by the board of the Bank of Estonia on the proposal of the President of the Bank of Estonia. The Minister of Finance is the Chairman of the supervisory board. The board has had only infrequent changes in composition since its establishment in 2002. The Authorities pointed out that this model whereby the FSA has autonomous competence and a separate budget, but operating at the Bank of Estonia, “was mostly influenced by Finland’s model”, where financial supervision is administratively connected with the central bank.
The management board is elected by the supervisory board and is in charge of day-today management of the FSA. The FSA currently employs 69 people, including 7 professionals in the securities market division. Most employees are accountants, analysts or lawyers.
The FSA budget comes directly from fees paid by supervised entities (except listed companies which do not pay fees). For criminal cases, the FSA may gather initial information but has limited discovery powers and must refer these cases to the police or prosecutor’s office for formal investigation and criminal prosecution. The FSA is not authorised to carry out criminal prosecutions. It therefore deals mainly with administrative cases. Since 2008, there have been three cases sent to prosecutors for further investigation and consideration of prosecution.
Statistics on enforcement show little or in some cases no evident activity. In 2008, five cases of alleged insider information and the same number for market manipulation were investigated. In 2009, two investigations on market abuse were referred to criminal authorities. Regarding sanctions applied in Estonia, the Estonian report indicated that the highest administrative fine in 2008 was set at EUR 64. In the whole of 2008, FSA collected approximately EUR 315 in fines. According to the FSA, the number of cases with no formal outcome could be up to ten times more than those with formal outcomes reported in the table below (or higher, depending on the matter), but FSA does not track statistics of such informal activities.
Table 2.3. Summary of Estonian FSA enforcement
The FSA acknowledges that there have been three main obstacles to effective enforcement in Estonia in recent years. These are: low monetary penalties; the very high level of circumstantial evidence needed to rule on criminal and misdemeanour procedures; and deficient co-operation and priority-setting between FSA and law enforcement agencies. The latter is an important issue in relation to Principle I.C, which states that “the division of responsibilities among different authorities in a jurisdiction should be clearly articulated and ensure that the public interest is served”. The issues highlighted by the regulator regarding low monetary level penalties and the data provided on enforcement also point to some difficulties in fully implementing Principle I.D., which calls for “supervisory, regulatory and enforcement authorities ..." to “have the authority, integrity and resources to fulfil their duties.". Although maximum penalties for misdemeanours are low, these were increased in 2005 from 50 000 EEK to EEK 500 000 (EUR 32 000) for legal persons. For natural persons, the maximum penalty for misdemeanours stands at EEK18 000 (EUR 1150). Legislative amendments would need to be introduced by the Ministry ofJustice for these limits to be modified further.
FSA relations with the Prosecutor’s Office (PO) have been improving, according to the FSA. The FSA only has powers to issue sanctions and fines for misdemeanours, while it can gather initial information on criminal cases before referring them to the PO. However, the PO sets its priorities for criminal cases based on separate priority-setting by the Ministry of Justice and has not necessarily given priority to market abuse crimes, while generally citing lack of sufficient evidence to pursue prosecution. More recently, according to the FSA, the working relationship has improved, with more advance consultation occurring before a case is referred to the PO to help increase the prospects of the case being pursued. According to supplementary information provided by Estonia, the FSA made substantial progress in enforcement against market abuse cases in 2009. The FSA won its first market manipulation case (a misdemeanour), a case that went to court, and a second market manipulation case (this time a criminal offence), that was prepared in conjunction with the Public Prosecutor’s Office and filed with a criminal court. A third case of market abuse involving insider trading was successfully tried in a criminal court, with the decision going in favour of the FSA.
According to the FSA, the IOSCO verification team completed its review of Estonia in 2009 and determined that it complied with IOSCO requirements related to cross-border co-operation and exchange of information except for restrictions related to criminal cases involving countries outside the European Economic Area. More recently, the FSA informed the review team that it has removed this single remaining obstacle to becoming a full signatory to the IOSCO Multilateral Memorandum of Understanding (MMOU) on Consultation and Co-operation on Exchange of Information. The remaining obstacle related to cross-border exchange of information that had previously been protected by the Estonian personal data protection regulation. References to the Personal Data Protection Act were removed from the provisions in the Financial Supervision Authority Act in January 2010. The FSA is currently awaiting IOSCO’s response to a recent letter regarding Estonia’s willingness to become a full signatory to the IOSCO MMOU. Nevertheless, Estonia is currently a party to IOSCO Annex B, which indicates a country’s commitment to such information exchange while recognising certain gaps in formal compliance.
In 2005, Estonia published its first voluntary Corporate Governance code, “The Corporate Governance Recommendations" issued by the FSA in co-operation with the Tallinn Stock Exchange (TSE), which entered into force on 1 January 2006. Its stated goal was “enhancing corporate governance and transparency through notably improved reporting systems by listed companies.” The CG code is intended for companies whose shares trade on a regulated market operating in Estonia (issuers, except for investment funds registered as public limited companies). In 2007, the EBRD commissioned an Estonian Law firm to analyse the voluntary CG code, which is based on a “comply or explain” reporting mechanism. It concluded that the CG code was “generally compliant with the OECD Principles” (EBRD, 2007). Both the FSA through its regulatory oversight or the Stock Exchange through its listing requirements have the authority to sanction companies for incomplete or unsatisfactory submissions. Nevertheless, monitoring of code submissions is done by the FSA. All listed companies must prepare an annual Corporate Governance Recommendations report, and make it publicly available.
This CG code refers to six overarching areas: 1) the General Meeting; 2) the management board; 3) supervisory boards (mainly with respect to their duties, composition, and mechanisms to deal with conflicts of interest); 4) co-operation of the two boards; 5) disclosure; and 6) financial reporting and auditing.
Unfortunately, a 2008 FSA analysis of the 2007 results appears to indicate significant weaknesses both in terms of companies’ inclination to follow the CG code’s recommendations and the seriousness shown towards its reporting requirements. The FSA found that: 1) companies did not evaluate their governance practices against all the recommendations with sufficient detail; 2) listed companies did not completely or sufficiently clarify in their reports what circumstances had caused the difference in the issuers’ governance practices from the recommendations; 3) issuers did not disclose the required information appropriately. Reports contained references to other documents or parts of an activity report, which made it complicated and time-consuming to find the information; 4) on reporting companies’ websites, certain information deemed important to disclose in the voluntary CG code was not entirely available; and 5) there were deficient notices to call a general meeting. The FSA found very uneven levels of “diligence”, stating that “there are some issuers whose ... reports consisted of a couple of lines in their annual reports, even though comparison revealed several differences in the actual governance practices of the said issuers compared to the ... recommendations”. As of September 2009, the FSA had not yet completed a similar analysis of the 2008 submissions, but suggested that while there were some improvements in 2008, significant weaknesses remained. In late 2009, the FSA submitted proposals to legislate on the following elements:
Estonian authorities noted that the incorporation of these elements into law had yet to be decided. Under the Estonian Financial Supervision Act, the FSA has the right to submit proposals to the Bank of Estonia, the Ministry of Finance and other state agencies concerning the drafting, amendment and repeal of legislation.
In 2003, the FSA and Stock Exchange concluded a Memorandum of Understanding (MoU) regarding the general division of responsibilities between these two entities. The Stock Exchange is the primary authority responsible for the supervision and enforcement of the Stock Exchange rules and regulations. The Stock Exchange is also required to apply adequate systems and controls to detect cases of possible market abuse and to submit such cases to the FSA. According to supplementary information provided to the review team “the main principle for the division of responsibilities and primary enforcement between the FSA and the Stock Exchange is ... based on whether the offence in question is a breach of legal requirement or Stock Exchange rules and regulations. The Stock Exchange enforces its rules and regulations usually without prior consultation with the FSA. However, in cases of more serious infringements (usually if both Stock Exchange rules and legal requirements have been violated), the FSA and the Stock Exchange may consult and co-ordinate their actions informally before enforcement.”
Supplementary information for this review showed that in 2007, the Stock Exchange issued penalty fines in three cases, two related to breaches of disclosure obligations and one case related to delayed disclosure under the CG code. In 2008, fines for breaches of information disclosure requirements were issued in two cases. In 2009, the SE issued one fine relating to non-disclosure of related party transactions. In addition, the Stock Exchange has issued several warnings for minor breaches (mainly relating to late or inaccurate disclosure of information). Furthermore, the Stock Exchange has submitted to the FSA only one formal notification of suspicious transactions. However, according to Estonian officials it is general practice for the Stock Exchange to forward to the FSA most of the correspondence it has with issuers relating to possible breaches of rules and regulations, and it is also common practice for the Stock Exchange to co-operate with the FSA in more complicated cases prior to enforcement actions.