Catalog

	Table of Contents
p. 40 of 58 BACK | NEXT Purpose and Structure of the Toolkit Part One: Introduction and Overview Part Two: Preconditions and Infrastructure for Financial Sector Development Part Three: Financial Regulation and Supervision I. Financial Stability, Development and Institutional Design II. Financial Regulation: General Principles III. Financial Regulatory Structure IV. Banking Regulation V. Bank Insolvency and Depositor Protection VI. Securities and Derivatives Regulation A. International Standards B. Guidance and Recommendations VII. Insurance and Pensions Regulation VIII. Regulation of Financial Conglomerates Part Four: Regional Financial Integration Part Five: ADB's Intervention in the Financial Sector Bibliography Glossary and List of Abbreviations Acknowledgements

Financial Sector Legal and Regulatory Toolkit : Part Three: Financial Regulation and Supervision : VI. Securities and Derivatives Regulation

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B. Guidance and Recommendations

The development of capital markets depends on the existence of an effective company law covering, at the very least, the regulation of corporate structures, protection of minority shareholders, and sound policies of corporate governance. Beyond formal rules of company law, some form of functioning, reliable, and transparent accounting system is critical, not only for the operation of capital markets, but also as a fundamental aspect of any meaningful corporate business structure. Moreover, a well-trained management capable of adequately understanding and fulfilling its responsibilities is essential.

Legal infrastructure is especially important in the context of equity market development, with much emphasis placed on investor protection. Based on country-level data, researchers have found that better legal protection for investors is associated with

1. higher stock market valuations,
2. higher value of listed firms relative to their assets or changes in investments,
3. larger listed firms in terms of their sales and assets, and
4. greater reliance on external financing by firms for growth. (La Porta, et al, 2002; Kumar, et al, 1999; Rajan, et al, 1998)

Potentially significant legal aspects of minority shareholder protection include

• a fair and reliable judicial system,
• regulation of voting rights attaching to shares,
• pre-emptive rights,
• directors' duty of loyalty,
• minority shareholders' mechanisms to contest perceived oppression by controllers,
• laws prohibiting insider dealing, and
• regulation of disclosure. (Cheffins, 2001)

Of these, disclosure and private enforcement are probably the most important. A recent major study found little evidence that public enforcement benefits stock markets. On the other hand, laws mandating disclosure and facilitating private enforcement through liability rules provide the greatest benefit (La Porta, et al, 2004). In support of the importance of disclosure regulation to securities market development, another study, through a review of behavioral research, cautions that it is overly optimistic to expect issuers to disclose voluntarily optimal levels of information, to expect securities intermediaries to consider appropriately the interests of investors, or to expect investors to be able to bargain effectively for fraud protection. (Prentice, 2002)

In addressing design and structure of securities regulation, it is useful to begin with the IOSCO Objectives and Principles. The IOSCO Objectives and Principles provide a useful summary and checklist of issues which must be considered in securities regulatory design and implementation through a country's domestic legal system. Since they are written at a general level reflecting their status as an internationally negotiated and agreed standard, the IOSCO Objectives and Principles will in most cases only be the starting point in reviewing and addressing issues of securities regulation.

If a country has gone through an FSAP or a securities ROSC, then this should be reviewed closely as it will provide important guidance in addressing issues. However, if a country has not undergone an FSAP or securities ROSC, it may refer to the FSAP/ROSC for similar countries as these would provide useful guidance regarding the process for becoming integrated into the international financial system.

The IOSCO Methodology provides a detailed and specific checklist of issues to address and consider in implementing the IOSCO Objectives and Principles. Further, the Objectives and Principles and Methodology are also supported in most cases by individual standards and guidance from IOSCO on implementation and approach. In the securities area, these are increasingly forming a comprehensive and detailed resource set.

Once key issues and design factors have been addressed through the preceding analysis, it is useful to look at possible models. While there are no internationally agreed model laws, treaties, and other instruments, the EU regional financial arrangements provide a useful starting point. A variety of EU directives directly addresses matters of securities regulation, and may be useful as they are directed towards a variety of different legal, economic, and development environments.

In addition, Asian securities regulators have formed an Asia-Pacific regional committee under the IOSCO umbrella and are engaging in discussions (with support from the ADB) on possible use of IOSCO standards as a basis for cooperation. In this context, as a first step, the ASEAN Capital Markets Forum (ACMF) has now agreed regional standards based upon IOSCO standards for equity and debt securities disclosure.

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