1. Legal Aspects of Finance Slide Set 1 Regulative Views on the Markets Matti Rudanko

2. The Views of the Regulator (and Supervisor) of the Markets The views are taken from regulative provisions, either from European or national legislation, which are effectively harmonized “Financial Services policy should deliver stable, secure and efficient financial markets and ensure coherence and consistency between the different policy areas, such as banking, insurance, securities and investment funds, financial markets infrastructure, retail financial services and payment systems.” (http://ec.europa.eu/internal_market/finances/index_en.h tm )http://ec.europa.eu/internal_market/finances/index_en.h tm Legal Aspects of Finance 1 2

3. Views on the Markets Economics: markets in the context of political economy Finance: pricing of derivatives, investor behavior, market efficiency, financial instruments etc. –Methods of economics and business economics Communication sciences, sociology etc. (Here:) the legal view: regulation of the markets –Classical question: why regulate the markets? –Karl Marx – Adam Smith (the visible / invisible hand) – the modern competition law –The special characteristics and role of financial markets may increase the need of regulation Legal Aspects of Finance 1 3

4. The Special Characteristics and Role of Financial Markets Purpose: (like that of other markets): transfer resources (funding) to where they are needed –Macroeconomic view: blood circulation of national economy –Requires efficiency ensured also by means of regulation –Another regulatory objective: investor protection For companies, markets are a means of getting capital – for investors a means of getting profit –Primary markets: collecting capital to companies –Secondary markets: profit through market value increase (cf. dividends) –Cf. Investment markets / Markets of corporate control Disorders affect all markets – and political economy –They easily escalate on global markets Legal Aspects of Finance 1 4

5. 5 Public trade in securities Collective anonyme automatic (electronic) –the book-entry system: securities exist only as electronic book-entries (both shares and bonds) –two-fold account system: the mass deposit accounts: total amount of shares per each class of shares personal book-entry accounts relating to investors: entries of transfers etc. registrations

6. Main Objects of Regulation in Securities Markets Law 1: Disclosure Duties Disclosure duties on securities markets –Duties in conjunction with the issue of securities Information of the issuer (financial position, future prospects etc) and of the security to facilitate well-founded investment decisions Especially the prospectus duty Obligation of the issuer –Regular (interim and annual accounts and account statements) and ongoing disclosure duties (any news having a material impact on the value of the security) Obligation of the issuer –Flagging duties (share ownership portion reaching / exceeding / falling below defined thresholds) Obligation of a shareholder Legal Aspects of Finance 1 6

7. Other Main Sets of Securities Market Provisions Rules of trading (mostly self-regulation of the Stock Exchange) Ban on market abuse –Insider regulation: ban on trading on the basis of non-public price-sensitive information –Market manipulation: affecting market prices in an inappropriate way e.g. by operations in the company’s own shares Public bids and mandatory redemption of minority shares Regulation of securities intermediaries (brokers) –E.g. codes of conduct, protection of clients Legal Aspects of Finance 1 7

8. 8 Securities markets regulation 1

9. Legal Aspects of Finance 1 9 Rulings given by authorities Norm giving power delegated in law more detailed norms specifying those in law main norm giving authorities pertaining to securities markets –Ministry of Finance –Financial Supervision Authority: guidelines and regulations –Consumer Ombudsman office –The Finnish Accounting Standards Board

10. Legal Aspects of Finance 1 10 Self Regulation Norms concretizing the general norms in law binding in general only on members of the self- regulatory body if not issued under normative authority delegated in law to the self-regulatory body creating practical standards stricter than those in law e.g. the rules and guidelines of the Stock Exchange and the Association of Securities Dealers the Ethical Rules of the Stock Exchange

11. Legal Aspects of Finance 1 11 Regulations of the Association of Securities Dealers General contract terms of investment service General terms and conditions of orders to purchase and sell securities general conditions of a lending agreement –affirmed by the Finacial Supervision Authority on the basis of a legal provision: chapter 4, section 5 a of the SMA (a lending contract), delivery of securities with repurchase terms (a repurchase contract).