IOSCO Core Principles Principles relating to the Regulator Principle1: The responsibilities of the regulator should be clear and objectively stated. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 1.1 If implemented: Please describe how this principle has been implemented. It has to be made clear from the very beginning that the Hungarian Financial Supervisory Authority (HFSA) is not the regulator. The HFSA has the right to comment on statutory instruments under preparation concerning the financial sector and submits proposals for the adoption of such statutory instruments but it doesn’t have the right to issue decrees and regulations within its sphere of activity. The Ministry of Finance is vested with this right. Answers to Principles 1-5 are to be understood with the interpretation, that in Hungary the Supervisory Authority is only a supervisor. The Supervision’s responsibilities are set out by the following acts: a. Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority b. Act CXI of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange, c. Act XXXIX of 1994 on the Commodities Exchange and on the Transactions of the Commodities Exchange d. Act LXIII of 1991 on Investment Funds, e. Act CXII of 1996 on Credit Institutions and Financial Enterprises Modifications to the Supervision’s responsibilities can only be implemented by modifying the respective act. The Supervision has no discretion to interpret its authority under its mandate. Procedures for appointment, terms of office and criteria for removal of the President and Deputy President of the Supervision are specified by act CXXIV of 1999 on the Hungarian Financial Supervisory Authority. (According to the act, the Supervision has no governing body.) The Hungarian Financial Supervisory Authority is the only authority responsible for the smooth and fair functioning of the securities market, therefore no cooperation or communication is necessary with other authorities is in this regard. Principles relating to the Regulator Principle 2: The regulator should be operationally accountable in the exercise of its functions and powers independent and 2. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented _____________________________________________________________ 2.2 If partially implemented: 1. Please describe how this principle has been implemented: Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority states that the Supervision a. is an organisation of public administration with national jurisdiction reporting to the government and supervised by the Minister of Finance, b. is a legal entity functioning as an independent organisation. It is part of the budget, financed by its own revenues, c. its internal organisational and operational rules shall be approved by the Minister of Finance. However, the minister has no right to intervene into decisions of the Supervision concerning the supervised institutions or markets. Independence of the Supervision is assured by the appointment and removal procedure of the President and Deputy President of the Supervision. The President of the Supervision is appointed by the Parliament upon the recommendation of the Prime Minister for 6 years and can be dismissed by the same procedure. The Deputy President is appointed for 6 years by the Prime Minister upon the recommendation of the Minister of Finance and can be dismissed by the same procedure. Dismissal may be effected only in cases defined by the law and shall be justified publicly. Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority prescribes that only the court may review the resolutions of the Supervision. The court may decide against the resolution of the Supervision only in the case if the resolution was unlawful. Employees of the Supervision acting in their official capacity may be sued by a supervised institution only in the case if they infringe secrecy. Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority states that all resolutions of the Supervision - with the exception of those which may affect banking secrecy or trade secret – may be published. The practice of the Supervision is to publish all resolutions with do not infringe secrecy. This provides public control on the activities of the Supervision. Consultation with other governmental bodies is necessary only in case of closure of an investment house. In this case approval of the Minister of Finance and the President of the National Bank of Hungary is needed. The Supervision has to report to the Government annually about its activities in the previous year and to publish an annual report to the public. Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority states that all information containing business secrecy has to be preserved unless law obliges the Supervision to give out the secret. Eventual breaching of this obligation has consequences according to the criminal code (Act IV of 1978). Principles relating to the Regulator Principle 3: The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. 3. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? Implemented ? Partially implemented ? Not Implemented ______________________________________________________________ 3.1. If implemented: 1. Please describe how this principle has been implemented. The Hungarian Financial Supervisory Authority is not a rule making authority. According to the Act CXI of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange it has all powers necessary to perform its functions. Regarding investigation, the supervisor has power to carry out offsite and on-site supervisions. If criminal investigation is needed, it can be carried out by the police. Intersectoral domestic information sharing is not necessary, for there is only one supervisor. International information sharing is possible. The Supervision is funded by the fees of the supervised institutions. These are basic fees and transaction fees. The Supervision has no flexibility in collecting fees. The resources are sufficient to the functioning of the Supervision, however the Supervision in certain cases is bound strictly to administrative rules in using its resources deriving from its status in public administration. Resources are allocated by the Supervision. The State Audit Office oversees the use of the resources. Appropriate personnel is obtained through personal applications or competition. Technical resources are obtained according to the public procurement procedure laid down in the Act XL of 1995 on Public Procurement. Though the employees of the Supervision are public servants, the salaries are not significantly lower than those in the supervised institutions due to the exemptions granted by the Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority. Principles relating to the Regulator Principle 4: The regulator should adopt clear and consistent regulatory processes. 4. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented ______________________________________________________________ 4.1 If implemented: 1. Please describe how this principle has been implemented: Regulations are laid down in acts, government decrees and in decrees of the Minister of Finance. Procedural rules are laid down in orders of the President of the Supervision. The Supervision has the right to initiate legislation and has to be consulted in the process of drafting the acts and decrees. Acts, government decrees and decrees of the Minister of Finance are available to the public, they are published in the Gazette. Orders of the President of the Supervision are not available to the public because they consist of information relevant to the employees of the Supervision. The Supervision has to give reasons for regulatory decisions or actions that affect the rights or interests of other persons. The reasons may be omitted only if the decision is the approval of an application. Act CXXIV of 1999 on the Hungarian Financial Supervisory Authority prescribes that only the court may review the decisions and actions of the Supervision. The court may decide against the decision or action of the Supervision only in the case if it was unlawful. The general criteria for granting or revoking a license are disclosed by the respective acts. Those affected by the licensing process are not entitled to a hearing but the Supervision is not averse from consultations. In case of modification of existing legislation or introducing new legislation the respective section of the public has to be consulted (e.g. Association of Investment Service Providers.) Regulatory actions which don’t infringe secrecy are published in the official journal of the Supervision (Hungarian Capital Market). If the reasons don’t infringe secrecy they are published as well. The Supervision may set standards and issue its opinion. They are not legally binding. The Supervision plays a role in educating investors and other market participant. It is financed by part of the fines it levies from supervised institutions. The Supervision calls for a competition every year for the improvement of general professional knowledge of investors and clients. Both the call for competition and the results are published. Research programs, publications. conferences etc. are sponsored. A major sponsored program for 1999 was an information leaflet for the general public on Y2K preparations. The Supervision doesn’t regularly publish information about actions taken in the furtherance of its policy objectives (including, for example, information about investigations, inquiries and regulatory programs). Principles relating to the Regulator Principle 5: The staff of the regulator should observe the highest professional standards including appropriate standards of confidentiality. 5. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented _________________________________________________________________ 5.1 If implemented: 1. Please describe how this principle has been implemented: Remuneration of the staff of the Supervision is not significantly lower than that of the supervised institutions. Therefore, the Supervision is able to recruit and keep the staff with high professional standards. The Supervision promotes inservice training and study-tours of the staff. According to the Act on the Hungarian Financial Supervisory Authority, employees must not possess securities or other investment instruments except of government securities, investment units and non-publicly offered securities. If they had obtained them prior to their appointment or came to possession through inheritance, they have to declare it and have to dispose of the securities within three month. If next of kins obtains securities not falling under exemption, it has to be declared as well. Employees must not take part in the decision-making process pertaining to those securities which they or next of kins possess. Employees are bound by the obligation of secrecy in connection with any information they obtain in connection with their supervisory activities. They must not use any such information for their own advantage. 2. Are further improvements or changes proposed? If so, please describe. A Code of Conduct has been elaborated in the Supervision by a special taskgroup and is to be adopted soon. Principles for Self-Regulation Principle 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, and to the extent appropriate to the size and complexity of the markets. 6. Please briefly describe the role of SROs in your jurisdiction and explain, with respect to each SRO: a. what functions it is required to perform; b. the source of its powers to perform those functions; and c. what general limitations, if any, exist on the scope of the powers of SROs. The Budapest Stock Exchange (hereinafter the BSE) is a selfgoverning, self-regulating, non-profit oriented exchange owned by its members, providing a large number of financial instruments to the investors. BSE is regulated by the Act CXI. of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange (the Securities Act). The exchange determines its activity, elects its own organs, committees and officials, regulates its operation and determines the fees payable for its services. The Exchange is a legal entity." For the time being, BSE is a non-profit organization but decision was made on transformation into a company limited by shares. Property of the BSE is to be divided according to the contributions to the own capital of the stock exchange. Members must fulfil criteria defined by the BSE, they must also have a licence granted by the HFSA. Firms in the field of securities investment services are authorized on an exclusive basis, they are not allowed to engage in other activities than those explicitly mentioned in the law. As a result of the amendments to the laws on securities and credit institutions (approved in 1997) banks are allowed to provide full range of investment services to their clients beginning January 1, 1999. The stock exchange becomes a legal entity upon approval by the government and it starts operation on the basis of the Charter and procedural rules approved by the HFSA. The BSE is responsible for examining the liquidity and business management of its members, the processes of the securities market, it enforces full compliance with membership regulations and checks and examines general enforcement of the rules of the exchange by members in specific cases. After having applied sanctions, the stock exchange council shall expel an exchange member if he fails to comply with his obligations stipulated in the charter and in the fundamental rules of the exchange. A decision on the expulsion shall be subject to an application for revision submitted to the general meeting. In the event the general meeting approves the decision on the expulsion of the member, the expelled member may resort to law against the decision of the general meeting within 30 days of the announcement thereof; any failure to observe this deadline shall involve forfeiture of rights. Initiation of an action shall have no delaying force in respect of an expulsion. Any action brought against the resolution of the general meeting, giving approval of the expulsion, shall fall within the exclusive jurisdiction of City Court of Budapest. The legal supervision of the BSE means that all the regulations of the BSE need the approval of the HFSA, which has the power to impose penalties such as fines or to suspend the trading in certain securities or the whole exchange. The HFSA provides for the BSE to make its own regulations relating to such matters as trading procedure, types of trades, the listing of securities, the clearing and settlement system, information system and rules of operation. Under the Securities Act almost all trading activities, except the basic organizational issues are to be regulated by the BSE, but the right of approval and overseeing belongs to the HFSA. Pursuant to Act XXXIX. of 1994 on the Commodity Exchange and Its Transactions, the Budapest Commodity Exchange (hereinafter BCE) is also a self-governing and self-regulating organization owned by its members which concentrates demand and supply in respect of the goods licensed and traded on the exchange, in the manner, place and trading hours pre-defined and published. Centralised trading on the exchange is conducted through standardised contracts, in the case of futures transactions, under a guarantee of performance extended by the Clearing House, providing identical conditions for the conclusion of transactions. The exchange is a legal entity and may be founded by an incorporated economic association, co-operative or state-owned company. Members must fulfil criteria determined by BCE. The applicants should also have the licence of the supervisory authority. The constitution and regulations of the commodity exchange, and the business regulations of the members of the exchange shall become valid on approval by the HFSA. The Supervision, on a regular basis, checks whether the activity of trading and the operation of the exchange are in compliance with the legal rules, the licences, and the Charter and regulations of the exchange. The HFSA is entitled to have access to any documents and registers of the exchange, the members of the exchange and the brokers related to trading on the exchange. Those mentioned above shall deliver their documents or data concerning their activity to the Supervision, on request. There is one clearing and settlement institution in Hungary , the Central Clearing House and Depository Ltd. (hereinafter KELER). KELER was established in 1993. It is a company limited by shares, shareholders are the National Bank of Hungary (50%), the Budapest Stock Exchange (25%) and the Budapest Commodity Exchange (25%). KELER settles all the spot transactions and derivatives traded at the two exchanges and businesses on government securities dealt on the OTC market. It was declared as national depository by the predecessor HFSA in 1995, Moreover, the US SEC accepted it as a foreign depository according to the point 17F-5 of the US Securities Act. The functions and duties of KELER are defined in the Act CXI. of 1996 on the Offering of Securities, Investment Services and the Stock Exchange. Principles for Self-Regulation Principle 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. 7. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented ____________________________________________________________ __ 7.1 If implemented: 1. Please describe how this principle has been implemented: Generally the SROs are responsible for the compliance of their members with the provisions of the relevant laws, rules of the exchange and those of the central clearing house and depository, as well. The BSE is responsible for examining the liquidity and business management of its members, the processes of the securities market, it enforces full compliance with membership regulations and checks and examines general enforcement of the rules of the exchange by members in specific cases. The legal supervision of the BSE means that all the regulations of the BSE need the approval of the HFSA, which has the power to impose penalties such as fines or to suspend the trading in certain securities. The HFSA provides for the BSE to make its own regulations relating to such matters as trading procedure, types of trades, the listing of securities, the clearing and settlement system, information system and rules of operation. Under the Securities Act almost all trading activities, except the basic organizational issues are to be regulated by the BSE, but the right of approval and overseeing belongs to the HFSA. Principles for the Enforcement of Securities Regulation Principle 8: The regulator should have comprehensive inspection, investigation and surveillance powers. 8. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? Implemented ? Partially implemented ? Not Implemented 8.1 If implemented: 1. Please describe how this principle has been implemented: In accordance with the law, the Supervision is authorised to inspect and investigate organisations under its supervision, however the Supervision is not empowered to carry out criminal investigation. The Supervision is entitled by the Securities Act to retain an auditor or another external expert included in the list compiled by the Supervision to perform the on-site examination. The auditor or external expert carrying the letter of assignment issued by the Supervision is regarded as an official person during the procedure and is subject to the same disclosure and confidentiality requirements than those applicable to the regulator. The Supervision is empowered to inspect books, documents and data carriers of the supervised entities or to request the supervised entities to submit extraordinary reports, statement, audit reports and to give information on all of their business issues. Such inspection or requests are not subject to other judicial actions. The supervised entities are obliged by law to enable and assist the Supervision to perform the on-site examination ensuring the revision of business books, reports, records and providing access to the data and information required. If the persons under the inspection of the Supervision don’t have the required licences the Supervision has right to prohibit the pursuance of unauthorised investment service activities. Due to the fact that activities are penalised by the Penal Code the Supervision is required to report the case to the police. 2. Are further improvements or changes proposed? If so, please describe. The most significant issue is to improve the effectiveness of the inspection and investigation while supervising the daily operation of investment services provider organisations. Principles for the Enforcement of Securities Regulation Principle 9: The regulator should have comprehensive enforcement powers. 9. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? Implemented ? Partially implemented ? Not Implemented 9.1 If implemented: 1. Please describe how this principle has been implemented: Pursuant to the laws, the Supervision is entitled to enforce and has the power to obtain data, information, documents and records and to conduct inspection and investigation and as a result of them to act against market players that do not comply with the relevant legislation and rules. The Supervision within its sphere of competence, administrative powers provided by the law can mete out fines, revoke the licence temporarily or finally or appoint a supervisory commissioner to the investment service provider company, can initiate and conduct full-scale administrative proceedings/inquiries. If, as a result of the inquiry/investigation carried out by the Supervision the suspicion of any wrongdoing is well-founded then the Supervision lays information against the offender(s) with the police and/or the public prosecutor. 2. Are further improvements or changes proposed? If so, please describe. The current requirements towards the market players is deemed weak. More detailed and stricter reporting, risk management and capital requirements adjusted to market risk should be introduced. The amendments of the relevant laws are under way and expected to come into force in 2001. Principles for the Enforcement of Securities Regulation Principle 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. 10. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? Implemented ? Partially implemented ? Not Implemented ____________________________________________________________ __ 10.1 If implemented: 1. Please describe how this principle has been implemented: The Supervision regularly checks compliance of offering of securities, investment service activities and the Stock Exchange and the Clearing House with the relevant laws and regulations, supervisory decisions and the requirements of the safety of investors. The Supervision is entitled to perform on-site examination of compliance with the law and its own decisions on the authorization and operation of investment firms, the Stock Exchange and the Clearing House. Supervising investment firms and investment fund management companies the Supervision conducts on-site inspections in a periodic manner. However, if it is necessary the Supervision carries out inspections for cause. In case of routine inspections the supervised institutions are provided with advance notice of examination, but inspections for cause are usually conducted unannounced. Concerning the methodology of on-site examinations substantial changes have been made recently. The Supervision implemented a new rating method that facilitates the establishment of inspection priorities, based largely upon the risks involved in the operation of supervised entities. However, in case of inspections for cause the priorities may be (and often are) established by the number and relevance of complaints concerning the investment firms. Whenever the results of an inspection can prove the non-compliance of the inspected entity the Supervision is entitled to take actions prescribed in the Securities Act. Depending on the type and seriousness of non-compliance the Supervision may order the inspected entity to comply with the law or regulations by setting a deadline, prohibit the pursuance of unauthorised investment service activities, impose a fine, initiate dismissal of executives or the auditor of the investment firm, suspend the subscription and trading of the security, the issue of the investment instrument, the trading in a section of the stock exchange or the entire trading on the stock exchange, prohibit activities of the stock exchange or the clearing house, suspend the application of the charter or procedures or a specific provision of these entities or obligate them to prepare new procedures/make a new decision, revoke the licence or suspend the provision of the investment service activities, initiate proceedings by another competent authority, delegate a supervisory commissioner. The Government Decree No. 207 of 1996 establishes the obligation of investment firms to report their financial and trading data to the Supervision. Depending on the type of information investment firms must prepare their reports on a daily or monthly basis. Moreover, investment firms and issuers of securities are obliged by the Securities Act to provide the Supervision with their annual reports and in case of the latter entities their preliminary annual reports. Principles for Cooperation in Regulation Principle 11: The regulator should have authority to share both public and non-public information with domestic and foreign counterparts. 11. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ?? Partially implemented ? Not Implemented 11.1 If implemented: 1. Please describe how this principle has been implemented: The key factor in cooperation between securities regulators is the ability and the need to share information, the HFSA is able to request and provide both public and non-public information from and to domestic and foreign counterparts. The Supervision maintains non-public, detailed records on data of issuers and investment service providers and the subsequent changes in their data as well. For the purpose of implementing its tasks laid down in the Securities Act the Supervision may handle data, including personal data defined in the Securities Act. It should also be noted that for the purpose of implementing its tasks the Supervision may take over data from other authorities - with the purpose specified - within the range of data defined in the Securities Act. The receipt of the data shall be documented both at the organization providing it and at the Supervision. The President of the Supervision shall ensure the prevention of illegitimate access, disclosure, alteration or deletion within the framework of the handling of information, including application of technical and logical protection ensuring such prevention. In the course of international cooperation the Supervision may use data and information received from foreign supervisory authorities, and may supply information to foreign supervisory authorities, for the following purposes: o assessment of applications for authorization of the establishment or operation of financial and capital market organizations, and the examination of the contents of the authorization, o consideration underlying the supervisory decisions, in particular measures or sanctions 2. Are further improvements or changes proposed? If so, please describe. As the domestic markets develop and the national markets are more intensively integrated into the "global village" the need for closer cooperation is becoming more and more important and inevitable. Principles for Cooperation in Regulation Principle 12: 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. 12. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 12.1 If implemented: 1. Please describe how this principle has been implemented: Besides the HFSA, the National Bank of Hungary also collects information on financial sector participants and instruments for monetary policy purposes. In order to enhance efficiency of both supervision and monetary policy, there is a Memorandum of Understanding between the Supervision and the NBH. The Supervision has MOUs with the following domestic organizations as well: Institutional Protection Fund of Credit Cooperatives, Institutional Protection Fund of Saving Cooperatives, Superintendance of Consumer Protection, Fair Competition Office, Ministry of Economy and National Deposit Insurance Fund. In the area of international relations the Supervision is empowered to conclude cooperation agreements with foreign supervisory authorities. In the course of international cooperation the Supervision may use data and information received from foreign supervisory authorities, and may supply information to foreign supervisory authorities, for the following purposes: a) assessment of applications for authorization of the establishment or operation of financial and capital market organizations, and the examination of the contents of the authorization, b) consideration underlying the supervisory decisions, in particular measures or sanctions. The MOUs signed with the regulatory and supervisory authorities of Quebec(Canada), Luxemburg, Germany, France, Italy, Austria, Poland, Portugal and Czech Republic provide a framework for mutual assistance and the exchange of information to the extent permitted by the laws and practises of each jurisdiction and place on a more formal basis the former ad hoc cooperation and information-sharing. Principles for Cooperation in Regulation Principle 13: 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. 13. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 13.1 If implemented: 1. Please describe how this principle has been implemented: The Supervision -- under international agreement -- upon receiving a reasonable and eligible request may immediately and directly transmit all information that is not qualified as business secret and/or security secret. Pursuant to Para. 3, Section 116. of the Securities Act the obligation for the keeping of security secrets does not exist if the HFSA, on the basis of an international agreement and upon request of a foreign securities supervisory authority, requests in writing, information from an investment firm, the stock exchange and clearing house. The statutory rules concerning the capital market and the Supervision differentiate within the information available at HFSA such as security secret, business secret and banking secret. On the basis of obligation of confidentiality any fact, information, solution or data belonging to the scope of business or security secrets shall not be disclosed to third persons as defined in the Securities Act and shall not be used for purposes other than performing tasks without the express authorization by the customer. Anyone obtaining business or security secrets shall not use such to get an advantage for themselves or for any other person, directly or indirectly, or to cause disadvantage to the investment firm, the stock exchange or the clearing house or to customers thereof. There are strict business and security secret rules in force for the Supervision with the exception of the waiver (Section 121. of the Securities Act) concerning secrecy requirements provided by the law, HFSA may only transfer information about an investment firm, issuer or other person or the activities thereof, to other persons or authorities in consolidated forms which are not suitable for the identification of the entities concerned. This also means that information of such nature cannot be disclosed even to other administrative and investigating authorities in Hungary. The law clearly defines the range of all those authorities that are entitled to ask for information embodying security secrets and the investment firm, the stock exchange and the clearing house shall not refuse the disclosure of the information to these authorities on the ground of confidentiality. Pursuant to Para. f, Section 120. of the Securities Act it shall not constitute a breach of security secret if the data transfer is performed in a way suitable for the supervisory authority with competency over the headquarters of the foreign investment firm to carry out its supervisory activities and in line with the MOU entered into between the foreign supervisory authority and the Supervision. It should be noted that the requesting authority may not communicate the information received from the requested authority to other authorities of its country without the prior consent of the requested authority. The requesting authority may use the information solely for the purpose stated in the request sent to the requested authority. The Supervision, within its sphere of competence, administrative powers provided by the law can initiate and conduct full-scale administrative proceedings/inquiries. It stands to reason that the Supervision through its experts is involved and their expertise is used in judicial and other criminal investigation proceedings related to securities wrongdoings. If, as a result of the inquiry/investigation carried out by the Supervision the suspicion of any wrongdoing is well founded then the Supervision lays information against the offender(s) with the police or the public prosecutor. Principles for Issuers Principle 14: There should be full, accurate and timely disclosure of financial results and other information which is material to investors’ decisions. 14. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 14.1 If implemented: 1. Please describe how this principle has been implemented: Act CXI of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange governs the conduct of issuers based on the principle of full and fair disclosure to investors. The issuers are required by the Act to disclose financial and other information at a regular basis or in case the information may have an effect on the value or the yield of the security. The Supervision has to approve the prospectus within 60 days after submission. Upon the request of the Supervision, the issuer and the broker is obliged to verify the facts presented in the prospectus. The Supervision is entitled to inspect the documents in the possession of the broker and the issuer that form the basis of the prospectus, to ask for copies thereof as well as to have them examined by professional experts. The Supervision may request specification of details of any fact presented in the prospectus submitted for approval and/or the provision of additional data or deletion of certain data or statements. The Supervision refuses the approval if the prospectus is not in compliance with the provisions of any law, the intention of the prospectus is the abuse of the law and the broker and the issuer fail to comply with the requests of the Supervision. If the Supervision becomes aware of any fact or circumstance during the period between the approval of the prospectus and the closing of subscription period or sale, that requires an amendment to the prospectus, following a hearing of the broker and the issuer the Supervision orders the amendment of the prospectus. Amendment to the prospectus requires the approval of the Supervision. The Supervision may suspend the offering until the publication of the amendment. It may suspend the offering also in the case of non-compliance with the criteria defined in a law, decisions, in the charter and/or procedural rules of the stock exchange, in the business procedures and/or other procedural rules of the clearing house, as well as in the case of conduct jeopardizing the interests of the investors and the equilibrium of the capital market as well as the position of the other participants in the capital market. If the Supervision becomes aware of any fact or circumstance during the period of offering, which would have required the refusal of the approval or which seriously violates the interests of investors, the Supervision revokes its approval for the publication of the prospectus and obliges the issuer and the broker to terminate the offering. The issuer and the broker have to publish jointly the public offer in a notice indicating the reference number and date of the approval of the prospectus, the place, time and availability of the prospectus or its publication. The public offer contains the name of the issuer, the volume (number) of the securities, the nominal value, the sale price (issue price) as well as the period of time available for subscription. The notice has to be published not later than seven days prior to the first day of the subscription (sale) period in one daily paper of nation-wide circulation and in the journal of the Stock Exchange. Prior to the commencement of the subscription period the whole text of the prospectus has to be made available to the public free of charge at all places of subscription or has to be published in the same daily paper where the public offer was published. In the latter case a notice must be placed at all subscription places specifying the daily paper and the date of publication. The above requirements refer all kinds of issues and to all issuers except of the Government. There aren’t any restrictions on, or disclosure requirements with respect to the content of information that an issuer discloses outside the prospectus during an offering, such as in advertisements, "roadshow" materials or on the issuer’s Internet web site. The issuer, the broker and auditor are required to take legal liability for the content of the whole prospectus. As explained above, the Supervision has the power to review the prospectus to determine whether it meets the prospectus requirements and it does the work in practice. If the issue of a security entails risks different from the average risks undertaken by investors, the Supervision may require the broker and the issuer to include a salient indication of this fact at the beginning of the prospectus and in its notices. There aren’t any circumstances in which an issuer is permitted to withhold such information from the public which are required to be disclosed. The Supervision has no competence to approve the withholding of any information. The issuers are required to prepare listing particulars by Stock Exchange when they seek to list their securities on a stock exchange. It is available to the public. The most important differences between prospectus for public offering and prospectus for listing are the followings: Consolidated figures are required in the listing prospectus, whereas in the prospectus for public offer issuers are not obliged to provide consolidated data. Financial data in the listing prospectus can be drawn from figures generated according to international accounting rules (IAS, GAAP, etc.). The prospectus for public offering contains data along with the line of Hungarian Accounting Rules. The prospectus for public offering contains planned dividend payment, and other plan data. The prospectus used for listing securities should comprise only fact figures, must not contain plan figures. The Listing Rules of the Budapest Stock Exchange (BSE) say: "Issuers shall draw up a prospectus in order to make the public disclosures required for listing. The prospectus shall contain all material information required for evaluating the economic position of the issuer." In accordance with the BSE Regulations the prospectus prepared for stock exchange listing must contain the following information. Particulars of the company: company name, official seat, share capital, newspaper in which official statements are published, etc. Securities structure, the figures of previous securities issues. An overview of the company’s activities (scope of activities, organizational and staff structure, senior members of the management and data on their shareholdings, brief introduction of the companies included in consolidation). It must be mentioned whether any bankruptcy or liquidation procedure was initiated against the company (or its legal predecessor) during the three calendar years preceding the listing, or whether it failed to perform its payment obligations for a longer period of time. Furthermore, any legal disputes, which may have significant financial consequences, must be presented. Consolidated and audited financial statements according to IAS or HAL principles (balance sheet, profit and loss account, and cash flow statement). Analysis of the company’s financial and economic position supported by financial indices, together with an overview of the given sector and an explanation of changes in profitability. The prospectus must also include figures not older than six months (which do not have to be audited). In the A and B listing categories, the analysis must cover three years preceding the listing. Highlighting of risk factors involved in the given business activity. The prospectus may also contain other – compulsory – information which in theory may be submitted later: such as ownership structure, the identification number of the public offering license, nominal value of free float, etc. The Chief Executive Officer of the BSE decides on the Issuer’s application based on the Prospectus or the Information Memorandum and the annexes drawn up for listing the securities. The Chief Executive Officer of the BSE will evaluate the listing within (30) thirty days. The BSE examines the documents attached to the application for listing and will upon a failure to submit a necessary annex, notify the applicant, indicating the missing elements within 8 business days. The deadline for evaluation will be postponed in line with the time allotted to supplying such elements. Based on a submission by the Chief Executive Officer of the Exchange, the Exchange Council has the authority to reject applications for listing. The Council may refuse listing in the following cases: a.) the Issuer fails to meet one of the requirements specified for listing in these Regulations; b.) the Council has reason to deem that listing the security jeopardizes fair and safe trading or is contrary to the interest of investors. 1. Are further improvements or changes proposed? If so, please describe. The Securities Act is being upgraded. We plan to shorten the time limit for extraordinary disclosure of information from the existing two days. According to our plans, the new act will be tabled before Parliament this year and will be effective from the beginning of next year. Principles for Issuers Principle 15: Holders of securities in a company should be treated in a fair and equitable manner. 15. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 15.1 If implemented: 1. Please describe how this principle has been implemented: Act CXI. of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange and Act CXLIV of 1997 on Companies regulate the fair treatment of all shareholders of a company. Issuers are required to disclose publicly the identity and ownership position of a shareholder if its direct and indirect share exceeds thirty-three per cent at the time this limit is surpassed. Further disclosure requirements at general meeting are not necessary. There are stricter rules for banks and investments service providers. Statutes of companies may require more stringent regulations than it is stipulated by the law. For the general meeting of the issuer the issuer has to present its audited financial statements. A public offer shall be made in connection with the acquisition by the transfer of shares - either directly or indirectly - of more than thirty-three per cent of the voting shares of a public limited company. Business policy plans regarding the future operation of the company have to be disclosed, and if the bidder is a company, it shall also compile information regarding its prior business activities. The subject of the public offer shall be the company’s shares in excess of thirty-three per cent of voting shares, and the public offer shall also apply to convertible bonds. The public offer has to be directed to all shareholders and convertible bond holders of the company and must cover at least a further fifty per cent of the voting shares and convertible bonds. Each shareholder and convertible bond holder shall be given equal opportunity during the public offer to decide whether to accept or reject the offer. The time frame available for the acceptance of the offer must be at least thirty days. The price offered in the case of shares traded on the stock exchange must not be less than the weighted average stock exchange price of the ninety days preceding the offer and in the case of shares not traded on the stock exchange, the weighted average price of the 180 days preceding the bid, as published by the stock exchange. Directors or other members of senior management of an issuer are not required to disclose any compensation or personal benefits they may receive in connection with a proposed transaction involving the issuer. Resolutions of the general meeting which discriminate against the rights attached to a certain series of shares may be passed only if a majority of at least three-quarters of the shareholders of the series of shares in question consent. The provisions on the possible restriction or exclusion of voting rights attached to such shares may not be applied. A resolution of the general meeting aiming at the change of the form of a public company may be passed only if a majority of at least three-quarters of the shareholders representing at most one percent each of the votes consent. Members (shareholders) representing one-tenth or more of the votes may at any point in time request that the company's supreme body be convened, indicating the reason and the purpose thereof. Statute of the company may also grant this right to shareholders representing a smaller proportion of the votes. If the management does not comply with this request within a period of thirty days, upon the request of the shareholders making the proposal, the court of registration shall convene the meeting of the company's supreme body within a period of thirty days after the submission of a request to this effect. There shall be no appeal against a judgment of the court of registration admitting such a request. If shares belonging to different series are issued, the resolution of the general meeting related to the increase of the share capital may be passed only if a majority of at least threequarters of the shareholders of the series of shares concerned in the share capital increase consent. In the course thereof, the provisions on the possible restriction or exclusion of voting rights attached to such shares may not be applied. At the time of the public offering the issuers are required to disclose publicly the identity and ownership position of each shareholder registered in the share register, whose shareholding is in excess of five percent of the share capital, specification of shareholding, by each class of share and the names of the holders (registered in the share register) of shares of a minimum of ten percent of earlier issued securities of the issuer. Shareholders don’t have to disclose their identity and ownership position at annual meetings. Principles for Issuers Principle 16: Accounting and auditing standards should be of a high and internationally acceptable quality. 16. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 16.1 If implemented: 1. Please describe how this principle has been implemented: Hungarian accounting and auditing standards are largely compliant with the relevant international standards. The Ministry of Finance continues to work towards harmonizing Hungarian standards with international ones. The publicly owned companies required to publish on an annual basis financial statements audited by an external auditor. The issuers are required to provide audited financial statements in offering prospectuses for all types of offerings. The Supervision has the power to review financial statements filed by public companies. The Supervision has power to oblige the issuer to give details of financial statements contained in prospectuses and to review listing documents, annual financial statements and other periodic or extraordinary reports. Principles for Collective Investment Schemes Principle 17: The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. 17. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ??Partially implemented Not Implemented 17.2 If partially implemented: 1. Please describe what has been done with regard to implementation and what remains to be done. Act LXIII of 1991 on Investment Funds regulates investment fund management companies and custodians and sets standards. Investment fund management activity may be performed only with the licence of the Supervision. Licence may be granted to those companies which perform only investment fund management activity and/or pension fund management activity. The companies carrying out investment fund management activity have to be companies limited by shares with a minimum capital of HUF 20 million. (As of May, 2000 1EURO equals to circa 260,- Hungarian Forints) Shareholders of the fund manager holding a share or vote in excess of twenty-five per cent, the senior officers and senior employees of the fund manager may only be persons with high business and professional reputations. The investment fund manager has to employ a custodian independent from its organisation. Custodian may be only a bank approved by the Supervision. Investment fund manager and custodian must not have a direct and indirect share of each others’ ownership greater than 10 per cent. The Supervision may carry out on-site inspection at the fund manager and the custodian before granting the licence and any time during their activity. The sale and redemption of investment units, as well as the payment of proceeds are the responsibilities of the custodian, and/or the securities trader designated by the investment fund manager. Principles for Collective Investment Schemes Principle 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. 18. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ??Partially implemented ? Not Implemented 18.1 If implemented: 1. Please describe what has been done with implementation and what remains to be done. regard to The Act LXIII of 1991 on Investment Funds regulates the form and structure of investment funds. In a company name, advertisement or in any other form, the designation "investment fund manager" may be used only by an investment fund management company established and operated according to the stipulations of this Act. The designation "investment fund" may be used to indicate only investment purpose funds established and operated according to the stipulations of this Act. The Supervision - while banning further illegal use of the name - may impose a fine on those who contravene these prohibitions. The fine may be imposed repeatedly. Investment fund management activity may be performed only with the licence of the Supervision. Licence may be granted to those companies which perform only investment fund management activity and/or pension fund management activity. They may establish and manage several funds but the assets have to be managed and registered separately. Fees and commissions have to be disclosed. The investment fund manager has to employ a custodian independent from its organisation. Custodian may be only a bank approved by the Supervision. Investment fund manager and custodian must not have a direct and indirect share of each others’ ownership greater than 10 per cent. The custodian has to control the activity of the fund manager. Deficiencies have to be reported immediately to the fund manager and to the Supervision. The custodian has to calculate the net asset value of the fund. The fund manager has to employ an independent auditor to audit the annual report of the fund. The auditor has to report all deficiencies to the Supervision. Principles for Collective Investment Schemes Principle 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. 19. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 19.1 If implemented: 1. Please describe how this principle has been implemented: Section 24 – 28 of the Act LXIII of 1991 on Investment Funds regulates the disclosure requirements of investment funds. The basic condition of the public offering of investment units is that the fund manager publishes a prospectus. The prospectus has to contain all information that enable the assessment of the operation, investment principles and management of the investment fund, as well as of the risks of investing in the said investment fund. The prospectus must not contain future promises, or comparison with any other investment funds managed by other fund managers. The fund manager shall, after closing the first half of the year, and after the closing of the year disclose information on the investment fund managed by it to the investors, in accordance with Schedule No. 2. and 3. of the act. (See attached.) The biannual prospectus shall be published within sixty days of the subject half year and the annual prospectus within 120 days. It is forbidden to disclose any data differing from the contents of the prospectus and the rules of management, and to make any promises in respect of the proceeds, or increase in the capital of the investment fund. The proceeds of individual investment funds managed by the same fund manager may only be compared on the basis of clearly described calculation methods. The fund manager has to make available the prospectuses to the investor on his or her request free of charge. The fund manager shall publish in two national daily newspapers, as well as in the official journal of the Stock Exchange, when and where investors may obtain copies of the annual and the bi – annual information material. Attachment to Principle 19 Schedule No. 2 to Act LXIII of 1991 Compulsory Substantial Elements of the Biannual Prospectus a) Names and seats of managing and custodian companies. b) Name of investment fund. c) Number of investment units offered for trading in respect of the investment fund, and in circulation at the time of the completion of the biannual prospectus. d) Net asset value per investment unit as at 30 June of the subject year. e) Composition of stock of securities or real estate by kinds, types, and itemized by securities and real estates. f) Detailed information on any changes in the composition of the stock of securities or real estate. g) Quantity of investment units newly issued and redeemed during the period covered by the prospectus, in a monthly breakdown. h) Ratios of securities listed or traded on the Stock Exchange and those not traded on the Stock Exchange in the securities portfolio. i) Itemized list of liquid assets. Schedule No. 3 to Act LXIII of 1991 Compulsory Substantial Elements of the Annual Prospectus a) Names and seats of managing and custodian companies. b) Name of investment fund. c) Property account of investment fund certified by an auditor, in which any increase in capital and decrease in capital shall be indicated by legal titles. d) An itemized description of the securities or real estate portfolio as at 31 December. e) Development of liquid assets in a monthly breakdown. f) Number and net asset value of investment units offered for trading in respect of the investment fund, and in circulation at the date of the completion of the annual prospectus. g) Proceeds paid for investment units, and annual amount of capital increment following payment of proceeds. Principles for Collective Investment Schemes Principle 20: 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. 20. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 20.1 If implemented: 1. Please describe how this principle has been implemented: The net asset value of the securities fund has to be calculated by taking into account the price of securities held by the securities fund on the previous day and the value of its liquid assets. If the securities are listed or traded on the stock exchange, they have to be taken into account at their stock exchange average price of the previous day rated by turnover, while securities not traded on the stock exchange but offered to the public shall be taken into account at the daily (closing) price, when calculating the net asset value. The net asset value of the real estates of a real estate fund has to be calculated at least quarterly by an independent organisation specialised in real estate evaluation. The assignment of the organisation has to be approved by the Supervision. The net asset value of an open-end fund and the asset value of each investment unit has to be calculated daily, and is to be published on the first business day following calculation in two national daily newspapers, as well as in the official journal of the stock exchange. The net asset value shall be calculated by the custodian, and the fund manager shall be responsible for the publication. The net asset value of a closed-end fund has to be calculated at least bi-weekly, and has to be published in two national daily newspapers, as well as in the official journal of the stock exchange on the first business day following calculation. The net asset value shall be established by the custodian, and the fund manager shall be responsible for the publication. Detailed rules of calculating the net asset value (methods of evaluation in respect of each class and type of securities, the procedure of calculation in case the security was not traded on the day in question or if it is traded in a different time-zone etc.) has to be included in the Rules of Management of the investment fund. Investment units of a securities fund have to be sold or repurchased every working day based on the net asset value. Sale and repurchase may be suspended in the interest of the investors if the net asset value cannot be determined, or if its stock exchange circulation is suspended. The Supervision may suspend sale and repurchase of the investment units in the interest of the investors for a maximum of ten working days. Investment units of a real estate fund can be repurchased after a notice of maximum ninety days. Principles for Market Intermediaries Principle 21: Regulation should provide for minimum entry standards for market intermediaries. 21. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 21.1 If implemented: 1. Please describe how this principle has been implemented: Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange defines the types of investment service activities and investment service providers. Investment service activities may be carried out only with the licence of the Supervision. There are common basic entry standards for all investment service providers. They have to meet the material-technical requirements, the requirements for personnel defined in the Act and in government decrees connected to the Act. They have to prepare internal rules and regulations such as general contractual conditions, internal procedural rules for preventing money laundering, procedural rules of handling of cash and other valuables. An independent auditor has to prove the suitability of the information system of the investment service provider for the establishment of its actual financial position at any point of time. Investment firms (commission brokerage companies, securities trading companies and securities investment houses) have to meet special entry requirements: An investment firm may be incorporated only in the form of a company limited by registered shares or as a branch unit of a foreign investment firm. The registered initial capital of an investment firm - in the case of branch units capital endowment shall be interpreted as registered capital - may be no less than: a) for commission brokerage companies, twenty million Forints, b) for securities trading companies, one hundred million Forints, c) for investment houses, one billion Forints, which may only be provided in the form of cash contribution, including increases of the registered capital and may only be contributed through a credit institution which does not participate in the foundation, and/or in which the founder has no proprietary interest and which has no proprietary interest in the founder. (As of May, 2000 1EURO equals to 260,- Hungarian Forints) The investment firms applying for licence from the Supervision have to prove the application for the joining of the Investor Protection Fund and provide the name of any other entities in which the applicant has a shareholding, the internal regulations of their accounting policy and the internal accounting procedures; prove the suitability of their business record keeping system and of their controlling system. Custody operations and safekeeping services of securities may be carried out if the applicant has a property insurance policy providing a coverage of a minimum of fifty million Forints per claim; and its security, custody operation and depository operation procedures have to be approved by the Supervision. Supervision has right to reject or revoke the license if the investment firm doesn’t comply with the prescription of the Act, presents misleading or false information in the course of the licensing procedure, has not proven its intent of joining the Investor Protection Fund or has been excluded from the membership of the Fund, fails to start the authorized activity within six months of the issue of the license or fails to perform such activities for over six months, or discontinues the activity. Contracts of acquisition of ownership in investment firms for an aggregate share of a minimum of ten percent have to be licensed by the Supervision. The acquisition is licensed by the Supervision if the applicant proves the legitimate origin of the financial resources required for the acquisition, has no tax and social security liabilities, is not subject to the restrictions on ownership defined in the Act (which prohibits cross ownership between investment firms), its other business interests and business activities do not jeopardize the safe operation of the investment firm. Individual shareholders must have clean criminal records, companies must not be subject to bankruptcy or liquidation proceedings. In case if an entity intends to increase its influential shareholding in an investment firm in the way that its ownership or voting power reaches fifteen, thirty three, fifty or seventy five percent, it has to go through similar procedures as described above. Principles for Market Intermediaries Principle 22: There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. 22. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 22.2 If partially implemented: 1. Please describe what has been done with regard to implementation and what remains to be done. 2. Are needed improvements/amendments related primarily to: There are initial capital requirements as mentioned in point 21.1.1.which are in connection with the general risks of the conducted investment service activities. Parallely, investment firms have to maintain proper ongoing capital to comply with different conditions. The own equity of the investment firm must not be smaller than the minimal amount of the initial capital. Capital requirements do not reflect the risks properly. Adjusted capital consists of own equity and other capitals which may be taken into account and utilised in case of insolvency. The adjusted capital must not be smaller than the minimal amount of the initial capital as well. Besides the adjusted capital of the investment firm has to be equal to at least eight percent of the total value of its exposures. The total amount of the exposures of an investment firm arises from its open positions, deferred payments, the loans it has extended, the possible consolidated depreciation of the investment instruments held and the outstanding underwritten amount not covered by subunderwriting by a credit institution or another investment firm. An investment house must generate general reserves from its profit (ten percent of the profit) after tax, prior to the payment of dividends. It becomes the part of own equity. The Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange restricts undertaking of large risks. It is regarded as a large risk if the total value of the exposures undertaken in relation with one customer exceeds ten percent of the adjusted capital of the investment firm The total value of the risks undertaken by the investment firm in relation with one customer - not including institutional investors - must not extend twenty five percent of the adjusted capital of the investment firm and the total aggregate value of the large risks undertaken by the investment firm shall not be in excess of eight times the adjusted capital of the investment firm. In order to avoid unproper investments the extension of activities of investment firms are restricted. Investment firms are prohibited to acquire interest entailing unlimited liability and real properties unless it is required to perform its own activities. Only investment houses are permitted to keep shares for a period of more than one year. Other kinds of investment firms may acquire shares for the purpose of investment only in (ancillary) enterprises directly serving their investment service activities. The investment firm shall maintain its solvency on a permanent basis: it has to keep five percent of its registered capital in liquid assets (cash and government securities) at all times. ?. Initial and ongoing capital requirements ? Prudential requirements for market intermediaries ? Sanctions for failure to meet prudential requirements ? Others (Please describe) 3. Please describe the major impediments that exist with regard to implementation. Are there areas in which you would welcome assistance in order to achieve full implementation? 4. Please describe your current plans for implementation and the timetable for giving effect to those plans. The Government Decree on the Trading Book and the market risk capital requirement which is the transposition of the European Union’s Capital Adequacy Directive is under elaboration. It is planned to come into effect in 2001. Principles for Market Intermediaries Principle 23: 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. 23. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 23.2 If partially implemented: 1. Please describe what has been done with regard to implementation and what remains to be done: Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange defines the internal rules and regulations necessary for issuing the license of an investment firm. These are the following: the activity plan, general contractual conditions, the internal procedural rules to be applied to prevent money laundering, the procedural rules of handling of cash and other valuables, rules in connection with conflicts of interest, internal rules relating to the physical safety of the investment firm, the procedural rules relating to the handling of securities in deposit, accounting policy and the internal accounting procedures, internal regulations of its business record keeping system, internal regulations of its controlling system. Before issuing the licence, the Supervision has to approve the general contractual conditions the procedural rules to be applied to prevent money laundering, the internal rules relating to the physical safety of the investment firm, the procedural rules relating to the handling of securities in deposit. Amendments have also to be approved. Obligatory elements regarding the contents of most internal regulations are strictly prescribed. Duties of the management of any business entity are defined in Act CXLIV of 1997 on Companies. The management has to fulfil its duties with due diligence and has to obey the laws and other regulations. It can be called to account on the basis of the civil code and the criminal code. The Supervision elaborated a draft to amend the Government Decree on the Personal and Technical Requirements and the draft of a Decree of the Minister of Finance on the Internal Control Systems and Procedures. They have been submitted to the Ministry of Finance and they are under scrutiny. We expect them to be issued in 2000. Principles for Market Intermediaries Principle 24: There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. 24. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? x Implemented ? Partially implemented ? Not Implemented 24.1 If implemented: 1. Please describe how this principle has been implemented: The Supervision may appoint one or more supervisory commissioners in an investment firm if the investment firm has got into a position where it may not be able to meet its obligations; its board of director (or any executive) is not capable of performing its responsibilities and it threatens the interests of the investors; or the deficiencies in its accounting or internal controlling system are of such gravity that the assessment of the financial position of the enterprise becomes impossible. During the period of assignment of the supervisory commissioner the executives may exercise their right to sign only with the countersignature of the supervisory commissioner. If there is no executive or person authorised to sign, the tasks of the executives and the right to sign have to be performed by the supervisory commissioner. If a receivable is deemed as frozen (i.e. the investment firm is not able to provide the receivable to the investor within five days of the due date), the Investor Protection Fund pays the frozen receivables to the persons entitled to indemnification up to a maximum limit of one million Forints to each person and investment firm. The Fund has its assets from the entry fees and annual fees of its members. Each investment firm has to be member of the Fund. If the assets of the fund are not sufficient, the members may pay extraordinary contribution up to three times the annual fee. If it is not sufficient, the persons entitled to indemnification may queue. In case of liquidation of an investment firm the provisions of Act IL of 1991 on Bankruptcy and Liquidation Procedures apply. In order to contain systemic risk on the spot markets, the Central Clearing House and Depository has two guarantee funds, one for government securities and one for other securities. In case of failure of a Stock Exchange member the guarantee funds warrant. The funds have their assets form payments of the Stock Exchange members which are proportional to the turnover. The Central Clearing House and Depository has unlimited right to increase the payments of the members, therefore, there is an unlimited guarantee. In order to contain systemic risks on the futures market, the Central Clearing House and Depository liquidates the position if the exchange member fails to pay in the margin on time. In addition, there are two guarantee funds for futures transactions, one for the Stock Exchange transactions and one for the Commodity Exchange transactions. The funds have their assets form payments of the Exchange members which are proportional to the turnover. 2. Are further improvements or changes proposed? If so, please describe. The Supervision has its own non-profit liquidator firm which is exclusively dealing with liquidation procedures of credit institutions. We intend to increase the scope of this firm to deal with liquidation procedures of investment firms as well. This change will be effected at the course of the upgrading of the securities law. The new securities law will come to force most probably at the beginning of 2001. Principles for the Secondary Market Principle 25: The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. 25. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 25.1 If implemented: 1. Please describe how this principle has been implemented: Act. No. CXI. of 1996 on the Offering of Securities, Investment Services and on the Stock Exchange regulates the establishment, organisation, operation and dissolution of the stock exchange, the foundation and operation of the clearing house, furthermore contains the main and basic rules, minimum standards of the capital market securities transactions. The stock exchange is a " sui generis" legal person. The rules of the trading system on the stock exchange are regulated by the stock exchange itself. It is to be noted that the stock exchange is a self- regulating, self-governing body under the rules of The Act. This legal principles means that the stock exchange defines its own charter and procedural rules, that is to say it creates the rules of trading on the stock exchange in the Trading Procedural Rules. The charter and the procedural rules of stock exchange comes into effect with approval of the Supervision. Principles for the Secondary Market Principle 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. 26. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 26.1 If implemented: 1. Please describe how this principle has been implemented: The rules which can ensure the undertaking of this principle are following: All internal regulations of the Stock Exchange have to be approved by the Supervision prior to coming to force. This includes introduction of new trading systems as well. A representative of the Supervision may be present during the trading sessions of the Stock Exchange. Since the trade is usually conducted electronically, the Supervision has a workstation in its premises where a representative of the Supervision can follow all transactions. Internal regulations of the Stock Exchange are adopted by the Stock Exchange council in which the brokers, issuers and investors have representatives. Principles for the Secondary Market Principle 27: Regulation should promote transparency of trading. 27. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 27.1 If implemented: 1. Please describe how this principle has been implemented: In case of a security introduced to the stock exchange (except of government securities) or in case of other stock exchange products the broker may perform contracts exclusively through trading on the stock exchange. In the case of a commission contract the broker may perform the contract as a transaction on its own account or consolidate it with other transactions or break it up only with express consent of the customer. The broker shall be obliged to perform contracts with identical content in time sequence and in the case of transactions of identical contents, to grant priority to the transactions for the customers, over the transactions on its own account. All transactions are published by the stock exchange in time sequence in the daily bulletin of the Stock Exchange. In case of publicly offered securities not introduced to the stock exchange the brokers may publish their own bid and offer prices. In this case the broker has either to specify the smallest and largest volume for which the bid and offer price is valid with duration of the offer, or the specified price is valid until the withdrawal or modification of the price. In this case the broker has to publish the withdrawal or modification of the price quote in a way identical with the publication of the earlier bid and offer price. During the period of validity of the price quote the broker may deviate in various sale and purchase contracts from the published price only in the case of the occurrence of an extraordinary event, together with the simultaneous notification of the Supervision. The brokers have to notify the stock exchange about all transactions with publicly offered securities not introduced to the stock exchange. The stock exchange publishes all transactions monthly. 2. Are further improvements or changes proposed? If so, please describe. The notification requirements of brokers in case of transactions with publicly offered securities not introduced to the stock exchange are planned to change. In the future, the brokers will have to notify the Supervision and the transactions will be published by the Supervision. Principles for the Secondary Market Principle 28: Regulation should be designed to detect and deter manipulation and other unfair trading practices. 28. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 28.1 If implemented: 1. Please describe how this principle has been implemented: Manipulation of trade and other unfair trading practices are dealt with in the Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange and the Penal Code. According to the Securities Act fine may be imposed on those who enter into unfair price manipulation or insider trading. According to the Penal Code confinement up to three years may be imposed on a person who enters into insider trading. According to present practice the Stock Exchange monitors unusual price movements and in case of suspicion of price manipulation or insider trading they will be reported to the Supervision which conducts the investigations, if necessary imposes fine or transfers the case to the police. 2. Are further improvements or changes proposed? If so, please describe. There is a contradiction of the definition of insider information between the Securities Act and the Penal Code. According to the Penal Code information relating to the issuer is insider information, and information relating to the security itself (i.e. the sale order for a larger amount) is not defined as such, while the Securities Act defines both information as insider information. The Supervision has proposed the modification of the Penal Code. The Supervision has the technical equipment to monitor unusual price movements. We plan not to resort to the signals obtained form the Stock Exchange only but to monitor unusual price movements as well. Principles for the Secondary Market Principle 29: Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. 29. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ??Not Implemented 29.1 If implemented: 1. Please describe how this principle has been implemented: 2. Are further improvements or changes proposed? If so, please describe. 29.2 If partially implemented: 1. Please describe what has been done with implementation and what remains to be done. regard to The Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange restricts undertaking of large risks. It is regarded as a large risk if the total value of the exposures undertaken in relation with one customer exceeds ten percent of the adjusted capital of the investment firm The total value of the risks undertaken by the investment firm in relation with one customer - not including institutional investors - must not extend twenty five percent of the adjusted capital of the investment firm and the total aggregate value of the large risks undertaken by the investment firm shall not be in excess of eight times the adjusted capital of the investment firm. 2. Are needed improvements/amendments related primarily to: Definition of large exposures Monitoring of large exposures ??Procedures relating to defaults and market disruption Co-operation between market authorities ? Others (Please describe) 1. Please describe the major impediments that exist with regard to implementation. Are there areas in which you would welcome assistance in order to achieve full implementation? 2. Please describe your current plans for implementation and the timetable for giving effect to those plans. The new legislation is expected to come into force from the beginning of the next year. Principles for the Secondary Market Principle 30: 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. 30. What is your assessment of the current status of your jurisdiction regarding implementation of this Principle? ? Implemented ? Partially implemented ? Not Implemented 30.1 If implemented: 1. Please describe how this principle has been implemented: Act No. CXI. of 1996. on the Offering of Securities, Investment Services and on the Stock Exchange regulates the activities of the Central Clearing House and Depository and its regulatory oversight. All transactions effected on the Stock Exchange are settled through the Central Clearing House and Depository. The business procedures and other procedural rules of the clearing house require approval by the Supervision prior to coming into force. A representative of the Supervision is entitled to participate, with a consulting right, in the general meeting and the meeting of the board of directors of the clearing house.The clearing house has to prepare reports on its activities to the Supervision. In order to protect the interest of the investors and of those using the services of the clearing house the Supervision may restrict the right of disposal over certain accounts kept by the clearing house for a period of maximum thirty days. The Supervision may withdraw the license of the clearing house with the approval of the Minister of Finance and the President of the National Bank of Hungary. In order to maintain its solvency the clearing house creates reserves. Funds to ensure reduction of systemic risks are dealt with in the answer relating to principle 24. The fairness, effectiveness and efficiency is reflected by the fact that it is an acknowledged national depository and has co-operation agreements with several internationally reputed clearing houses.