In 2000, the International Monetary Fund (IMF) released its Report on the Observance of Standards and Codes (ROSC) on Estonia's compliance with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. The report showed that Estonia either "broadly" or "fully" observed 20 of the 30 principles, and did not observe 10 principles. Many of the shortcomings revealed by the IMF were related to the former securities regulator, the Securities Inspectorate. However, according to the IMF's 2002 update to the ROSC, with the establishment of the unified Estonian Financial Supervision Authority on January 1, 2002, some of the weaknesses identified in the 2000 report had been remedied. In its 2004 Securities Markets Legislation Assessment, the European Bank for Reconstruction and Development (EBRD) found Estonia to be in high compliance with the IOSCO Objectives and Principles of Securities Regulation. In the subsequent 2005 update of the EBRD assessment, Estonia again achieved a high-compliance rating, and almost achieved very high compliance.

General Overview

According to the 2000 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) on Estonia's adherence to the Objectives and Principles of Securities Regulation as promulgated by the International Organization of Securities Commissions (IOSCO), Estonia either 'broadly' or 'fully' observed 20 of the 30 principles and did not observe 10 principles. The major shortcomings concerned the weak oversight powers of the Securities Inspectorate (SI), which was the securities regulator at the time of the assessment. However, according to the 2002 ROSC update, with the establishment of the unified Estonian Financial Supervision Authority (FSA) on January 1, 2002, some of the weaknesses found in the 2000 report were addressed. In its 2004 Securities Markets Legislation Assessment, the European Bank for Reconstruction and Development (EBRD) found Estonia to be in high compliance with the IOSCO Objectives and Principles of Securities Regulation. In the subsequent 2005 update of the assessment, Estonia again achieved high compliance, and almost achieved very high compliance.

According to the 2006 EBRD assessment of the Estonian commercial laws, the Estonian securities market is governed by the Securities Market Act, the Investment Funds Act, the Financial Supervision Authority Act, the Guarantee Fund Act, and the Estonian Central Register of Securities Act. In 2005, the Act Amending the Securities Market Act, the Investment Funds Act, the Guarantee Fund Act and the Law of Property Act transposed the Acquis Communautaire and particularly the European Union Prospectus Directive into national legislation. The Prospectus Directive allows European Union (EU) companies to issue or list securities in the EU based on a single prospectus, which is subject to prior approval in the home EU member state. The EBRD further states that, in the area of money laundering, the Ministry of Finance (MoF) released new rules in 2005, requiring credit and financial institutions to adopt a code of conduct for internal audit rules.

The FSA is the common supervisor for the financial sector. The Authority, which is a member of the IOSCO, is an autonomous part of the Bank of Estonia (BoE) and has a separate budget. It supervises the securities and insurance markets and banking. The amended Securities Market Act specifies the rights and duties of the FSA and gives it the authority to supervise foreign issuers. In 1995, Estonia established the Tallinn Stock Exchange (TSE), which is part of the OMEX Group (The Nordic Exchange). The TSE is the only regulated securities market in the country. According to the 2006 EBRD report, the number of securities accounts increased by 30% and the number of transactions increased by 106% in 2005. The total turnover amounted to EUR 1,941 million, which is an increase of 190%.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

CP

In its 2000 ROSC, the IMF indicated that Estonia "broadly observed" this principle. However, the report assessed the former securities regulator, the SI, which was replaced in 2002 by the FSA. According to the 2006 EBRD assessment, the FSA is the common supervisor for the financial sector. The 2002 update to the ROSC states that "the formal objectives of securities supervision are stipulated in the Financial Supervision Authority Act, and the responsibilities of the FSA are clearly stated in the FSA and SMA Acts" (p. 3).

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

EN

According to the 2006 EBRD assessment, the FSA, which is a member of the IOSCO, is an autonomous part of the BoE and enjoys a separate budget. It supervises the securities and insurance markets and banking.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

EN

According to the 2002 ROSC update, "the Securities Market Act (SMA) of 2001 has increased and specified the rights and obligations, the mandate, and the powers of the... FSA" granting it "the sole right of granting and withdrawing licenses, more precisely regulated power to impose sanctions and to exercise supervisory rights" (p. 3).

4. The regulator should adopt clear and consistent regulatory processes.

II

There is insufficient information publicly available as to Estonia's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

II

According to the 2002 ROSC update, the Financial Supervision Authority Act sets forth rules for the avoidance of conflicts of interests and for the use of confidential information, as well as for measures regarding the liability of members of the regulator's management board. However, there is insufficient information publicly available as to Estonia's compliance with this 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, to the extent appropriate to the size and complexity of the markets.

FC

According to the 2000 IMF ROSC, this principle is fully observed. The 2006 EBRD report notes that, in 1995, Estonia established the TSE, which is the only regulated securities market in the country. In 2005, the number of securities accounts increased by 30% and the number of transactions increased by 106%. The total turnover amounted to EUR 1, 941 million, which is an increase of 190%.

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.

EN

The IMF in its 2002 ROSC update states that the amended Securities Market Act and the Financial Supervision Authority Act subject the TSE to "appropriate oversight by the Financial Supervision Authority" (p. 3).

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

II

According to the 2002 ROSC update, "the Securities Market Act (SMA) of 2001 has increased and specified the rights and obligations, the mandate and the powers of the... FSA" granting it "the sole right of granting and withdrawing licenses, more precisely regulated power to impose sanctions and to exercise supervisory rights" (p. 3). However, there is insufficient information publicly available as to Estonia's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

II

See Principle 8.

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.

II

According to the 2002 ROSC update, "the Securities Market Act (SMA) of 2001 has increased and specified the rights and obligations, the mandate and the powers of the... FSA" granting it "the sole right of granting and withdrawing licenses, more precisely regulated power to impose sanctions and to exercise supervisory rights" (p. 3). However, there is insufficient information publicly available as to Estonia's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

CP

According to the 2002 ROSC update, the FSA may exchange confidential information with its foreign counterparts if the foreign supervisor agrees to keep the information confidential and to use the information only for supervisory purposes. The rights, obligations, and procedures for the information exchange are contained in MoUs, which, at the time of the assessment, existed with Finland and Germany. The FSA is negotiating additional memoranda with other countries.

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.

CP

See Principle 11.

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.

CP

See Principle 11.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. The Securities Market Act specifies the notification requirements for the issuance of securities. Requirements for the disclosure of information in issuance prospectuses are set forth in the Regulations for the Announcement and Registration of Public Securities Issues, Procedures for the Public Issue of Securities, and Procedures for the Registration of a Public Issue of Securities. Also, issuers have a duty to disclose information about the activities and financial situation of the company. Moreover, the TSE holds issuers liable for the accuracy of the published information. Besides that, real time news is provided during trading hours.

15. Holders of securities in a company should be treated in a fair and equitable manner.

FC

According to the 2000 IMF, ROSC, this principle is fully observed. The ROSC states that "issuers and securities brokers must provide information to all potential investors on an equal basis. The Securities Market Act was amended in January 2000 to require all persons tendering to take over a listed company to tender for the entire amount of the issuer's shares."

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

ID

The 2007 KPMG Investment Guide for Baltic States explains that, pursuant to the 2003 Accounting Act, Estonian companies may choose whether to apply Estonian Accounting Standards (RTJs) or International Financial Reporting Standards (IFRSs). KPMG states that RTJs generally require less disclosure than IFRSs and are primarily designed for use by small and medium size entities. Therefore, differences between RTJs and IFRSs occur, and some areas are not covered at all. These include accounting for joint ventures, employee benefits, retirement benefit plans, and income taxes. The World Bank, in its 2004 ROSC on Accounting and Auditing, adds that Estonian public interest companies, such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other EU Member State are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia therefore complies with European Commission (EC) Regulation No 1606/2002. However, at the time of the assessment, some public interest entities, including investment and pension funds, were not required to apply IFRSs, prompting the World Bank to urge the Estonian authorities to require all public interest entities to prepare financial statements according to IFRSs.

According to the 2006 Estonian Auditing Board (EAB) self-assessment, audits of listed and non-listed companies must be conducted in accordance with the Estonian Auditing Guidelines. The Guidelines, as stated by the World Bank in its 2004 ROSC on Accounting and Auditing, require auditors to carry out audits in accordance with International Standards on Auditing (ISAs) and to follow the principles of integrity, objectivity, and independence. However, overall, the World Bank found the Guidelines to be seriously deficient for any regulatory role. In Estonia, audits of certain public interest entities, banks, and insurance and investment companies must be conducted according to ISAs. Also, some additional auditing requirements apply to banks, insurance, listed, and investment companies. Since Estonia is a member of the EU, it must implement EC Directive 2006/43, which requires all statutory audits to be carried out on the basis of ISAs as adopted by the EC by June 29, 2008.

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.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. However, the IMF recommended implementing rules for closed-end contractual funds.

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.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. The Investment Funds Act and the Pension Funds Act govern the legal forms of investment schemes. However, the IMF was concerned that the laws did not prohibit a bank from owning a fund management company and serving as the custodian bank at the same time.

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.

FC

According to the 2000 IMF ROSC, this principle is fully observed. The IMF states that "both the Investment Funds Act and the Pensions Funds Act provide clear disclosure guidelines to funds relating to their investment policies" (2000).

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.

FC

According to the 2000 IMF ROSC, this principle is fully observed by Estonia. The IMF states that the MoF "has issued a regulation that provides the procedure for the establishment of the net asset value of the fund. This is described in the Investment Funds Act. The Act also states that the management company must publish the latest issue and redemption prices in at least one daily national newspaper each day that it issues or redeems units, but not less than once every two weeks" (2000).

21. Regulation should provide for minimum entry standards for market intermediaries.

CP

According to the 2000 IMF ROSC, Estonia broadly observed this principle. The Securities Market Act and MoF regulations govern minimum entry standards for market intermediaries.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

CP

According to the 2000 IMF ROSC, Estonia broadly observed this principle. The Securities Market Act requires securities market participants to have share capital of at least €400,000. TSE listed companies are required to hold at least 10 shares in the TSE (with a nominal value of €100,000) and have a minimum share capital of €1 million. Prior to trading on the TSE, a company must make a contribution to the guarantee fund account of the TSE at the BoE. In its 2000 ROSC, the IMF recommended implementing margin trading limits.

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.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. Members of the TSE are required to disclose their audited annual reports, semiannual reports, and quarterly reports. Activities that might affect the financial situation of the company must also be disclosed. The IMF further states that member firms are required "to execute a client's order at the best possible price available at the time of transaction." The report adds that in the case of client dissatisfaction with a member firms actions or offers of resolution, the client may appeal to the Court of Arbitration of the Exchange. The TSE rules include a code of conduct that requires members, their employees, and the members of TSE supervisory bodies to adhere to the principle of fair and equitable trading. However, the ROSC added that the TSE rules are "a contract between the TSE and its members, and are not directly enforceable by specific Estonian law," and expressed the concern that the TSE rules were not enforceable by law.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

II

In its 2000 ROSC, the IMF stated that Estonia did not observe this principle. However, the shortcomings revealed by the IMF concerned the former securities regulator, the SI, and there is insufficient information publicly available as to the current regulator's (the FSA) compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

FC

The IMF 2002 ROSC update states that the amended Securities Market Act and the Financial Supervision Authority Act subject the TSE to "appropriate oversight by the Financial Supervision Authority" (p. 3). In 1995, Estonia established the TSE, which is the only regulated securities market in the country. According to the 2006 EBRD report, in 2005, the number of securities accounts increased by 30% and the number of transactions increased by 106%. The total turnover amounted to EUR 1,941 million, which is an increase of 190%.

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.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. In its 2002 ROSC update, the IMF stated that the amended Securities Market Act and the Financial Supervision Authority Act subject the TSE to "appropriate oversight by the Financial Supervision Authority" (p. 3).

27. Regulation should promote transparency of trading.

CP

In its 2000 ROSC, the IMF indicated that Estonia broadly observed this principle. The IMF stated that "since the TSE provides real time quotes along with an order book, system trading is considered to be transparent. However, the secondary market stocks are much less liquid, and thus trading is much less transparent given the lack of market makers. In addition, certain information may not be immediately widely released to the public at large, such as when a shareholder acquires a substantial interest in a company or when there is (legal) insider buying or selling." The 2000 ROSC recommended enhancing the dissemination of information, especially on insider trading and major shareholder acquisitions.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

II

In its 2000 ROSC, the IMF stated that Estonia did not observe this principle. However, the shortcomings the IMF revealed concerned the former securities regulator, the SI, and there is insufficient information publicly available as to current regulator's, the FSA's, compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

II

See Principle 28.

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.

FC

According to the 2000 IMF ROSC, this principle is fully observed. The Estonian Central Depository for Securities (ECDS) maintains a register for dematerialized securities, which is supervised by the MoF. In 2000, a draft law on the ECDS stipulated that "there will be compulsory registration of publicly traded securities, investment and pension funds, joint-stock companies with more than 100 share holders, and public securities." Only the register will possess the right to register dematerialized securities, providing better control opportunities and increased reliability. The ROSC added that "the services will be offered via account holders and clearing will be performed through the BoE."