The Institute of International Finance's (IIF's) 2005 report on corporate governance in Lebanon indicates that the enforcement of capital market regulations is inhibited by the underdeveloped institutional framework, and especially the lack of an independent securities authority. The Ministry of Finance (MoF), Beirut Stock Exchange, and Central Bank of Lebanon share the responsibility of regulating the securities market. The IIF report indicates that the Lebanese government is involved in drafting stock exchange regulations and has passed several new laws to improve securities regulation. Lebanon's efforts to improve the regulation of the capital market is demonstrated by the Council of Ministers' approval of the Capital Market Draft Law on March 1, 2006, which had previously been pending for years. A 2006 MoF report indicates that the Capital Market Draft Law is a framework law to which provisions will be added as the capital market matures. The Law will establish the Capital Markets Council, a capital markets regulatory authority, and will empower it to issue detailed regulations to govern the capital market.

General Overview

The Institute of International Finance's (IIF's) 2005 report on corporate governance in Lebanon indicates that the enforcement of capital market regulations is inhibited by the underdeveloped institutional framework, and especially the lack of an independent securities authority. The Ministry of Finance (MoF) carries out enforcement through normal investigative and judicial processes. The Beirut Stock Exchange (BSE) is an independent authority with the power to suspend or de-list companies for non-compliance with the BSE Listing Rules and other laws. The agencies are professional but understaffed for the purposes of capital market regulation, notes the IIF report. In addition, the Central Bank of Lebanon (CBL) is responsible for licensing and supervising banks, brokerage firms, money dealers, foreign banks, leasing companies and mutual investment schemes, as indicated on its website. It is also responsible for developing and ensuring the proper conduct of securities clearing operations, as mentioned on its website. The BSE website reports that Midclear S.A.L., the Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East, which is owned by the CBL, handles clearing and settlement operations.

The IIF's 2005 report conveys that the Lebanese government is involved in initiatives drafting stock exchange regulations. Lebanon's efforts to improve the regulation of the capital market are demonstrated by the Council of Ministers' approval of the Capital Market Draft Law on March 1, 2006, which had previously been pending for years. A 2006 MoF report indicates that the Capital Market Draft Law is a framework law to which provisions will be added as the capital market matures. The Law will establish the Capital Markets Council, a capital markets regulatory authority, and will empower it to issue detailed regulations to govern the capital market. Other new laws have also been designed to improve regulation of financial markets, according to the MoF's 2005 report. The Securitization Law was enacted in 2005 and "permits institutions to securitize assets and allows them to originate loans that will not be held on their books following their securitization" (p. 11). Also, the Collective Investment Schemes (CISs) Law of 2005 regulates the legal form and structure of CISs and requires the separation of clients' assets from those of the broker.

According to its website, the BSE is governed by legislative decree No. 120 of 1963, and is supervised by the MoF. There are three BSE market segments. The official market has a capital requirement of US$3 million, the junior market has a capital requirement of US$1 million, and the unlisted, over-the-counter (OTC) market has a capital requirement of US$100,000. According to the 2006 U.S. Department of Commerce (DoC) Country Commercial Guide, there are 6 commercial banks, 5 investment funds, 16 sovereign Eurobond issues, and five companies listed on the BSE. Trading is accomplished through auction and continuous trading. Also, tradable stocks and papers may be listed on the BSE. The Arab Stock Exchange Union is also headquartered in Lebanon.

The Principles

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

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The IIF's 2005 report on corporate governance in Lebanon indicates that the enforcement of capital market regulations is inhibited by the underdeveloped institutional framework, and especially the lack of an independent securities authority. The MoF carries out enforcement through normal investigative and judicial processes. The BSE is an independent authority with the power to suspend or de-list companies for non-compliance with the BSE Listing Rules and other laws. In addition, the CBL is responsible for licensing and supervising banks, brokerage firms, money dealers, foreign banks, leasing companies and mutual investment schemes, as indicated on its website. However, the publicly available information does not directly address this principle.

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

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The IIF's 2005 report states that the MoF and the BSE are operationally independent, but does not provide further information regarding Lebanon's compliance with this principle.

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

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According to the IIF's 2005 report, the MoF carries out enforcement through normal investigative and judicial processes. In addition, the BSE is an independent authority with the power to suspend or de-list companies for non-compliance with the BSE Listing Rules and other laws. The agencies are professional but understaffed for the purpose of capital market regulation. The CBL is responsible for licensing and supervising banks, brokerage firms, money dealers, foreign banks, leasing companies and mutual investment schemes, as indicated on its website. The MoF 2006 report indicates that the Council of Ministers approved the Capital Market Draft Law on March 1, 2006, which will establish the Capital Markets Council, a capital markets regulatory authority, and will empower it to issue detailed regulations to govern the capital market. However, the publicly available information does not directly address this principle.

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

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See Principle 3.

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

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There is insufficient publicly available information addressing 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.

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There is insufficient publicly available information addressing this 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.

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There is insufficient publicly available information addressing this principle.

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

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According to the IIF's 2005 report, the MoF carries out enforcement through normal investigative and judicial processes. The BSE is an independent authority with the power to suspend or de-list companies for non-compliance with the BSE Listing Rules and other laws. In addition, the CBL is responsible for licensing and supervising banks, brokerage firms, money dealers, foreign banks, leasing companies, and mutual investment schemes, as indicated on its website. However, the MoF 2006 report indicates that the Council of Ministers approved the Capital Market Draft Law on March 1, 2006, which will establish the Capital Markets Council, a capital markets regulatory authority, and will empower it to issue detailed regulations to govern the capital market. However, the publicly available information does not directly address this principle.

9. The regulator should have comprehensive enforcement powers.

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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.

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The IIF's 2005 report states that the Lebanese government is involved in initiatives drafting stock exchange regulations. Lebanon's efforts to improve regulation of the capital market are demonstrated by the Council of Ministers' approval of the Capital Market Draft Law on March 1, 2006, which had previously been pending for years. A MoF 2006 report indicates that the Capital Market Draft Law is a framework law to which provisions will be added as the capital market matures. The Law will establish the Capital Markets Council, a capital markets regulatory authority, and will empower it to issue detailed regulations to govern the capital market. Other new laws have also been designed to improve regulation of financial markets, according to the MoF's 2005 report. The Securitization Law was enacted in 2005 and "permits institutions to securitize assets and allows them to originate loans that will not be held on their books following their securitization" (p. 11). Also, the CISs Law of 2005 regulates the legal form and structure of CISs and requires the separation of clients' assets from those of the broker. However, the publicly available information does not directly address this principle.

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

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There is insufficient publicly available information addressing this 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.

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There is insufficient publicly available information addressing this 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.

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There is insufficient publicly available information addressing this principle.

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

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As stated in Saidi's 2004 report, the Lebanese Corporate Governance Task Force (LCTF) aims to "produce guidelines for disclosure and transparency" (p. 96) as part of its Action Plan. The LCTF further recommends disclosing financial and nonfinancial information, promoting transparency in compliance with the International Accounting Standards (IASs), setting up a legal and regulatory framework to monitor the collaboration of listed companies, and enforcing auditing standards based on the International Auditing Standards (ISAs). As noted in a 2005 Center for International Private Enterprise (CIPE) report, the Legal and Regulatory Subcommittee of the LCTF has been working on amendments to the Code of Commerce in order to strengthen minority and foreign shareholder rights, and comply with the IASs and the ISAs. According to the 2005 IIF report, Lebanon has made progress in improving disclosure of information, adopting International Financial Reporting Standards (IFRSs), and requiring disclosure of ownership stakes in companies. However, the publicly available information does not directly address this principle.

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

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As noted by Saidi in 2004, the LCTF aims to "maximize the rights and equitable treatment of shareholders through a legal and regulatory framework by creating enforcement mechanisms to rectify violations" (p. 96) as part of its Action Plan. According to a 2005 CIPE report, the Legal and Regulatory Subcommittee of the LCTF has been working on amendments to the Code of Commerce in order to strengthen minority and foreign shareholder rights, and comply with the IASs and the ISAs. According to the 2005 IIF report, minority shareholders rights are not adequately addressed in the securities regulation. Hence, the IIF Equity Advisory Group recommended raising the voting threshold and providing minority shareholders with "the right to sell stock at appraised value in the event of a merger or takeover" (p. 8). However, the publicly available information does not directly address this principle.

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

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The 2003 World Bank ROSC reports that with the exception of banks and listed companies, compliance gaps existed in both accounting and auditing practices. According to Saidi in his 2004 paper, "the Lebanese private sector recognizes International Accounting and Auditing standards; however, no legal requirement or formal mechanism exists to monitor compliance" (p. 39). Furthermore, Saidi pointed out that no supervisory body had been established for monitoring reporting practices and ensuring consistency. The World Bank advised the Lebanese government to "amend or legislate laws dealing with accounting, auditing, corporate financial reporting, and the accountancy profession in the country" (p. 11). According to the 2007 self-assessment, the LACPA adopted the International Federation of Accountants (IFAC) Code as issued, without modifications. The LACPA is listed as a member on the IFAC website. However, the publicly available information does not directly address this 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.

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The CBL is responsible for licensing and supervising banks, brokerage firms, money dealers, foreign banks, leasing companies and mutual investment schemes, as indicated on its website. However, the publicly available information does not directly address this 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.

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See Principle 17.

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.

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See Principle 17.

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.

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See Principle 17.

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

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There is insufficient publicly available information addressing this principle.

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

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There is insufficient publicly available information addressing this 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.

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There is insufficient publicly available information addressing this principle.

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.

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There is insufficient publicly available information addressing this principle.

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

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There is insufficient publicly available information addressing this 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.

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There is insufficient publicly available information addressing this principle.

27. Regulation should promote transparency of trading.

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There is insufficient publicly available information addressing this principle.

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

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There is insufficient publicly available information addressing this principle.

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

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There is insufficient publicly available information addressing this 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.

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According to its website, the Financial Markets Department of the CBL is responsible for developing and ensuring the proper conduct of securities clearing operations. The BSE reports that Midclear S.A.L., which is owned by the CBL handles clearing and settlement operations. This information does not address Lebanon's compliance with this principle however.