In 2004, the European Bank for Reconstruction and Development (EBRD) assessed the Lithuanian securities market legislation against the International Organization of Securities Commissions Objectives and Principles of Securities Regulation and found Lithuania to be in 'high compliance.' Some minor shortcomings were revealed with respect to "issuers and disclosure," "market intermediaries," "secondary markets," and "availability of security instruments." A major issue concerned the lack of adequate legislation on prospectuses. In 2005, Lithuania addressed some of these shortcomings and adopted new laws on listing documents and prospectuses. Moreover, other regulations implemented in 2005 improved the disclosure of the identity of major shareholders and shareholders who have reached certain thresholds and established additional requirements for auditors of listed companies. Consequently, an EBRD update to its assessment in 2005 confirmed the 2004 rating of the legislative framework for securities regulation as one of "high compliance," but provided no information on its actual enforcement.

General Overview

In 2004, the European Bank for Reconstruction and Development (EBRD) assessed the Lithuanian securities market legislation against the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. The assessment was intended to measure the current status of the legal framework governing the securities markets in the twenty seven countries where EBRD operates. The assessment does not measure the actual enforcement of the laws, but rather the degree to which the existing legislation conforms with the IOSCO Principles. The assessment found Lithuania to be in 'high compliance.' Some minor shortcomings were revealed with respect to "issuers and disclosure," "market intermediary," "secondary market," and "availability of security instruments." A major issue was the lack of adequate legislation on prospectuses. A 2005 update confirmed the high compliance rating. With respect to the identified shortcomings, Lithuania adopted new laws on listing documents and prospectuses in 2005. As summarized by the EBRD, "the possibility for a public offer of securities and their listing in a regulated market is now associated with the publication of a prospectus rather than with registration of the securities with the Securities Commission. Other regulations issued in 2005 set additional requirements for auditors of listed companies and have improved the disclosure of the identity of major shareholders and shareholders who have reached certain thresholds" (p. 7).

According to the EBRD's 2006 assessment of the commercial laws in Lithuania, the primary securities market legislation consists of the Law on Securities Market, the Law on Companies, and the Law on Collective Investment Undertakings. The latter is the most recent addition to the securities legal framework and was adopted with the goal to harmonize the regulation of collective investment undertakings with European Union (EU) legislation. The Law on Companies was adopted in 2001 and last amended in June 2005.

The securities market supervisor is the Lithuanian Securities Commission (LSC), which was established in 1992 and is a member of IOSCO. In 2004, the LSC became a member of the Committee of European Securities Regulators (CESR). The LSC is funded by the state budget. The Vilnius Stock Exchange (VSE) was privatized and became part of the OMX Group in 2004. As stated in the EBRD's 2006 report, the OMX Group is "a common Nordic and Baltic trading system with harmonized trading rules, securities listing and stock exchange membership principles, providing members of the stock exchange access to the common trading platform through a single access point" (p. 6).

The Principles

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

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

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

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According to the 2006 EBRD assessment of the commercial laws in Lithuania, the LSC is funded by the state budget. However, there is insufficient information publicly available as to Lithuania'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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There is insufficient information publicly available as to Lithuania's compliance with this principle.

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

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

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

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There is insufficient information publicly available as to Lithuania'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.

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According to the VSE website, "the regulated secondary market in Lithuania is operated by the Vilnius Stock Exchange. VSE is a self-regulated organization, issuing and enforcing its own rules and regulations that set listing, trading and other procedures at the VSE. OTC market trades are registered by brokerage firms and are reported to the VSE." However, there is insufficient information publicly available as to Lithuania's compliance with 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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According to the VSE website, "the regulated secondary market in Lithuania is operated by the Vilnius Stock Exchange. VSE is a self-regulated organization, issuing and enforcing its own rules and regulations that set listing, trading and other procedures at the VSE. OTC market trades are registered by brokerage firms and are reported to the VSE." However, there is insufficient information publicly available as to Lithuania's compliance with this principle.

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

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

9. The regulator should have comprehensive enforcement powers.

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

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There is insufficient information publicly available as to Lithuania's compliance with 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 information publicly available as to Lithuania's compliance with 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 information publicly available as to Lithuania's compliance with 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 information publicly available as to Lithuania's compliance with 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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The European Commission, in its 2006 publication on the planned implementation of International Financial Reporting Standards (IFRSs) in EU member states, explains that Lithuanian listed companies are required to prepare their annual and consolidated financial statements in accordance with IFRSs. Lithuania complies with EC Regulation No. 1606/2002, which requires all EU-listed companies to prepare consolidated accounts following IFRSs as endorsed by the EC starting January 1, 2005. Basically, Lithuania does not permit other companies to apply IFRSs in their annual and consolidated accounts; however, banks and their controlled financial institutions are required to prepare their annual and consolidated financial statements pursuant to IFRSs. According to the 2007 KPMG Doing Business Guide, companies that do not apply IFRSs prepare their financial statements subject to Lithuanian Business Accounting Standards (LBASs), which are applicable as of January 1, 2004. As stated by KPMG, LBASs are simplified translations of IFRSs and generally require less disclosure than the corresponding IFRSs. Some areas, such as accounting for derivative and hedging financial instruments, employee benefits and accounting by retirement benefit plans are not covered by LBASs at all. At the end of 2006, there were 32 LBASs in force.

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

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In its 2002 ROSC Assessment, the World Bank rates Lithuania's observance with all three sub-principles of Principle III of the Organization for Economic Cooperation and Development's Principles of Corporate Governance regarding "The Equitable Treatment of Shareholders" as "Largely Observed," indicating that only minor shortcomings are observed, which do not raise questions about the authorities' ability and intent to achieve full observance in the short term. The World Bank noted that insider trading was prohibited and subject to both fines and imprisonment under the Law on Public Trading in Securities (LPTS).

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

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The EC, in its 2006 publication on the planned implementation of IFRSs in EU member states, explains that Lithuanian listed companies are required to prepare their annual and consolidated financial statements in accordance with IFRSs. Lithuania thereby complies with EC Regulation No. 1606/2002, which requires all EU listed companies to prepare consolidated accounts following IFRSs as endorsed by the EC starting January 1, 2005. Basically, Lithuania does not permit other companies to apply IFRSs in their annual and consolidated accounts. However, banks and their controlled financial institutions are required to prepare their annual and consolidated financial statements pursuant to IFRSs. According to the 2007 KPMG Doing Business Guide, companies that do not apply IFRSs prepare their financial statements subject to LBASs, which are applicable as of January 1, 2004. As stated by KPMG, LBASs are simplified translations of IFRSs and generally require less disclosure than the corresponding IFRSs. Some areas, such as accounting for derivative and hedging financial instruments, employee benefits and accounting by retirement benefit plans are not covered by LBASs at all. At the end of 2006, there were 32 LBASs in force.

In its 2002 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing in Lithuania, the World Bank explains that audits are conducted in accordance with National Standards on Auditing (NSAs), which are based on International Standards on Auditing (ISAs). However, the Lithuanian Chamber of Auditors (LCA), the auditing standards setter, in a 2006 self-assessment points out that there are some differences between NSAs and ISAs, which mainly exist because of timing differences in the work programs of the LCA and the International Auditing and Assurance Standards Board (IAASB). Also, some NSAs are applied later than the corresponding ISAs. Furthermore, the Lithuanian auditing standards framework does not provide a national equivalent to every single ISA; however, as stated by the LCA, those gaps are supposed to be closed in 2007. In addition to the LCA, the Bank of Lithuania (BoL), the Securities Commission, and the Insurance Supervisory Commission have the power to set additional audit requirements for entities under their respective supervision. Since Lithuania is a member of the EU, it also has to 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.

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According to a 2006 assessment of the commercial laws in Lithuania by the EBRD, the primary securities market legislation comprises the Law on Securities Market, the Law on Companies, and the Law on Collective Investment Undertakings. The latter was adopted in order to harmonize the regulation of collective investment undertakings with EU legislation. However, there is insufficient information publicly available as to Lithuania's compliance with 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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According to a 2006 assessment of the commercial laws in Lithuania by the EBRD, the primary securities market legislation comprises the Law on Securities Market, the Law on Companies, and the Law on Collective Investment Undertakings. The latter was adopted in order to harmonize the regulation of collective investment undertakings with EU legislation. However, there is insufficient information publicly available as to Lithuania's compliance with this 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.

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

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

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

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

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

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The VSE was privatized and became part of the OMX Group in 2004. As reported by the EBRD in 2006, the OMX Group is "a common Nordic and Baltic trading system with harmonized trading rules, securities listing and stock exchange membership principles, providing members of the stock exchange access to the common trading platform through a single access point" (p. 6). However, there is insufficient information publicly available as to Lithuania's compliance with 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 information publicly available as to Lithuania's compliance with this principle.

27. Regulation should promote transparency of trading.

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

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

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There is insufficient information publicly available as to Lithuania's compliance with 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 information publicly available as to Lithuania's compliance with 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 the VSE website, the Central Securities Depository of Lithuania (CSDL) is the operator of the securities settlement. The CSDL "conducts general accounting of securities and their circulation, opens and operates securities accounts, prepares and implements accounting systems for account managers, provides securities custody, settlement and other services for market participants." However, there is insufficient information publicly available as to Lithuania's compliance with this principle.