In its 2003 Financial System Stability Assessment (FSSA), the International Monetary Fund (IMF) found the Romanian securities regulatory framework to be compliant with best practices in many areas. However, the assessment also revealed shortcomings, particularly with respect to disclosure, transparency, and the integrity of the capital markets. The IMF recommended strengthening the enforcement powers of the National Securities Commission (NSC), enforcing listing requirements, delisting inactive companies, and improving transparency and disclosure of the Financial Investment Funds. The 2004 European Bank for Reconstruction and Development Securities Market Legislation Assessment, which benchmarks Romanian securities market legislation against the Objectives and Principles of Securities Regulation published by the International Organization of Securities Commissions, found Romanian legislation to be in medium compliance with international standards.

General Overview

According to the 2003 International Monetary Fund (IMF) Financial System Stability Assessment (FSSA), the regulatory framework based on the 2002 securities laws complies with best practices in many areas. However, shortcomings were noted, particularly with respect to the winding up of entities, market intermediaries, investment management companies, open-ended funds, as well as insufficient resources within the National Securities Commission (NSC). The IMF also criticized insufficiently transparent corporate governance and disclosure of financial conditions and policies of the five Financial Investment Funds, which were established for the trading of shares of privatized enterprises.

The 2004 European Bank for Restructuring and Development (EBRD) Securities Market Legislation Assessment, which benchmarks Romanian securities market legislation against the Objectives and Principles of Securities Regulation published by the International Organization of Securities Commissions (IOSCO), found the Romanian legislation to be in medium compliance with international standards. The assessment revealed major shortcomings in the securities market legal framework with respect to the secondary market, clearing and settlement, and accounting and auditing provisions. However, the EBRD's 2006 assessment of the Romanian commercial laws pointed out that Romania made several significant improvements in the legal framework during 2004 and 2005. Nevertheless, the EBRD explained that shortcomings still exist, such as the failure to require disclosure of nominee and indirect ownerships; the absence of specific provisions granting shareholders the right to petition the regulator; the absence of a clear mandate for the National Securities Commission (NSC) in the protection of shareholder rights; and unclear reporting duties with regard to related party transactions. Finally, as of January 2006, some procedural regulations as required under the Capital Market Law had not been adopted.

According to the 2006 EBRD assessment of the Romanian commercial laws, the Capital Market Law, which entered into force on July 28, 2004, is the primary legislation regulating capital markets in Romania. The law replaced previous legislation contained in several acts and incorporated a number of EU Directives. The Romanian securities market regulator is the NSC, which was established in October 1994 and, according to the IOSCO website, is a member of the IOSCO. The EBRD states that the NSC is independent and derives its budget from capital markets and operations. The NSC, which is accountable to the Parliament, supervises the stock exchange and financial intermediaries, oversees takeovers, enforces insider trading provisions and disclosure requirements, imposes fines, and issues legally binding regulations.

After 47 years of inactivity, the Bucharest Stock Exchange (BSE) reopened in 1995. It trades in domestic securities, bonds, government securities, and foreign securities. Domestic issuers are organized under three tiers: Base Tier, Tier 1, and Plus Tier. The Plus Tier is represented only by companies that comply with the BSE's Corporate Governance Code. The EBRD reported in 2006 that an over-the-counter market (RASDAQ) opened in 1996 to provide a trading platform for companies that were privatized during the mass privatization program in the 1990s. According to the 2006 PricewaterhouseCoopers (PwC) Doing Business Guide, the BSE and the RASDAQ merged at the end of 2005. As of 2006, 65 companies were listed on the BSE.

The Principles

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

II

The 2006 EBRD assessment states that the securities market regulator, the NSC, is independent and derives its budget from capital markets and operations. The NSC, which is accountable to the Parliament, supervises the stock exchange and financial intermediaries, oversees takeovers, enforces insider trading provisions and disclosure requirements, imposes fines, and issues legally binding regulations. However, there is insufficient publicly available as to Romania's compliance with this principle.

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

EN

The 2006 EBRD assessment states that the securities market regulator, the NSC, is independent and derives its budget from capital markets and operations. The NSC, which is accountable to the Parliament, supervises the stock exchange and financial intermediaries, oversees takeovers, enforces insider trading provisions and disclosure requirements, imposes fines, and issues legally binding regulations. However, the IMF in its 2003 FSSA stated that Romania should grant more legal protection to the NSC staff.

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

EN

The 2006 EBRD assessment states that the securities market regulator, the NSC, is independent and derives its budget from capital markets and operations. The NSC, which is accountable to the Parliament, supervises the stock exchange and financial intermediaries, oversees takeovers, enforces insider trading provisions and disclosure requirements, imposes fines, and issues legally binding regulations.

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

II

In its 2003 FSSA, the IMF states that the decision-making process is transparent. However, there is insufficient publicly available as to Romania's compliance with this principle.

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

II

The IMF in its 2003 FSSA states that, as of 2003, the Code of Conduct had not been violated. However, there is insufficient publicly available as to Romania'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.

NC

According to the 2003 IMF FSSA, as of 2003, there were no SROs under the supervision of the NSC. The BSE has never had SRO status, even though it operates as a de-facto SRO. The IMF recommended giving the BSE SRO status.

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.

NC

According to the 2003 IMF FSSA, as of 2003, there were no SROs under the supervision of the NSC. The BSE has never had SRO status, even though it operates as a de-facto SRO. The IMF recommended giving the BSE SRO status.

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

EN

In its 2003 FSSA, the IMF states that the NSC has the authority to conduct examinations for any reason, with or without prior announcement. The NSC, however, does not have the authority to obtain information from unregistered entities. The IMF recommended consolidating and simplifying record keeping requirements for collective investment schemes (CISs) and requiring identification of the beneficial of a brokerage account during the application process.

9. The regulator should have comprehensive enforcement powers.

EN

In its 2003 FSSA, the IMF states that the NSC can issue administrative orders, freeze assets of regulated entities, refer issues to criminal authorities, suspend trading of securities, and impose fines. The NSC, however, does not have the authority to obtain information from unregistered entities. Therefore, the IMF recommended authorizing the NSC to question and obtain documents from non-registrants. Alternatively, the NSC should be able to cooperate with specific prosecutors and magistrates. Also, a closer cooperation with the financial police was suggested.

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

In its 2003 FSSA, the IMF states that the NSC established a program for regular examinations of registrants based on periodicity and a risk-based approach. However, there is insufficient publicly available as to Romania's compliance with this principle.

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

EN

According to the 2003 IMF FSSA, the NSC, the Romanian National Bank, and the Insurance Supervisory Commission agreed to cooperate in supervisory matters. With respect to non-registered entities, the NSC may obtain information from the financial police and the prosecutor. The NSC, based on reciprocity, is granted the power to assist investigations by their foreign counterparts. As of 2003, the NSC entered into Memoranda of Understanding with Portugal, China, and Greece, and was in negotiation with Cyprus. The IMF recommended signing the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange Of Information.

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.

EN

According to the 2003 IMF FSSA, the NSC, the Romanian National Bank, and the Insurance Supervisory Commission agreed to cooperate. With respect to non-registered entities, the NSC may obtain information from the financial police and the prosecutor. The NSC, based on reciprocity, is granted the power to assist investigations by their foreign counterparts. As of 2003, the NSC entered into Memoranda of Understanding with Portugal, China, and Greece, and was in negotiation with Cyprus. The IMF recommended signing the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange Of Information.

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.

EN

According to the 2003 IMF FSSA, the NSC, the Romanian National Bank, and the Insurance Supervisory Commission agreed to cooperate. With respect to non-registered entities, the NSC may obtain information from the financial police and the prosecutor. The NSC, based on reciprocity, is granted the power to assist investigations by their foreign counterparts. As of 2003, the NSC entered into Memoranda of Understanding with Portugal, China, and Greece, and was in negotiation with Cyprus. The IMF recommended signing the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange Of Information.

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

NC

According to the 2004 EBRD Corporate Governance Sector Assessment, Romanian legislation is in low compliance in this area, when assessed against the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. The EBRD points out that "flaws in the corporate governance framework are present in all sections assessed, most of all with regard to the rights of shareholders, responsibilities of the board and transparency & disclosure" (p. 11).

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

NC

According to the 2004 EBRD Corporate Governance Sector Assessment, Romanian legislation is in low compliance in this area when assessed against the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. The EBRD points out that "flaws in the corporate governance framework are present in all sections assessed, most of all with regard to the rights of shareholders, responsibilities of the board and transparency & disclosure" (p. 11). The EBRD further states that "with reference to the "Equitable Treatment of Shareholders", the relevant legislation gives the by-laws a possibility of granting differing voting rights to shareholders. Significant transactions are not subject to specific approval procedures and related party transactions are not sufficiently regulated" (p. 12).

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

ID

In its 2007 Doing Business Guide, Ernst & Young (E&Y) states that, pursuant to Ministry of Economy and Finance (MoEF) Order No. 1752/2005, all companies are required to prepare financial statements according to Romanian statutory accounting rules, which, as stated by E&Y, differ from International Financial Reporting Standards (IFRSs). However, MoEF Order No. 1121/2006 requires listed entities to prepare an additional set of IFRS financial statements for the year ending December 31, 2007. Moreover, under MoEF Order No. 907/2005, banks, other credit institutions, and insurance companies have to prepare financial statements in accordance with IFRSs for the year ending December 31, 2006. Other public interest entities may prepare an additional set of financial statements pursuant to IFRSs for internal purposes. The Deloitte IAS Plus website indicates that Romania, which became a member of the European Union on January 1, 2007, complies with European Commission Regulation No. 1606/2002 by requiring listed companies to prepare their consolidated financial statements according to IFRSs.

According to a 2005 self-assessment by the Romanian Body of Expert and Licensed Accountants (BELA), listed and large entities are audited by financial auditors who follow International Standards on Auditing (ISAs). In its 2006 self-assessment, the Romanian Chamber of Financial Auditors (CFA), which is responsible for the translation of ISAs, reports that the most recent fully translated set of ISAs is based on ISAs effective in 2003; however, as of November 2006, the CFA was in the process of translating the 2006 version of ISAs. Entities other than listed companies with a balance sheet total less than 5 million EUR are audited by censors. These audits are conducted pursuant to auditing standards issued by the BELA, which, according to the BELA, are harmonized with ISAs. However, there is insufficient information publicly available as to the extent of harmonization of these standards with ISAs. Romania, as a member of the EU, also has to comply with EC Directive 2006/43, which requires all statutory audits to be carried out on the basis of ISAs as adopted by the EC. In its 2007 Doing Business Guide, PricewaterhouseCoopers reports that the Ministry of Economy and Finance (MoEF), the BELA, and the CFA have begun their work on the implementation of the Directive.

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.

II

In its 2003 FSSA, the IMF recommended prohibiting CISs employees from holding CIS stock in order to prevent conflicts of interest. Also, book- and record-keeping rules for CISs had to be consolidated. However, there is insufficient publicly available as to Romania'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.

II

In its 2003 FSSA, the IMF stated that the CISs were not governed by any bankruptcy procedure. The IMF recommended prohibiting collective CISs employees from holding CIS stock in order to prevent conflicts of interest. Also, book- and record-keeping rules for CISs had to be consolidated. However, there is insufficient publicly available as to Romania'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.

II

There is insufficient information publicly available as to Romania'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.

II

In its 2003 FSSA, the IMF recommended avoiding backward pricing, since this could expose the fund to manipulation. Instead, the IMF suggested establishing forward pricing, where the purchase or sale price is based on the net asset value on the day the order is received. However, there is insufficient publicly available as to Romania's compliance with this principle.

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

II

There is insufficient information publicly available as to Romania'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.

ID

In its 2003 FSSA, the IMF reports that "minimum capital requirements of market intermediaries are set at 25 percent of initial paid up capital. No adjustment for risk takes place, nor are the full range of risks taken into account when calculating the net capital. It is difficult to determine if this level is sufficient. This entire capital structure regime is undergoing review in order to organize it in accordance with EU standards" (p. 30). The IMF recommended implementing regulations on financial groups, particularly a clear definition of those companies (2003).

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.

II

According to the 2003 IMF FSSA, Ordinance 28/2002 and Law No. 525/2002 establish a compensation fund for investors, which, as of 2003, had not been implemented. However, there is insufficient publicly available as to Romania'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.

NC

In its 2003 FSSA, the IMF reports that the NSC does not have access to a bankruptcy procedure for market intermediaries The IMF urged the Romanian authorities to implement winding-up procedures similar to those for banks, including the authority to appoint a receiver over these entities. Also, as of 2003, a compensation fund still needed to be established.

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

EN

In its 2003 FSSA, the IMF reports that the NSC monitors the exchanges on a day to day basis. However, the efficiency of the system could be enhanced through an increase of staff.

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.

II

In its 2003 FSSA, the IMF reports that the NSC monitors the exchanges on a day to day basis. The efficiency of the system could be enhanced through an increase of staff. However, there is insufficient publicly available as to Romania's compliance with this principle.

27. Regulation should promote transparency of trading.

II

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

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

NC

In its 2003 FSSA, the IMF reports that the NSC monitors the exchanges on a day-to-day basis. However, the efficiency of the system could be enhanced through an increase of staff. Sanctions, such as withdrawal or suspension of authorization, fines, and deterrence were not efficient. The IMF recommends improving finality of settlement at the National Securities Clearing, Settlement and Depository Company (SNCDD).

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

II

There is insufficient information publicly available as to Romania'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.

II

In its 2003 FSSA, the IMF reports that "in the event of default of delivery, the clearing and settlement system at the SNCDD... gives the selling broker an additional day to borrow securities or reach an agreement with the counterparty to cancel the trade. Buy-in by the broker has not been effective due to the illiquid nature of most stocks on the market" (p. 30). However, there is insufficient publicly available as to Romania's compliance with this principle.