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Kiev, 10-11 December 2012 Supervision and control over investment companies activity by regulator, in particular prudential supervision Prof. Maurizio Mensi SSEF - Italy 1 OVERVIEW OF THE PRESENTATION PART I 1. The evolution of rules (supervision) 2. Structure of the italian system- Investment services and activities 3. Different models of supervision 4. Financial regulation in Italy – Institutional actors (Bank of Italy, Consob, ISVAP) 5. Cooperation between Authorities: a duty 6. Objectives and subjects of supervision 7. Consob and the Bank of Italy: a division of tasks based on a functional criterium 8. Regulatory supervision, reporting and inspection PART II 1. Regulatory (prudential) supervision: detailed elements 2. Reform of financial intermediaries 3. Regulatory powers 4. Information supervision 5. Inspection supervision 6. Specific measures to be taken following infringements of rules 7. Supervision of financial groups (specific rules) 2 THE EVOLUTION OF RULES The role of Monitoring Authorities within international markets The regulation of Financial Market: a multilevel source of law: EU (Regulations and Directives) and national Starting point: from Investment Services Directive ISD (93/22/CEE) to MiFID Dir. 2004/39/CE: growing harmonization Lights and shadows: different standards at European and national level The evolution of the EU framework (financial activities, banking and insurance) Action Plan for Financial Services (FSAP) 11 May 1999 – European Commission – ECOFIN 2000 Lamfalussy Committee MiFid Dir 2004/39/CE – Dir. 2006/73/CE – Reg. CE n. 1287/2006 New European architecture: FSAP: measures to be adopted by 2005 Financial Activities: Home country control – Progress, but Path Dependency 3 THE EVOLUTION OF RULES (2) Financial crisis 2007 and 2008 – High Level Group (De Larosiére) 2011: three European Control Authorities AVE – CESR – Their powers Powers of proposal and delegated regulation – Soft law, directives, supervision Intervention in case of urgency – Coordination and settlements resolution – Power of replacement Independence of Monitoring Authorities Appeal Commission – The jurisdictionary regime of acts adopted by European Monitoring Authorities European Systemic Risk Board - ESRB (Reg. UE 1092/10) 4 GLOBAL LEGAL STANDARDS The new regulation of the financial sector should be based on the framework of rules and principles in the global economy which are emerging at the international level It is intended to ensure the integrity and transparency of economy and came from five categories: 1. corporate governance of enterprises and institutions 2. market integrity (preventing illegal activities such as money laundering and financing terrorism) 3. financial regulation and supervision 4. tax cooperation 5. transparency of macroeconomic data 5 THE STRUCTURE OF THE ITALIAN SYSTEM The structure of the Italian banking and financial system is based on the presence of different kinds of institutions, which are entitled to conduct their business in relation to the following activities: Banks: legally entitled, in principle, to carry out most types of banking activity (collecting savings from the general public, granting of loans and other forms of financing, payment services, issuing of e-money and, pursuant to specific rules, the exercising of investment services). Italian banks may be incorporated as companies limited by shares, as cooperative banks or as mutual banks. Financial Intermediaries: used to be entitled to provide financing, equity investments, brokerage on currencies and payment services (as reserved activities); however, after a very recent reform in 2010, they are now entitled only to grant financing as a reserved activity. Payment Institutions: entitled to carry out only payment services or other ancillary activities. E-money Institutions: entitled to carry out business in the electronic money sector. 6 INVESTMENT SERVICES AND ACTIVITIES The notion of "investment services and activities" is identified by the TUF (Law on Financial Activities, Leg. Decree n. 58/98). It has undergone extensive changes and additions following the implementation of the MiFID Dir. Pursuant to Art. 1, par. 5, TUF for services and investment activities are the following when they relate to financial instruments: (a) dealing on own account; (b) execution of orders on behalf of clients; (c) subscription and / or placement of money; (c-bis) placement without firm or standby commitment to issuers; (d) portfolio management; (e) reception and transmission of orders; (f) advising on investments; (g) management of multilateral trading systems. 7 THE DISCIPLINE OF THE SUPERVISION OF INTERMEDIARIES The discipline of the supervision of intermediaries is contained in TUF and it applies to all categories of persons covered by TUF, and therefore investment firms, asset management companies, investment companies and brokers. The formulation of a set of rules applicable in general to all categories of intermediaries, according to the principle of uniformity, is one of the most significant innovations introduced by the 1998 reform. So we have a common framework for financial intermediaries, through the adoption of common standard. 8 BANKS AND FINANCIAL INTERMEDIATION Such an approach is, among other things, the more significant, where we analyze the relationships between the TUF and TUB (Leg. Decree n. 385/1993), on banking sector. In fact, the general provisions on supervision contained in the TUF from Art. 5 to 12, are (although reformulated in part due to the implementation of the MiFID Dir.) based on similar provisions contained, in respect of banks in the TUB 1993. This ensures uniformity of discipline covers the entire field of financial intermediation. The similarity between the TUF and the TUB, however, is not surprising in light of the affinity that exists between the Directive on investment services investment services directive (ISD 93/22/EEC), hence the TUF, and II to Directive coordinating banking (Dir. 89/646), hence the TUB. 9 DIFFERENT MODELS OF SUPERVISION Supervisory models in the theory ... • Institutional Model - Each intermediary / market has a specific authority • Functional Model - Each function performed by financial institutions corresponds to a separate authority • Model centralized - Single regulator • Model for purposes - 3 regulatory objectives, three separate authorities 10 MODELS in Europe: Institutional Model: Greece, Spain, France, Portugal Centralized model: Austria, Germany, UK, Sweden and Belgium Model for purposes: The Netherlands In Italy: hybrid model under review Institutional approach to the banking sector, for purposes to securities markets, semi-institutional approach to insurance and pension funds • 11 FINANCIAL REGULATION IN ITALY In Italy, financial regulation is organized along functional lines. Financial services activities are divided among four main activities: banking, investment services, asset management, and insurance. Each sector has its own supervisor, legal framework, and rules. The Bank of Italy, the central bank, has a monetary policy role as part of the European System of Central Banks, and has supervisory and regulatory authority over Italian banks. It is a prudential regulator whose focus is on the safety and soundness of the institutions subject to its jurisdiction. In addition to its banking supervision responsibilities, the Bank of Italy focuses on the stability of the financial system. It has a statutory mandate to ensure overall stability, efficiency, and competitiveness of the financial system. The Bank of Italy has rulemaking authority and enforcement powers. 12 THE INSTRUMENTS OF SUPERVISION 1. Structural concerning the structural characteristics of the system and intermediaries 2. Regulatory general rules management 3. Information functional assessment of the technical and operational conditions of the intermediaries and of compliance 4. Intervention directed at resolving situations of crisis or problematic 5. Transparency to customers and the public on technical risk 13 CONSOB CONSOB (Companies and Stock Exchange Commission) is an independent Authority competent for the Italian financial products market, with the aims to protect investors and the efficiency, transparency and development of the market. It is responsible for regulating the securities markets and the provision of investment services. Its mandate includes: (a) transparency of and reviewing business practices by securities market participants; (b) disclosure of complete and accurate information to the investing public by listed companies; (c) accuracy of prospectuses related to share and security offerings to the investing public; and (d) compliance with regulation by auditors. CONSOB also conducts investigations related to insider trading and market manipulation. 14 ISVAP The supervisor of the insurance sector in Italy is the Insurance Industry Regulatory Authority (ISVAP). ISVAP is responsible for regulating and monitoring the activities of insurance intermediaries. It is also required to perform all activities necessary to promote consumer protection. The TUF (financial sector) mandates that the primary purpose of insurance supervision is both the sound and prudent management of the insurance and reinsurance business and the integrity of the insurance market and consumer protection. Thus, ISVAP is a functional regulator of the insurance sector with both safety and soundness and conduct-of-business mandates. A few weeks ago the Government decided to incorporate ISVAP into Bank of Italy 15 INVESTMENT SERVICES TO THE PUBLIC The provision of investment services to the public (negotiation on own account, execution of orders on behalf of customers, subscription and/or placement, with or without guarantees, portfolio management, receipt and transmission of orders, investment consulting and the management of multilateral trading facilities) is reserved by law to investment firms, EU and non-EU investment companies, asset management companies, banks authorised by the Bank of Italy, EU and non-EU banks and foreign stockbrokers. CONSOB authorises investment firms to exercise one or more investment services, registering them in a Register when they possess specific capital requirements and when their administrative and internal supervisory bodies meet specific requirements of respectability and professionalism. 16 AUTHORIZED PERSONS For out-of-office offerings of financial products and services, intermediaries must appoint authorised persons, registered in a special Register (managed by CONSOB until 31/12/2008 and now by a specific body: “Organismo per la tenuta dell’albo dei promotori finanziari”), after passing an exam to certify eligibility. Registration is by entitlement provided that specific requirements are met. 17 RELATIONS WITH THE EUROPEAN UNION LAW AND INTEGRATION INTO ESFS Art. 2 TUF (Law on Financial Activities, Leg. Decree n. 58/98) 1. The Ministry of Economy and Finance, the Bank of Italy and Consob shall exercise the powers granted to them in harmony with the provisions of the European Union regulations apply and EU decisions and act on the recommendations on the matters covered by this decree. 2. The Bank of Italy and Consob, in the exercise of their respective powers, are parts of the ESFS and participate in the activities it carries out, taking into account the convergence in the European tools and supervisory practices. 3. The Bank of Italy and Consob, in cases of crisis or tensions in financial markets, keep account the effects of their actions on the stability of the financial system of other Member States, also making appropriate exchange of information with ESMA, the Joint Committee, the ESRB and the supervisory authorities of the other Member States. 18 COOPERATION BETWEEN AUTHORITIES Cooperation at national level : a duty not an option Art. 4 TUF, Leg. Decree n. 58/98 Law n. 262/2005 on “protection of saving” has in particular reorganised responsibilities and mutual cooperation of the two main public authorities responsible for supervision of the banking system (Bank of Italy) and of the securities market (Consob) Cooperation at European (ref. MiFid Dir. and Art. 7, co. TUB, italian law of Banking) and international level Secrecy – Transparency – Administrative proceeding and access to documents detained by Consob (ref. case law of italian Constitutional Court) Law on Administrave proceeding (n. 241/1990) 19 SUPERVISION Similarly to TUB (banking sector), the discipline of supervision of financial intermediaries in TUF (financial sector) is divided into three different areas, which relate, respectively to (i) Regulatory supervision (Art. 6) (ii) Information supervision (Art. 8) (iii) Inspection supervision (Art. 10). There are also specific powers to take action against the supervised entities (Art. 7 TUF). 20 GENERAL OBJECTIVES AND SUBJECT OF SUPERVISION Art. 5 TUF Art. 5, "Purpose and supervision”, following the implementation of the MiFID Directive, has been extensively revised. In the current formulation, in fact, par. 1 of Art. 5 TUF identifies the objectives of the supervision of the activities carried out by the entities subject to regulations: a) the maintenance of confidence in the financial system; b) the protection of investors; c) the stability and the proper functioning of the financial system; d) the competitiveness of the financial system; e) compliance with the financial provisions. 21 DIFFERENT COMPETENCES FOR CONSOB AND BANK OF ITALY The basic approach adopted by the Italian legislation on the supervision of the securities market operator, is the division of supervision between Consob and the Bank of Italy on a basis of a functional type. In this perspective, the TUF confirmed the choice to entrust the Bank of Italy of a so-called "conservative“ supervision and of the "transparency" and "proper behavior” to Consob. Competition rules: Authority for Competition 22 CONSOB AND BANK OF ITALY The Bank of Italy is responsible for risk containment, financial stability and sound and prudent management of the intermediary, while the Consob is responsible for the transparency and fairness of behaviors (Art. 5, par. 2 and 3, TUF). “The Bank of Italy and Consob shall exercise the powers for the supervision of authorized persons, each monitor compliance with the laws and regulations in accordance with the responsibilities defined in paragraphs 2 and 3“ (par. 4). The distribution of tasks for the purpose is then to be realized within the general criterion in specific provisions, relating, respectively, to regulatory oversight, disclosure and audit. 23 THE PURPOSE OF SUPERVISION The generic identification of the "purpose" of surveillance, based on the concepts above, can lift, however, difficulties in enforcement. On the one hand, it is not always easy to identify, within the wide range of subjects and topics that make up the discipline of the securities market, such issues as part of either "vigilance“. On the other hand there are matters with respect to which there is a clear risk of overlap between the two areas of supervision. In order to solve these issues, the TUF does not rely only on general concepts, but analytically identified, according to the different areas of supervision, the powers of the one and the other Authority. In addition, with the implementation of the MiFID Directive are also well identified several areas in which the exercise of the tasks of regulatory supervision should be jointly by the Bank of Italy and Consob. 24 MONITORING FUNCTIONS Objectives Consob and Bank of Italy Coordination and cooperation The Agreement of 31 October 2007 Responsability of Consob for lack of control – Legal consequences (case law of Supreme court) Dir. 2010/78/UE – Commission Communication of 4 March 2009, Driving European recovery 25 DUTIES OF COOPERATION BETWEEN AUTHORITIES The choice of different functions to the supervisory brings out the best specific skills and expertise of each Authority, but poses obvious problems of coordination and cooperation between them. The solution provided by Art. 4 TUF is to establish clear obligations for cooperation between the supervisory authorities 26 COOPERATION DUTY It is established a clear obligation to notify one another of the measures taken, and the irregularities detected in the exercise of supervision (Art. 5, par. 5, TUF). In addition, the rule reflects the justified concern that the fragmentation between several supervisory functions would result in an increase in the workload of the supervised entities, and thus establishes a clear obligation to act "in order to minimize the burden imposed on authorized persons“. It is a highly innovative rule, reflecting an approach to economic regulation aimed at ensuring an adequate balance between the needs of public oversight, and the development of regulated sectors. 27 MEMORANDUM OF 31 OCTOBER 2010 Par. 5-bis, Art. 5 TUF requires that the Bank of Italy and Consob to enter into an agreement aimed to "coordinate the exercise of their functions" and "minimize the burden on the regulated parties ". Therefore, the protocol must be adjusted: (i) the tasks of each authority and the manner of their execution, according to the principle of the division of functions, and (ii) the exchange of information (Memorandum of Understanding - Bank of Italy and Consob, published on October 31, 2007) 28 THE GENERAL AIMS OF SUPERVISION Objectives of the supervision services and investment activities: trust in the financial system, the protection of investors, stability, smooth operation and competitiveness of the financial system and compliance with the provisions on financial matters. Among these is worthy the reference to the "competitiveness" and "proper functioning" of the financial system, as it has to be added to those more typically related to the purposes of public intervention in the financial markets, but also the "transparency and proper behavior", which are not found in analogous prediction of the TUB (Art. 5), due to the greater attention to measure profiles of prudential supervision, with respect to other purposes of supervision. 29 SOUND AND PRUDENT MANAGEMENT Art. 5 TUF, par. 2, highlights the criterion of "sound and prudent management” as one of the aims pursued by the Bank of Italy in the exercise of supervision. 30 THE REGULATORY SUPERVISION, REPORTING AND INSPECTION Turning then to the forms in which it is carried out the supervisory activity, there are three general types of them, and two more specific. General ones, similar to the banking sector regulated in the TUB, are: (I) regulatory supervision; (II) information supervision ; (III) inspection supervision. Specific ones are represented by so called "Specific actions" and the supervision of groups. Although discipline is clearly inspired by the TUB, there is the problem of differentiation of the powers and tasks of the Bank of Italy, from those of Consob. 31 32 REGULATORY POWERS Art. 6 TUF In exercising the functions of regulatory supervision, Bank of Italy and Consob observe the following principles: a) enhancing the decision-making of a qualified entity; b) proportionality criterion, understood as the exercise of power in order to attain the goal, with the least sacrifice of the interests of the recipients; c) recognition of the international character of financial market and safeguard the competitive position of the Italian system; d) facilitating innovation and competition. 33 RESPONSIBILITIES OF THE BANK OF ITALY AND CONSOB Consob is, however, competent to regulate, after consulting the Bank of Italy, the obligations of authorized transparency and proper conduct. Par. 2-bis also identifies the matters falling within the "joint" jurisdiction of Consob and Bank of Italy, that are between the responsibility of each Authority and which represent one of the most significant innovations introduced by the MiFID Directive. 34 REGULATORY POWERS More precisely, the Bank of Italy and Consob adopt a regulation with reference to the provision of services and investment activities, as well as the asset management, the requirements of a qualified entity in relation to: (1) general requirements of organizations; (2) continuity; (3) administrative and accounting procedures, including the establishment of the function referred to in point e); (4) procedures, including internal control, proper and transparent provision of investment services and activities as well as the asset management; (5) monitoring of compliance with standards; (6) risk management firm; (7) Internal Audit; (8) responsibility of senior management; (9) handling of complaints; (10) personal transactions; (11) outsourcing of critical or important operational functions or services or activities; (12) Conflicts of interest potentially detrimental to a client; (13) record keeping; (14) procedures, including internal control, for the charging or payment of 35 incentives. INVESTORS In the context of regulatory oversight, is worth mentioning the reference to the scope of the provision concerning the "professionalism" or the competence of investors. For example, the need to enact specific rules of conduct "to relations between authorized persons and professional clients", letter. d) refers to the special regime applicable in the relations with the cd. "Eligible counterparties“ (Par. 2-c, letter. c) and d), art. 6 TUF). In this sense, the rules reflect a specific set of Community rules, in particular the MiFID Directive, which provides for a specific graduation of the discipline as a function of "nature" professional or not of he customer. In this context, the MiFID Directive provides for different treatment depending on whether the investor is considered "Retail clients", "professional clients" or "Eligible counterparties". 36 REGULATORY POWERS For the matters covered by Dir. 2006/73/EC, Bank of Italy and Consob may maintain or impose obligations in the regulations additional to those laid down in that directive only in exceptional cases where such obligations be objectively justified and proportionate, taking into account the need to cope with specific risks to investor protection or market integrity that are not adequately addressed by Community legislation and if at least one of the following conditions is satisfied: (1) the specific risks to which the additional requirements are designed to cope are particularly relevant, given the structure of the Italian market, (2) the specific risks that additional obligations are aimed at tackling emerge or become evident after the publication of the relevant Community provisions in this field. 37 REGULATORY SUPERVISION Principles of secundary regulation The “Gold Plating” (Dir. 2006/73) Consob regulations Reg. 16190/2007 on financial operators and services (ref. Part II of TUF) Reg. 29/10/2007, Consob and Bank of Italy, organization and procedures of financial operators Decree of Ministry of Economy and Finance 24/12/2008, n. 206 on professionalism, integrity independence Decree of Ministry of Economy and Finance 24/5/1999 n. 228 on Investment Funds 38 REGULATORY SUPERVISION (2) Regulatory supervision The Bank of Italy’s supervision aims at ensuring the sound and prudent financial management of supervised entities as well as the stability, efficiency and competitiveness of the banking and financial system as a whole. This aim is pursued through the enforcement of the rules and provisions regulating the credit sector. Within the exercise of regulatory supervision, the Bank of Italy adopts provisions having as their purpose: • capital adequacy; • risk containment; • ownership restrictions; • permissible shareholdings; • administrative and accounting organisation of the banks and internal audits; and • public disclosure that supervised entities must provide with respect to the above points. 39 REGULATORY SUPERVISION (3) The legal basis of power The public consultation with market operators (stakeholeds) The analysis of impact of regulation (AIR) – The verification of impact of regulation (VIR) Better regulation (Checklist OCSE 2005 – White Paper 2005-2010 on Financial Services Policy, of Dec. 2005, 2006 Guidelines) “Transparent, evidence-based policymaking” (Lamfalussy procedure) Best practices: Financial Supervisory Authority FSA (UK) – Securities and Exchange Commission SEC (USA) 40 REFORM OF FINANCIAL INTERMEDIARIES A recent reform, by Leg. Decree n. 141/2010, introduced a new set of rules, which amends title V and VI of the TUB, mainly regards financial intermediaries (ie, entities carrying out financial activity but without collecting savings from the general public). On one hand, some activities originally considered as reserved activities (equity investments and brokerage on currencies) have been removed and are no longer subject to authorisation, unless they fall under other regulated activities, on the other hand, the reform raises the level of supervision on capital adequacy, as well as the number of requirements for the administrative and accounting organisation of those entities. 41 REFORM OF FINANCIAL INTERMEDIARIES (2) The aim of this reform is to ensure that all entities operating in the financial sector comply with the organisational and accounting rules once required only for certain financial intermediaries involving systemic risks (intermediaries formerly falling under Art. 107 TUB) and therefore to exclude from the sector or market all those entities that are not able to grant an equivalent level of protection. As a result, in the next few years there will probably be a reduction in the total number of financial intermediaries authorised to conduct business in Italy. The scope of the reform also includes new rules governing financial agents and credit intermediaries, providing a more thorough regulation of those entities. 42 INTERVENTION ON AUTHORIZED ENTITIES Art. 7 . The Bank of Italy, after consulting Consob, shall regulate: a) the obligations of investment firms and asset management companies in the area of capital adequacy, containment risk in its various shareholdings, b) the obligations of SIM, the EU investment firms, asset management companies, as well as financial intermediaries entered in the register provided for in Art. 107 TUB, Italian banks and non-EU banks, authorized to provide the services or investment activities in the field of mode deposit and sub-deposit financial instruments and funds belonging of customers; c) the rules applicable to collective investment undertakings concerning: 1) the criteria and prohibitions related to investing, having regard also to group relations; 2) the prudential rules for limiting and spreading risk; 3) type schemes and methods of preparation of financial statements that companies asset management and the Company shall prepare periodically; 4) the methods of calculating the value of units or shares of collective investment undertakings; 5) criteria and procedures to be adopted for the valuation of assets and securities in which assets are invested and the frequency of valuation. For the evaluation of goods not traded on regulated markets, the Bank of Italy may provide for the use independent experts and request their intervention even in the purchase and sale of goods by the operator. 43 INTERVENTION ON AUTHORIZED ENTITIES (2) For the evaluation of goods not traded on regulated markets, the Bank of Italy may provide for the use independent experts and request their intervention even in the purchase and sale of goods by the operator. 44 INFORMATION SUPERVISION Art. 8 TUF The Bank of Italy and Consob may request, within their respective competences, to authorized entities the communication of data and information and the transmission of records and documents. Information duties towards control bodies The regulation powers of Consob and Bank of Italy - MiFid Dir. 45 INFORMATION SUPERVISION (2) It consist of the obligation imposed on intermediaries to provide the Bank of Italy a series of information (quantitative and qualitative) that represent the primary source of knowledge through which it is evaluated the technical situations of banks and financial companies. They are instrumental in the evaluation of the technical and operational conditions of intermediaries and verification of compliance. They form a necessary tool for Information Supervision. 46 INFORMATION SUPERVISION (3) This power can be exercised essentially in two ways: the request for information may be formulated in a general way (through, for example, regulations requiring reporting requirements or reporting, periodically or episodic) or they may be made specific requests on a case-by-case basis. The rule does not limit the power of the supervisory authorities and shall, therefore, makes a qualified entity absolutely "transparent" with regard to any data, information, information. 47 INFORMATION SUPERVISION (4) The power is attributed to the Bank of Italy and Consob in matters of their respective competence: it follows that each Authority may request information and data relating to matters falling within their sphere of competence. For issues which are regulated jointly, the exercise of supervision is regulated by art. 6, par. 2-ter, TUF. The Bank of Italy and Consob may exercise its powers to request data, information, records and documents to the company's auditors (Art. 8, par. 2, TUF). 48 INFORMATION SUPERVISION (5) In implementation of Dir. 95/26/EEC, aimed at strengthening the prudential supervision, the same Art. 8, par. 3, now provides that internal auditing (auditors, or - depending on the business model adopted - the supervisory board or audit committee on operations) promptly inform the Bank of Italy and Consob all acts or facts which may constitute an irregularity in the management, or a violation of the rules governing the activities of SIM, the asset management company or the Fund. A similar formula - relating to the auditing firm - is finally provided for in par. 4 of Art. 8, according to which auditors "inform the relevant facts which may constitute a serious violation of the rules governing the activities of the audited companies, or which may affect the continuity of the company or result in an adverse opinion on the financial statements or on periodic statements”. The same tasks are finally provided in the bodies of internal control and external auditors of the entities that control the intermediaries. 49 INTERNAL CONTROL BODIES AND AUDITORS For the internal control bodies and auditors, the rules are not formulated in the same way: there are, in fact, obvious differences between the scope of the obligations of auditors than those of the reviewers. In particular, while the auditors are required to inform the supervisory authorities of the facts that "may constitute" irregularities in the management, or violation of rules governing the activities of intermediaries, the auditor is required to report only the facts "relevant“ that would constitute a "serious violation“ of the rules governing the activities of the companies subject to this review. In addition, the reporting obligations of auditors also affect the facts that while not constituting fraud or violations of laws - may affect the continuity of the company. 50 INSPECTION SUPERVISION Consob may request the company's auditors to conduct audits (Art. 10, par. 1bis, TUF). The rule, however, says nothing about time and manner of carrying out the inspections by the independent auditors, nor regulates the formalization of the results of audits and / or to transmit Supervisory Authority. 51 INSPECTION SUPERVISION (2) Art. 10 TUF The Bank of Italy and Consob may, in accordance with their respective competences and with the EU provisions, order and make directly inspections and require the submission of documents and the adoption of measures deemed necessary. Consob may require the person carrying out the audit of the accounts of to initiate additional audits. The costs involved, the fairness of which is assessed by the Consob, are charged to the subject inspected. 52 INSPECTION SUPERVISION (3) It is important to ensure coordination between the activities carried out by the two authorities. In this case, the objective is pursued not only reaffirming the principle of the division of functions between the Bank of Italy and Consob, but also establishing the possibility that the two authorities to exchange roles, and perform investigations on the profiles within their respective areas of expertise (Art. 10 TUF) 53 INSPECTION SUPERVISION (4) Subjects and methods The inspections – Reports The cooperation between Italian and foreign Authorities The coordination between Consob and Bank of Italy 54 SUPERVISION INSPECTION (5) Art. 10 TUF. Each authority shall inform the inspections it undertakes other authorities, which may request assessments of their competence profiles. The Bank of Italy and Consob may request the competent authorities of a Member State to carry out inspections at branches of SIM (Securities company), of asset management companies and banks established in territory of that state or agree on other methods of verification. The competent authorities of another EU country, after informing the Bank of Italy and Consob, may inspect, including through their representatives, branches of companies investment, community banks and harmonized management companies by the same, established in the Italian territory. If the authorities of another EU country the require, the Bank of Italy and Consob, within their respective competences, shall directly to the findings or agree on other methods of verification. The Bank of Italy and Consob may agree, within their respective competences, with the competent authorities of non-EU countries the procedures for the inspection of branches of investment firms and banks established in their respective territories. 55 SPECIFIC ACTIONS ON THE ENTITIES As a consequence of the the surveillance of the safety rules, regulation and inspection, there are more specific actions to be taken ie "interventions on qualified entities" and the supervision of groups financial. As to the first, it is a profile already set for the banks in the TUB, and is governed - with some changes - in the TUF with reference to the areas covered by this measure. The overall objective of the legislator aims is to recognize the supervisory authorities specific powers, which have a direct impact on the activities of the governing bodies of the supervised entities. According to Art. 7 TUF, the Bank of Italy and Consob may then: (A) convene the directors, auditors and managers of authorized persons; (B) order the convening of the governing bodies, setting the agenda; (C) proceed directly to convene the governing bodies, when the bodies have not complied with the provisions of the letter. 56 SPECIFIC ACTIONS ON THE ENTITIES (2) The power of Supervisors is limited to, at least on a formal level, convening of the governing bodies, but taking of decisions is, however, entrusted to the competent bodies. However, it is inevitable that, in most cases, the fact that a given deliberation has been requested by the Supervisory represents a strong incentive for the adoption of the same, by virtue of the moral suasion exerted by the intervention of the supervisory. 57 THE SPECIFIC ACTIONS ON THE ENTITIES (3) Art. 7 TUF states that the authorities exercise their competencesc, only "within their respective powers“. Thus applies the principle of functional division of tasks between Consob and the Bank of Italy (as provided in general by Art. 5 TUF). A specific power is finally assigned to the Bank of Italy in order to guarantee the stability of the system: the Bank of Italy may issue provisions of a special nature, relating to the matters listed in Art. 6, par. 1, TUF and impose restrictive measures concerning the services and activities carried out by authorized persons (Art. 7, par. 2, TUF). 58 AUTHORISED INTERMEDIARIES In order to ensure the observance of the obligations of transparency and correctness and the proper performance of negotiations in financial instruments, CONSOB may: ask the intermediaries to report figures and news and to send deeds and documents, also on a periodical basis; acquire news and clarification from company exponents to ascertain the exact and complete nature of the figure and news reported or published; carry out inspections. 59 POWERS OF CONSOB CONSOB may: order the intermediaries to put a stop to irregularities committed in the performance of investment services and forbid them from entering into new transactions when the breaches committed may influence general interests or when it there is an urgent need to protect the interests of investors. 60 POWERS OF CONSOB (2) Consob may urgently suspend the administrative bodies of investment firms and asset management companies when there are situations of danger for clients or the markets and nominate a commissioner to manage cases in which there are serious irregularities with regard to administration or serious breaches of regulations. 61 POWERS OF CONSOB (3) CONSOB may: inflict financial penalties upon company members and employees of companies failing to observe the rules governing the provision financial instrument investment services; propose to the Ministry of the Economy and Finance that the intermediaries be subject to extraordinary administration or coercive administrative liquidation. 62 CONDUCT OF AUTHORIZED INTERMEDIARIES CONSOB checks that the conduct of authorized intermediaries with investors is diligent, correct and transparent. It enforces cautionary measures against them (suspension of activity for a maximum of 60 days or, in specific cases, for as long as a year) and inflicts different sanctions (ranging from warning to disqualification from the register). 63 THE SUPERVISION OF FINANCIAL GROUPS Art. 12 TUF provides for the supervision of financial groups, taken from the TUB, which establish a comprehensive legislation on consolidated supervision of banking groups. It is not surprising that, even in this context, it is established a very strong influence on the formulation of the TUB of the statutory provisions referred to in TUF. This rule has, inevitably, been inspired by the more detailed rules on the subject, ie, the banking legislation, extending in part to the non-banking groups. 64 THE SUPERVISION OF FINANCIAL GROUPS (2) Art. 11 TUF gives to Bank of Italy the power to "define" the notion of group relevant for the regulation at issue. With regard to the content of the framework, the Bank of Italy may issue to the SIM, the asset management company or financial institution located on the summit, provisions related to all the entities in the same group (as determined by art. 61 TUB). Always modeled on Art. 61 TUB, is the further provision (Art. 12 TUF) according to which the parent company, in the exercise of management and coordination, issues to members of the group so that they carry out the instructions issued by the Bank of Italy. 65 THE SUPERVISION OF FINANCIAL GROUPS (3) The Bank of Italy and Consob: 1) may request, as regards matters within their competence, the entities in the group, the transmission, periodic data and information. Information necessary for exercising supervision may be required also to persons who, while not performing investment services, asset management services, as well as related and instrumental activities or other financial assets, are linked to the SIM (Securities company) or the company's asset management indicated in the shareholders' equity (Art. 11, par. 1, lett. b), TUF). 2) may have against the persons belonging to the application of the provisions of the TUF in the fields of auditing, and 3) may, as regards matters within their competence, carry out inspections of persons belonging to the group. This power may also be exercised - for the exclusive purpose of verifying the accuracy of the data and information provided - at persons who, while not performing investment services, asset management services, as well as related and instrumental activities or other financial assets, are linked to the SIM or the company's asset management by investment relationships indicated in Art. 11, par. 1, lett. b) TUF. 66 INFRINGEMENTS In cases of infringement of both laws and secondary level regulations by supervised entities, the Bank of Italy has a wide range of powers of intervention and sanction. Supervision authorities, and in particular the Bank of Italy, mainly enforce laws and regulations by the following means (in rising order of seriousness): 1. Written warnings, 2. Notice of infringement by the Bank of Italy (upon receiving such notice a full hearing of the parties starts, in which the entities involved may file with the Bank of Italy a written defence and potentially block the adoption of a sanctioning resolution), 3. Administrative pecuniary fines on persons and banks, companies or other bodies involved, should the written defence not be accepted. 67 SERIOUS IRREGULARITY If a serious irregularity is found in the management of the supervised entities or in case of a serious breach of the law or of regulatory or statutory provisions, the Bank of Italy may propose that the Minister of Economy and Finance to withdraw the licence. If the Minister considers the motivation and reasoning of the Bank of Italy well founded, it may order, by means of ministerial decree, the withdrawal of the licence and the commencement of the administrative forced liquidation procedure against the supervised entity. 68 MOST COMMON ENFORCEMENT ISSUES From 2009 and 2010 annual report on supervision issued by the Bank of Italy shows that the on-site inspections carried out by the supervisory authority were 205 in 2009 and 138 in the first five months of 2010. In 2009 and during the first five months of 2010, 234 cases of irregularity were investigated. The most common infringements relate to the internal structure of supervised entities and to the inadequacy in the management of lending activity. Several procedures regarded non-compliance with the rules providing periodical information duties towards the Bank of Italy or breach of the rules in the matter of transparency in contractual terms and conditions. As a consequence the supervisory authority were issued 55 orders for cancellation against financial intermediaries during 2009; issued 88 orders for cancellation of financial intermediaries investigated in the first few months of 2010; started 11 extraordinary administration procedures against banks, during 2009; and investigated 15 cases of forced administrative liquidation during the first half of 2010. 69 Thank you for your attention ! Prof. Maurizio Mensi Academy of Economy and Finance - SSEF Ministry of Economy and Finance – Rome – Italy [email protected] Mobile: +39 335 5623327 70