Whether the Amsterdam Exchanges NV's activities should be regulated by the bourse itself or by the government comes up for discussion with every case of bourse related misconduct. The question takes on an added dimension with next year's implementation of the European directive liberalising securities trading within the EU. ASE chairman Boudewijn van Ittersum believes the bourse is better equipped to meet the challenge.
The Amsterdam Exchanges NV is considering imposing a requirement on directors of listed companies to disclose transactions in shares of their own companies. The requirement, if implemented, would form part of a new, more stringent Modelcode, according to ASE chairman Boudewijn van Ittersum.
Incorporated into the bourse's securities regulations in 1986, the Modelcode serves as a safeguard against insider trading by imposing requirements on listed companies and bourse members and employees regarding the treatment of price-sensitive information.
Since members of Borsumij Wehry's management board have been revealed to have traded heavily - and possibly with insider information - in Borsumij derivatives, the bourse's self-regulatory mechanisms have become a topic of controversy. Critics claim the stock exchange's enforcement efforts are half-hearted; justice officials say the Modelcode is too loosely worded.
In the ASE's 1994 annual report released last week, Van Ittersum devoted considerable attention to the principle of self-regulation. Circumstances forced him to. In preparation for the January 1996 liberalisation of European securities markets, the Dutch law for securities trading (WTE) is now being amended. The question of where supervisory control of trading lies is more relevant than ever.
The stock exchange chairman makes an unabashed case for his own bailiwick. Believing that the bourse has more expertise on financial markets than the government, Van Ittersum calls for a strengthening of the self-regulating function of the bourse in making and enforcing rules. 'If the official bourses were not the competent authorities as specified in the European directive, their self-regulating function - particularly with regard to international trading - would be undermined.' He writes in the report; 'this would seriously damage the quality and cost levels of our market.'
In his personal remarks, he is more explicit. 'If the STE (the Netherlands Securities Board) takes on more regulatory responsibility, it will have to increase its capacity and the bourse will have to pay the STE. Our costs will then go up' he explains
The downfall of Barings illustrates the need for firm agreements between bourses and national legislators regarding their mutual responsibilities, according to Van Ittersum; Barings' problems had much to do with differing supervisory methods in the UK and in Singapore. 'You can't open the borders unless there are firm agreements on home-country control and host-country control,' he says; 'home-country control must be among our responsibilities.'
The facts that have emerged so far in the Borsumij Wehry affair serve as proof of the effectiveness of the bourse's self-regulation, Van Ittersum asserts, 'Self-regulation has never been as effective as it has recently,' he says. He dismisses the criticism of the justice ministry, whose lack of expertise and manpower he sees as a major problem. 'We have recommended the appointment of one nationally operating justice official for insider trading affairs. Expertise must be concentrated. But the government does not give enough priority to making resources available.'
At present, one justice official handles insider trading as well as fraud and drug cases. This function rotates regularly so that the cognisant official is frequently caught in the learning curve. In the six years since the enactment of the Dutch law prohibiting insider trading, the bourse has had to work with four different justice officials.
Van Ittersum finds the current situation unworkable. insider trading investigations by the economic affairs inspectorate take as long as six months. 'The capacity of the public prosecutor's office must be expanded,' he says; 'you can't leave individuals and companies in uncertainty for so long. If you create legal regulations, you must also invest in enforcing them.'
The question is whether things can move any faster. The bourse's compliance and enforcement department needed one month to prepare its report on Borsumij Wehry before submitting it to the STE.. Internal investigations into insider trading took two and a half months in an affair involving Orco Bank shares and two months in the HCS case. These investigations only marked the start of more in-depth investigations carried out subsequently by the STE and the economic Affairs Inspectorate (ECD).
New arrangements will have to be made to speed up the ECD's investigation phase, according to Van Ittersum; the idea is to be able to enlist the ECD at the moment an incident is reported. The bourse is receptive to the criticism of the Modelcode, which existed for several years before the insider trading law was enacted in 1989. 'I don't think the Modelcode is so loose but perhaps it shouldn't be so dependent on interpretation and should be more clearly worded,' says Van Ittersum: 'as for directors reporting transactions, we will consider it.. But things shouldn't go so far that share ownership by employees is no longer possible.
Self-regulation is not the ultimate supervisory instrument, according to Van Ittersum. 'There must be counterforces present. Self-regulation is part of an adequate legal framework. I believe it's a good thing that someone is keeping an eye on us,' he says.
But isn't it a sign of weakness for the bourse and the association of listed companies to request legislation from finance minister Gerrit Zalm to support their plan for regulating corporate defences? The bourse could just as easily say that any company not willing to accept the ruling of the take-over panel , doesn't belong on the Amsterdam Exchanges NV. No legislation would be necessary.
I'm not na‹ve, says Van Ittersum; there are certain limits to self-regulation.' He sites the case of CSM, a bourse-listed company that took the ASE to court for having suspended its listing when CSM refused to withdraw its non-convertible depository receipts from the market. The last agreement between the bourse and companies, dating from 1991, prohibited the use of such receipts as an anti-take-over defence. 'The market must have an unambiguous ruling from the take-over panel, with no possibility for -' he says. 'That's impossible under self-regulation because one could always appeal under private law.'
From The Netherlander June 10-16 1995
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ASE Chief Defends Bourse's Claim To Self-Regulation
