Estonia: Second Tier Of Reforms: Bringing Securities Regulation Up To European Standards

The securities law reform is designed to incorporate the respective European principles into Estonian law. The reform in the field of financial supervision is expected to improve the efficiency of supervision in the Estonian securities market, as the respective agencies will be united and the political influence on supervision will be minimized.

In 1993, the first Securities Market Act (the "Act of 1993") was introduced. This regulation was based on the respective U.S. basic statutes. The Act of 1993 discussed mainly the mechanics of public offers and briefly touched insider dealing. Unfortunately it did not reflect a number of important areas, such as takeover bids and requirements for stock exchanges and investment companies.

In 1996, Tallinn Stock Exchange ("TSE") opened its doors with 11 securities listed. TSE adopted its rules and regulations, which were largely based on the rules and regulations of London Stock Exchange and, to a certain extent, on the respective EU Directives.

TSE used (and still uses) an electronic online interactive trading system enabling remote access by way of linking the database server of TSE with the terminals of TSE's members. The settlement period in TSE was T+3. At the beginning of 2001, TSE was acquired by the Finnish stock exchange HEX (Helsinki Stock Exchange).

Due to an extensive increase in trading in securities, the Act of 1993 created a number of questions arising from its vague wording. Furthermore, due to lack of takeover rules the first takeovers of listed companies by multinationals created confusion among public at large.

In 1999, TSE initiated a procedure to extensively amend the Act of 1993. As a result of this initiative, the Act of 1993 was amended in respect of the part that provided for the regulation of takeover bids. Also certain other issues, such as the definition of private placement, were fine-tuned on the basis of the respective EU directives. A new regulation of details of prospectuses was adopted on the basis of the modified Act of 1993.

At the same time, the Estonian Central Registry for Securities Act of 2000 ("the ECRA") was drafted and adopted. Until then, the activities of the Estonian Central Depository for Securities, a stock corporation functioning as the central depository and running the central register for securities, were based on good practice rather than on firm legal grounds.

Among other things, the ECRA settled ownership issues relating to dematerialized securities. The Estonian securities market is largely dematerialized, only a part of securities being in paper form. The ECRA required that all equity securities and certain types of debt securities be dematerialized and registered with the central register.

Notwithstanding the modification of the Act of 1993, a totally new draft Securities Market Act (the "New Act") has been prepared and introduced to the Parliament. The New Act regulates in detail public offers, activities of investment companies including cross-border services, activities of regulated markets, as well as clearing and settlement. A more extensive regulation of insider dealing and takeovers has also been introduced in the New Act. It is presumed that the Parliament will adopt the New Act during this year and the New Act will start to operate as from the beginning of 2002.

While the New Act was being drafted, it was also decided to merge several government agencies and the Central Bank of Estonia agencies exercising supervision over banking, insurance, and securities market. The new agency named Financial Supervisory Authority has been envisaged to be independent from political influences, having a rather wide authority to exercise supervision, based on good enforcement practices of the Banking Supervision. The latter was/is an agency of the Central Bank of Estonia. The Parliament has approved the establishment of the Financial Supervisory Authority and the unification of financial supervision agencies is expected to be finalized at the beginning of 2002.