SAN SEBASTIAN, Spain, April 2 (UPI) -- With the echoes of several financial scandals still fresh -- including Gescartera and Enron -- a new financial law is up for discussion in Spain, and the country would join Europe in fighting transgressions such as misuse of privileged financial information, a thorny issue due to the difficulty of getting evidence of whether an investor acted knowing more than his or her pals.
The proposed law includes three major points:
- It intends to safeguard information by setting up a system of "Chinese walls" that prevents confidential data from jumping from one department to another within the same company or group.
- It amends and expands the concept of "privileged information."
- It adds to existing rules details about those relevant issues that can have an effect over share prices.
Abuse of privileged knowledge is hard to prove beyond any doubt, so the law allows the connection between having access to privileged information and an irregular operation related to that information as basis for prosecution. It also clarifies what "privileged information" is. According to the new law, a piece of information related to shares, bonds or financial instruments is considered privileged when "it has not been made public," and once in the street, "would influence their [shares, bonds or financial instruments'] value significantly."
With the "democratization" of the markets, it has become crucial for every investor to play the game with the same information at hand. In 1934, the United States enacted the Securities Exchange Act. But Spain was sluggish. The Ley de Mercado de Valores dates from 1988. With regard to privileged information, in Europe there are different attitudes: In Germany, for instance, using privileged information is optional, but following an ethics code means a good reputation in the market.
With regard to the use of privileged information in Spain, the National Stock Market Commission -- known by the local acronym CNMV -- has intervened on rare and unambiguous occasions. In 1992, it sanctioned a Dragados executive when he bought a package of CAE's shares just before Dragados was preparing a takeover bid. Tomas Fernandez Rodriguez, member of the board of Banco de Espana, was fined in 1994 after he sold his Banesto shares as the central bank was preparing to audit Banesto.
The last time the CNMV has investigated a case of misuse of privileged information has been generated by an Xtrata take over bid this year.
The CNMV just emerged from a deep crisis after the Gescartera scandal. Gescartera was supposed to be a successful stock-brokering operation until the commission found during a routine inspection that bogus certificates purporting to show that some $95 million were at Banco Santander Central Hispano and La Caixa, Spain's largest savings bank. The then CNMV President, Pilar Valiente, resigned, and a full-blown investigation by a special parliamentary commission followed.
Gescartera, founded in 1992, lured 2,000 investors with promises of returns as high as 10 percent per month in what has been described by some as a classic pyramid scheme. It first functioned as a portfolio management company, but in July 2000 the CNMV extended a license to Gescartera, which then became a stock-brokering firm. The license was granted to Gescartera in spite of its having being ordered by the CNMV to pay a fine of $38,000 for accounting irregularities in 1999 and other wrongdoings -- something not advertised because the law then did not require it.
The CNMV has a new president, Blas Calzada, whose first responsibility is rebuilding credibility. In his first six months, Calzada has made some changes, but critics say he has not improved the mechanisms of supervision. While Calzada is a respected figure, the government has done nothing to change the way the commission's president is elected, which is a political decision.
While he waits for supervisory reforms the new law will bring, Calzada has trimmed down the commission's executive offices from 13 to three, in charge of issuing companies, investors and trading middlemen, taking other international financial supervisory institutions as models.
Up to now, the CNMV has been accused of neglecting investors in favor of companies and trading firms. Gescartera experience has served to initiate a project to create a guarantee fund for investors. But according to Expansion, an economic magazine, regulating issuers will be one of his toughest challenges -- especially in connection with the use of privileged information.
There have been some improvements in supervision, but the resources of the commission are regarded as inadequate. The commission supervises a market of around $440 billion, but counts on only 15 supervisors. It recently opened five positions more in this area, and requested eight trainees.
Copyright 2002 by United Press International. All rights reserved.
