Report and Accounts

DIRECTIVES, ETC.

Status concerning the Financial Services Action Plan
In 1999 the European Commission launched a Financial Services Ac-tion Plan (FSAP) that set priorities for the work of implementing the single financial market and included 47 proposals for directives. The majority of these directives have now been adopted, and focus has turned to preparing the detailed rules, as well as national implementation.

In the spring of 2004 the European Commission launched a follow-up project to evaluate FSAP, popularly known as "Post FSAP". A number of expert groups on e.g. banking, insurance and securities were set up. The task of these groups was to assess the extent to which FSAP had contributed to financial integration, as well as any further measures required. The expert groups reported in June 2004, and the general conclusion was that it is difficult to say at present whether FSAP has had the desired effect. The directives that are part of FSAP must have time to affect the financial markets. The expert groups found it important to introduce a pause in legislation in order to focus on uniform implementation and enforcement of the directives, rather than preparation of legislation. In the opinion of the expert groups, future legislative measures in the financial sector should be targeted at specific areas with a clearly documented need for regulation.

Directive on the harmonisation of transparency requirements (the Transparency Directive)
One of the last directives under the Financial Services Action Plan is the Transparency Directive (Directive 2004/109/EU) of 15 December 2004. The Directive stipulates minimum requirements for the information submitted by listed companies. The directive must be transposed into national legislation in the EU member states by 20 January 2007.

In relation to the existing Danish rules, the directive implies that companies must submit annual and interim reports prepared in accordance with international accounting standards. In addition, management statements must be published after the 1st and 3rd quarters. This does not apply to companies that already prepare quarterly re-ports.

Proposal for a directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing (the Third Money Laundering Directive)
On 30 June 2004 the European Commission submitted a proposal for a third money laundering directive. Under the proposed directive, financial enterprises are required to report suspicion of money laundering to the financial intelligence unit. Such reporting shall take place if there are reasonable grounds to suspect that the money originates from serious crime. In addition, the proposal includes special requirements for financial enterprises' monitoring of relations with Politically Exposed Persons, new requirements for the identification of the beneficial owners of companies, and mutual recognition of the customer identification principle.

Proposed directive on new capital-adequacy rules (Basel II)
On 26 June 2004 the Basel Committee adopted its new recommendations for capital-adequacy rules, the Basel II Accord. Against this background the European Commission on 14 July 2004 proposed a new directive on capital requirements for banks and investment firms.

On 7 December 2004 the Ecofin Council reached political agree-ment on the proposal, which is awaiting approval by the European Parliament before it can be finally adopted. The directive will take effect from 2007-08.

With the new capital-adequacy rules, the existing uniform set of rules is replaced by more institution-specific rules where the capital requirement better reflects the risks incurred by each individual institution. Pillar 1 is the minimum capital requirement to cover credit and market risk and, as a new element, operational risk. An individual institution can choose between several calculation methods, subject to approval by the supervisory authorities. Under Pillar 2 the supervisory authorities must supervise that the credit institutions' capital base is sufficient to cover their risks and encourage the credit institutions to optimise internal risk management and control. Pillar 3 lays down requirements for credit institutions concerning disclosure of more detailed information on e.g. risks and capital adequacy in order to support increased market discipline.

Since its Third Consultative Paper, which was published in April 2003, the Basel Committee has postponed the commencement of the rules from 2007 to 2008 for the institutions that wish to use the advanced methods for calculation of the minimum capital requirement.

ACTS, ETC.

Act on Financial Business, etc.
On 6 May 2004 the Folketing (Parliament) passed the Act on Financial Business, etc. With a few exceptions, the Act entered into force on 1 July 2004.

Among other things, the Act amends the rules concerning financial conglomerates under the Financial Business Act with a view to implementing the Conglomerates Directive (2002/87/EC). The objective is to ensure supplementary supervision of conglomerates. In addition the Act amends the rules on transfer of information within a group for risk management purposes. At the same time, the Acts on ATP (the Labour Market Supplementary Pension Fund) and LD (the Employees' Capital Pension Fund) are amended to bring parts of these Acts in line with the Financial Business Act. The amendments are part of the ongoing legal reform in the financial area.

Financial conglomerates are groups comprising both credit institutions and insurance companies. Conglomerates have not previously been supervised at pan-European group level. Under the Conglomerates Directive, rules concerning supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate were to be introduced by 11 August 2004.

Among other things, the Conglomerates Directive requires that financial conglomerates always have a certain capital base. In addition, the competent supervisory authority must monitor risk concentrations and intra-group transactions. Finally, a financial conglomerate must have adequate risk-management processes and internal control mechanisms. The requirements under the directive correspond to a large extent to the current treatment of financial groups under the Financial Business Act. To promote uniform rules for financial groups, irrespective of organisational structure, the necessary amendments to the Financial Business Act as a result of the Conglomerates Directive will also be introduced for financial groups that are not conglomerates.

The rules apply to groups supervised by the Danish Financial Supervisory Authority, as well as groups comprising Danish financial enterprises where the parent company is a financial enterprise or a holding company domiciled outside the EU.

Act to amend the Securities Trading Act, etc.
On 4 June 2004 the Folketing (Parliament) passed the Act to amend the Securities Trading Act, etc. The Act entered into force on 1 July 2004 and 1 January 2005.

Among other things, the Act changes the tasks and composition of the Danish Securities Council.

Under the Act, the Securities Council has powers in two areas. In the first area, the Securities Council will have powers equivalent to those of the Financial Business Council, i.e. in future the Securities Council will be part of the Danish Financial Supervisory Authority and will make decisions on issues of a fundamental nature or of major importance to players in the securities market. In addition, the Securities Council will advise the Financial Supervisory Authority on regulatory issues. The powers of the Securities Council to issue rules will lapse and its general decision-making powers will no longer comprise routine cases concerning good practice, but solely fundamental issues where the Consumer Ombudsman will also participate in the consideration of the case. In cases concerning good practice the confidentiality obligations of the members will be eased so that the public can subsequently gain insight into the various views leading to a decision. This is also in step with the Financial Business Council.

In the second area, the Securities Council will be an overall, independent authority. The Securities Council will be responsible for controlling financial information in annual and interim accounts, while financial information in other documents, e.g. prospectuses, will be subject to the control of the Financial Supervisory Authority. In connection with the Securities Council's control of financial information in annual and interim reports, the secretariat will be split between Financial Supervisory Authority and the Danish Commerce and Companies Agency.

To ensure that the Securities Council can react to enforce its control of financial information in annual and interim reports, it will be empowered to impose orders on the enterprises. The Securities Council will be empowered to suspend or delete the securities concerned. This increases the response and sanction options of the Securities Council.

The composition of the Securities Council will be changed from the current 12 to 14 members. The previous composition of the Securities Council reflected the conditions in the securities market at the time of the Council's establishment in 1995. Until 1 January 2005 eight of the 12 members of the Securities Council represented institutional investors and securities dealers and issuers. In future, seven members will be independent of the financial sector, while the remaining seven members will have a professional interest in the securities market. This new balance will make the Securities Council independent of professional interests, which is a requirement under several financial directives applying to the securities market, e.g. the Market Manipulation Directive. Of the 14 Securities Council members, four will be appointed directly by the Minister of Economic and Business Affairs. These will be the Chairman and Vice Chairman, as previously, as well as a member with theoretical accounting expertise and a member with capital markets expertise. Danmarks Nationalbank will still appoint one member.

The decisions of the Securities Council in relation to legislative matters as well as supervision of financial information may be appealed to the Danish Company Appeals Board. In future it will be possible to appeal decisions made by stock exchanges, authorised marketplaces, etc. under the Securities Trading Act to the Danish Financial Supervisory Authority.

Financial Business Act
On 10 December 2004 the Folketing (Parliament) passed amendments to the Financial Business Act with effect from 1 January 2005.

This implements the IAS regulation, which applies to the consolidated financial accounts of listed enterprises as from 1 January 2005. At the same time, new accounting rules (the Executive Order on Accounts), which are compatible with the IAS principles, entered into force for financial enterprises. Financial enterprises and financial holding companies may apply IAS, even though they are not obliged to do so under the IAS regulation. Financial enterprises that are not obliged to or choose not to present accounts in accordance with IAS must instead comply with the Executive Order on Accounts.

The Danish Financial Supervisory Authority will be empowered to lay down disclosure requirements, e.g. to ensure that readers are able to compare annual reports presented according to the two methods, and to compare them with statistics and key ratios on the Danish financial sector based on the Executive Order on Accounts.

To facilitate a smooth transition to the new accounting rules, a supplement to the existing solvency rules has been introduced so that the boards and managements of the individual credit institutions, etc. must now determine individual solvency requirements. If the Danish Financial Supervisory Authority finds the solvency requirement insufficient, it may determine an individual solvency requirement for the enterprise that exceeds the previous 8-per-cent requirement. The new solvency rules are inspired by Pillar 2 of the new solvency recommendations from the Basel Committee.

For credit institutions the solvency requirement must, as a minimum, take into account the institution's business profile, risk concentration, large exposures, growth in lending, growth expectations, opportunities to procure capital, dividend policy, control environment and sensitivity to cyclical fluctuations. In addition, the impact of the transition to new accounting rules must be considered.

As part of the ongoing efforts to harmonise and simplify legislation in the financial area, the provisions relating to the winding up of different types of financial enterprise have been combined and harmonised so that the provisions apply to all types of financial enterprise. Previously e.g. mergers and takeovers of insurance portfolios were regulated separately. Certain special provisions have been maintained where the nature of the individual type of financial enterprise so warrants.

Finally, the provisions concerning the confidentiality obligations of the Danish Financial Supervisory Authority have been amended in connection with the transfer of the supervision of financial enterprises' compliance with good practice from the Consumer Ombudsman to the Financial Supervisory Authority. The Financial Supervisory Authority may now publish the names of enterprises not complying with rules and orders concerning good practice, or with orders concerning required measures. Such openness must, however, still take into account the legal rights of the financial enterprises and the considerations underlying the confidentiality obligation.

Securities Trading Act, implementation of the Market Manipulation and Prospectus Directives
On 16 December 2004 the Folketing (Parliament) passed amendments to the Securities Trading Act. The purpose of the amendment act is to implement the Market Manipulation and Prospectus Directives and the associated implementation measures. The amendments are by and large direct consequences of EU legislation.

The objective of the Market Manipulation Directive is to ensure confidence in the European markets for securities trading and to facilitate cross-border securities trading. The directive contains rules to prevent market abuse, i.e. insider trading and market manipulation, when trading in securities admitted for listing or trading on regulated markets within the EU.

The major areas in which it has been necessary to adjust Danish legislation to bring it in line with the Market Manipulation Directive are:

Extension of the scope of the Act
Definition of inside information
Definition of market manipulation
More detailed regulation of the disclosure obligations of issuers of financial instruments
Reporting of the individual transactions of executive employees, and discontinuation of the insider register
The obligation to report any suspicion of insider trading or market manipulation to the authorities
Publication of disciplinary actions and penalty payments

The Prospectus Directive serves a dual purpose: to create a more effective European passport for prospectuses and to ensure a high level of information in order to protect investors. The European passport enables issue of financial instruments in all EU member states on the basis of a prospectus approved in one member state. The Danish provisions implementing the new EU regulation on prospectuses enter into force on 1 July 2005. As previously, government-debt issues are not subject to the Act.

The key areas in which it has been necessary to adjust Danish legislation to bring it in line with the Prospectus Directive are:

Threshold values in the provisions on prospectuses
The competent authority
Definition of public offer of securities
Exemptions from the obligation to publish a prospectus
Eligible investors

As regards threshold values in the provisions on prospectuses, the new legislation – and the prospectus directive – states that there must be uniform rules for prospectuses for public offers of securities exceeding 2.5 million euro (market value) and for prospectuses for admitting securities for listing or trading on regulated markets. Where an offer of securities with a total consideration of less than 100,000 euro is made to the public, the directive stipulates that the obligation to publish a prospectus shall not apply. For public offers of securities in the range of 100,000 to 2.5 million euro, member states may lay down their own rules concerning the obligation to publish a prospectus. In Denmark the rules will be introduced via an executive order issued by the Danish Financial Supervisory Authority. The reason Denmark has opted for national provisions is that the limit of 2.5 million euro is high in a Danish perspective since the existing rules only exempt issues to the public below kr. 300,000 (approximately 40,000 euro) from the obligation to publish a prospectus.

As regards the competent authority, the Prospectus Directive stipulates that each member state must have one central, competent administrative authority responsible for obligations under the directive, including the power to approve prospectuses. In Denmark the Danish Financial Supervisory Authority is in charge of this control as from 1 January 2005.

Consequently the Financial Supervisory Authority will be responsible for approving prospectuses, whether they relate to issues to the public or admission for listing and/or trading on a regulated market. Approval of prospectuses for securities to be listed on the Copenhagen Stock Exchange is currently delegated to the Copenhagen Stock Exchange, while the Financial Supervisory Authority approves prospectuses for issues of securities to the public. Under to the Prospectus Directive, such delegation must cease by the end of 2011. Tasks relating to the publication of prospectuses may, however, still be delegated after the end of 2011.

Bill to amend the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act
On 19 October 2004 the Danish Financial Supervisory Authority published a bill on hedge associations for consultation. The bill primarily relates to amendments to the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act, but also to the Financial Business Act and various tax acts. The bill was introduced in the Folketing (Parliament) on 15 December 2004.

The purpose of the bill is to establish a supervisory and legal basis for creating hedge associations in Denmark. Hedge associations will be the Danish equivalent of hedge funds and will be set up as associations according to the Danish model.

There will be no legal restrictions to the investment strategy and risk profile of hedge associations. They will thus have unlimited investment opportunities. The public must be able to familiarise itself with the investment strategy and risk profile via the association's statutes and prospectus.

The bill does not include a definition of a hedge association. Hedge associations receiving funds from a broad group of investors or from the public must be approved by the Financial Supervisory Authority. Other hedge associations may seek approval by the Financial Supervisory Authority. Approved associations will have an exclusive right – and an obligation – to use the term "hedge association" in their names.

The Financial Supervisory Authority must supervise approved hedge associations on an ongoing basis. The funds of a hedge association must be managed and held by a custodian company approved by the Financial Supervisory Authority that must be a bank domiciled in Denmark or a Danish branch of a foreign credit institution domiciled in the EU. The custodian company will have an obligation to ensure that the association complies with its own risk limits. If they are exceeded, this must be reported immediately to the Financial Supervisory Authority.

CONSULTATION RESPONSES

Re the bill to amend the Financial Business Act
The bill is described on p. 159.

On 3 September 2004 Danmarks Nationalbank submitted the following consultation response:
The bill implements the IAS regulation, which will apply to the consolidated financial accounts of listed enterprises as from 1 January 2005. It is proposed that the IAS-compatible accounting rules come into force on the same date. In this connection it is noted that the committee work concerning valuation of lending and capital reserves, the purpose of which is to assess the implications of the provisions, etc. for credit institutions before the accounting chapter of the Financial Business Act enters into force, has not yet been concluded.

The bill gives financial enterprises a choice between presenting IAS accounts and presenting accounts in accordance with the IAS-compatible Danish accounting rules for companies and unlisted financial enterprises. At the same time the bill enables the Danish Financial Supervisory Authority to impose supplementary disclosure and reporting requirements on financial enterprises that present IAS accounts, which Danmarks Nationalbank supports. Danmarks Nationalbank is ready to participate in discussions of how to lay down disclosure requirements that make IAS accounts comparable with accounts presented under the Danish accounting rules. It is important to ensure that readers of the accounts are able to make a real comparison of IAS accounts with accounts presented under the Danish IAS-compatible accounting rules, and it should also be possible to prepare comparable key ratios, etc. for the entire sector.

As the explanatory notes state, it is expedient for supervisory purposes to operate with national rules on deviations from the accounting rules, i.e. prudential filters. The necessary adjustments should as far as possible be introduced before the new accounting rules enter into force on 1 January 2005.

The rules for write-down of lending under IAS will lead to a reduction of the banks' corrective accounts. Danmarks Nationalbank supports the proposal to give the Financial Supervisory Authority an extra supervisory instrument by introducing rules from Pillar 2 of Basel II so that risks that are not deemed to be hedged – not even with the introduction of the new accounting rules – are in fact hedged. Alternatively, transitional provisions may be introduced to ensure suitable buffers in the banks up to the introduction of the new capital-adequacy rules.

In previous consultation responses concerning the Financial Business Act, Danmarks Nationalbank has supported further steps towards a single act regulating the financial sector so that similar products are to a larger extent treated equally within the various financial areas. The preparation of and subsequent amendments to the Financial Business Act are part of an ongoing process, and in the further work on the legal reform it is also the intention to investigate the possibility of further harmonisation and simplification of the rules. A case in point is the combination of the winding-up rules for various types of financial enterprise. Danmarks Nationalbank looks forward to continuing this work.

Act to amend the Securities Trading Act, etc.
The bill is described on p. 157.

On 3 September 2004 Danmarks Nationalbank submitted the following consultation response:
In the areas where the bill aims to implement the new EU regulations on market abuse, the provisions of the bill closely resemble the EU provisions. This reflects that the directive aims at a high degree of harmonisation within the EU.

Under the Prospectus Directive, each member state must have one central, competent administrative authority responsible for obligations under the directive, including the power to approve prospectuses. Approval of prospectuses for securities to be listed on a stock exchange is currently delegated. Under the Prospectus Directive such delegation of authority must cease, but may, however, continue for a transitional period until the end of 2011. The current bill does not state any date by which delegation must cease. Danmarks Nationalbank finds that authority should only be given to public authorities.


		Publication overview - Contents - Top/Bottom - Previous/Next
The Statutory Basis for the Financial Sector
	DIRECTIVES, ETC. Status concerning the Financial Services Action Plan In 1999 the European Commission launched a Financial Services Ac-tion Plan (FSAP) that set priorities for the work of implementing the single financial market and included 47 proposals for directives. The majority of these directives have now been adopted, and focus has turned to preparing the detailed rules, as well as national implementation. In the spring of 2004 the European Commission launched a follow-up project to evaluate FSAP, popularly known as "Post FSAP". A number of expert groups on e.g. banking, insurance and securities were set up. The task of these groups was to assess the extent to which FSAP had contributed to financial integration, as well as any further measures required. The expert groups reported in June 2004, and the general conclusion was that it is difficult to say at present whether FSAP has had the desired effect. The directives that are part of FSAP must have time to affect the financial markets. The expert groups found it important to introduce a pause in legislation in order to focus on uniform implementation and enforcement of the directives, rather than preparation of legislation. In the opinion of the expert groups, future legislative measures in the financial sector should be targeted at specific areas with a clearly documented need for regulation. Directive on the harmonisation of transparency requirements (the Transparency Directive) One of the last directives under the Financial Services Action Plan is the Transparency Directive (Directive 2004/109/EU) of 15 December 2004. The Directive stipulates minimum requirements for the information submitted by listed companies. The directive must be transposed into national legislation in the EU member states by 20 January 2007. In relation to the existing Danish rules, the directive implies that companies must submit annual and interim reports prepared in accordance with international accounting standards. In addition, management statements must be published after the 1st and 3rd quarters. This does not apply to companies that already prepare quarterly re-ports. Proposal for a directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing (the Third Money Laundering Directive) On 30 June 2004 the European Commission submitted a proposal for a third money laundering directive. Under the proposed directive, financial enterprises are required to report suspicion of money laundering to the financial intelligence unit. Such reporting shall take place if there are reasonable grounds to suspect that the money originates from serious crime. In addition, the proposal includes special requirements for financial enterprises' monitoring of relations with Politically Exposed Persons, new requirements for the identification of the beneficial owners of companies, and mutual recognition of the customer identification principle. Proposed directive on new capital-adequacy rules (Basel II) On 26 June 2004 the Basel Committee adopted its new recommendations for capital-adequacy rules, the Basel II Accord. Against this background the European Commission on 14 July 2004 proposed a new directive on capital requirements for banks and investment firms. On 7 December 2004 the Ecofin Council reached political agree-ment on the proposal, which is awaiting approval by the European Parliament before it can be finally adopted. The directive will take effect from 2007-08. With the new capital-adequacy rules, the existing uniform set of rules is replaced by more institution-specific rules where the capital requirement better reflects the risks incurred by each individual institution. Pillar 1 is the minimum capital requirement to cover credit and market risk and, as a new element, operational risk. An individual institution can choose between several calculation methods, subject to approval by the supervisory authorities. Under Pillar 2 the supervisory authorities must supervise that the credit institutions' capital base is sufficient to cover their risks and encourage the credit institutions to optimise internal risk management and control. Pillar 3 lays down requirements for credit institutions concerning disclosure of more detailed information on e.g. risks and capital adequacy in order to support increased market discipline. Since its Third Consultative Paper, which was published in April 2003, the Basel Committee has postponed the commencement of the rules from 2007 to 2008 for the institutions that wish to use the advanced methods for calculation of the minimum capital requirement. ACTS, ETC. Act on Financial Business, etc. On 6 May 2004 the Folketing (Parliament) passed the Act on Financial Business, etc. With a few exceptions, the Act entered into force on 1 July 2004. Among other things, the Act amends the rules concerning financial conglomerates under the Financial Business Act with a view to implementing the Conglomerates Directive (2002/87/EC). The objective is to ensure supplementary supervision of conglomerates. In addition the Act amends the rules on transfer of information within a group for risk management purposes. At the same time, the Acts on ATP (the Labour Market Supplementary Pension Fund) and LD (the Employees' Capital Pension Fund) are amended to bring parts of these Acts in line with the Financial Business Act. The amendments are part of the ongoing legal reform in the financial area. Financial conglomerates are groups comprising both credit institutions and insurance companies. Conglomerates have not previously been supervised at pan-European group level. Under the Conglomerates Directive, rules concerning supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate were to be introduced by 11 August 2004. Among other things, the Conglomerates Directive requires that financial conglomerates always have a certain capital base. In addition, the competent supervisory authority must monitor risk concentrations and intra-group transactions. Finally, a financial conglomerate must have adequate risk-management processes and internal control mechanisms. The requirements under the directive correspond to a large extent to the current treatment of financial groups under the Financial Business Act. To promote uniform rules for financial groups, irrespective of organisational structure, the necessary amendments to the Financial Business Act as a result of the Conglomerates Directive will also be introduced for financial groups that are not conglomerates. The rules apply to groups supervised by the Danish Financial Supervisory Authority, as well as groups comprising Danish financial enterprises where the parent company is a financial enterprise or a holding company domiciled outside the EU. Act to amend the Securities Trading Act, etc. On 4 June 2004 the Folketing (Parliament) passed the Act to amend the Securities Trading Act, etc. The Act entered into force on 1 July 2004 and 1 January 2005. Among other things, the Act changes the tasks and composition of the Danish Securities Council. Under the Act, the Securities Council has powers in two areas. In the first area, the Securities Council will have powers equivalent to those of the Financial Business Council, i.e. in future the Securities Council will be part of the Danish Financial Supervisory Authority and will make decisions on issues of a fundamental nature or of major importance to players in the securities market. In addition, the Securities Council will advise the Financial Supervisory Authority on regulatory issues. The powers of the Securities Council to issue rules will lapse and its general decision-making powers will no longer comprise routine cases concerning good practice, but solely fundamental issues where the Consumer Ombudsman will also participate in the consideration of the case. In cases concerning good practice the confidentiality obligations of the members will be eased so that the public can subsequently gain insight into the various views leading to a decision. This is also in step with the Financial Business Council. In the second area, the Securities Council will be an overall, independent authority. The Securities Council will be responsible for controlling financial information in annual and interim accounts, while financial information in other documents, e.g. prospectuses, will be subject to the control of the Financial Supervisory Authority. In connection with the Securities Council's control of financial information in annual and interim reports, the secretariat will be split between Financial Supervisory Authority and the Danish Commerce and Companies Agency. To ensure that the Securities Council can react to enforce its control of financial information in annual and interim reports, it will be empowered to impose orders on the enterprises. The Securities Council will be empowered to suspend or delete the securities concerned. This increases the response and sanction options of the Securities Council. The composition of the Securities Council will be changed from the current 12 to 14 members. The previous composition of the Securities Council reflected the conditions in the securities market at the time of the Council's establishment in 1995. Until 1 January 2005 eight of the 12 members of the Securities Council represented institutional investors and securities dealers and issuers. In future, seven members will be independent of the financial sector, while the remaining seven members will have a professional interest in the securities market. This new balance will make the Securities Council independent of professional interests, which is a requirement under several financial directives applying to the securities market, e.g. the Market Manipulation Directive. Of the 14 Securities Council members, four will be appointed directly by the Minister of Economic and Business Affairs. These will be the Chairman and Vice Chairman, as previously, as well as a member with theoretical accounting expertise and a member with capital markets expertise. Danmarks Nationalbank will still appoint one member. The decisions of the Securities Council in relation to legislative matters as well as supervision of financial information may be appealed to the Danish Company Appeals Board. In future it will be possible to appeal decisions made by stock exchanges, authorised marketplaces, etc. under the Securities Trading Act to the Danish Financial Supervisory Authority. Financial Business Act On 10 December 2004 the Folketing (Parliament) passed amendments to the Financial Business Act with effect from 1 January 2005. This implements the IAS regulation, which applies to the consolidated financial accounts of listed enterprises as from 1 January 2005. At the same time, new accounting rules (the Executive Order on Accounts), which are compatible with the IAS principles, entered into force for financial enterprises. Financial enterprises and financial holding companies may apply IAS, even though they are not obliged to do so under the IAS regulation. Financial enterprises that are not obliged to or choose not to present accounts in accordance with IAS must instead comply with the Executive Order on Accounts. The Danish Financial Supervisory Authority will be empowered to lay down disclosure requirements, e.g. to ensure that readers are able to compare annual reports presented according to the two methods, and to compare them with statistics and key ratios on the Danish financial sector based on the Executive Order on Accounts. To facilitate a smooth transition to the new accounting rules, a supplement to the existing solvency rules has been introduced so that the boards and managements of the individual credit institutions, etc. must now determine individual solvency requirements. If the Danish Financial Supervisory Authority finds the solvency requirement insufficient, it may determine an individual solvency requirement for the enterprise that exceeds the previous 8-per-cent requirement. The new solvency rules are inspired by Pillar 2 of the new solvency recommendations from the Basel Committee. For credit institutions the solvency requirement must, as a minimum, take into account the institution's business profile, risk concentration, large exposures, growth in lending, growth expectations, opportunities to procure capital, dividend policy, control environment and sensitivity to cyclical fluctuations. In addition, the impact of the transition to new accounting rules must be considered. As part of the ongoing efforts to harmonise and simplify legislation in the financial area, the provisions relating to the winding up of different types of financial enterprise have been combined and harmonised so that the provisions apply to all types of financial enterprise. Previously e.g. mergers and takeovers of insurance portfolios were regulated separately. Certain special provisions have been maintained where the nature of the individual type of financial enterprise so warrants. Finally, the provisions concerning the confidentiality obligations of the Danish Financial Supervisory Authority have been amended in connection with the transfer of the supervision of financial enterprises' compliance with good practice from the Consumer Ombudsman to the Financial Supervisory Authority. The Financial Supervisory Authority may now publish the names of enterprises not complying with rules and orders concerning good practice, or with orders concerning required measures. Such openness must, however, still take into account the legal rights of the financial enterprises and the considerations underlying the confidentiality obligation. Securities Trading Act, implementation of the Market Manipulation and Prospectus Directives On 16 December 2004 the Folketing (Parliament) passed amendments to the Securities Trading Act. The purpose of the amendment act is to implement the Market Manipulation and Prospectus Directives and the associated implementation measures. The amendments are by and large direct consequences of EU legislation. The objective of the Market Manipulation Directive is to ensure confidence in the European markets for securities trading and to facilitate cross-border securities trading. The directive contains rules to prevent market abuse, i.e. insider trading and market manipulation, when trading in securities admitted for listing or trading on regulated markets within the EU. The major areas in which it has been necessary to adjust Danish legislation to bring it in line with the Market Manipulation Directive are: Extension of the scope of the Act Definition of inside information Definition of market manipulation More detailed regulation of the disclosure obligations of issuers of financial instruments Reporting of the individual transactions of executive employees, and discontinuation of the insider register The obligation to report any suspicion of insider trading or market manipulation to the authorities Publication of disciplinary actions and penalty payments The Prospectus Directive serves a dual purpose: to create a more effective European passport for prospectuses and to ensure a high level of information in order to protect investors. The European passport enables issue of financial instruments in all EU member states on the basis of a prospectus approved in one member state. The Danish provisions implementing the new EU regulation on prospectuses enter into force on 1 July 2005. As previously, government-debt issues are not subject to the Act. The key areas in which it has been necessary to adjust Danish legislation to bring it in line with the Prospectus Directive are: Threshold values in the provisions on prospectuses The competent authority Definition of public offer of securities Exemptions from the obligation to publish a prospectus Eligible investors As regards threshold values in the provisions on prospectuses, the new legislation – and the prospectus directive – states that there must be uniform rules for prospectuses for public offers of securities exceeding 2.5 million euro (market value) and for prospectuses for admitting securities for listing or trading on regulated markets. Where an offer of securities with a total consideration of less than 100,000 euro is made to the public, the directive stipulates that the obligation to publish a prospectus shall not apply. For public offers of securities in the range of 100,000 to 2.5 million euro, member states may lay down their own rules concerning the obligation to publish a prospectus. In Denmark the rules will be introduced via an executive order issued by the Danish Financial Supervisory Authority. The reason Denmark has opted for national provisions is that the limit of 2.5 million euro is high in a Danish perspective since the existing rules only exempt issues to the public below kr. 300,000 (approximately 40,000 euro) from the obligation to publish a prospectus. As regards the competent authority, the Prospectus Directive stipulates that each member state must have one central, competent administrative authority responsible for obligations under the directive, including the power to approve prospectuses. In Denmark the Danish Financial Supervisory Authority is in charge of this control as from 1 January 2005. Consequently the Financial Supervisory Authority will be responsible for approving prospectuses, whether they relate to issues to the public or admission for listing and/or trading on a regulated market. Approval of prospectuses for securities to be listed on the Copenhagen Stock Exchange is currently delegated to the Copenhagen Stock Exchange, while the Financial Supervisory Authority approves prospectuses for issues of securities to the public. Under to the Prospectus Directive, such delegation must cease by the end of 2011. Tasks relating to the publication of prospectuses may, however, still be delegated after the end of 2011. Bill to amend the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act On 19 October 2004 the Danish Financial Supervisory Authority published a bill on hedge associations for consultation. The bill primarily relates to amendments to the Investment Associations, Special-Purpose Associations and Other Collective Investment Schemes Act, but also to the Financial Business Act and various tax acts. The bill was introduced in the Folketing (Parliament) on 15 December 2004. The purpose of the bill is to establish a supervisory and legal basis for creating hedge associations in Denmark. Hedge associations will be the Danish equivalent of hedge funds and will be set up as associations according to the Danish model. There will be no legal restrictions to the investment strategy and risk profile of hedge associations. They will thus have unlimited investment opportunities. The public must be able to familiarise itself with the investment strategy and risk profile via the association's statutes and prospectus. The bill does not include a definition of a hedge association. Hedge associations receiving funds from a broad group of investors or from the public must be approved by the Financial Supervisory Authority. Other hedge associations may seek approval by the Financial Supervisory Authority. Approved associations will have an exclusive right – and an obligation – to use the term "hedge association" in their names. The Financial Supervisory Authority must supervise approved hedge associations on an ongoing basis. The funds of a hedge association must be managed and held by a custodian company approved by the Financial Supervisory Authority that must be a bank domiciled in Denmark or a Danish branch of a foreign credit institution domiciled in the EU. The custodian company will have an obligation to ensure that the association complies with its own risk limits. If they are exceeded, this must be reported immediately to the Financial Supervisory Authority. CONSULTATION RESPONSES Re the bill to amend the Financial Business Act The bill is described on p. 159. On 3 September 2004 Danmarks Nationalbank submitted the following consultation response: The bill implements the IAS regulation, which will apply to the consolidated financial accounts of listed enterprises as from 1 January 2005. It is proposed that the IAS-compatible accounting rules come into force on the same date. In this connection it is noted that the committee work concerning valuation of lending and capital reserves, the purpose of which is to assess the implications of the provisions, etc. for credit institutions before the accounting chapter of the Financial Business Act enters into force, has not yet been concluded. The bill gives financial enterprises a choice between presenting IAS accounts and presenting accounts in accordance with the IAS-compatible Danish accounting rules for companies and unlisted financial enterprises. At the same time the bill enables the Danish Financial Supervisory Authority to impose supplementary disclosure and reporting requirements on financial enterprises that present IAS accounts, which Danmarks Nationalbank supports. Danmarks Nationalbank is ready to participate in discussions of how to lay down disclosure requirements that make IAS accounts comparable with accounts presented under the Danish accounting rules. It is important to ensure that readers of the accounts are able to make a real comparison of IAS accounts with accounts presented under the Danish IAS-compatible accounting rules, and it should also be possible to prepare comparable key ratios, etc. for the entire sector. As the explanatory notes state, it is expedient for supervisory purposes to operate with national rules on deviations from the accounting rules, i.e. prudential filters. The necessary adjustments should as far as possible be introduced before the new accounting rules enter into force on 1 January 2005. The rules for write-down of lending under IAS will lead to a reduction of the banks' corrective accounts. Danmarks Nationalbank supports the proposal to give the Financial Supervisory Authority an extra supervisory instrument by introducing rules from Pillar 2 of Basel II so that risks that are not deemed to be hedged – not even with the introduction of the new accounting rules – are in fact hedged. Alternatively, transitional provisions may be introduced to ensure suitable buffers in the banks up to the introduction of the new capital-adequacy rules. In previous consultation responses concerning the Financial Business Act, Danmarks Nationalbank has supported further steps towards a single act regulating the financial sector so that similar products are to a larger extent treated equally within the various financial areas. The preparation of and subsequent amendments to the Financial Business Act are part of an ongoing process, and in the further work on the legal reform it is also the intention to investigate the possibility of further harmonisation and simplification of the rules. A case in point is the combination of the winding-up rules for various types of financial enterprise. Danmarks Nationalbank looks forward to continuing this work. Act to amend the Securities Trading Act, etc. The bill is described on p. 157. On 3 September 2004 Danmarks Nationalbank submitted the following consultation response: In the areas where the bill aims to implement the new EU regulations on market abuse, the provisions of the bill closely resemble the EU provisions. This reflects that the directive aims at a high degree of harmonisation within the EU. Under the Prospectus Directive, each member state must have one central, competent administrative authority responsible for obligations under the directive, including the power to approve prospectuses. Approval of prospectuses for securities to be listed on a stock exchange is currently delegated. Under the Prospectus Directive such delegation of authority must cease, but may, however, continue for a transitional period until the end of 2011. The current bill does not state any date by which delegation must cease. Danmarks Nationalbank finds that authority should only be given to public authorities.


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The Statutory Basis for the Financial Sector

DIRECTIVES, ETC.

ACTS, ETC.

CONSULTATION RESPONSES