Control of Auditors
Control of the Stock Market
On April 25 2002 the Swiss Banking Federal Commission (FBC) held its annual press conference to present its annual management report.
Representatives of the FBC presented three topics at the press conference:
- international assistance in administrative matters;
- control of auditors; and
- monitoring of the exchange market.
It remains to be seen whether the Swiss Federal Counsel and the Parliament will act on the FBC's recommendations and suggestions.
International Assistance in Administrative Matters
The FBC reported that the existing legislation hinders the assistance of foreign regulatory bodies as far as the financial markets are concerned. The Stock Exchange Statute authorizes the FBC to grant assistance provided that the following conditions are met:
- The foreign authority must be bound by official or professional secrecy;
- The foreign authority must use the information supplied exclusively for the purpose of regulating the stock markets and security trading (speciality principle);
- The foreign authority cannot forward the information received to other bodies, especially criminal bodies, except with the FBC's consent (arm's length principle); and
- If the requested information concerns the client of a security trader, the FBC must render a decision on whether to provide, which can be challenged before the Federal Supreme Court.
In the last five years 228 requests have been submitted to the FCB in relation to approximately 700 clients. One hundred and eighteen decisions have been rendered, and 73 were appealed against and brought before the Federal Supreme Court. Of 61 decisions issued by the Federal Supreme Court, 34 have partially or fully rejected the request for assistance.
As a result, the FBC will soon suggest to the Swiss Federal Counsel and Parliament a proposal to modify the Stock Exchange Statute in order to facilitate the provision of administrative assistance, and thus protect the Swiss financial market and assist in the global efforts to strengthen market supervision. The proposal will aim to relax the speciality principle and the arm's length principle, so that assistance can be more easily granted not only for the supervision of the financial market in the strictest sense, but also for the correct application of foreign securities legislation - that is, in criminal and civil proceedings. The FBC will also suggest that it should no longer be possible to challenge an FBC decision to provide international assistance, although the client would still be entitled to challenge any request abroad.
Due to several problems encountered with auditors both in Switzerland and abroad, the FBC has proposed that a new body be established within its organization in order to monitor the quality of banking auditors. The idea is not to introduce direct supervision in opposition to the indirect supervision conducted by private audit companies, but rather to test regularly the quality of these private audit companies. In particular, the scope of the controls will cover:
- internal organization;
- professional qualifications;
- risk management; and
- application of professional rules and international regulations.
In addition, the FBC proposes that all financial institution must be audited every five years by a different audit company to that which conducts the annual audit.
Finally, the FBC confirmed that it will continue to support the practice whereby the organization and internal regulations of branches and subsidiaries of Swiss banks located abroad are controlled by their Swiss auditors. This practice assists the FBC in fulfilling its obligation to ensure that the Swiss standards are fully applied abroad for the purpose of consolidated supervision.
In relation to control of the stock market, the FBC suggests that the practice of selling off large numbers of a security before a profits warning should be considered as insider trading and should be prosecuted as such. This is not possible under existing legislation.
Further, the FBC intends to issue a new code of conduct describing those situations which can be qualified as abusive, in order to inform the financial markets of practices which cannot be tolerated. The FBC considers that some practices, which cannot be considered as criminal offences, may nonetheless be harmful to the financial market (eg, abuse of information, or spreading wrong or incomplete information).
To achieve these goals, the FBC suggests that the scope of its control be extended to all parties active on the market. Eventually, it will also propose that its arsenal of available sanctions be strengthened by the power to publish the results of its investigations (ie, names of the parties involved, confiscation of unlawful profits and penalties).
For further information on this topic please contact Guy-Philippe Rubeli at Pestalozzi Lachenal Patry by telephone (+41 22 80 94 500) or by fax (+41 22 80 94 501) or by email ([email protected]).