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(photo credit: Bloomberg)
The Israel Securities Authority on Wednesday published draft recommendations it hopes will make it easier for the public to understand the increasingly complex types of securities being offered in the capital markets.
"We expect that the recommendations will lead to the regulation of various investment companies and prevent public offerings of complex financial instruments that carry high risk and lack transparency, while allowing institutional and qualified investors to benefit from commercial freedom and the ability to purchase complex, high-risk financial instruments without limitations," the report said.
The recommendations were compiled by the ISA's financial instruments working group, a team that was appointed by ISA director Moshe Tery in mid-2006 and charged with examining the reorganization of the country's capital markets. Tery deemed this essential for managing the substantial growth of various financial products offered to the public and also for handling the increased influence of investment companies on the Israeli capital market.
"The goal of the working group is a two-part strategy that is aimed at the protection of the investing public," said the report. "We aim to strengthen public confidence in the capital market and to develop the capital market's competitiveness by encouraging the entry of new participants, diversifying financial instruments and improving the market's infrastructure."
In compiling its draft, the working group examined the regulation of investment companies in the US and Europe, concluding that the regulations "aim at creating complex and regulated markets that enable rapid and flexible development of capital markets while supervision makes them more accessible to the general public," the report said. "We have concluded that those same principles have to be adopted and implemented on the Israeli capital market."
According to Yoram Naveh, deputy director of the Department of Corporate Finance in the ISA and chairman of the working group, the group hopes to bring about the introduction of principle-based regulations that examine the business of companies in order to determine if that business must issue certain financial services.
"The issue at hand is the structure of the reforms that the group suggests and what we intend to do is move away from a formal, technical rule of decision to a relationship that is based on substance and the essence of the company," he told The Jerusalem Post. "In the US, this is the case - it matters what kind of business you have and the regulatory bodies separate between the sophisticated institutional market and the retail market, something which does not yet exist here, but what we want to institute."
In order to separate the markets, the report said, the ISA has chosen a double-layered model, the first part of which is the implementation of a comprehensive regulation pertaining to various managerial bodies that invest for the public, along with an examination of the bodies' activities. The second part of the intended capital market reorganization, the ISA said, will be the tightening of regulation pertaining to financial brokers, including the classification of complex financial instruments, such as structured products, exchange-traded funds and sophisticated derivatives, and the requirement for brokers to give compulsory advice regarding complex financial instruments.
The working group included representatives from the ISA, the Finance and Justice Ministries and the Tel Aviv Stock Exchange.
Naveh could not provide an exact timetable for the completion of the recommendations, although he was hopeful a final draft would be ready by year-end.