2007 SML Latvia Final Revised by the Commission

SECURITIES MARKETS LEGISLATION ASSESSMENT PROJECT

2007 ASSESSMENT

based on legislation in force on 1 June 2007

LATVIA

LIEPA, SKOPINA/BORENIUS 20A Lacplesa, Riga,

Latvia http://www.borenius.lv

EBRD – Securities Market Legislation Assessment 2007

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TABLE OF CONTENTS General Information ______________________________________________________________________________________________________ iv

Section I – Basic Information about Securities Market Related Laws and Regulations __________________________________________________ v

Section II – Identity of the Relevant Market Regulatory Authorities (Statutory and Non-statutory) by Activities Regulated _____________________x

Section A – Regulator ______________________________________________________________________________________________________1 Responsibilities of the Regulator _________________________________________________________________________________________________________________ 1 Independence of the Regulator___________________________________________________________________________________________________________________ 1 Accountability of the Regulator __________________________________________________________________________________________________________________ 1 Regulator’s powers and resources ________________________________________________________________________________________________________________ 4 Clear and Equitable Procedures _________________________________________________________________________________________________________________ 6 Professional Standards ________________________________________________________________________________________________________________________ 6 Cooperation among Regulators __________________________________________________________________________________________________________________ 8

Section B – Self-regulation ("SROs") _________________________________________________________________________________________9 Performance and Functions of SROs ______________________________________________________________________________________________________________ 9 Authorisation or delegation subject to oversight ____________________________________________________________________________________________________ 11 Oversight __________________________________________________________________________________________________________________________________ 12 Misuse of Information and Conflict of Interests_____________________________________________________________________________________________________ 12

Section C – Issuers and their Information-Disclosure Obligation __________________________________________________________________13 Content of the Prospectus______________________________________________________________________________________________________________________ 13 Foreign Issuers______________________________________________________________________________________________________________________________ 14 Full Disclosure______________________________________________________________________________________________________________________________ 15 Liability ___________________________________________________________________________________________________________________________________ 16 Derogations ________________________________________________________________________________________________________________________________ 16 Regulator’s Powers __________________________________________________________________________________________________________________________ 16 Other Listing Documents ______________________________________________________________________________________________________________________ 17 Ongoing Disclosure Requirements_______________________________________________________________________________________________________________ 18 Fair and Equitable Treatment of Shareholders _____________________________________________________________________________________________________ 19 Change in Corporate Control __________________________________________________________________________________________________________________ 21

Section D – Collective Investment Schemes (CISs) ______________________________________________________________________________24 Entry and Eligibility Criteria ___________________________________________________________________________________________________________________ 24 Supervision and Ongoing Monitoring ____________________________________________________________________________________________________________ 25 Delegation of Functions _______________________________________________________________________________________________________________________ 28


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Legal Form/Investors Rights ___________________________________________________________________________________________________________________ 28 Separation of Assets __________________________________________________________________________________________________________________________ 29 Disclosure _________________________________________________________________________________________________________________________________ 30 Asset Valuation______________________________________________________________________________________________________________________________ 32 Pricing and Redemption of Interest ______________________________________________________________________________________________________________ 33

Section E – Market Intermediaries ___________________________________________________________________________________________34 Authorisation and Licensing ___________________________________________________________________________________________________________________ 34 Ongoing Requirements________________________________________________________________________________________________________________________ 36 Investment Advisers __________________________________________________________________________________________________________________________ 37 Custodians _________________________________________________________________________________________________________________________________ 38 Capital Adequacy Requirements ________________________________________________________________________________________________________________ 38 Management and Supervision __________________________________________________________________________________________________________________ 40 Customer Protection _________________________________________________________________________________________________________________________ 40 Procedures for Dealing with intermediary in Financial Difficulty ______________________________________________________________________________________ 41

Section F – Secondary Market ______________________________________________________________________________________________44 Licensing of Exchanges and Trading Systems ______________________________________________________________________________________________________ 44 Ongoing supervision _________________________________________________________________________________________________________________________ 46 Transparency of Trading ______________________________________________________________________________________________________________________ 47 Detection of Unfair Practices___________________________________________________________________________________________________________________ 48 Monitoring of Large Exposures _________________________________________________________________________________________________________________ 49 Default Procedures __________________________________________________________________________________________________________________________ 51

Section G – Clearing and Settlement _________________________________________________________________________________________53 Authorisation and Licensing of Securities Settlement Systems__________________________________________________________________________________________ 53 Trade Confirmation and Delivery Versus Payment __________________________________________________________________________________________________ 54 Transparency _______________________________________________________________________________________________________________________________ 55 Central Depository___________________________________________________________________________________________________________________________ 55 Oversight __________________________________________________________________________________________________________________________________ 56 Derivatives _________________________________________________________________________________________________________________________________ 56 Protection of customers’ securities ______________________________________________________________________________________________________________ 56

Section H – Accounting and Auditing of Financial Reports _______________________________________________________________________58 Disclosure of Financial Results _________________________________________________________________________________________________________________ 58 External Auditor_____________________________________________________________________________________________________________________________ 59 Accounting Standards ________________________________________________________________________________________________________________________ 61


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Auditing Standards___________________________________________________________________________________________________________________________ 64

Section I – Money Laundering ______________________________________________________________________________________________68 Scope of the criminal offence of money laundering __________________________________________________________________________________________________ 68 Customer due diligence and record-keeping _______________________________________________________________________________________________________ 68 Reporting of Suspicious Transactions and Compliance_______________________________________________________________________________________________ 69 International Cooperation _____________________________________________________________________________________________________________________ 70

Section J –Financial Instruments ____________________________________________________________________________________________71 Variety of financial instruments traded ___________________________________________________________________________________________________________ 71 Derivatives _________________________________________________________________________________________________________________________________ 72 Cross-Border Issuance________________________________________________________________________________________________________________________ 72 Sponsor/Underwriter _________________________________________________________________________________________________________________________ 72 Concentration Rule __________________________________________________________________________________________________________________________ 72 Private Placement ___________________________________________________________________________________________________________________________ 73


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2007 ASSESSMENT: GENERAL INFORMATION

In Latvia the basic legislation on the securities market is comprised by the Financial Instruments Market Law (FIML), which is in force since 01.01.2004. The FIML regulates the issuing of securities, takeovers of public companies, as well as the offering of investment services. There is separate legislation for pension funds and collective investment funds, which are subject to separate legislation. The FIML also regulates the stock exchange and the securities depositary. The securities market legal framework was most recently amended in 2007 when a number of provisions of FIML with respect to indirect holdings in listed companies, notification of significant shareholdings in listed companies, and reporting obligations of listed companies were amended. Further amendments to FIML are expected to be adopted during 2007. On 21.06.2007 amendments to FIML were adopted by the Parliament in their first reading (there are three reading altogether). The amendments aim at implementation of MiFid directive. The securities market regulator is the Finance and Capital Market Commission, which is competent in banking, insurance and pension fund regulation. There is one stock exchange, Riga Stock exchange, which is a part of OMX group and has established a joint trading system for Baltic countries. At the end of 2006 there were 35 companies listed on the Baltic main list, out of which 6 were Latvian. At the end of 2006, there were 65 companies listed on the Baltic Secondary list out of which 36 were Latvian. The large number of Latvian companies on the Secondary list of the exchange can be explained by the fact that a large number of state companies were listed on the so called “free list” of the Stock Exchange for the purposes of privatisation and have remained there since mid-nineties without having to fulfil the quantitative and qualitative requirements normally set for companies listed on the exchanges. In 2006, the capitalisation of the equity market was 1.2 billion LVL at the end of the second quarter of 2006, while the amount of corporate bonds emitted was 80.4 million LVL. Clearing and settlement of securities is performed by the Latvian Central Depositary. There are 18 CIS, with a market value in 2006 equal to 220 million EUR.


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2007 ASSESSMENT CHECKLIST FOR SECURITIES MARKET LEGISLATION Section I – Basic Information about Securities Market Related Laws and Regulations

# Official Title of Law/Regulation (in English) Promulgating Authority Date of Promulgation Dates of Past

Amendments

1. Law On the Financial and Capital Market Commission (LFCMC) Saeima (The

Parliament of the Republic of Latvia)

Adopted on June 1, 2000 08/11/2001

2. The Financial Instruments Market Law (FIML) Saeima Adopted on November 20, 2003

14/04/2005 09/06/2005 15/06/2006 29/03/2007

3. Investment Management Companies Law (LIC) Saeima Adopted on December 18, 1997

01/06/2000 24/10/2002 18/03/2004 08/03/2007

4. Law On Mortgage Bonds Saeima Adopted on September 10, 1998

01/06/2000 05/07/2001 24/10/2002

5. Investor Protection Law Saeima Adopted on November 8, 2001

20/11/2003 24/05/2007

6. Law On the Prevention of Laundering of Proceeds Derived from Criminal Activity (LPLPDCA) Saeima Adopted on December

18, 1997

08/06/2000 15/06/2000 20/06/2002 18/12/2003 26/05/2005 11/05/2006


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Amendments

7. Credit Institutions Law (CIL) Saeima Adopted on October 5, 1995

07/03/1996 09/04/1996 30/05/1996 17/10/1996 05/08/1997 30/10/1997 21/05/1998 01/06/2000 11/04/2002 24/10/2002 08/05/2003 20/11/2003 20/11/2003 11/12/2003 27/05/2004 28/10/2004 26/05/2005 09/06/2005 22/06/2006 22/02/2007 17/05/2007

8. Commercial Law (CL) Saeima Adopted on April 13, 2000

21/12/2000 29/03/2001 26/06/2001 20/12/2001 14/02/2002


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Amendments 31/03/2004 22/04/2004 04/11/2004 16/06/2005 22/06/2005 16/03/2006

9. Regulations on Mortgage Bond Coverage Register FCMC Adopted on November 23, 2001

10. Regulations on Completion and Storage of Financial Instrument Transaction Justification Documents FCMC Adopted on March 19,

2004

11. The FCMC Regulation for Calculation the Minimums Capital Requirements FCMC Adopted on May 2,

2007 (new regulation – implementing Basel II)

12. Regulations on Presentation of Financial Statements of Investment Funds FCMC Adopted on December

8, 2006 (NEW REDACTION)

13. Regulations on the Presentation of Monthly Financial Statements of Broker Companies FCMC Adopted on June 27,

2003

14. Regulations No. 1 on LCD Participants LCD Adopted on January 23, 2004

15. Regulations No. 2 on Accounting of the Issue of Financial Instruments LCD Adopted on January 23, 2004

16. Regulations No. 3 on Accounting of Financial Instruments and Effecting the Financial Instruments Events LCD Adopted on January

23, 2004

17. Regulations No. 4 on Transfers of Financial Instruments LCD Adopted on January 23, 2004 27/10/2006

18. Regulations No. 5 on DVP Settlements with Financial Instruments LCD Adopted on October 27, 2006

19. Regulations No. 6 on Settlement of Transactions Executed or Registered at the LCD Adopted on June 18, 27/03/2006


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Amendments Stock Exchange 2004 29.05.2007

20. Regulations No. 7 on Identification of Owners of Financial Instruments LCD Adopted on January 23, 2004 25/05/2005

21. Regulations No. 8 on the Payment of Dividends, Interest, Principal and Other Proceeds

Latvian Central Depository (LCD)

Adopted on January 23, 2004 09/11/2005

22. Regulations No. 9 on the Pledging of Financial Instruments LCD Adopted on January 23, 2004

23. Regulations No. 10 on De-registration of Financial Instruments LCD Adopted on January 23, 2004 02/06/2004

24. Regulations No. 11 on Data Exchange LCD Adopted on January 23, 2004

10/08/2004 25/05/2005 27/10/2006

25. Regulations No. 12 on Issuance of the LCD Professional Certificate LCD Adopted on January 23, 2004

26. Regulations No. 13 on the Financial Transactions with Latvian State Securities LCD Adopted on May 22, 2005

27. Regulations No. 14 on LCD Service Tariffs LCD Adopted on January 23, 2004

27/02/2004 10/08/2004 25/05/2005 15/02/2006 27/10/2006 29/05/2007

28. Regulations No. 15 on Delivery Versus Payment Settlement in Foreign Currency LCD Adopted on February

27, 2004 29/05/2007

29. Procedure of Payment and Enforcement of Regulations of Financial

Instruments for Financial Instruments Booked in Estonian Central Securities Depositary

LCD Adopted on September 27, 2004 12/04/2006

30. Rules on Money and Financial Instrument Payments Riga Stock Exchange (RSE)

Adopted on August 31, 2004 30/01/2007


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Amendments

31. Bylaws on Payments for the Stock Exchange Services RSE Adopted on April 18, 2007

32. Member and Trading Rules RSE Adopted on August 31, 2004 22/12/2006

33. Rules on Listing and Trading Financial Instruments on the Markets regulated by the Exchange RSE Adopted on May 18,

2007

34. Trading Regulations RSE Adopted on August 31, 2004

35. Regulations on the Requirements to be Complied with when Presenting Investment Recommendations FCMC Adopted on July 15,

2005

36. Instruction on inside information of RSE and LCD RSE & LCD Not publicly available


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Section II – Identity of the Relevant Market Regulatory Authorities (Statutory and Non-statutory) by Activities Regulated

# Activities Regulated Name of the Relevant Regulator

Date of Establishment Legal Basis

1. Securities issuance and offering1 Financial and Capital Market Commission (FCMC) July 1, 2001 LFCMC, FIML

1) Competition Council 1) January 1, 1998 1) Competition Law, adopted on

October 4, 2001, in force since January 1, 2002.

2. Change of control transactions2 2) FCMC– only takeovers and squeeze-outs in public listed companies. FCMC does not

have any responsibilities with regard to the Competition Law

2) July 1, 2001 2) LFCMC, FIML

3. Securities markets3 LFCMC, FIML

4. Brokerage or dealing related activities4 LFCMC, FIML

5. Fund (or portfolio) and asset management (including investment advisers, asset managers, etc.) LFCMC, FIML

6. Collective investment schemes

FCMC July 1, 2001

LFCMC, LIC

Board of Accountants, Ministry of Finance August 5, 2003 Law on Accounting, adopted on

October 14, 1992

FCMC – set accounting rules for investment firms5 July 1, 2001 LFCMC, FIML 7. Accounting and auditing standards/services

Latvian Sworn Auditors Association December 8, 1994 Law on Sworn Auditors, adopted on

May 3, 2001

1 Including prospectus and disclosure requirements, share registrations, tender offers, shareholder rights, beneficial ownership reporting, etc. 2 e.g., mergers, take-overs, monopoly positions, and other transactions affecting control in a company. 3 e.g., including establishment of exchanges and trading systems, admission to listing, trading, clearing and settlement, depository, etc. 4 e.g., including licensing, conduct of business requirements, prudential requirements, etc. 5 Procedures for preparation and submission of annual reports are prescribed. Layout – recommendable, valuation rules – according to IAS/IFRS


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# Activities Regulated Name of the Relevant Regulator

Date of Establishment Legal Basis

8. Investment services providers FCMC July 1, 2001 LFCMC

9. Money Laundering (i.e., FIU – Financial Intelligence Unit) 1) Control Service 1998 LPLPDCA


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Section A – Regulator6

# Issue Yes ( )

No ( )

Relevant provision number/citation of law/regulation;

Remarks/Other Comments

IOSCO Relevance

RESPONSIBILITIES OF THE REGULATOR

1. Whether the regulator responsibilities, powers and authority are clearly defined in the law? Articles 6-7, LFCMC 1

2. Whether the regulator has discretion to interpret its responsibilities based on clear and transparent criteria and process so to prevent abuse of discretion?

The answer is given without prejudice to CESR standards, where the regulators of the EU member states have agreed to voluntarily agree upon a common interpretation of the EU law, which is binding for the regulators themselves.

1

INDEPENDENCE OF THE REGULATOR

3. Whether the term of office, the procedures for appointment and removal and the criteria for removal of the head and members of the governing body of the regulator are specified under the relevant law?

Article 13, LFCMC 2

4. Whether the operational independence of the regulator is assured by the law from external political, commercial, or other interest interference when exercising its respective functions and powers?

Article 2, LFCMC 2

5. Whether the law provides legal protection (for bona fide actions only) to the regulator, the head and members of the governing body and its staff against lawsuits for actions taken in their functions?

Article 5, FIML 2-5

ACCOUNTABILITY OF THE REGULATOR

6. In the exercise of its regulatory powers, whether the regulator is required by the law to consult with or obtain an approval by the government, ministry or 2

6 Please answer the questions of this section considering the regulator (see Section II, above) in charge for: Securities issuance and offering; Securities markets; Brokerage or dealing related activities and Collective investment schemes


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# Issue Yes ( )

No ( )



IOSCO Relevance

other authorities? [Please specify the cases and the authority] If the answer to the above question is "yes" (if "no" in the above, please tick "no" in the following sub-questions): (1) whether the circumstances in which consultation or approval is required are clearly defined and the relevant process is sufficiently transparent? [If "yes", please briefly describe the process]

7.

(2) whether the circumstances where consultation or approval is required are limited to policy issues and not to day-to-day technical matters?

2

8. Is the regulator accountable to the Parliament or another government body on an ongoing basis? [Please explain]

The monitoring of the activities of the regulator is performed by the Parliament. Articles 13 and 14, LFCMC – the Saeima elects and dismisses the Chairperson and the Deputy Chairperson of the FCMC The president of the Bank of Latvia and the Minister of Finance have the right to attend board meetings of the FCMC. This, however, falls short of a strict definition of “oversight”, as this was the intent of the legislator to create an institution, which is insulated from political interference, while at the same time retaining maximum standards of transparency.

2

9. Are the regulator and the other parties to which the regulator is accountable required by the law to treat as confidential information received as part of the supervisory process and only to disclose information in certain defined circumstances?

Article 20, LFCMC prohibits FCMC Council members, directors and employees from divulging confidential information during the term of their employment and thereafter, Article 132, FIML, and Articles 329 - 330 of the Criminal Law provides for a criminal liability against disclosure of classified information

2


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# Issue Yes ( )

No ( )



IOSCO Relevance

10. Is the regulator’s receipt and use of funds subject to review or audit? Articles 27, LFCMC 2

11. Does the regulator have to provide written reasons for its material decisions?

In accordance with the definition of the administrative act contained in article 1 part 3 of the Law on Administrative Procedure, the decisions adopted by the FCMC are administrative acts, which have to comply with certain standards, including the requirement for being reasoned.

2

12. Are affected persons permitted to make representations prior to a regulator’s decision in appropriate cases?

The affected persons are entitled to express their views in writing and are also invited to participate in the meetings of the Council of the FCMC where their case is decided upon. That is because the process at the FCMC is administrative process in an institution defined in the Law on Administrative Procedure, specifically articles 55-88 of the Law on Administrative Procedure.

2

13. Are all decisions taken by the regulator subject to a sufficient, independent review process, ultimately including judicial review?

The administrative acts adopted by the FCMC are reviewed by the administrative court. That is because the process at the FCMC is administrative process in an institution and according to article 101 of the Law on Administrative Procedure, the control over the legality of administrative acts adopted by the institutions is exercised by the court.

2


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# Issue Yes ( )

No ( )



IOSCO Relevance

REGULATOR’S POWERS AND RESOURCES

14. Whether the regulator is empowered by the law to receive routine financial reports from regulated entities7? If "yes", please identify from whom the regulator receives such routine reports.

Article 133, FIML - from credit institutions (banks), and investment broker companies. Articles 72 - 752 , LIC - investment companies and funds

2, 10

15. Whether the regulator is empowered by the law to inspect a regulated entity business operation without giving prior notice? Article 7, LFCMC 8

16. Whether the regulator is empowered by the law to have access to books and records and request data or information from regulated entities without judicial actions, even in absence of suspected misconduct, in response to (i) a particular inquiry? (ii) on a routine basis? [please specify]

Article 7, LFCMC – the FCMC is entitled to review, request and receive information necessary for the execution of its functions from all and any capital market participants

8

Does the regulator have the investigative and enforcement power to require from any persons involved in relevant conduct of who may have information relevant to a regulatory or enforcement investigation:

(a) data? (b) information? (c) documents? (d) records?

17.

(e) statements or testimony?

According to Articles 90 and 138 of the FIML the FCMC is entitled to request that any person submit information on its activities in the financial and capital market and that such person arrive in person at the FCMC and provide information himself/herself

9

18. Whether, under the law or regulation, the regulator has the power to impose administrative sanctions? If "yes", please briefly describe the kinds of sanctions that can be imposed. If "no", please briefly describe what the regulator can do in case of non-compliance with laws.

FCMC can impose fines for the amount up to 10 thousand lats (approximately EUR 14000): FIML article 148. FCMC can also declare null and void the management institutions’ decisions or suspend the

9

7 “Regulated entity” includes authorised or licensed entities or persons


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# Issue Yes ( )

No ( )



IOSCO Relevance

members of management institutions in the case of a breach by stock exchanges or a depository: FIML article 40. FCMC can prohibit the use of voting rights by a shareholder with decisive interest in a public company: FIML 64.3 FCMC can restrict operation or revoke issued licences of an investment brokerage and investment companies: FIML 111. FCMC can suspend trade with financial instruments and issue orders to stop transactions in case of manipulations or insider dealing: FIML 90.

19. Whether, under the law or regulation, the regulator has the power to order suspension of trading in securities? Articles 90, 111, FIML 9

20. Whether, under the law or regulation, the regulator has the power to initiate or refer matters for criminal prosecution?

General rights to refer matters for criminal prosecution if criminal activities are suspected. Criminal prosecution is delegated to the Prosecution Office on the basis of articles 1 and 2 of the Law on Prosecution.

9

21. Whether the regulator is assured by the law and/or regulation to have sufficient financial and other resources to properly discharge its functions?8 If "no", please indicate the areas of insufficiency. [Please also specify if the regulator’s budget is taken from the state budget or from the market]

Articles 22 – 26, LFCMC. According to LFCMC the FCMC budget is taken from the market.

2

8 The points of consideration in financial aspect should include: competitive salary scales, ability to hire external experts if necessary, training budget and programme, information technology equipment, and travel budget, etc.


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# Issue Yes ( )

No ( )



IOSCO Relevance

CLEAR AND EQUITABLE PROCEDURES

22. Whether the regulator has the power to issue legally binding rules and regulations? If yes, is the regulator obliged to make all rules and regulations available to the public?

Articles 7 - 8, LFCMC. The rules and regulations must be published and enter into force on the next day after the publication in the official gazette “Latvijas Vestnesis”, unless the regulations specify a different date for their entry into force.

4

23. Whether the law or regulation sets forth the general criteria for granting, suspending or revoking licenses? FIML, CIL, LIC 4

24. Whether the regulator is required by the law or regulation to publicly disclose and explain its policies in important operational areas, such as through interpretations of regulatory actions, settings of standards, or issuance of opinions stating the reasons for regulatory actions?

The policies in important operational areas of the regulator are included in the Regulation Strategy of the Financial and Capital Market, which the FCMC is obliged to produce and keep up to date (Article 17, LFMC). The mentioned strategy is publicly disclosed on the official website of the FCMC. Where a regulatory action is taken, the FCMC is always required to provide the reasons for such action. (Article 67, Administrative Procedure Law).

4

PROFESSIONAL STANDARDS

25. Whether the staff of the regulator is required by law, regulation or other, [please explain] to observe a "Code of Conduct" or other written standards/guidance of the same nature in exercising their regulatory powers and discharging their functions?

There is a Code of Conduct established by the FCMC, however, it is an internal document and not public. In discharging their functions, the staff of the FCMC also has to follow the principles applicable to all public officials, as well as applicable in administrative procedures.

5


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# Issue Yes ( )

No ( )



IOSCO Relevance

If the answer to the above question is "yes", whether the relevant "Code of Conduct" addresses issues in the following areas:

(1) conflicts of interest? This is regulated by a specific law applicable to all public officials – the Law on Prevention of Conflicts of Interests,

(2) dealing with information obtained in the course of the exercise of powers and discharge of duties? Article 19-20, FCMCL

(3) observance of confidentiality and secrecy provisions and protection of personal data?

The observance of confidentiality and secrecy is secured by Article 20 FCMCL. Unauthorised disclosure of personal data is explicitly prohibited by the Personal Data Protection Law.

(4) ensuring procedural fairness?

Procedural fairness is ensured by the explicit provisions of the Administrative Procedures Law, which is applicable to the FCMC staff. The FCMC staff is required to disclose financial affairs or interest to the employer according to the internal rules in order to avoid the conflict of interest

26.

(5) restriction on the holding or trading of securities and requirement to disclose financial affairs or interest.

The Code of Conduct and employment contracts establish that holdings and transactions in publicly traded securities should be disclosed to the employer (the FCMC).

5

27. Whether there are legal or other sanctions against the staff of the regulator who fails to adhere to the above mentioned "Code of Conduct"?

Not specific provisions in this respect, although sanctions for the FCMC staff that fails to observe the requirements of an employment contract as well as requirements established by employer (i.e. Code of Conduct) could be imposed in accordance with the Labour Law.

5


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# Issue Yes ( )

No ( )



IOSCO Relevance

COOPERATION AMONG REGULATORS

28. If there is more than one regulator listed in Section II above, whether the division of the responsibility among regulators are clearly and objectively set out by law?

Notwithstanding the fact that Section II mentions also the Competition Council, Board Accountants and Latvian Sworn Auditors Association we consider that financial services market is supervised by a single regulator and there is no ambiguity as to the division of responsibilities

1

29. If there is more than one regulator listed in Section II, whether they are required by the law to co-operate and share information with each other?

There are no specific provisions in the law on sharing of information between the authorities.

1

30. Whether the regulator has the authority under the law to share information with regulators in foreign jurisdictions? [please specify with which countries]

Articles 143 – 147, FIML. Also the FCMC has concluded bilateral agreements on sharing of information with national banks or regulators in the following countries: the Netherlands, Switzerland, Ukraine, Cyprus, Finland, Lithuania, Estonia, Belarus, Germany, Sweden, Luxembourg, Denmark, Russia

11

31. Whether the regulator is permitted by the law to provide assistance to regulators in foreign jurisdictions? [please specify with which countries]

The FCMC has concluded bilateral agreements on sharing of information with national banks or regulators in the following countries: the Netherlands, Switzerland, Ukraine, Cyprus, Finland, Lithuania, Estonia, Belarus, Germany, Sweden, Luxembourg, Denmark, Russia. Those bilateral treaties provide also for cooperation in the field of supervision and provision of assistance.

13


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Section B – Self-regulation ("SROs")9

# Issue Yes ( )

No ( )



IOSCO Relevance

PERFORMANCE AND FUNCTIONS OF SROS

Are there any organisations in your country, that: 1.

a) establish rules of eligibility that must be satisfied in order for individuals or firms to participate in any significant securities activity?

In accordance with the definition of an “SRO” used by the EBRD and conclusions of the European Commission Peer Review, there are two self-regulatory organisations in Latvia – Riga Stock Exchange and Latvian Central Depositary. The organizer of the regulated market (RSE) following authorization by the FCMC is entitled to organize one or several regulated markets. It is open and accessible to all participants of the financial instruments market and ensures the transparency and operation corresponding to good management principles. The organizer of the regulated market is required to develop rules for its members, to enforce them and it is subject to the supervision of the FCMC.

6

9 A self-regulatory organisation (SRO) is any organisation that has been given the power or responsibility to regulate any part of the securities market of industry. The term

“self-regulatory organisation” means any national securities exchange , registered securities association, or registered clearing agency, which have been granted the right to regulate themselves and enforce such regulation. This section applies to all SROs in your country – i.e. stock exchange, central depository to the extent that they fit within the SRO definition]


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# Issue Yes ( )

No ( )



IOSCO Relevance

Similar regulation is provided for the Latvian Central Depositary, which is entitled to set rules for its members regarding securities custody, clearance and settlement and also has a certain competence of the enforcement of the rules and is under supervision of the FCMC. FIML article 94 delegates the Latvian Central Depositary with the responsibility to adopt rules. FIML article 28 delegates the organiser of the regulated market (Riga Stock Exchange) to adopt rules and regulations.

b) establish and enforce binding rules of trading or business conduct for individuals or firms engaging in securities activities?

Riga Stock Exchange and Latvian Central Depositary FIML article 94 delegates the Latvian Central Depositary with the responsibility to adopt rules. FIML article 28 delegates the organiser of the regulated market (Riga Stock Exchange) to adopt rules and regulations.

c) establish disciplinary rules and/or conduct disciplinary proceedings, which have the potential to impose enforceable fines, or other penalties, or to bar or suspend a legal or natural person from participating in securities activities or professional activities related to securities activities?

Riga Stock Exchange and Latvian Central Depositary FIML article 94 delegates the Latvian Central Depositary with the responsibility to adopt rules. FIML article 28 delegates the organiser of the regulated market (Riga Stock Exchange) to adopt rules and regulations.


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# Issue Yes ( )

No ( )



IOSCO Relevance

AUTHORISATION OR DELEGATION SUBJECT TO OVERSIGHT

Whether, as a condition of ongoing authorisation, the regulatory framework requires SROs to: (1) have the necessary capacity to enforce compliance by its members and associated persons with laws, regulations and rules? Article 27, 32, 39 FIML

(2) treat all members of the SRO and applicants for membership in a fair and consistent manner? Article 27, 32 FIML

(3) develop rules that (i) are designed to set standards for its members and (ii) to promote investor protection? Articles 27- 28, FIML

Article 94, FIML

(4) submit to the regulator its rules and any amendments thereto for review and/or approval? Article 28, FIML

Article 94 (3), FIML

(5) co-operate with the regulator and other SROs in your jurisdiction to investigate and enforce applicable laws, regulations and rules? Article 39, FIML

Article 100, FIML

(6) enforce its own rules and impose appropriate sanctions for non-compliance with its own rules? Article 39, FIML

Article 99(3), FIML (7) assure fair representation of members on its board of directors and administration of its affairs? Article 98, FIML

2.

(8) assure that its rules do not create anti-competitive situations?

Article 28, FIML A market organizer shall ensure that financial instruments are admitted to and traded on the regulated market in a fair and transparent manner, that all persons of the same status (e.g., issuers, participants) enjoy equal treatment;

7


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# Issue Yes ( )

No ( )



IOSCO Relevance

OVERSIGHT

3. Whether the regulator is required by the law or regulation to establish a programme/procedure/process to oversee the operations of SROs (including inspections, periodic reviews, reporting requirements, review/revocation of SRO rules, monitoring of continuing compliance with conditions of authorisation)?

Article 40, FIML Article 100, FIML

7

4. In matters related to SRO responsibility, whether the regulator retains authority to (i) inquire and (ii) intervene into matters affecting investors or the market? Article 40. FIML 7

MISUSE OF INFORMATION AND CONFLICT OF INTERESTS

Does the law or regulation requires SROs to:

(1) ensure that potential conflicts of interest at the SRO are avoided and resolved?

Instruction on inside information of RSE and LCD. (In order to avoid the conflicts of interest and insider trading, employee of market organizer is obliged to disclose the information on financial instruments admitted to trading on the OMX group markets that he/she possess, as well to disclosure the information on personal transactions carried out).

5.

(2) address prevention of misuse of information and observance of confidentiality of information?

Article 39, FIML, Employment contracts contain the terms on protecting commercial secrets.

7


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Section C – Issuers and their Information-Disclosure Obligation

# Issue Yes ( )

No ( )



IOSCO Relevance

CONTENT OF THE PROSPECTUS

In a public offering of securities10, whether issuers are required to:

(i) prepare a prospectus (or an information document of similar nature) Article 15, FIML

(ii) distribute it, and

Article 21, FIML - an issue prospectus shall be made available to the public as soon as practicable and in any case in a timely manner in advance of the public offer, but not later than at the beginning of the public offer

1.

(iii) file the prospectus with the regulator/stock exchange for review/approval [Please specify]

Articles14 and 15, FIML. Article 14, FIML - the FCMC shall scrutinize an application and the enclosed documents and take a decision on granting or refusing permission to make a public offer within 10 working days.

14

Whether the prospectus is required to include information on: (i) key financial information, including capitalisation and indebtedness of the issuer and reason for the offer and use of proceeds and risk factors [please specify if all or just some of these issues are included]

Article 17, FIML, – the prospectus should be drafted in accordance with the EC Regulation No 809/2004.

2.

(ii) the company, including history and development of the company, business overview, organisational structure, property, plants and equipment [please specify if all or just some of these issues are included]


IOSCO – International Disclosure

standards for cross-border offerings and Initial listings

by foreign issuers

10 The term Public Offering of Securities refers to the issuance and/or sale of the securities to the public.


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(iii) operating and financial review and prospects, including operating results, liquidity and capital resources, research and development, patents and licenses. [please specify if all or just some of these issues are included]


(iv) directors, senior management and employees, including compensation of directors, board practices, number of employees and share ownership [please specify if all or just some of these issues are included]


(v) major shareholders and related party transactions Article 17, FIML, – the prospectus should be drafted in accordance with the EC Regulation No 809/2004.

(vi) the identity and holdings of persons who hold a substantial beneficial ownership interest in the company

(to the extent

known to the

issuer)

Article 17, FIML, – the prospectus should be drafted in accordance with the EC Regulation No 809/2004 (to the extent known to the issuer)

FOREIGN ISSUERS

3. Whether a foreign issuer is required to disclose additional information in the prospectus? If "yes", please briefly describe

No additional information should be disclosed, and the same standards are applicable to domestic and foreign issuers. For EU issuers - an issue prospectus and all supplements thereof registered with the competent authority of the respective home member state is valid for making a public offer, provided that the competent authority of the respective home member state has notified the FCMC of the registration of that issue prospectus.(Article 49, FIML) For third country issuers – the FCMC recognizes and registers the prospectus if: - a prospectus has been drawn up in accordance with international standards

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established by international securities commission organizations; - the requirements for information, including financial information, are equivalent to the requirements set out in the FIML and EC Regulation 809/2004. (Article 23, FIML)

4. Whether a foreign issuer is allowed to use a prospectus which has been approved by a foreign regulator? If "yes", please briefly describe

Article 22, FIML prescribes that an EU issuer is allowed to use a prospectus that is approved by another EU regulator. Regarding third country issuer, please see information above (point 69).

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FULL DISCLOSURE

5. Whether there are different disclosure requirements for different types of securities or according to the different circumstances in which securities are offered? If "yes", please briefly describe

Disclosure requirements are set in accordance with the EU Directive 2003/71/EC and Regulation No 809/2004.

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6. In addition to public offering of equity, whether prospectus requirements also apply to other types of public offerings (e.g., debt securities, warrants, pre-emptive rights offering to existing shareholders, etc.)? Please specify.

Articles 3, 14, FIML – the disclosure requirements apply to all transferable securities

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7. Whether there are any restrictions on, or disclosure requirements with regard to, the content of information that an issuer discloses outside the prospectus during an offering (e.g., in advertisement, "road-show" materials or on the issuer's web-site)?

Articles 21 and 24, FIML 14

8. If the answer to the above question is "yes", whether any such restrictions or requirements extend to those acting on behalf of the issuer in connection with the offering (e.g., underwriters or advisors)?

Article 24, FIML provides that the issuer or the person authorised is entitled to disseminate only the information as it is in the prospectus.

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LIABILITY

9. Whether the issuer is liable for the content of the prospectus? If "yes", please describe if there are any exceptions provided for under the law.

Article 20, FIML – an issuer's managing body, a person making a public offer and a guarantor, if any, shall be responsible for the contents of prospectus.

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10. Other than the issuer, whether there are any other persons/entities that may be held liable for the content of the prospectus (e.g., underwriter, auditor)? If "yes", please describe.

Article 20, FIML – a person making a public offer and a guarantor 14

DEROGATIONS

11. Whether there are circumstances where an issuer is permitted to proceed with a public offering without full disclosure of relevant information? If "yes", please briefly describe.

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REGULATOR’S POWERS

12.

Whether the regulator has the power to enforce prospectus and/or other listing documents disclosure requirements by delaying or stopping the offering or through other regulatory actions? If "yes", please briefly describe the nature of these actions (e.g., civil, administrative or criminal) and indicate whether these actions if taken are with immediate effect (e.g., trading halt or injunction).

Article 55, FIML – the regulated market, or, if it fails to do so, the FCMC may suspend the financial instruments trading or exclude the financial instruments from the regulated market. There are no time limits set for the enforcement of such decision. Article 24.1, 55.1, FIML prescribes the rights of the FCMC. Article 148, FIML – the FCMC has rights to issue a warning or impose a fine of up to 10,000 lats (approximately EUR 14,000). Article 194 “Illegal issue of financial instruments“, the Criminal Law provides that public trading of financial of financial instruments without having registered such

9, 14


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financial instruments according to the law or intentional provision of false information regarding the issue of financial instruments for public trading may be punished by imprisonment for a period up to eight years or arrest or monetary fine up to one hundred minimum monthly salaries. However, it will be enforced by the prosecutor’s office.

OTHER LISTING DOCUMENTS

13. Apart from the prospectus, are issuers required to prepare or distribute documents for listing purposes? (e.g., listing particulars 11 or a document of similar nature)?

Article 41, FIML and EC Regulation 809/2004The law allows to issue additional requirements for listing on a regulated market, however, currently a regulated market (Riga Stock Exchange) accepts same prospectus used for public issue of financial instruments. For companies not listed on the official list of a regulated market, the disclosure requirements are less strict.

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14. Does the regulator have the power to enforce listing document disclosure requirements by delaying or refusing a listing?

Article 55, FIML – the regulated market, or, if it fails to do so, the FCMC may suspend the financial instruments trading or exclude the financial instruments from the regulated market. 55.1 FIML prescribes the rights of FCMC to enforce listing rules.

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11 Listing particulars: details which a company is obliged to publish about itself together with any securities it issues before it obtains a listing on a recognised stock exchange.


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ONGOING DISCLOSURE REQUIREMENTS

15. Whether open/public/listed/admitted to trading companies [please specify] are required to prepare annual reports and/or periodic reports, under a certain timeframe? Please specify.

All types of companies have to prepare annual and periodic accounts. Articles 56 – 57, FIML set forth the requirements for listed/admitted to trading companies. The requirements for other “off-exchange companies” are set forth in the Law on Annual Accounts.

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16. If the answer to the above question is "yes", whether the annual and the periodic reports are made available to the public? If yes, please explain how they are distributed.

Articles 56 – 57, FIML require that the annual accounts are submitted to the FCMC. The FCMC does not disclose the accounts to the public, but the Riga Stock Exchange does.

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17. Whether issuers are required to file the annual and periodic reports with the regulator for review/approval?

Articles 56, 57 FIML, A company whose transferable securities are admitted to trading on the regulated market shall submit annual and periodic reports for review to the respective market organizer, that are obliged to post them on the website. The FCMC review the reports and are entitled to take actions in case the reports do not comply with requirements set by legal acts (violation of reporting deadlines (late reporting) or deficient disclosure of information.)

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18. Whether the regulator has the power to enforce the disclosure requirements of the reports? If yes, please describe the available actions.

The FCMC is entitled to take actions in case the reports do not comply with requirements set by legal acts (a violation of reporting deadlines or deficient disclosure of information.) Article 148, FIML.

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19. Whether the issuer is liable for the content of the reports? If "yes", please describe if there are any exceptions provided for under the law Articles 2 and 16, Law on Accounting 14

20. Other than the issuer, whether there are any other persons/entities which may be held liable for the content of the annual/periodic reports (e.g., auditor)? If "yes", please describe.

Issuer’s representatives (officials), sworn auditors FIML, article 20 states that the persons indicated as the ones responsible for the contents of the prospectus can be held liable. According to article 41 of the Law on Sworn Auditors, an auditor is liable to a third party only if the information contained in the audit report is materially different from the factual situation.

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21. Whether issuers are subject to a general and continuing obligation to disclose promptly any material information that would significantly affect the price of their securities? If "yes", please describe whether such requirement varies according to types of issuers.

Articles 58 – 59, FIML 14

22. Whether there are circumstances where an issuer is permitted to derogate from its disclosure obligations (e.g., confidentiality)? Article 87, FIML 14

FAIR AND EQUITABLE TREATMENT OF SHAREHOLDERS

23. Whether the relevant law or regulation stipulates the right of fair and equitable treatment of shareholders? Articles 226 and 227, CL; Article 54 of

FIML 15

24. Whether issuers are required to disclose information to shareholders in order to help them make voting decisions? If "yes", please briefly describe the types of voting decisions that would trigger such disclosure requirement.

Article 273, CL - Draft decisions of shareholders shall be available at least 14 days before the shareholders’ meeting

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25. Whether investors have the right to petition the regulator? If "yes", please indicate the grounds based upon which a petition can be made.

Article 1 Law on the Procedures for Examining of Petitions, Complaints and Proposals Submitted to State and Local Government Institutions. For instance, they can petition the regulator in cases where they suspect that disclosure of information

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was insufficient. They cannot, however, petition the regulator in cases, which can only be resolved by the court (e.g. civil disputes).

26. Whether minority shareholders have the right to appoint an auditor to re-examine the books and accounts of the company? If yes, please specify the minority shareholding percentage requirement and other specific conditions and whether the shareholder or the company must pay for this audit

Article 176, CL – a shareholder owning at least 10% of the shares has a right to appoint the auditor. The minority shareholders is entitled to object to the auditor chosen for the company, if the objections are dismissed by the shareholders meeting, 10% minority can appoint a different auditor at their own expense.

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27. Whether shareholders of a company have the right to start derivative suit (i.e., in the name of the company) against the directors of the company? If "yes", please indicate the shareholding percentage requirement, if any, for exercising such right.

Article 172, CL – a shareholder owning at least 5% of the shares 15

28. Whether shareholders of a company have the right to request an extraordinary general meeting of shareholders to be held? If "yes", please indicate the shareholding percentage requirement, if any, for exercising such right.

Article 270, CL - a shareholder owning at least 5% of the shares, unless the Articles of Association provide for a lower amount

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29. Whether beneficial shareholders are required to publicly disclose their ownership and identity in specific circumstances? If yes, please specify the circumstances and the disclosure procedures

Articles 278 – 279, CL – the issuer has to prepare a list of shareholders before the meeting and the shareholders or their representatives should register themselves prior to the meeting This register of shareholders shall be made accessible to the other shareholders of the company.

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30. Whether the shareholders who are required to disclose their identity and ownership position due to their shareholding percentage have an on-going obligation to report changes in their shareholding? If "yes", please indicate how significant the change has to be to trigger such reporting obligation.

Article 61, FIML – a shareholder who directly or indirectly has acquired or sold shares corresponding to the threshold of 10, 25, 50, 75 or 95% of shares with voting rights

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CHANGE IN CORPORATE CONTROL

31. Does the relevant law or regulation provide for the circumstances in which a mandatory tender offer must be made? If "yes", please describe the circumstances.

Article 73, FIML establishes the procedure whereby information on a share buyout offer (mandatory or voluntary) has to be disclosed. A mandatory offer to buy out the shares belonging to other shareholders shall be made by a person that acquires, directly or indirectly, the voting rights attached to such shares in the amount that the voting rights of this person in the shareholders’ meeting reach or exceed a half of the total number of shares; A person shall be entitled to make a voluntary share buyout offer provided that the purpose of the offer is to acquire the number of shares that ensures at least 10 percent of the voting rights in a joint-stock company.

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32. Whether public/open/listed/admitted to trading companies are required to disclose adequate information in connection with a change in corporate control (e.g., take-over etc.) to enable minority shareholders to assess the offer?

Public companies operating off-exchange do not have disclosure obligations with respect to take-overs, etc. There is a certain procedure on disclosure of information about changes to corporate control in listed companies. According to article 73 FIML, the offeror has to publish information about take-over offer in the official gazette, among other things, the publication has to contain the offer price as well as information on the validity of the offer. According to article 75 FIML, the

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board of the target has to provide an opinion on the takeover offer.

33. Does the regulatory framework provide minority shareholders with the opportunity to vote eventual manoeuvres (e.g., poison pills) made up by the management to resist the tender offer?

In practice, there is little possibility for the minorities to be able to exercise a poison pill option. Nevertheless, article 75 FIML states that the board and the council of the company has to obtain the consent of the shareholders before conducting any activities that could potentially hinder the smooth process of the takeover offer. Thus, since the board has to have the shareholder consent, there is small likelihood that the minorities will be able to vote on “ poison pills”.

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34. In connection with a proposed transaction involving the company, whether the directors or other members of senior management of a company are required to disclose compensation or personal benefits that they may receive?

15

35. Does the regulatory framework provide minority shareholders with the concrete opportunity to sell their shares to the bidder at the same conditions as the controlling shareholder?

Article 74.1 of the FIML provides that the squeeze-out price shall is regulated identically as redemption price and shall not be lower of any the following: 1) the price for which the initiator of the offer has acquired the target company stocks. If the stocks have been acquired at different prices, the redeeming price shall be the highest price for the acquisition of stocks within a period of the last 12 months prior to the squeeze-out offer; 2) the weighted average price of a stock on the regulated market within a period of the last 12 months prior to the squeeze-out offer, provided that it has been determined on the basis of the

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price of these stocks on an active market; 3) the value of a stock that is calculated by dividing the net assets with the number of stocks issued. Net assets shall be calculated by deducting from the total assets own stocks and obligations belonging to the target company. If the target company owns stocks with different nominal values, when calculating the value of stocks the net assets shall be divided proportionally for the proportion of stocks at each nominal value in the equity capital.


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Section D – Collective Investment Schemes (CISs)12

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1. Does you country have a specific legislation on collective investment schemes? Please specify is the regulation is specifically on CIS or instead on other investment funds (e.g., privatisation funds)]

Investment Management Companies Law (LIC) and the FCMC Investment Fund Report Preparation Regulations adopted on November 1, 2002

ENTRY AND ELIGIBILITY CRITERIA

Whether there are specific standards or requirements set forth in the relevant law or regulation for eligibility13 to:

(i) promote and sell a CIS? Article 10, LIC 2.

(ii) operate a CIS? Article 10-13, LIC

17

Whether the eligibility standards or requirements for licensing or registration of operators of CIS include the following factors: (1) fitness and propriety of operator (including persons who hold a material interest in the operator)? Articles 7, 10 – 11, LIC

(2) honesty and integrity? Articles 10 - 11, LIC

(3) competence to carry out the functions and duties of a scheme operator (i.e., human and technical resources)? Articles 10 - 11, LIC

(4) financial capacity? Article 8, LIC

(5) capacity to discharge operator-specific powers and duties? Articles 10 - 11, LIC

3.

(6) adequacy of internal management procedures? Articles 10(6), 11, LIC

17

12 CIS includes open-end funds that redeem their shares or units (whether on a continuous basis or periodically), closed-end funds whose shares or units are traded in securities markets, unit investment trusts, contractual models and the European UCITS model. For purposes of this assessment checklist, CIS excludes schemes investing in property/real estate, mortgages or venture capital. 13 The term “eligibility” is intended to include authorisation, licensing, registration or other preconditions to operating or marketing a CIS.


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4. Whether, in assessing eligibility to market or operate a CIS, it is required by the law or regulation to assess the qualifications of key individuals employed by the CIS operator or manager?

Articles 9 - 10, LIC 17

If the answer to the above question is "yes", whether the following factors are considered:

(1) educational requirements? Articles 9 - 10, LIC

(2) fitness and propriety? Articles 9 - 10, LIC

(3) honesty and integrity? Articles 9 - 10, LIC

(4) past experience in marketing or operating of CIS? Articles 9 - 10, LIC

5.

(5) continual professional training? Articles 9 - 10, LIC

17

6. Whether CIS operators are required to make public disclosure of the information listed in the preceding questions? Please briefly describe what is the disclosure procedure

17

7. Whether there are sanctions against unlicensed operation of a CIS? If "yes", please briefly describe. Article 87, LIC, the FCMC may impose a

fine in the amount of 400 minimum salaries 17

SUPERVISION AND ONGOING MONITORING

8. Whether CIS operators are subject to a general and continuing obligation to report to the regulator or to investors any information regarding material changes in its management or organisation?

Article 13, LIC 17

9. If the answer to the above question is "yes", whether the regulator's approval of these changes is required?

Article 13, LIC – the changes take effect, unless the FCMC objects within a 10 day’s time

17

10. Whether there are provisions to prohibit, restrict or disclose conduct likely to give rise to conflicts of interests between a CIS and its operators or their associates or related parties? If "yes", please briefly describe.

Articles 14 and 33, LIC – the operator has to establish internal control system, which prevents conflict of interest. It has to separate management of CIS and operator’s investments as well as back office work.

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The operator can not purchase shares in another operator or fund units etc.

11. Whether there are regulatory means14 available to minimise conflict of interest situations to ensure that any conflicts if they arise do not adversely affect the interests of investors? If "yes", please describe.

Articles 14 and 33, LIC – The operator does not have the right to undertake liabilities at the expense of the fund property if such liabilities do not directly relate to the fund. The operator may not perform transactions with the fund property without consideration. The operator may not alienate the fund property to the benefit of the company managing such fund and its interested parties or other funds managed by the same company or purchase property from such persons. The fund may not incur expenses to cover the liabilities of the company, grant loans to an operator, etc.

17

12. Whether there is an ongoing monitoring of the conduct of CIS operators throughout the life of a CIS (including compliance with licensing or registration requirements)? If "yes", please briefly describe the monitoring method(s) adopted.

Articles 72 - 73, LIC – the operator shall submit to the FCMC annual and quarterly reports. Article 8, LIC – the operator’s own capital shall never decrease below the minimum initial equity capital or 25% of the expenses of the previous year. The operator has to follow other requirements set in the same

17

14 Possible means include direct prohibition of particular transactions under the law, use of a code of conduct, review and/or approval of certain transactions and activities by the regulatory authority, disclosure by the operator, prior approval or ratification of certain transactions by the investors, record keeping by the operator, limitation of the activities of the operator and independent review by a third party, etc.


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Article. Article 13, LIC – the operator has to inform the FCMC on any amendments to the lists of interested parties of the company, as well as on any amendments and supplements to the documents and information submitted to the FCMC within 10 days from the day the amendments were made. Article 19, LIC – the operator may be reorganised only subject to the FCMC’s permission. Articles 15, 16, LIC – the operator may transfer the fund management rights or outsource certain obligations to another company only subject to the FCMC’s permission. Article 13, LIC – the FCMC shall be informed on the management changes and may object to them. Article 45, LIC - the custodian bank has a duty to notify the FCMC and the operator’s council on the operator’s actions known to the custodian bank, which are in conflict with the law, the fund prospectus, the fund management by-laws or the custodian bank agreement. Article 56, LIC – the FCMC shall approve the amendments to the prospectus. Article 72, LIC, and the FCMC Investment Fund Report Preparation Regulations – the operator shall submit annual, semi-annual


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and monthly reports on the fund status.

13. Whether the regulator has the power under the law to take actions in the event of suspected or actual breaches or default by CIS operators? If "yes", please briefly describe what actions the regulator can take.

Articles 79 – 83, 84 - 87, LIC Rights to perform internal audit Rights to obtain information Rights to convene a meeting of managing bodies Rights to limit operations with banking accounts Revoke the licence Rights to impose a fine

17

DELEGATION OF FUNCTIONS

14. Whether CIS operators are permitted to delegate their functions to other persons? Articles 15 – 16, LIC 17

If the delegation by CIS operators of their functions is permissible: (1) whether the regulatory system require the CIS operator to (i) monitor the activity and (ii) evaluate the performance of the delegate? Article 15, LIC

(2) whether the delegating operator is required to disclose to investors the delegation arrangements and the identity of the delegate? Article 15, LIC

(3) whether the delegating operator will be held responsible for actions or omissions of the delegate as though they were done as its own? Article 15, LIC

15.

(4) whether the CIS operator can terminate the delegation and make alternative arrangements for the performance of the delegated function, where available? Article 15, LIC

17

LEGAL FORM/INVESTORS RIGHTS

16. Whether there are requirements as to the legal form and structure of a CIS? Articles 20 – 21, LIC 18

17. Whether the rights of investors to a CIS, the ways to exercise them and the Articles 25, 56 - 57, LIC 18


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risks associated with the investment are required to be disclosed to investors?

18. Does the regulatory framework provide that where changes are made to investor rights that do not require prior approval from investors, notice is given to (i) investors and to (ii) the regulator before the changes take effect?

Article 28, LIC requires a notification to the FCMC to be made in case the fund management rules are amended

18

SEPARATION OF ASSETS

19. Whether the operator of a CIS is required to separate and segregate CIS assets from the assets of managers, its related entities and other schemes? Articles 20, 33, LIC 18

20. Whether there are qualification requirements for the entities holding CIS assets? If "yes", please briefly describe.

Article 40, LIC – A credit institution to which the FCMC has issued a credit institution operating licence and which, pursuant to the procedures prescribed by regulatory enactments, has launched investment services (also, keeping of financial instruments), may be a custodian bank.

18

21. If CIS assets are required to be held in safekeeping on behalf of the investors by a third party, whether it is required that the third party be independent of the CIS operator? If "yes", please briefly describe such independence requirement.

Article 40, LIC requires that the custodian bank acts independently from the management company and only in the interests of the investors

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22. If the custodian and investment functions may be performed by the same legal entity or related entities, whether there are special legal or regulatory safeguards with respect to the CIS assets? If "yes", please briefly describe.

Not applicable 18

23. Whether CIS operators are required to maintain a register of holders of shares or units in the scheme?

Technically this registrar is maintained by custodian banks, but at any time the CIS operator may request the Latvian Central Depository to produce a consolidated list of holders of fund units. According to the rules of the Latvian Central Depositary No. 3, the members of the Latvian Central Depository have to have

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a register of the securities registered with the Latvian Central Depository.

24. Whether CIS operators are required to keep all books and records in relation to transactions involving CIS assets and all transactions in CIS shares or units? Articles 13, 72 and 73, LIC 18

25. Whether there are auditing requirements in relation to CIS assets? Article 72 - 752 , LIC 18

26. If the answer to the above question is "yes", whether the auditors are required to report to the regulator any irregularities or non-compliance? Article 33, Law on Sworn Auditors 18

DISCLOSURE

In making a public offering of a CIS, whether the CIS operator is required to

(i) issue an offering document (e.g., a prospectus)? Articles 56 – 58, LIC

(ii) deliver it to investors? Article 58, LIC requires making the prospectus available to all interested persons free of charge

27.

(iii) deposit it to the regulator and obtain its prior approval? Article 56, LIC

19

Whether CIS offering document is required to include the following information:

(1) the date of the issue of the offering document? (2) information concerning the legal constitution of the CIS? (3) the rights of investors in the CIS?

Article 57, LIC

(4) any pending material legal proceedings involving the CIS?

(5) procedures for purchase, redemption, and pricing of units? (6) relevant, audited financial information concerning the CIS?

28.

(7) information on the custodian? Article 57, LIC

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(8) the investment policy of the CIS (i.e., indicating the markets and instruments in which investments are made)? (9) information on the risks involved in achieving the investment objectives? (10) the appointment of any external administrators or investment managers or advisers who have a significant and independent role in relation to the CIS? (11) fees and charges in relation to the CIS? (12) the regulatory authority, auditors and other independent third parties and their responsibilities in relation to the CIS?

(13) description of the methodology of asset valuation?

Article 57, LIC

29. Whether CIS operators are subject to a general disclosure obligation to allow investors to evaluate the suitability of the CIS for them?

Article 57, LIC - An offering document contains a description of the fund risk profile and an analysis of the investment-related risk;

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30. Whether the regulator has the power under the law to take actions in the event that the issuing documentation is inaccurate, misleading or false or fails to satisfy the filing/approval requirements? If "yes", please list all regulatory actions available.

Articles 79 – 83, 84 - 87, LIC: Rights to convene a meeting of managing bodies; rights to limit operations with banking accounts; revoke the licence; rights to impose a fine

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31. Whether the offering document is required to be kept up-to-date to take account of any material changes affecting the CIS? Article 58, LIC 19

32. Whether prior notification is required to be given to the regulator regarding changes to information in an offering document? If "yes", please indicate whether the regulator's approval is required.

Article 56, LIC – the regulator’s approval is required for material changes to information 19

33. Whether CIS operators are required to submit to the regulator a report setting forth the activities in respect of a CIS on a periodic basis (please specify the report’s periodic basis: annual, semi-annual, quarterly)?

Article 72, LIC, and the FCMC Investment Fund Report Preparation Regulations – the operator shall submit annual, semi-annual and monthly reports on the fund status.

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If the answer to the above question is "yes":


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If the answer to the above question is "yes":

(1) whether the law or regulation require a timely distribution of the report? The FCMC Investment Fund Report Preparation Regulations 34.

(2) whether the regulatory framework requires that the accounts of a CIS be prepared in accordance with high quality, internationally acceptable accounting standards?

Article 2, the FCMC Investment Fund Report Preparation Regulations – IAS standards shall be used

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ASSET VALUATION

35. Whether CIS operators are required to have the CIS net asset value (NAV)15 calculated on a regular basis? If "yes", please indicate the frequency.

Article 30, LIC – each day for an open end fund and at least once a month for a closed end fund

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36. Whether the valuation of the CIS assets is required to be checked by independent auditors?

Article 74, LIC requires the auditor to verify that the financial accounts give a clear and true overview of the financial condition of the CIS. The auditor verifies each of the accounts included in the annual accounts, including asset and liability valuation.

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37. Whether there are specific regulatory requirements in respect of fair valuation of assets where market prices are not available?

Article 51 of the FCMC Investment Fund Report Preparation Regulations provides for classification of assets according to their valuation, e.g., market price or other, but there are no specific requirements with respect to fair valuation when the market prices are not available. Article 39 of the FCMC Investment Fund Report Preparation Regulations only provides for general principles of valuation.

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15 The calculation of the net asset value (NAV) of a CIS is extremely important, as the NAV reflects the price which an investor pays when investing in a CIS (subject to any additional up-front charges) and the price an investor will receive (subject to any additional exit charges) should a holding be liquidated.


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PRICING AND REDEMPTION OF INTEREST

38. Whether the operator of a CIS is required to disclose or publish the price of the CIS unit on a regular basis? Article 30, LIC 20

39. Whether CIS operators are subject to an on-going obligation to disclose, in a timely fashion by way of notices or announcements, information which is material to the value of a CIS or otherwise significant to holders of interests in a CIS?

Article 56, LIC 19

40. Whether there is a maximum time period for making payment of redemption proceeds? Please specify

Article 54, LIC provides that in case of a redemption the proceeds must be paid in the time and manner provided for in the fund prospectus

20

41. Whether there are rules governing the fees or charges payable by investors on the purchase or redemption of shares or units of a CIS? Articles 53, 54 and 57, LIC 20

42. Whether there are rules or mechanisms in place to address errors in respect of the price of the CIS units or the value of CIS assets? Article 55, LIC 20

43. Whether suspension or deferral of routine valuation and pricing and regular redemption of shares or units of a CIS is permissible under certain circumstances? If "yes", please briefly the circumstances.

Suspension or deferral of routine valuation and pricing is not permissible. Articles 54 and 57, LIC – the operator is entitled to suspend the repurchase in the cases and in accordance with the procedures prescribed in the fund prospectus. The suspension of the repurchase may be provided for only in exceptional cases if circumstances so require, and the suspension is justified by taking into account the interests of the investors.

20

44. Whether the regulator has the power to demand, delay or stop the deferral or suspension of redemption rights? Article 82, LIC 20


-- 34 --

Section E – Market Intermediaries

# Issue Yes ( )

No ( )



IOSCO Relevance

AUTHORISATION AND LICENSING

Whether licensing is required to conduct business as:

(i) Market intermediaries16? Articles 101 –103, FIML 1.

(ii) Investment Advisers17? Articles 101 –103, FIML

21

2. Whether the relevant law or regulations establish minimum standards or criteria that all applicants for licensing must meet before a license is granted? Articles 103, 105 – 108, 120, FIML 21

3. Whether the circumstances in which a license application may be refused are clearly set forth in the law or regulation? If "yes", please briefly describe.

Article 108, FIML – the FCMC refuses to issue a license if: 1) upon foundation the legislation has not been complied with; 2) close relationship of the investment broker company with third parties threatens or may threaten its financial stability or limit the FCMC’s rights to carry out the supervisory functions defined under the law; 3) foreign legislative requirements applicable to persons engaged in close relationship with an investment broker company limit the FCMC’s rights to carry out the supervisory functions defined under the law;

21

16 “Market intermediaries” include those who are in the business of managing individual portfolios, executing orders and dealing in, or distributing, securities. 17 “Investment advisers” for the purpose of this assessment are those engaged in the business of advising others regarding the value of securities or the advisability of investing in, purchasing or selling securities. They offer only advisory services without offering other investment services.


-- 35 --

# Issue Yes ( )

No ( )



IOSCO Relevance

4) the submitted documents contain false or incomplete data; 5) its board members fail to comply with the legislative requirements; 6) the identity, reputation and financial stability of the persons having material shareholding in the investment broker company cannot be verified; 7) the financial resources invested in the equity of the investment broker company are the proceeds of extraordinary or suspicious financial transactions or their lawful origination has not been documented

If the answer to the above question is "yes", whether these requirements include: 4.

(1) an assessment of whether the applicant has the appropriate financial resources (e.g., minimum initial capital) to carry on the proposed business? If "yes", please specify

Article 21, CIL – EUR 5M for banks Article 120, FIML – for investment broker companies EUR 50,000 – if the intermediary wants to offer basic services like consultations, fulfilment of investor orders, management of investors’ financial instruments EUR 125,000 - if the intermediary wants to offer basic services like the above mentioned and offer custody of financial instruments and money EUR 730,000 – if the intermediary wants to offer initial allocation of financial instruments or carry out financial instruments transactions at the expense of the intermediary

21


-- 36 --

# Issue Yes ( )

No ( )



IOSCO Relevance

(2) an assessment of whether the applicant has adequate operational systems and controls for the businesses it proposes to carry on, such as proper books and records, internal controls, risk management, and supervisory systems?

Articles 103 and 107, FIML

(3) an assessment of whether the applicant has senior management and directors with the knowledge, skills and experience necessary to perform their proposed roles?

Article 106, FIML

(4) an assessment of whether the applicant has a proven track record/past conduct? Articles 106 – 107, FIML

ONGOING REQUIREMENTS

In the event that a market intermediary fails to meet ongoing requirements, whether the regulator has the power to:

(1) suspend the intermediary's license? Article 104, FIML

(2) revoke the intermediary's license? Article 111, FIML

(3) impose conditions or restrictions on the intermediary's business operations? Article 104, FIML

(4) take effective steps to seek the removal of persons employed at the intermediary which have committed securities violations?

Article 104, FIML, FCMC could request that the securities are transferred to a different institution until the relevant persons are suspended/terminated.

5.

(5) impose other sanctions? If "yes", please specify.

Article 104, FIML – If the FCMC imposes restrictions on the activities of a market intermediary with respect to the custody of financial instruments, it is entitled to require that the market intermediary transfers all the financial instruments held by it on behalf of the clients to another market intermediary.

21


-- 37 --

# Issue Yes ( )

No ( )



IOSCO Relevance

Whether intermediaries are required to immediately report to the regulator on the occurrence of the following events:

(1) significant change in the ownership of the firm? Articles 9 –13, FIML Articles 16, 17, 19, 28 – 332, CIL

(2) change in the senior management or directors of the firm? Article 107, FIML Articles 24 –26, CIL

(3) change in the information delivered during the licensing process or a material change in the intermediary's circumstances? Articles 107, 119 and 133, FIML

6.

(4) other specific events? If "yes", please specify. Article 110, FIML – the licence should be re-registered, if the firm (name) of the intermediary has changed

21

Whether the following information about intermediaries is required to be made publicly available:

(1) the existence of a license, its category and status?

One of the FCMC functions set by Article 6 of LCMCL is to publish the information relating to the financial and capital market. The FCMC has established that information relating to all market participants, licences and categories has to be accessible on its webpage www.fktk.lv

7.

(2) the scope of its permitted activities, the names of its senior management and other individuals authorised to act in the name of the intermediary?

21

INVESTMENT ADVISERS18

8. Does the regulatory framework on investment adviser include detailed requirements setting out the disclosures to be made by the adviser to potential clients, including: (i) descriptions of the adviser’s educational qualifications, (ii) investment strategies, (iii) fee structure and other client charges, (iv)

21

18 See footnote 17, above.


-- 38 --

# Issue Yes ( )

No ( )



IOSCO Relevance

potential conflicts of interest, and (v) past investment performance? [please specify for each of the items]

CUSTODIANS19

9. In case of custodians, does regulation provides for the protection of client assets, including segregation and periodic or risk-based inspections (either by the regulator or an independent third party)?

Article 129, FIML requires the investment adviser to keep the clients funds separated from its own funds in a credit institution or investment brokerage company and inform the relevant custodian that the assets belong to its clients. The monies of the clients cannot be used to satisfy the claims of the creditors of the investment adviser.

21

CAPITAL ADEQUACY REQUIREMENTS

10. Whether intermediaries are required to calculate and maintain a minimum amount of capital on an on-going basis? If "yes", please briefly describe.

The minimum required capital rules for investment broker companies are described in FIML. Article 121 of the FIML requires that investment brokerage companies to ensure existence of equity capital, the sum total of which is equal to or exceeds the sum of: credit risk capital requirement; foreign currency and commodity risk capital requirement, debt securities and counterparty risk capital requirement, operational capital requirement. The minimum required capital rules for banks are described in CIL and in detailed FCMC rules and regulations. Article 21 CIL

22

19 For the purpose of this assessment, custodians are c those professionals who do not deal, but are permitted to have custody of client assets (i.e., to hold securities on behalf of clients).


-- 39 --

# Issue Yes ( )

No ( )



IOSCO Relevance

provides that own funds of the credit institution cannot be less than the minimum initial capital. The FCMC is entitled to review the sufficiency of own funds.

11. Does the regulatory framework provide for different minimum capital requirement for intermediaries depending on the risks undertaken?

Article 120, FIML, there are different requirements for initial capital depending on the type of investment service provided.

22

12. Whether intermediaries are required to provide audited financial statements or other audited reports to the regulator? Articles 114 - 119, 133, FIML 23

13. Whether the regulatory framework require intermediary to have specific liquidity and solvency requirements (e.g., enough capital to run the business for three months)?

Article 37, CIL and the FCMC regulations prescribe the liquidity requirements for banks. Articles 140, 143, 145 prescribe the insolvency requirements for banks.

22

14. Whether an intermediary is required to give notice to the regulator if its capital falls below the minimum requirements?

Article 119 and 133, FIML stipulates that an intermediary has an obligation to inform the FCMC on all events that may materially influence its operations

22

15. Whether there are regulatory measures that the regulator can take in the event that a market intermediary's capital falls below a required minimum? If "yes", please list them.

Articles 104 and 111, FIML – limit the scope of offered services or revoke the licence

22

16. Whether capital adequacy requirements take into consideration trading book20 positions?

Article 3.6 of the FCMC Regulations on the Calculation of Capital Adequacy requires division of all the balance sheet items into trading and company book.

22

20 The trading book of an institution shall consist of all positions in financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book (Art.111 of EC Directive 2006/49).


-- 40 --

# Issue Yes ( )

No ( )



IOSCO Relevance

MANAGEMENT AND SUPERVISION

Whether market intermediaries are required to establish and maintain:

(1) appropriate standards of conduct to ensure that the firm complies with all applicable laws and regulations? Please describe

Article 107, FIML requires investment services providers to adopt a number of internal regulations and standards for conduct to ensure the compliance with applicable laws and regulations

17.

(2) appropriate systems of risk management and internal controls? Please describe

Article 107, FIML requires investment services providers to have systems of risk management and internal control in place.

23

CUSTOMER PROTECTION

18. Whether a market intermediary is required to “know its customer” before providing specific advice to a customer? Articles 7 - 101, LPLPDCA

Article 107and 130, FIML 23

19. Whether market intermediaries are subject to a general duty to put the interests of a client ahead of its own interests? Article 127, 128FIML 23

20. Whether market intermediaries are required to disclose to the clients where there is a potential for conflicts of interest?

FCMC Regulation on the Requirements to be Complied with when Presenting Investment Recommendations provides for the procedure whereby investment brokerage firms and banks producing investment recommendations disclose their conflict of interests. Article 127, FIML provides for a general obligation to limit the possibility of conflict of interest

23

21. Whether market intermediaries are required to treat all clients equally in case where conflicts of interest arise between several of the firm's clients? Article 127, FIML 23


-- 41 --

# Issue Yes ( )

No ( )



IOSCO Relevance

22. Whether market intermediaries are required to enter into written contracts with all clients? Article 126, FIML 23

Whether market intermediaries are required to provide clients with:

(1) transaction reports and/or confirmations? [Please specify the frequency]

Article 130, FIML delegates defining of the frequency to the agreement with the client. At the same time it notes that the report must always be provided upon client’s request. 23.

(2) account statements? [Please specify the frequency]

Article 130, FIML delegates defining of the frequency to the agreement with the client. At the same time it notes that the statement must always be provided upon client’s request.

23

PROCEDURES FOR DEALING WITH INTERMEDIARY IN FINANCIAL DIFFICULTY

24.

Whether the regulator has a contingency plan or other measures to deal with the financial difficulty (i.e., a situation which could potentially lead to insolvency) of a market intermediary, including a combination of activities to restrain conduct, to ensure assets are properly managed and to provide information to the market as necessary?

Article 104, FIML The FCMC is entitled to restrict the rights of a market intermediary to provide one or the other investment service and to engage in the custody of financial instruments. If the FCMC imposes restrictions on the rights of financial instruments’ custody, it is entitled to require that the respective market intermediary transfers all the financial instruments held on behalf of its clients to another investment broker company engaged in custody of financial instruments.

24


-- 42 --

# Issue Yes ( )

No ( )



IOSCO Relevance

25. Whether there is an investor compensation fund/scheme21 in place?

Article 27 FIML, provides the RSE with a right to establish a guarantee fund. The rules of the RSE (“Guarantee fund rules”) provide for establishment of a guarantee fund. The monies in the guarantee fund are kept separately from the funds of the RSE. The members of the RSE have to become members of the guarantee fund at least 2 days prior to commencing any trading on the exchange. The members of the exchange each have an account with the guarantee fund where the following amounts must be paid-in: a) LVL 3,000 for trading in Latvian lats

(approximately EUR 4,260) (currency segment of the market;

b) EUR 5,000 for trading in each segment of the market with other currency.

The funds paid-in for one currency segment cannot be used to settle transactions in other currencies. This does not apply to the monies of the particular member who has defaulted.

24

26.

Does the regulatory framework provide for early warning systems or other mechanisms (e.g., a specified threshold below which a market intermediary is considered in financial difficulty and the regulator's action is required) to give the regulator notice of financial difficulty by a market intermediary and time to address the problem and to take corrective actions?

24

21 The investor compensation fund (or scheme) is a fund set up usually with contributions of market intermediaries (or the state) aiming to compensate investors in case of an intermediary insolvency. It is not a banking deposit insurance scheme.


-- 43 --

# Issue Yes ( )

No ( )



IOSCO Relevance

In the event of financial difficulty of a market intermediary, whether the regulator has the power to:

(1) restrict activities by the intermediary? Article 104, FIML, 102-103, CIL

(2) require the intermediary to take specific actions (e.g., moving clients accounts to another intermediary)? Article 104, FIML, 102-103, CIL

(3) freeze or seize assets held by the intermediary or by a third party on behalf of the intermediary?

(4) appoint a monitor, receiver, or other administrator?

Article 104, CIL, In order to control the fulfilment of requirements specified in accordance with the intensified supervision procedures (Article 102), the FCMC has the right to appoint its authorised representative.

27.

(5) require that the relevant information is disclosed to the market?

24


-- 44 --

Section F – Secondary Market

# Issue Yes ( )

No ( )



IOSCO Relevance

LICENSING OF EXCHANGES AND TRADING SYSTEMS

Whether prior authorisation or licensing [please specify] is required in respect of:

(1) a securities exchange? [please specify is this authorisation/licensing is different from the one of market intermediary]

Articles 29 – 32, FIML requires a specific license for operation of a securities exchange

1.

(2) a trading system 22 ? [please specify is this authorisation/licensing is different from the one of market intermediary]

Prior authorisation would not be required if an existing exchange would start to operate another trading system; however, if any person was to start operating a trading system, it would qualify as a securities exchange

25

In connection with an application by an exchange or trading system for authorisation or licensing, whether the regulatory framework requires: (1) evidence of the operational or other competency or fitness of the system operator as a secondary market ? Articles 27 – 31, FIML

2.

(2) the operator of the system assuming risks23 to comply with prudential and other requirements designed to reduce the risk of non-completion of transactions (e.g., mandatory margin assessment and collection, capital or financial resources, member contributions, compensation scheme, credit or position limits)?

A market organizer is subject to the requirement of a minimum paid-up share capital to be at least 250,000 lats. (approximately EUR 355,720) (Article 26, FIML)

25

22 A trading system means essentially any organization, association, person, group of persons, or system that constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange. The main difference between a trading system and the stock exchange is that the former does not set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or discipline subscribers other than by exclusion from trading (for a different definition under EU law, see Art. 4, item 14 and 15 of Directive 2004/39/EC dated 21 April 2004 on markets in financial instruments – so-called MiFID). 23 I.e., principal risk, settlement risk, guarantee risk and performance risk.


-- 45 --

# Issue Yes ( )

No ( )



IOSCO Relevance

(3) the regulator to be informed of the types of securities to be traded?

Article 41-43, FIML – the law prescribes what securities can be traded. The requirements for the admission of other financial instruments to trading on the regulated market not mentioned by the FIML shall be established by the respective market organizer. Article 28, FIML, The rules governing the trading or listing of the product, and any amendments, are subject to approval by the FCMC.

(4) the regulator to give approval of the rules [and any amendments thereof] governing the admission of securities to be traded? Article 28, FIML

(5) all persons with direct access to the system to be authorised or licensed? [please specify if the same rules apply to the trading system and stock exchange]

Article 36, FIML applies to the members of the exchange and, thus, also to the persons allowed to access the trading system of the exchange

(6) the same financial capacity, integrity, or performance criteria as those for market intermediary must be met by persons with direct access to the system or exchange?

Article 4.2.1., the RSE Member and Trading Rules – only a member of the stock exchange may trade on the trading system, with the exception that access may be granted to the State Exchequer, the Bank of Latvia and similar state institutions.

(7) clearly disclosed standards or procedures governing trade execution (e.g., requirements with respect to precedence of client orders, prohibitions on front-running24 or trading ahead of customers, etc)? If "yes", please describe.

Articles 126 – 128, FIML – an intermediary shall fulfil client orders first, conflict of interests shall be avoided, all investment services shall be performed in accordance to good market practice.

24 The illegal practice of taking a position based on information not publicly available regarding an imminent transaction, possibly ahead of a customer order. (e.g., a broker who buys himself 200 shares in a stock just before his or her brokerage plans to buy a large block of 400,000 shares).


-- 46 --

# Issue Yes ( )

No ( )



IOSCO Relevance

ONGOING SUPERVISION

3. Whether the regulatory framework requires the regulator to have arrangements in place for continuous monitoring, surveillance and supervision of the trading system and the conduct of its participants?

Articles 39 – 40 and 84 – 91, FIML 26

4. Whether the regulatory framework provides the system operator, the regulator or others have the power to suspend or halt trading, set margins, set position limits or otherwise intervene in case unusual or potentially improper trading occurs? If "yes", please briefly describe.

Article 90, FIML – the FCMC is entitled to request ceasing of such activities, suspend trading of financial instruments, freeze operations in securities or cash accounts or limit operations of a market intermediary

25

5. Whether the regulatory framework requires the regulator to have a procedure in place to assess the continuing compliance of the trading system or exchange with the initial authorisation requirements?

Article 34 FIML provides the FCMC with a right to terminate the license of the exchange if it does not comply with the authorisation requirements, etc.

26

Is the regulator determines that the exchange or trading system is unable to comply with the conditions of its initial authorisation, does the regulatory framework provide the regulator with the power to:

(i) re-examine the exchange or trading system conditions of authorisations/licensing and impose a range of actions, such as restrictions or conditions on the market operator?

Article 34 FIML provides the FCMC with a right to terminate the license of the exchange if it does not comply with the authorisation requirements, etc.

6.

(ii) withdraw the exchange or trading system’s authorization? Articles 34 and 40, FIML – the FCMC can declare null and void the exchange decisions or revoke the licence

26


-- 47 --

# Issue Yes ( )

No ( )



IOSCO Relevance

TRANSPARENCY OF TRADING

Whether the regulatory framework includes

(i) requirements or arrangements for providing (a) pre-trade (i.e., posting bids and offers) and (b) post-trade (i.e., last sale price and volume of transactions) information to market users? If "yes", please indicate the frequency and timing of reports and what is reported.

Articles 37 – 38, FIML Before a start of trading the regulated market shall publish information on average, highest and lowest price of the financial instrument as well as volume of transactions in previous business day. During trading unless the real time information is provided the market should inform its users on the prices every 20 minutes. After trading market intermediaries should report the volume of trade, including trades in non-regulated marketing its homepage.

7.

(ii) Requirements or arrangements that information on completed transactions be provided on an equitable basis to all participants? Articles 37 – 38, FIML

8. Does the regulatory framework allow the exchange or trading system’s operator to permit derogation from the objective of real-time transparency25? If yes, are conditions clearly defined?

27

25 The degree of transparency of a market can be measured as a deviation from a real-time standard. However, there is no single standard of “timeliness.” Most exchanges and regulatory systems provide for a certain degree of deviation from a real-time standard, such as, permitting some degree of opaqueness of quote information for block transactions, adopting different definitions of “real-time,” adopting a “promptness” standard that varies from several minutes to a longer time, allowing exceptions to real-time based on the size of the trade, type of trade (dealer mediated rather than auction market) or type of dealer. Indeed, each type of market microstructure delivers market fairness, efficiency and transparency in slightly different ways.


-- 48 --

# Issue Yes ( )

No ( )



IOSCO Relevance

DETECTION OF UNFAIR PRACTICES

Whether there is legislation prohibiting the following conduct in respect of securities admitted to trading on authorised exchanges and regulated trading systems:

(1) market or price manipulation? Articles 88 - 89, FIML

(2) misleading information? Article 21.3., the RSE Rules on Listing and Trading Financial Instruments on the Markets regulated by the Exchange

(3) insider trading? Articles 85 – 87, FIML

(4) front-running26? Article 127, FIML

(5) excessive leverage in the system (e.g., trading on margin27)? Article 88, FIML

9.

(6) other fraudulent or deceptive conduct and market abuses? Articles 88 - 89, FIML

28

10. Does the regulatory framework provide the regulator with the power to supervise and inspect (i) securities position limits, (ii) quotation display rules, (iii) order handling rules, (iv) settlement price rules or market halts?

Article 40, FIML gives the FCMC the rights to supervise the activities of the securities exchange as well as to request all the information, inspect the registries, data bases, etc.

28

In case of detection of trading violations, whether the following actions can be taken by the relevant authority: 11. (1) liquidation of positions? Article 90 and 104, FIML

28

26 The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information. 27 This practice is about trading with borrowed money, which can be extremely risky because both gains and losses are amplified. That is, while the potential for greater profit exists, this comes at a hefty price - the potential for greater losses. Margin also subjects the investor to a number of unique risks such as interest payments for use of the borrowed money.


-- 49 --

# Issue Yes ( )

No ( )



IOSCO Relevance

(2) suspension of trading?

Articles 90 and 104, FIML Article 4, the RSE Member and Trading Rules, Article 7, the RSE Rules on Money and Financial Instrument Payments, adopted on August 31, 2004

(3) fines? Article 39, 148, FIML Article 8, the RSE Member and Trading Rules, Article 7, the RSE Rules on Money and Financial Instrument Payments

(4) revocation or suspension of membership or access authorisation? Article 8, the RSE Member and Trading Rules

(5) other sanctions [please explain]? Articles 90 and 104, FIML

(6) required arbitration or mediation?

MONITORING OF LARGE EXPOSURES

12.

Whether the relevant regulatory framework requires the clearing firm, the market, and/or the regulator to monitor trading in order to identify large exposures28? If "yes", please briefly describe (i) how the law defines “large exposure” and (ii) the monitoring functions conducted (e.g., reporting requirement, inspections etc.)

Large exposures are monitored by monthly (or more frequent, if warranted) examination of prudential returns from market participants – banks and brokerage companies. Large exposures are also routinely reported by both banks and brokerage companies. Article 3.1 of the FCMC Regulations of 16.05.2004 on the Compliance with Restrictions on Exposures of Banks and Investment Brokerage Companies defines

29

28 The terms “large exposure” refers to open positions or credit exposures that are sufficiently large to expose a risk to the market or to a clearing firm.


-- 50 --

# Issue Yes ( )

No ( )



IOSCO Relevance

risk exposures with reference to the regulations on capital adequacy and risk exposures include the following: asset items, off-balance sheet items, derivatives (gold, percent, currency). Each credit institution is obliged to draft regulations defining the types and limits of large exposures for each client or categories of clients.

13. Whether the regulator or the market has the power to compel customers or market members carrying or controlling large positions to reduce their exposures or to post increased margin?

Article 61, FIML requires notification about acquisition of significant influence and any changes (increase/decrease) in equity ownership in the following thresholds: 5%, 10%, 15%, 20%,25%, 30%, 50%, 75%. Article 64, FIML states the persons failed to notify the acquisition of equities cannot use their voting rights

29

In case a market member does not make relevant required information needed to evaluate an exposure available to the market authority, whether the following action can be taken by the relevant market authority:

(1) impose limitations on future trading? Articles 90 and 104, FIML

(2) require liquidation of positions? Articles 90 and 104, FIML

(3) increase margin requirements? Currently derivatives are not traded on the market.

(4) revoke trading privileges? Articles 90 and 104, FIML Article 8, the RSE Member and Trading Rules

14.

(5) suspend from trading? Articles 90 and 104, FIML Article 8, the RSE Member and Trading Rules

29


-- 51 --

# Issue Yes ( )

No ( )



IOSCO Relevance

(6) require to increase capital of the market member?

DEFAULT PROCEDURES

15. Whether the market is required to have contingency plans or emergency procedures in dealing with a market disruption or system failure? Article 27, FIML 29

16. Whether the regulatory framework requires markets and/or the clearing and settlement system(s) promptly to isolate the problem of a firm in financial difficulty by addressing its open positions or otherwise protect customer funds and assets from an intermediary’s default under national law?

According to RSE regulation on the guarantee fund, the guarantee fund can be used where a member does not have sufficient funds to settle the transactions. In this event, the RSE transfers monies from the guarantee fund to the counterparty of the defaulting member. If the amount of the guarantee fund is insufficient, the transaction is settled only up to the amount available. The member whose transaction has been covered by the guarantee fund (i.e. the defaulting party) is under an obligation to repay the amount to the guarantee fund with interest (equal to double the amount of the refinancing rate of the Bank of Latvia for the time during which the funds have been used). If sufficient securities have not been delivered on the settlement day, settlement of that particular transaction is postponed and the Exchange informs the members involved in the transaction. Once the LCD has informed the RSE about a member failing to deliver the required amount of securities, the RSE may choose to suspend the operations of that member until the required amount of securities has been

29


-- 52 --

# Issue Yes ( )

No ( )



IOSCO Relevance

delivered or the member has agreed with the other party to postpone the transaction and has paid the penalty imposed for failure to deliver securities (discussed immediately below).

17. Whether the regulatory framework requires intermediaries to separate and segregate customers’ assets from other funds and assets? Article 125 and 129 FIML 29

18. If yes, in the event of intermediary’s insolvency, does the framework enable customer’s positions to be moved by a receiver to a solvent intermediary? Article 125 and 129 FIML 29


-- 53 --

Section G – Clearing and Settlement

# Issue Yes ( )

No ( )



CPSS / IOSCO

Relevance

AUTHORISATION AND LICENSING OF SECURITIES SETTLEMENT SYSTEMS

1. Whether the clearing and settlement systems are subject to direct supervision either by the regulator or the relevant market authority? Article 100, FIML 18

If the regulator has oversight responsibility regarding the clearing and settlement system, whether the regulator has the power to:

(1) license clearing and settlement systems?

In 1995 a tender was carried out in order to approve a national depositary. On the basis of the evaluation of settlement systems, procedures and documentation submitted by the applicants, LCD won this tender and was recognised as national depositary. Subsequently LCD rights were endorsed by FIML. Article 92, FIML – only the Latvian Central Depository (LCD) is allowed to perform certain functions described in this Article in Latvia, including the rights to book and record publicly traded financial instruments, open financial instruments accounts for market intermediaries, organize and manage transfers and settlements with financial instruments and similar.

(2) issue rules mandating specific standards for clearing and settlement systems? Rules for LCD are set by the FIML.

2.

(3) approve changes to a clearing and settlement system’s rules and procedures?

Article 94, FIML – the LCD regulations and their amendments are to be submitted to the FCMC that is entitled to issue objections thereto within 30 days as of submission. If there are no objections issued, the regulations are published and take effect.

30


-- 54 --

# Issue Yes ( )

No ( )



CPSS / IOSCO

Relevance

(4) conduct surveillance of the operations of clearing and settlement systems? Article 100, FIML

(5) inspect, audit or require a third party inspection or audit of clearing and settlement systems?

Article 100, FIML – the law does not stipulate the frequency of inspections or audits.

(6) require the clearing organization to file reports? Article 100, FIML

(7) bring regulatory actions against a clearing and settlement systems for violations of the securities laws and regulations or for failure to enforce its own rules?

Article 100, FIML

TRADE CONFIRMATION AND DELIVERY VERSUS PAYMENT

3. Whether the regulatory framework requires that confirmation of trades between direct market participants occur no later than trade date (T+0)?

Article 2, the RSE Rules on Money and Financial Instrument Payments Article 4, The LCD Regulation No. 6 On Settlement of Transactions Executed or Registered at the Stock Exchange

2

4. Whether the regulatory framework requires that trades be settled within three days from the trade date (T+3)?

The LCD Regulations No. 6 on On Settlement of Transactions Executed or Registered at the Stock Exchange, adopted on June 18, 2004 currently describe the standard settlement procedures as being T+3. Article 1, the RSE Rules on Money and Financial Instrument Payments stipulates that the Board of the Riga Stock Exchange may set different settlement periods.

3

5. Does the technical, legal and contractual framework ensure that delivery of securities takes place if, and only if, payment is received? (i.e., DVP - delivery versus payment)?

The LCD Regulations No. 5 on DVP Settlements with Financial Instruments, adopted on January 23, 2004 Article 2, the RSE Rules on Money and

3


-- 55 --

# Issue Yes ( )

No ( )



CPSS / IOSCO

Relevance

Financial Instrument Payments

TRANSPARENCY

6. Do entities that provide the clearing, settlement and custodial infrastructure of securities markets make clear disclosures to market participants about their rules, regulations, relevant laws, governance procedures, risks, steps taken to mitigate risks, and the rights and obligations of participants?

RSE’s and LCD’s regulations are published officially and are accessible easily. 17

CENTRAL DEPOSITORY29

7. Are securities issued on a dematerialised basis (i.e., electronic issue opposed to the issuance as a physical certificate)?

Articles 93 and 125, FIML – only dematerialised financial instruments are publicly issued in Latvia

6

8. Does the transfer of securities require any form of physical delivery? No, the FIML requires securities to be dematerialised 6

9. Does a central securities depository (CSD) exist? If NO, please briefly describe the settlement system. 6

10. If the answer to the above question is “yes”, does an entry in the CSD result automatically in the transfer of the legal title to the securities in the official register of the issuer? If NO, please specify which rights are given by the entry

Article 125, FIML – financial instruments are owned by the acquirer as of the moment when the financial instruments have been recorded on the account of the acquirer.

6

11. Are securities immobilised or dematerialised and transferred by book entry in a CSD? Securities are dematerialised and transferred

by book entries. 6

29 There are several different ways for owners to hold securities. In some jurisdictions, physical securities circulate and beneficial owners may keep securities in their possession, although owners typically employ a custodian to hold them to reduce risks and safekeeping costs. The costs and risks associated with owning and trading securities may be reduced considerably through immobilisation of physical securities, which involves concentrating the location of physical securities in a depository. The immobilisation or dematerialisation of securities and their transfer by book entry within a CSD significantly reduces the total costs associated with securities settlements and custody.


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# Issue Yes ( )

No ( )



CPSS / IOSCO

Relevance

OVERSIGHT

Is the clearing and settlement systems required to:

a) file periodic reports to the regulator?

Article 37, FIML The LCD submits information on transactions carried out outside the regulated market to the RSE according to the bilateral agreement concluded with the RSE. The RSE forwards this information to the FCMC.

12.

b) submit to periodic and/or special audits and inspections? Article 100, FIML

30

DERIVATIVES

13. Whether derivative securities clear and settle on a different system through a specialised trading and/or clearing system?

Currently there are no derivatives registered by the LCD, but an active work is going on in order to take a decision on the characteristics of clearing system for derivatives in the future.

30

14. If the answer to the above question is "yes", whether the legislative framework addresses the treatment of derivatives risks? Not applicable 30

PROTECTION OF CUSTOMERS’ SECURITIES

15. Dies the legal or regulatory framework provide any arrangements to protect customers’ securities from theft, loss or misuse and to ensure that they will not become subject to claims of the custodian’s creditors (e.g., segregation of assets insurance, compensation schemes)?

Articles 124, 125 Market intermediary ensures permanently separate recordings of the client’s and own financial instruments and cash funds. The financial instruments owned by a client of the investment broker company or credit institution may not be used for settling the creditor claims of such investment broker

12


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No ( )



CPSS / IOSCO

Relevance

company or credit institution. Article 5, Investor Protection Law

16. Are the entities holding securities in custody subject to mandatory internal or external audit, or both, to determine if there are sufficient securities to satisfy customer claims?

Article 3, FIML 12


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Section H – Accounting and Auditing of Financial Reports

# Issue Yes ( )

No ( )



IOSCO Relevance

DISCLOSURE OF FINANCIAL RESULTS

1. Whether issuers are required to publish financial and other information at regular intervals (i.e. annual and periodic financial reports, please specify)? Articles 56 – 59, FIML 14

If the answer to the above question is "yes", (1) Whether the issuer or other persons (depending on the circumstances, they might be the underwriter, sponsor, advisor, etc.) is legally responsible for the contents of these reports?

Articles 2 and 16, Law on Accounting

(2) Whether companies are required to file these reports with the regulator for review/approval?

Articles 56, 57 FIML, A capital company whose transferable securities are admitted to trading on the regulated market shall submit annual and periodic reports for review to the respective market organizer, that are obliged to post them on the website. The FCMC review the reports and is entitled to take actions in case the reports do not comply with requirements set by legal acts (violation of reporting deadlines or a deficient disclosure of information.)

2.

(3) Whether the regulator has the power to take action for incomplete or misleading information in these reports?

The FCMC is entitled to take actions in case the reports do not comply with requirements set by legal acts (a violation of reporting deadlines or a deficient disclosure of information.) Article 148, FIML.

14


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# Issue Yes ( )

No ( )



IOSCO Relevance

EXTERNAL AUDITOR

3. Whether the relevant law or regulation requires that annual financial statements published by issuers should be audited by external auditors? Article 56, FIML 16

4. Does the regulatory framework require that an issuer’s governance body independent in both fact and appearance of the management of the company (e.g., shareholders or a statutory or corporate audit oversight body) oversee the process of selection and appointment of the external auditor?

Article 176 CL provides that an auditor must be appointed by the shareholders’ meeting

16

5. Whether the regulatory framework requires issuer to change the external auditor after a certain number of years (i.e., rotation)? If yes, please specify the rotation period

Article 29 – Law on Sworn Auditors Auditor is not entitled to conduct an audit of annual financial accounts of one and the same financial institution, as well as of the commercial company the shares of which are admitted to official stock exchange listing, for more than five consecutive years

16

6. Whether issuers are required to provide audited financial statements in public offering prospectuses? Annex 1 of EC Regulation 2004/809. 16


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No ( )



IOSCO Relevance

Whether the required audited financial statements include the elements listed below:

(1) a balance sheet or statement of financial position?

(2) a statement of the results of operations?

Articles 56 – 57, FIML Definitions, Law On the Annual Accounts Latvian Accounting Standard No. 1 “Key Aspects of Presentation of Annual Accounts” adopted by the Board of Accountants on February 5, 2004 Latvian Accounting Standard No. 3 "Events After the Balance Sheet Date" adopted by the Board of Accountants on December 8, 2004 Latvian Accounting Standard No. 4 "Accounting Policies, Changes in Accounting Estimates and Errors" adopted by the Board of Accountants on February 9, 2005 Latvian Accounting Standard No. 6 "Revenue" adopted by the Board of Accountants on December 7, 2005

7.

(3) a statement of cash flow?

Articles 56 – 57, FIML Definitions, Law On the Annual Accounts Latvian Accounting Standard No. 1 “Key Aspects of Presentation of Annual Accounts” adopted by the Board of Accountants on February 5, 2004 Latvian Accounting Standard No. 2 “Cash Flow Statement” adopted by the Board of Accountants on February 5, 2004

16


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No ( )



IOSCO Relevance

(4) a statement of changes in ownership equity or comparable information included elsewhere in the audited financial statement or footnotes?

Articles 56 – 57, FIML Definitions, Law On the Annual Accounts Latvian Accounting Standard No. 1 “Key Aspects of Presentation of Annual Accounts” adopted by the Board of Accountants

ACCOUNTING STANDARDS

8. Are financial statements required in public offering and publicly available annual reports required to be prepared and presented in accordance with a comprehensive body of accounting standards?

Annex 1 of EC Regulation 2004/809. 16

9. If the answer to question above is “yes”, are these accounting standards of a high and internationally acceptable quality?

Consolidated accounts: According to the Regulation (EC) 1606/2002 issuers of securities admitted to trading on a regulated market shall prepare their consolidated accounts in compliance with IAS/IFRS. Annual accounts (solo): Issuers of securities included in the official list shall prepare their accounts in compliance with IAS/IFRS; Issuers of securities included in the second and free list shall prepare their accounts in compliance with the legal provisions of the country of registration. (FIML, Art. 56) In Latvia financial and capital market participants shall comply with the IAS/IFRS, other companies shall prepare their accounts in compliance with the Law on Annual Accounts of Companies

16


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# Issue Yes ( )

No ( )



IOSCO Relevance

10. Whether an organisation responsible for the establishment and timely interpretation of accounting standards is set out by the relevant law or regulation? If "yes", please state the name of the body and its composition

Article 151, Law On Accounting establishes the Board of Accountants Cabinet Regulations No. 437 of 05.08.2003 “Bylaws of the Board of Accountants”

16

11. If the answer to the above question is "yes", whether the standard setting body is subject to regulatory oversight? If "yes", please indicate who the supervisory authority is.

The Board of Accountants is established by the Ministry of Finance, which should also develop state policy on accounting matters. However, no direct supervision powers are given to the Ministry of Finance

16

Whether the accounting standards used in preparing financial statements and financial reporting address the general topics listed below:

(1) presentation of financial information?

Sections 2 – 4, 6, Law On the Annual Accounts Latvian Accounting Standard No. 1 "Framework for the Presentation of Financial Statements" adopted by the Board of Accountants on February 5, 2004 Latvian Accounting Standard No. 3 "Events After the Balance Sheet Date" adopted by the Board of Accountants on December 8, 2004 Latvian Accounting Standard No. 4 "Accounting Policies, Changes in Accounting Estimates and Errors" adopted by the Board of Accountants on February 9, 2005 International Accounting Standards

12.

(2) consolidation of financial information? Law On Consolidated Annual Accounts, section 4. International Accounting Standards

16


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No ( )



IOSCO Relevance

(3) business combinations? Law On Consolidated Annual Accounts International Accounting Standards

(4) tangible and intangible assets (including impairment of assets)?

Sections 2 – 4, 6, Law On the Annual Accounts Latvian Accounting Standard No. 7 "Property, Plant and Equipment" adopted by the Board of Accountants on December 21, 2005 International Accounting Standards

(5) leases? Sections 2 – 4, 6, Law On the Annual Accounts International Accounting Standards

(6) income taxes? Sections 2 – 4, 6, Law On the Annual Accounts International Accounting Standards

(7) employee benefits (e.g., pension, stock compensation, etc.) Sections 2 – 4, 6, Law On the Annual Accounts International Accounting Standards

(8) provisions and contingencies?

Sections 2 – 4, 6, Law On the Annual Accounts Latvian Accounting Standard No. 8 "Provisions, Contingent Liabilities and Contingent Assets" adopted by the Board of Accountants on December 21, 2005 International Accounting Standards

(9) financial instruments (including derivative financial instruments)? Sections 7, Law On the Annual Accounts International Accounting Standards


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IOSCO Relevance

(10) securitisation?

Whether the accounting standards used in preparing financial statements and financial reporting address the following areas of particular interest to investors:

(1) earnings per share? Article 55, Law On the Annual Accounts – management report shall include recommendations for a profit distribution International Accounting Standards

(2) interim financial reporting?

Article 57, FIML – a company that quotes its shares on the official list of the regulated market shall submit quarterly and semi-annual financial statements International Accounting Standards

(3) information about business segments? Article 55, Law On the Annual Accounts International Accounting Standards

(4) related party transactions?

Articles 45 and 52, Law On the Annual Accounts, Law On Consolidated Annual Accounts, section 28 requires inclusion of information on related party transactions. International Accounting Standards

13.

(5) leases? Article 45, Law On the Annual Accounts International Accounting Standards

16

AUDITING STANDARDS

14. Are audited financial statements included in public offering and publicly available annual reports, required to be audited in accordance with a comprehensive body of auditing standards?

Law On Sworn Auditors, Law On the Annual Accounts 16


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# Issue Yes ( )

No ( )



IOSCO Relevance

15. Are these auditing standards of a high and internationally acceptable quality? 16

16. Does the regulatory framework provide for an organization responsible for the establishment and timely interpretation of auditing standards?

Article 152, Law on Accounting provides that the Board of Accountants is responsible for drafting, updating and interpreting the accounting standards.

16

Do auditing standards expressly require the auditor to:

(1) use due professional care in the performance of the audit? International Standards on Auditing,

(2) adequately plan and supervise the audit? International Standards on Auditing,

(3) obtain an understanding of the internal control system of the entity? International Standards on Auditing, 17.

(4) obtain sufficient evidence to determine whether the financial statements are free of material misstatements? International Standards on Auditing,

16

Whether an auditor report is required to disclose:

(1) any exceptions to the application of accounting principles used? Articles 1 and 33, Law on Sworn Auditors International Standards on Auditing,

(2) any material uncertainties in the financial statements? Articles 1 and 33, Law on Sworn Auditors International Standards on Auditing,

18.

(3) any going-concern issues? Articles 1 and 33, Law on Sworn Auditors International Standards on Auditing,

16

19. Whether the regulatory framework requires auditors to be independent from the issuer? If "yes", please define “independence”

Articles 25 – 26, Law On Sworn Auditors State and local government institutions, courts, prosecutors and pre-trial investigation institutions shall guarantee the independence of the professional activity of sworn auditors. It is prohibited: 1) to interfere with the professional activities of sworn auditors, to exert

16


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# Issue Yes ( )

No ( )



IOSCO Relevance

influence or pressure upon them; 2) to require information and explanations from sworn auditors, as well as to question them as witnesses regarding facts that have become known to them while providing professional services; 3) to control, inspect or seize the mail, telegraph and other means of correspondence, as well as the documents which sworn auditors have received while providing professional services, or to perform searches in order to find and withdraw correspondence and documents; 4) to control the information systems and means of communication necessary for the provision of professional services of sworn auditors, including electronic means of communication, to obtain information from them and to interfere with their functioning; 5) to require information from clients regarding the content of the professional services provided by sworn auditors; 6) to subject sworn auditors to any sanctions or threats in respect of the professional services they provide to clients; and 7) to bring sworn auditors to any type of liability for announcements, which they have made, pursuant to law and in good faith, while fulfilling their professional duties. The shareholders, the head, members of the


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No ( )



IOSCO Relevance

executive institution of a commercial company of sworn auditors and other persons are prohibited from interfering with the professional activities of a sworn auditor, or to exert pressure on him or her in order to influence the viewpoint of the auditor, or the opinion submitted by him or her as an independent expert. The responsible sworn auditor or the commercial company of sworn auditors shall not be directly or indirectly interested in the results of the audit of the annual accounts. The law lists conditions where the independence of a sworn auditor is jeopardised.

20. Whether auditors are required to be licensed or approved and to satisfy specific education criteria and other qualifications in order to practice? Articles 8, 9, 13, Law On Sworn Auditors 16

21. Whether auditors are subject to continuing professional education requirements after they are licensed or approved to practice?

Articles of Association of the Latvian Association of Sworn Auditors, adopted on November 16, 2002

16

22. Does the regulatory framework provide for a mechanism for enforcing compliance with accounting standards such as requiring restatements of financial statements that deviate from accepted standards?

The Law on Accounting provides only for liability for directors that have failed to observe the requirement to prepare the accounts according to the applicable standards.

16


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Section I – Money Laundering

# Issue Yes ( )

No ( )



FATF Relevance

SCOPE OF THE CRIMINAL OFFENCE OF MONEY LAUNDERING

1.

Whether there is legislation in place to address the issues of money laundering (ML)? If "yes", please identify the name of such legislation and when it was adopted [if a special law exists, please include details of the law in Section I, above]

LPLPDCA and the Government Regulations on Unusual Transaction Elements and Reporting Procedure, adopted on March 20, 2003

1

Whether the following conventions have been signed and ratified (please specify in your comments): (i) 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention)? Ratification and accession on 24 February

1994. (ii) 2000 UN Convention against Transnational Organized Crime (the Palermo Convention)? Signature on 13th December 2000,

ratification on 7th December 2001. 2.

(iii) 2003 UN Convention against Corruption? Signature 19th May 2005, ratification 4th January 2006.

1 and 35

3.

Does the law provide for the confiscation of property (including funds and securities) that has been laundered or which constitutes (i) proceeds from; (ii) instrumentalities used in; and (iii) instrumentalities intended for use in the commission of any ML, financing of terrorism (FT) or other predicate offences, and property of corresponding value.

(with some

exceptions)

Article 195, Criminal law provides for a general penalty of confiscation of property of the persons found guilty of money laundering. The property confiscated could include the items listed in (i) to (iii).

3

CUSTOMER DUE DILIGENCE AND RECORD-KEEPING

4. Does the regulatory framework require that financial institutions obtain senior management approval before establishing business relationships with politically exposed persons?

There is no explicit requirement in the law, but the FCMC has the rights to examine the policies of regulated entities. At the same time, LPLPDCA generally requires following know your customer rules and Article 4, LPLPDCA specifically refers to persons contained in the national or international lists of terrorists and similar.

6


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# Issue Yes ( )

No ( )



FATF Relevance

Therefore, there are certain procedures in place to verify if politically exposed persons are among the entities customers. Moreover, Article 4, LPLPDCA presumes that the financial means belonging to persons whose names appear on the national or international lists of terrorists have been obtained illegally via money laundering.

5. Does the regulatory framework require financial institutions to maintain all necessary records on transactions, both domestic and international, for at least five years following completion of the transaction regardless of whether the account or business relationship is ongoing or has been terminated?

The laws applicable to investment companies, fund management companies and credit institutions require maintaining of the documents for 10 years. Article 10, Law on Accounting.

10

6. Are financial institutions required to undertake customer due diligence measures including identifying and verifying the identity of their customers? Articles 6 - 101 , LPLPDCA 5

7. Does the regulatory framework prohibit from opening/maintaining (i) anonymous accounts, (ii) accounts in fictitious names, (iii) numbered accounts and (iv) non registered (i.e., bearer) securities?

Article 6, LPLPDCA prohibits opening/maintaining of any of the listed accounts.

5

REPORTING OF SUSPICIOUS TRANSACTIONS AND COMPLIANCE

8. Does the regulatory framework require financial institutions to report to the relevant authority suspicious transactions (i.e., when it suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity or terrorism financing), regardless of the amount of the transaction?

Articles 11-12, LPLPDCA 13

9. Does the regulatory framework require market intermediaries to have in place policies and procedures designed to minimise the risk of using an intermediary's business as a vehicle for money laundering?

Article 2, LPLPDCA requires all financial institutions to have relevant procedures to minimise money laundering risks in place

8


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# Issue Yes ( )

No ( )



FATF Relevance

INTERNATIONAL COOPERATION

10. Does the regulatory framework allow the relevant authority to cooperate with foreign authorities for AML purposes (e.g., search and seizure of information, taking of evidence or statements from persons, providing originals or copies of relevant documents and records)?

As noted FCMC has co-operation with a number of regulatory authorities. Similarly, Article 29, LPLPDCA provides that one of the duties of the Control Service is to cooperate with foreign institutions. Article 39, LPLPDCA provides that the Control Service may cooperate on its own initiative with foreign institutions and exchange information provided confidentiality of the data is ensured and the information is provided only for revealing of crimes that would be prosecuted also in Latvia.

36-38


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Section J –Financial Instruments

# Issue Yes ( )

No ( )



IOSCO Relevance

VARIETY OF FINANCIAL INSTRUMENTS TRADED

1. Does the regulatory framework provide for a definition of financial instruments/securities or similar? [Please provide the definition in your answer]

Article 1, FIML defines financial instruments as follows — an agreement, which concurrently creates financial assets for one person, but financial liabilities or capital securities for another.

Does the regulatory framework provide comprehensive regulation for listing and trading of:

(i) commercial bonds Section C, FIML defines the criteria and procedure for listing of financial instruments, including commercial bonds

(ii) government bonds Application of section C, FIML and its requirements with respect to prospectus to government bonds is voluntary

(iii) municipal bonds Application of section C, FIML and its requirements with respect to prospectus to municipal bonds is voluntary

2.

(iv) derivatives Section C, FIML defines the criteria and procedure for listing of financial instruments. However, no derivatives have been listed on the RSE on the basis of this

25

3. Whether there is a specific regulation applicable to the issuance of financial instruments to the benefit of employees as an employee share purchase plan? Articles 254 – 255, CL 14, 25


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# Issue Yes ( )

No ( )



IOSCO Relevance

DERIVATIVES

4. Does the regulatory framework clearly provide that derivative contracts are enforceable without exceptions?30 No specific exceptions can be reported 14, 25

5. If a market for derivatives exists, does the regulatory framework require disclosure of the terms of the contracts traded, the mechanisms of trading and the risks?

Not applicable 14

CROSS-BORDER ISSUANCE

6. Does the regulatory framework provide for any limits/restrictions to the issuance and the selling of financial instruments by a foreign issuer in your market? Please describe

Article 22, 49, FIML provides mutual recognition necessary for the sale of securities for other EU Member States

14-16

7. Does the regulatory framework provide for any limits/restrictions to the issuance and the selling of financial instruments by a national issuer in a foreign market? Please describe

No specific limitations can be reported. 14-16

SPONSOR/UNDERWRITER

8. In the case of Initial Public Offering, whether the issuer is required to have a sponsor or an underwriter?

Article 17, FIML allows the issuer to place the securities and apply for inclusion in the market right after the financial instruments have been issued

14

CONCENTRATION RULE

9. Does your regulatory framework require that all relevant transactions be conducted on a stock exchange? The transactions can be also conducted over

the counter 14

30 In some jurisdictions, the enforceability of derivatives is limited due to a concurring provision addressing unenforceability of gaming bets. In some other countries enforceability of derivatives is limited only to licensed financial institutions.


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No ( )



IOSCO Relevance

PRIVATE PLACEMENT

10. Whether there is a specific regulation for private placement of financial instruments? Please define private placement. 14

This Assessment does not constitute legal advice. Readers are advised to seek appropriate legal advice before entering into any transaction, making any determination or taking any action related to matters discussed herein. The contents of this Assessment are copyrighted. For further information or eventual comments please contact Gian Piero Cigna at [email protected]

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