According to its 2006 report on Commercial Laws, the European Bank for Reconstruction and Development (EBRD) carried out a study in 2004 that assessed the securities market legislation in Kazakhstan against the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. The report found Kazakhstan to be in "medium compliance." Per the same report, a 2005 update of Kazakhstan's securities markets legislation showed improvements that nearly brought it to a high compliance level. In 2000, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of Kazakhstan's compliance with the IOSCO Principles, and in 2004 published an update of the FSAP. The 2000 FSAP concluded that, while the core legal infrastructure of the securities market was in place, the regulatory framework remained weak. Since 2000, Kazakhstan has substantially improved its legal framework for securities regulation by enacting the Law on the Securities Market and the Law on Joint Stock Companies in 2003. Effective January 1, 2004, the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Markets and Financial Organizations (FSA) became the single supervisory and regulatory authority for the securities market, replacing the National Securities Commission. As stated in the IMF's 2004 FSAP Update, while the new laws provide the FSA with a clear and consistent regulatory framework; it is still too early to assess their effective implementation, and no comprehensive assessment has been published since.

General Overview

In 2000, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of Kazakhstan's compliance with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation, and subsequently published an FSAP Update in 2004. The 2000 FSAP concluded that there was a core legal infrastructure of the securities market in place, but the regulatory framework remained weak. The IMF noted in 2004 that while Kazakhstan has substantially improved its legal framework for securities regulation, it is still too early to assess the effective implementation of the new laws due to the recent establishment of the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Markets and Financial Organizations (FSA). The extensiveness of securities regulation practices in Kazakhstan was also assessed in 2004 by the European Bank for Reconstruction and Development (EBRD), as reported in its 2006 Assessment on Commercial Laws of Kazakhstan. The EBRD came to the conclusion that securities legislation in Kazakhstan was in "medium compliance" with the IOSCO Principles. The 2004 results were substantiated in a 2005 update, which stated that improvements in Kazakhstan nearly brought it to a high level of compliance. However, weaknesses remained regulating investment service providers and combating money laundering.

The securities market in Kazakhstan is mainly regulated by the 2003 Law on Securities Market No. 461-II (hereafter referred to as "Securities Market Law"), and the 2003 Law on Joint Stock Companies No. 415-II. As noted in the EBRD's 2006 report, the Securities Market Law regulates securities and securities market participants, as well as the protection of investors' rights and securities holders. On January 8, 2003, according to Ernst & Young in a 2003 International Financial Law Review (IFLR) article, Kazakhstan adopted the new Law on Investments No. 375, which provides for equal treatment between domestic and foreign investment. Furthermore, the Investment Funds Law was enacted in July 2004 to set the basic investment rules and limits for investment funds. The securities market is supervised by the FSA, which was established on January 1, 2004 under the 2003 Law on Government Regulation and Supervision of the Financial Market and Financial Organizations No. 474-II. The FSA replaced the National Securities Commission (NSC). The FSA is the single supervisory and regulatory authority for the financial sector, and is financed from the National Bank of Kazakhstan's (NBK) budget. It is subordinated to the President of Kazakhstan. The FSA is an ordinary member of IOSCO.

The Kazakhstan Stock Exchange (KASE) has been operational since 1997 and is comprised of four different markets: the foreign currency market, the government securities market, the shares and corporate bonds market, and the derivatives market. The NBK has majority ownership of the KASE. At the end of 2007, as stated in the 2008 U.S. Department of Commerce (DoC) Country Commercial Guide, there were 69 listed companies, and total capitalization of the KASE amounted to 70.7% of GDP (i.e. $71.95 bn). Despite recent developments, the DoC reported that the exchange is still at a very early stage of development. Kazakhstan signed an "Agreement on the General Principles of Establishing a Securities Market" with Uzbekistan, Kyrgyzstan, and Tajikistan in 1998, allowing shares of Kyrgyz companies listed on the Kyrgyz Stock Exchange to be traded on the KASE.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that the 2003 laws, including the Law on Government Regulation and Supervision of the Financial Market and Financial Organizations and the Securities Market Law, "provide clear objectives, functions, responsibilities, and authorities of the FSA" (p. 34).

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

FC

As stated in the IMF's 2004 FSAP Update, this principle was observed in 2000. The IMF noted in 2004 that the FSA was characterized by "a high degree of operational independence" (p. 34), and was subordinate to the President of Kazakhstan. Furthermore, although the FSA is financed from the NBK's budget, it is neither accountable to nor dependent on the NBK. The IMF report recommended ensuring the FSA's full budgetary autonomy.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that "the FSA has a mandate to directly carry out surveillance of the market" (p. 35). Furthermore, it has the authority to obtain any relevant information from financial actors, including the NBK, self-regulatory organizations (SROs), and stock exchanges. Under the Securities Market Law, the FSA also has legal powers to cooperate with foreign regulators.

4. The regulator should adopt clear and consistent regulatory processes.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that "powers to make or adopt substantive and procedural rules and regulations as well as to ensure that regulations and procedures are consistently applied, comprehensible, fair, and equitable, are specified in the legislation" (p. 36). Evidence shows, however, that market participants do not fully understand all processes of the 2003 laws, as noted in the IMF's 2004 FSAP Update.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

FC

As stated in the IMF's 2004 FSAP Update, this principle was observed in 2000. The IMF stated in 2004 that "the staff of the FSA observes high professional standards, including those of confidentiality" (p. 36).

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

II

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended improving standards and processes regarding the licensing of self-regulatory organizations (SROs). In 1997, per the same report, the NSC, which was replaced by the FSA in 2004, licensed two organizations as SROs, the Association of Asset Management Companies (AAMC) and the Kazakhstan Registrars' Association (KRKCA). According to the IMF's 2004 FSAP Update, mandatory participation of licensed market participants in their relevant SRO was subsequently introduced in 2003. However, under the 2003 Securities Market Law, stock exchanges, including the KASE, are no longer statutory SROs. The IMF further noted that the AAMC and the KRKCA continued "to lack the capacity, credibility, and will to develop as SROs" (p. 37). However there is insufficient information on the role of SROs following the enactment of the Securities Market Law in 2003.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

NC

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. The IMF noted in 2004 that while the 2003 laws "provide clear objectives, functions, responsibilities, powers and authorities of SROs" (p. 34), the capacity and resources of the SROs are very limited. The IMF report reiterates its previous recommendation to develop effective supervisory standards and procedures for SROs. However, the available sources do not directly address Kazakhstan's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that the 2003 laws "provide inspection, investigation and surveillance powers of the FSA with respect to various professional market participants, stock exchanges, over-the-counter trading systems, SROs, issuers, and training centers" (p. 38). Conversely, illiquid markets, and trades outside of the exchange make it difficult for the FSA to perform its supervisory tasks. Moreover, the KASE still lacks a market surveillance system.

9. The regulator should have comprehensive enforcement powers.

EN

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. At the time of the 2000 assessment, the IMF report recommended strengthening legislation, including enforcement powers. The IMF noted in 2004 that significant improvements had been made regarding the regulator's enforcement powers, enabling it to impose administrative and financial sanctions.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

II

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. In September 1999, the NSC, which was replaced by the FSA in 2004, adopted instructions, determining the procedures for conducting inspections on the securities market and issuers. The IMF noted in 2004 that although the FSA has the authority to sanction wrongdoing if complaints are filed by market participants (e.g. investors), "surveillance by market participants is severely lacking and no violations are expected to be reported by market participants" (p. 40). However, the available sources do not directly address Kazakhstan's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that the 2003 laws "provide that the FSA has a right to request and receive information required for its activity in the securities market from government authorities, issuers, licensees and SROs" (p. 40). Furthermore, under the Securities Market Law, the FSA also has legal powers "to cooperate with foreign regulators, share information, and coordinate activities in the area of prevention and avoidance of violations in the securities market or in other issues of mutual interest" (p. 40).

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. Under the 2003 Decree on Regulations on Financial Market and Financial Organizations Regulatory and Supervisory Authority, according to the same report, the FSA is required to publicly disclose information on its website regarding its rules and regulations, information on issuers and issues, sanctions enforced, and licensees. Furthermore, progress has been made in establishing mechanisms to share non-public information with domestic and foreign regulators. The IMF noted in 2004 that although Kazakhstan has not established Memoranda of Understanding (MoUs) with foreign regulators yet, it collaborates with Russian authorities, and is preparing an MoU for ratification procedures.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

II

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. Limitations on sharing information and cooperating with foreign regulators have been addressed since 2000, and the FSA is empowered to "coordinate activities in the field of prevention and avoidance of violations in the securities market or in any other issue of mutual interest" (p. 41). The IMF report recommended clarifying procedures for providing assistance to foreign regulators with regards to voluntary cooperation, information on regulatory processes, and obtaining documents, statements, and testimony, as well as court orders. However, the available sources do not directly address Kazakhstan's compliance with this principle.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

II

This principle was materially non-observed in 2000, as reported in the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended fully disclosing timely and accurate financial results, as well as other information relevant for investors. According to the IMF's 2004 FSAP Update, the 2003 Securities Market Law provides for "full and fair disclosure of information about a securities issue and issuer" (p. 42), and the 2003 Law on Joint Stock Companies abrogates closed Joint Stock Companies (JSCs). Furthermore, an electronic filing and disclosure system was being considered. Per a 2005 Doing Business report by Baker & McKenzie, the 2003 Law on Joint Stock Companies establishes specific reporting and disclosure requirements for JSCs. Furthermore, the latter are required to publish their financial reports annually, and to report to the FSA semi-annually. However, the available sources do not directly address Kazakhstan's compliance with this principle.

15. Holders of securities in a company should be treated in a fair and equitable manner.

II

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. Under the 2003 Law on JSCs, per the same report, JSCs in Kazakhstan are organized under a two-tier system, and apply the "one share/one vote" principle. In its 2006 report on Commercial Laws, the EBRD came to the conclusion that corporate governance legislation in Kazakhstan was in "high compliance" with regards to the equitable treatment of shareholders. However, the available sources do not directly address Kazakhstan's compliance with this principle.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

II

This principle was materially non-observed in 2000, as reported in the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended ensuring the high compliance of accounting and auditing standards with internationally accepted norms. From 2003, as noted in the IMF's 2004 FSAP Update, financial institutions in Kazakhstan have been implementing the International Financial Reporting Standards (IFRSs) and the International Standards on Auditing (ISAs). Evidence showed however that only the larger financial institutions were able to apply IFRSs. Nonetheless, the available sources do not directly address Kazakhstan's compliance with this principle.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. Since 2000, per the same report, operators of Collective Investment Schemes (CIS) are subject to regulation, supervision, and enforcement by the FSA.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

II

As reported in the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. The IMF noted in 2004 that while the Investment Funds Law was enacted in July 2004 to set the basic investment rules and limits for investment funds, the securities market did not welcome any new investment funds since the end of 2000. According to the EBRD's 2006 report, there has been some improvement in the protection of investors in the area of CIS. However, the available sources do not directly address Kazakhstan's compliance with this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

II

As stated in the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. Since 2000, per the same report, conflict of interest issues have been addressed. The IMF noted in 2004 that while the Investment Funds Law was enacted in July 2004 to set the basic investment rules and limits for investment funds, the securities market did not welcome any new investment funds since the end of 2000. According to the EBRD's 2006 report, CIS operators are now subject to a general disclosure requirement. However, the available sources do not directly address Kazakhstan's compliance with this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

II

As reported in the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. In 2002, per the same report, Kazakhstan established a Valuation Committee "to evaluate domestic securities and to develop a calculation methodology for pension asset managements companies" (p. 45). Furthermore, the 2004 Investment Funds Law was intended to provide requirements for unified asset valuation. However, the available sources do not directly address Kazakhstan's compliance with this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. Per the same report, the 2003 Securities Law "provides most of the basic conditions for authorizing market intermediary business... licensee's preliminary requirements, and enforcement procedures" (p. 45). The law also includes more specific rules regarding internal control procedures.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended establishing sufficient capital requirements for market intermediaries. Since 2000, market intermediaries, stock exchanges, the Central Securities Depository (CSD), and over the counter trading systems are subject to minimum capital requirements and prudential ratios, which in turn are under permanent monitoring. The IMF report recommended improving the implementation of consolidated supervision, and taking a more risk-based approach to supervision.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

II

This principle was non-observed in 2000, as reported in the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended requiring market intermediaries to comply with a code of conduct with the aim of protecting the interests of clients. According to the IMF's 2004 FSAP Update, a code of conduct for market intermediaries ("Code of Ethics") was established by the KASE in 2002. The Code determines standards of fair activity, confidentiality, and principles of fair competition, and is mandatory for broker-dealers of the KASE. Per the same report, while requirements have been established for internal control procedures to assure compliance with the laws and regulations, as well as requirement of risk management capacity and procedures, changes are not visible to market participants. The IMF report recommended "increasing awareness and understanding of these procedures through workshops and campaigns" (p. 47). However, the available sources do not directly address Kazakhstan's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

NC

This principle was non-observed in 2000, as reported in the IMF's 2004 FSAP Update. At the time of the 2000 assessment, the IMF recommended establishing procedures to deal with the failure of a market intermediary. According to the IMF's 2004 FSAP Update, the FSA has the authority "to inspect and monitor liquidation and reorganization procedures of licensees" (p. 47). The IMF report notes that this principle is not directly regulated by effective legislation.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

FC

This principle was observed in 2000, according to the IMF's 2004 FSAP Update. Per the same report, "stock exchanges and over the counter trading systems as licensees are subject to supervision, licensing, and prudential regulation" (p. 47).

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

FC

This principle was observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that the FSA has the authority to suspend securities trades, and conduct close supervision of the over the counter market, which is required to submit weekly, quarterly, and annual reports. Furthermore, the KASE's internal documents are subject to FSA approval, and stock exchanges are required to form an internal control department. Per the same report, stock exchange members have equal rights and responsibilities.

27. Regulation should promote transparency of trading.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that while regulation promoted transparency, the securities market lack transparency "due to illiquidity and lack of order inter-action" (p. 48). Per the same report, the FSA expects the stock exchange to provide "pre- and post-trade information on an equitable basis to all market members" (p. 49).

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

II

According to the IMF's 2004 FSAP Update, this principle was materially non-observed in 2000. At the time of the 2000 assessment, the IMF report recommended introducing regulation to detect and deter market manipulation. Since 2000, although legislation prohibits market manipulation, as stated in the IMF's 2004 FSAP Update, the KASE still lacks a market surveillance system. The IMF report notes that a market surveillance department is being developed. However, the available sources do not directly address Kazakhstan's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. The IMF noted in 2004 that due to the illiquidity of the securities market, trades were settled on a "delivery-versus-payment" basis. Hence counterparty credit risk exposures do not apply to Kazakhstan. Per the same report, "transactions confirmation system, and information technology and software requirements were enhanced to avoid market disruption" (p. 50). The IMF report recommended establishing additional systems, and re-examining the solvency structure, as the market develops.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

CP

This principle was found to be largely observed in 2000, according to the IMF's 2004 FSAP Update. Per the same report, the CDS is subject to regulatory oversight by the FSA. In its 2004 FSAP Update, the IMF recommended improving monitoring, and designing systems for clearing and settlement of securities transactions to ensure that they reduce systemic risk, as the market develops.