The framework for regulation and supervision of the securities markets is well developed and satisfactory, and there is full or partial observance of all of the International Organization of Securities Commissions' Principles, according to a 2002 Financial System Stability Assessment by the International Monetary Fund (IMF). The assessment did raise a number of issues, however. Chief among these is the fact that the Financial Supervisory Authority (FI) lacked sufficient legal authority to adequately enforce compliance with securities laws or to react effectively to non-compliance concerns short of withdrawing a license. As the FI cannot apply penalties directly to regulated entities, it has to rely on the public prosecution function and as a result, enforcement tools are limited. Enforcement is further hampered by the FI's lack of authority over individual employees of investment firms or ability to compel evidence or production of documents from third parties. Given the increasing integration of Nordic/Baltic financial markets through the OMX exchange group, supervisory arrangements between the regulation authorities, currently in the form of Memoranda of Understanding, may have to be strengthened, as a 2007 IMF paper contemplated.

General Overview

According to the IMF's 2002 Financial System Stability Assessment (FSSA), Sweden has a well developed framework for the regulation and supervision of the securities markets and is in full or partial compliance with the International Organization of Securities Commissions' (IOSCO) Principles. However, the assessment focuses on the need to improve the oversight of exchanges and clearing and settlement systems, rules for market intermediaries and issuer disclosure, and the risk management and supervision of clearing and settlement. It also points out weaknesses in the enforcement authority of the Swedish Financial Supervisory Authority (Finansinspektionen, or FI), noting that its power to penalize non-compliance and the scope of its enforcement tools are limited. More positively, the IMF mentions that there are high accounting standards that are nearly in compliance with the International Accounting Standards Committee (IASC) standards.

The Swedish Companies Registration Office (Bolagsverket) website indicates that a new Swedish Companies Act entered into force on January 1, 2006, which is contained in the Swedish Code of Statutes, SFS 2005:551 and the Companies Ordinance, SFS 2005:559. The Companies Act includes provisions pertaining to (1) formation of a new company, (2) articles of association, (3) board of directors, managing director, and signatory power, (4) auditor, (5) new issue of shares, (6) subscription rights, (7) distribution of profit at an extraordinary shareholders' meeting, (8) reduction of share capital, (9) reserve fund, (10) mergers, (11) division, (12) deferred contribution in kind, (13) public limited liability companies, and (14) adaptation of the articles of association to the new legislation. On July 1, 2007, additional changes to the Companies Act entered into force relating to shares, merger and division, the memorandum of association, and proposition. New legislation on the securities market (SFS 2007:528) replaced the Securities Business Act and Securities Clearing Operations Act on November 1, 2007, with changes regarding tied agents. Legislation applying to cross-border mergers took effect on December 15, 2007. In addition, legislation pertaining to audits is expected to enter into force in mid-2008. The FI website mentions new regulations implemented in July 2007 that require financial reports be submitted to the FI and the disclosure of changes in shareholdings to FI, based on the European Union's (EU) Transparency Directive. In addition, the EU Takeover Directive entered into effect in Sweden in July 2006 and the EU Directive on Markets in Financial Instruments (MiFID) was implemented in 2007.

The FI is responsible for the supervision, regulation, and licensing of the financial markets. The 2008 FI report on "Who We Are and What We Do" explains that its duties include supervision of financial stability, including risk management; supervision of the market, including conduct, consumer protection, and conflict of interest; and establishing rules and issuing licenses for operation in the financial markets. The 2006 OMX Nordic Exchange annual report indicates that the Nordic Exchange has an independent unit to carry out market surveillance which includes the listing process and ensuring compliance with Exchange rules by listed companies. In Sweden, the capital markets play a large role in the economy and offer a number of investment products, as reported in the 2002 IMF FSSA. Market intermediaries, and in particular four major financial groups and their subsidiaries, dominate the securities industry. There is ongoing integration of financial markets in the Nordic region, according to the 2007 Wajid et al. report on financial integration in the Nordic-Baltic region. The Norex alliance promotes cooperation, integration and harmonization of the Nordic-Baltic financial markets, and has unified membership requirements and trading rules. The OMX Nordic Exchange was launched in 2006 and owns seven of the eight stock exchanges that deal in securities and derivatives in the region, including the OMX Nordic Exchange Stockholm. According to the OMX Nordic Exchange 2006 annual report, between 2005 and 2006 equity transactions increased by 46 percent and equity value increased by 36 percent. Traded derivative contracts also increased by 15 percent. The Nordic Exchange has the fifth largest number of transactions in Europe and holds a market share of 7 percent.

The 2007 Wajid et al. report states that Memoranda of Understanding (MoUs) strengthen cooperation between the regulators of the Nordic states, but need to better address the supervisory oversight challenges of integration. The report suggests that the MoUs should include large banks and national supervisors. Also they could provide for a disagreement resolution mechanism and allow supervisory colleges for conglomerates to take regulatory action. Effective cooperation becomes increasingly important among the regulators as the stock markets are being consolidated and challenges for cross-border supervision emerge, including with regard to clearing and settlement systems. In 2004, the Finnish Central Securities Depository (APK) and the Swedish Central Securities Depository (VPC) merged to create the Nordic Central Securities Depository (NCSD) but its effectiveness is still in question. The FI is an ordinary member of IOSCO (IOSCO website).

The Principles

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

II

According to the 2002 IMF FSSA, "the general preconditions for effective securities regulation in Sweden appear to be in place" (p. 54). FI rules and other relevant legislation provide a good foundation for regulation, and the FI generally has sufficient authority to complete its responsibilities. The FI is responsible for the supervision, regulation, and licensing of the financial markets. However, the IMF assessment does not explicitly address Sweden's compliance with this principle. The 2008 FI report explains that its duties include supervision of financial stability, including risk management; supervision of the market, including conduct, consumer protection and conflict of interest; and establishing rules and issuing licenses for operation in the financial markets. However, there is little information publicly available addressing Sweden's actual compliance with this principle.

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

II

The 2002 IMF FSSA reports that the FI is both independent an accountable. However, the publicly available information does not explicitly address Sweden's compliance with this principle.

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

II

According to the 2002 IMF FSSA, the FI generally has sufficient authority to complete its responsibilities. However, the FI requires greater authority and resources, such as more staff in order to carry out thorough on-site investigations. Also, greater staff expertise is needed in certain areas, such as mutual fund supervision and clearing and settlement. The assessment recommends that the FI's authority be strengthened by giving it the ability to take interim action and assess penalties and fines resulting from corrective action. However, there is little information publicly available addressing Sweden's actual compliance with this principle.

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

FC

The FI maintains a clear, consistent, and transparent regulatory process and observes a high level of professional standards, as reported in the 2002 IMF FSSA. It involves stakeholder groups in the process of implementing rules and discloses the necessary information on its website.

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

FC

The 2002 IMF FSSA conveys that the FI observes a high level of professional standards. It involves stakeholder groups in the process of implementing rules and discloses the necessary information on its website. There is also a comprehensive set of laws governing confidentiality requirements.

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

The 2002 IMF FSSA recommends that, while Sweden utilizes both formal and informal self-regulatory organization (SROs), it should evaluate its informal relationships and initiate greater control in those areas, to balance the power. However, there is little information publicly available addressing Sweden's actual compliance with this principle.

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.

CP

While the 2002 IMF FSSA recognizes that Sweden's use of SRO's generally complies with the IOSCO Principles, it suggests that in Sweden the use of SRO's should not be used to replace the FI's regulation but complement it. It also recommends that there be greater oversight of SROs by the FI, particularly the stock exchange and the Central Securities Depository (VPC).

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

II

According to the 2002 IMF FSSA, the FI needs the authority to compel third parties to disclose evidence. The assessment recommends that the FI's authority be strengthened by giving it the ability to take interim action and assess penalties and fines resulting from corrective action. In addition, in order to conserve resources, the FI has adopted a risk-based approach to inspections, but it is insufficient to evaluate market participant compliance with rules and regulations. However, the IMF assessment does not explicitly address Sweden's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

NC

The 2002 IMF FSSA reports that the FI's enforcement capabilities are weak and suggests that providing the FI with the authority to conduct full enforcement proceeding, and the power to sanction non-compliance with fines and penalties, not just revocation of licenses, would improve its enforcement capabilities.

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 2007 IMF FSSA, the resources being dedicated to the inspection of investment firms, mutual funds, and SROs need to be increased. In addition, the assessment suggests that the stock exchange be better supervised. However, the IMF assessment does not explicitly address Sweden's compliance with this principle.

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

II

As mentioned in the 2002 IMF FSSA, the FI is a party to several information sharing agreements. Within the EU, the FI participates in the Committee of European Securities Commissions, the Conference of European Insurance and Occupational Pensions Supervisors, and the Committee of European Banking Supervisors. It participates in three global supervisory bodies: the Basel Committee for banking Supervision, IOSCO (securities), and the International Association of Insurance Supervisors. However, the information does not directly address Sweden's compliance with this principle.

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.

II

See Principle 11.

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

See Principle 11.

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

NC

The IMF's 2002 assessment notes that while the requirements for prospectuses are in place the "monitoring of compliance with the rules is weak for unlisted and O list securities (second tier listings on Stockholm's borsen)" (p. 56). Only listed companies are subject to continuous disclosure standards. The IMF's assessment criticized that, overall, Sweden's regulation with respect to issuer regulation "has not kept pace with international standards" (p. 21). Weaknesses were made out in the prospectus review process, in continuous disclosure requirements and protections for minority shareholders, and the fact the bulk of issuer regulations is administered by the Stockholm Stock Exchange is not appropriate. The assessment noted that while Sweden's insider reporting requirements and insider dealing legislation are sufficient, the weak enforcement powers of the FI hinders investigations. According to the assessment, "increased attention to continuous disclosure, and to minority shareholder rights (more stringent rules regarding public float, takeover bids, voting shares and non-arm's length transactions) could improve the environment" (p.21).

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

NC

See Principle 15.

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

II

The publicly available information pertaining to this principle does not directly address Sweden's compliance with this principle. During the early 1990s, the Swedish Financial Accounting Standards Council (Redovisningsradet) began issuing accounting standards (referred to as RRs) for listed entities. The IAS Plus 2002 update explains that the RRs diverge from International Accounting Standards (IASs) only when those standards conflict with Swedish laws. Sweden had therefore been following the international standards with modifications in line with the national tax and legal requirements since 1991 and several other International financial Reporting Standards (IFRSs) were translated and implemented in 2001, prior to the July 2002 European Commission Regulation (EC) No 1606/2002, which required the adoption of IFRSs issued by the International Accounting Standards Board. This Regulation requires that all EU listed companies beginning January 2005 must prepare their consolidated financial statements following IFRSs endorsed by the EC.

As pointed out in a 2004 paper by Fredriksson and Johansson, the Swedish Companies Act lays down detailed regulations concerning limited companies, including regulations on auditing and the functions of the auditor. The Auditor's Act spells out the difference between an approved and authorized auditor and in what form their business can be practiced. Further, this Act also explains the auditor's obligations with regard to "where the GAAP comes first followed by the regulations that will guarantee the auditor's independence" (p. 13). The Auditor's Act also clarifies what information the auditors need to disclose to the Supervisory Board of Public Accountants (Revisorsnämnden), and the disciplinary actions that can be initiated in cases of non-compliance with the legal requirements.

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.

II

The 2002 IMF assessment noted that "mutual fund licensing requirements are generally satisfactory. Conflicts of interest rules, particularly in a conglomerate setting, could be improved and supervision of mutual funds should be strengthened". (p. 56) However, there is little information publicly available addressing Sweden's actual compliance with this principle.

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

See Principle 17.

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

See Principle 17.

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

The 2002 IMF assessment urged that "net asset valuation calculation should be monitored more stringently and there should be rules governing valuation of illiquid securities" (p.56). It does not directly address Sweden's compliance with this principle however.

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

II

Investment firms are regulated by full licensing and capital adequacy rules, according to the 2002 IMF assessment. The FI has the appropriate supervisory authority over investment firms. The IMF noted that "inspections could be strengthened and the ability to take interim measures against an investment firm would improve FI's ability to enforce compliance with its rules" (p. 57). It also noted that better capital regulation could be achieved via more regular financial reporting requirements and "FI's practical ability to handle the failure of a major investment firm without undue market disruption would be hampered by its limited authority to take positive action" (p. 57). However, the IMF assessment does not explicitly address Sweden's compliance with this principle.

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

II

See Principle 21.

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

According to the 2002 IMF assessment, the FI does not license individuals or set "proficiency requirements for traders, advisors, portfolio managers, compliance officers, or officers and directors of the investment firms and mutual fund managers" (p. 57). The IMF noted in 2002 that the FI was planning to issue general guidelines on proficiency at the time. However, the IMF assessment does not explicitly address Sweden'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.

II

See Principle 21.

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

II

According to the IMF's 2002 assessment, the FI has "taken an advanced approach to marketplace regulation -- setting clear and adequate standards for exchanges and alternative trading systems" (p. 57). Overall, the assessment deemed transparency requirements to be adequate and noted that rules are in place to detect market abuse. The supervision of the Stockholm Stock Exchange (since 2006 the OMX Nordic Exchange Stockholm), however, required improvement. In spite of the above information, there is little information publicly available addressing Sweden's actual compliance with this principle.

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.

II

See Principle 25.

27. Regulation should promote transparency of trading.

II

See Principle 25.

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

II

See Principle 25.

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

II

See Principle 25.

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.

II

The new Nordic Central Securities Depository (CSD), was created in late 2004 through the consolidation of Swedish VPC and Finnish APK. It is the leading Nordic CSD operator, covering approximately 70 percent of the total Nordic CSD operations. The 2002 IMF assessment does not reflect this merger and there little further information publicly available that addresses Sweden's compliance with this principle.