Germany drafts transparency laws

Internal Auditor, June, 2004 by A. Scott

THE GERMAN GOVERNment has drafted three new financial-market laws to make the country more internationally competitive. According to a report in The Wall Street Journal, the new laws, agreed upon by the German cabinet, are designed to improve the market's transparency and integrity through monitoring corporate governance, improving insurance regulation, and strengthening investor protection.

The first law, drafted in response to recent corporate governance failures, creates a private enforcement unit to monitor an organization's balance sheets if their financial accuracy is called into question. The enforcement unit would also have the authority to conduct random audits at the request of BaFin, the German financial markets authority.

The second law attempts to improve the international competitiveness of German insurance companies by protecting those who are insured against financial market crises. Health and life insurers would be required to contribute to a fund based on the risk level of each company's business (currently, contributions to two similar funds are voluntary). According to the proposed law, the fund would cover all guaranteed claims for an insurer facing insolvency, and it would transfer existing contracts to another insurer.

Finally, requirements of the investor protection law would include:

* An attempt to sell stock--not just the actual sale--based on insider information would be considered a criminal act.

* Disclosure laws would apply to all those who are professionally involved in conducting and distributing financial analyses.

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* All executives with access to financially relevant internal information and who influence financial decisions--as well as their spouses, children, parents, and anyone who has lived in their household for a year or more--would be required to disclose dealings in their company stock.

* Companies traded outside the official stock markets would be required to provide prospectuses to the government if trading levels rise above a certain amount.

The laws will go to committees for discussion and then to the Bundestag, the lower house of parliament, for a vote. According to The Wall Street Journal, the German government expects the laws to go into effect in late 2004.