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b) Disclose inside information to any third party unless such disclosure is made in the normal course of the exercise of his employment, profession or duties;

c) Recommend to or procure a third party, on the basis of inside information, to acquire or dispose of Publicly Held Securities.

Analysis - The Securities Market Law (SML). The SML is drawn on German model and mostly reflects the international best practice in the field described in "The Objectives and Principles of Securities Regulation" adopted by the International Organization of Securities Commissions (IOSCO), but it has the following weaknesses: (i) It does not cover collective investment schemes (CIS), such as investment funds, and therefore there is currently no legal basis for the operation of CISs in Georgia¹³. Meanwhile, the experience obtained from the Central and Eastern Europe indicates on crucial importance of CIS, such as investment funds, in increasing the corporate governance standards and facilitating the trust amongst investors towards stock markets; and (ii) The NSCG does not have an authority to supervise private placements.

More specifically, the World Bank (WB) and the International Monetary Fund (IMF), also conducted the Assessment of the Implementation of the Objectives and Principles of Securities Regulation of The International Organization of Securities Commissions (IOSCO) in Georgia. The assessment identified quite a lot of problems in the operation of the securities regulator, the functions of which is assumed by the National Securities Commission of Georgia (NSCG). Namely, the report lists the following problems: (i) NSCG has a seriously insufficient budget; (ii) Code of ethics for NSCG staff is awaited; (iii) No specific oversight program to supervise self-regulatory organizations (SROs) has been established; (iv) Inspection and investigation powers of the NSCG over Reporting Companies and their major shareholders are not adequate; (v) Enforcement power of the NSCG on the basis of criminal legislation is limited; (vi) International Accounting Standards (IAS) are recognized but are not fully adopted in practice; (vii) There in no legislation on Collective Investment Schemes (CIS) in Georgia; (viii) There is no market surveillance and stock watch system to detect abnormal movements and unfair trading practices.

More detailed results of the assessment are summarised in Table 1.2.2.1 below:

Table 1.2.2.1 Georgia: Assessment of the Implementation of the IOSCO Principles

for Securities Regulation

IOSCO Principles for Securities Regulation

C¹⁴

PC¹⁵

MNC¹⁶

NC¹⁷

NA¹⁸

Comments

Principle 1 - Clear responsibilities. The responsibilities of the regulator should be clearly and objectively stated.

X

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

X

• The scope of accountability is limited.

• Lack of legal immunity for NSCG staff acting in good faith.

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

X

Seriously insufficient budget. As the market develops, more revenue from fees can be expected.

Principle 4 - Clear and consistent regulatory process. The regulator should adopt clear and consistent regulatory processes.

X

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

X

Code of ethics awaited, and introduction of a system of independent assessment may be considered.

Principle 6 - Use of Self‑Regulatory Organizations (SROs). The regulatory regime should make appropriate use of 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.

X

Principle 7 - Supervision of Self‑Regulatory Organizations (SROs). SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

X

No specific oversight program to supervise SROs has been established.

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

X

• Inspection power over Reporting Companies and their major shareholders is not adequate.

• Investigation power not adequate.

Principle 9 - Adequate enforcement power. The regulator should have comprehensive enforcement powers.

X

Enforcement power on the basis of criminal legislation limited.

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

X

Limited power was well used. Faced with a severe resource constraint.

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

X

Principle 12 - Information sharing mechanisms. 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.

X

No specific MOU or other agreement / procedure has been established.

Principle 13 - Assistance to foreign regulators. 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 the exercise of their powers.

X

Lack of legal immunity of NSCG staff in handling sensitive information in good faith.

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

X

Sound rule but compliance needed (due to the lack of enforcement power of NSCG over Reporting Companies?)

Principle 15 - Fair and equitable treatment of securities holders. Holders of securities in a company should be treated in a fair and equitable manner.

X

Compliance needed. (Private rights of action including class action are not established while the NSCG’s enforcement power over Reporting Companies is limited.)

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

X

IAS recognized but not fully adopted in practice.

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

X

No law, no CISs.

Principle 18 - Legal form and structure. 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.

X

No law, no CISs.

Principle 19 - Disclosure for suitability and valuation. The regulations 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.

X

No law, no CISs.

Principle 20 - Basis for valuation and pricing for redemption. The regulations 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.

X

No law, no CISs.

Principle 21 - Entry standards. The regulations should provide for minimum entry standards for market intermediaries.

X

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

X

Monthly capital. adequacy report not audited. NSCG does not have power to reject an auditor.

Principle 23 - Internal organization and operational conduct and risk management. 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.

X

No specific requirement of compliance officer / dept. with specific responsibilities.

Principle 24 - Procedures for failure. 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.

X

No procedures to manage winding down of a failed broker although other investor protection legislation, and regulations have been prepared.

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

X

Principle 26 - On-going supervision of exchanges and trading systems. 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.

X

• NSCG has no real time access to trading information, no real time oversight.

• SML does not expressly require fair trading rules for different members.

Principle 27 - Trading transparency. The regulations should promote transparency of trading.

X

SML does not expressly require real time transparency of pre-trade information for direct market participants.

Principle 28 - Detection and deterrence of unfair trading practices. The regulations should be designed to detect and deter manipulation and other unfair trading practices.

X

No requirement of market surveillance / stock watch system to detect abnormal movements.

Principle 29 - Management of exposures, default risk and market disruption. The regulations should aim to ensure the proper management of large exposures, default risk and market disruption.

X

Principle30 - Oversight of clearance and settlement systems and management of systemic risks. 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.

X

• The GCSD needs to comply with the requirement of ownership structure.

• The legal requirement for efficiency in settlement arrangements could be stated more explicitly.

1. Employment Regulations in Georgia

Labor Code. The Labor Code of Georgia regulates labor relations between workers and employees living in Georgia and enterprise, institution and organization (regardless their ownership and organizational legal form), supports to realization of human rights and freedoms through labor fair reimbursement (legal payment), creation of safe and healthy working conditions for all employees and workers including the working conditions for minors and women. On the basis of international agreements regulating labor relationships, the state protects the labor rights of Georgian citizens abroad. Foreign citizens and stateless persons living in Georgia have the rights and obligations equal to the rights and obligations of citizens of Georgia with some exceptions envisaged by the Constitution and law.

Nondiscrimination. Under the constitution labor is free. Each person has right to choose its field of activity and profession. Discrimination in obtaining a job, or in the workplace, based on race, skin color, language, sex, religion, political and other beliefs, national, ethnic and social origin, property and title of nobility or place of residence is prohibited.

Minimum and Maximum Age of Employment. According to the legislation of Georgia minimum working age is 16 years. Maximum working age is not determined, but pension can be given to a man in the age of 65 years and a woman in the age of 60 years.

Working Hours. According to the Labor Code of Georgia the duration of the working period is:

- 41 hours per week, with five working days;

- 36 hours per week in certain dangerous or unhealthy activities or jobs.

- The duration of a working day totals 8 hours and 15 minutes.

- Thus, the number of working days per month equals 21,1 days.

- Minimum leave is equal to a total of 24 working days.

Wages. Reimbursement of labor is carried out according to labor amount and quality. According to the legislation, minimum level of salary is determined in the amount of 20 GEL. The nominal average monthly salary of an employee in 2001 made up 91.4 GEL. Higher labor reimbursement is considered for employees working in certain dangerous or unhealthy climatic conditions. However, the wages for each professional category are usually negotiated in labor agreements.

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