1 Implementation and Enforcement Issues 20 November 2003 Hideki Kanda University of Tokyo

2 The Basic Topic  Rules must be implemented and enforced.  Are existing rules on corporate governance (in particular, securities regulation) suitable for effective implementation and enforcement?  What systems and resources exist in each Asian jurisdiction for effective implementation and enforcement of rules?

3 1. General Question: Three Types of Sanctions (Civil, Criminal and Administrative)  Q1-1: What should be the optimal mix of civil, criminal and administrative sanctions?  Q1-2: There are two distinct sets of law in securities regulation: disclosure rules and anti-fraud rules. How should the above-mentioned three types be appropriate for each set of law? For example, is criminal sanction effective for the enforcement of disclosure rules? Is it more suitable for anti-fraud rules? (Note: Administrative rules mean various means by the regulator applied to the regulated persons, typically brokers and dealers, such as a cease and desist order. But in some countries, the regulator may be empowered to set aside an illegal activity by anyone without going to the court, and this may be considered as an administrative relief.)

4 2. Civil Remedies  Q2-1: In your country, are civil remedies effective in the enforcement of securities regulation? Are injunctions popular? If not, why? How about damage claims?  Q2-2: Since each investor's loss resulting from a violation of securities law is rather small, certain system such as the class action system seems necessary for the effective enforcement of securities law. Does your country have the class action system? If not, do you plan to introduce it? What is your position?

5 3. Criminal Sanctions  Q3-1: In your country, is criminal sanction popularly used? Is it effective? If not, why?

6 4. Administrative Remedies  Q4-1: In your country, how active is the regulator in enforcing rules in securities regulation? Give us examples. If this remedy is not actively used, what is the problem?  Q4-2: In your country, is the regulator empowered to sue for "civil penalty"? If not, do you think such system should be introduced?  Q4-3: In your country, is the regulator empowered to issue an injunctive order with or without going to the court? Please explain the practice.

7 5. Certain Specific Areas  Q5-1: In your country, how effectively are the rules on insider trading enforced?  Q5-2: In your country, how effectively are anti- manipulation or other "anti-fraud" rules enforced?  Q5-3: In your country, how are disclosure rules enforced?

8 Findings: From Responses to Questionnaire  Enforcement investigations and actions with sanction range from 10 to 200 per year.  Investigations are initiated primarily by information from 4 categories: (1) public documents or information, (2) other governmental sections, (3) "insiders" and (4) investors.  Administrative sanctions are most popular, and indeed dominant in most Asian jurisdictions. Then, criminal, and civil sanctions follow. Civil remedies seem rare.  Whether the administrative body has sufficient staffs is not entirely clear.

9 Topics for Discussion (1)  How effective are administrative sanctions? Can we improve them? How?  "cease and desist orders"?  injunctive orders?  civil penalty?  To whom? (broker-dealers or anyone?)  Does the administrative body have enough staffs?

10 Topics for Discussion (2)  Criminal sanctions seem to be suitable for "extreme" cases. Is this correct? Does the existence of criminal sanctions have any deterrence effect on possible violations of rules in general?  criminal sanction for insider trading?  criminal sanction for other frauds (eg, manipulative conduct)?  criminal sanction of disclosure rules?

11 Topics for Discussion (3)  Civil remedies seem to be underdeveloped in Asia. Why?  lack of the solid judicial system (eg, courts and private attorneys)?  lack of the "class action system"?  lack of effective procedural rules (eg, rules on evidence)?  lack of incentives?