A shift of paradigm in legislation is normally triggered by flaws or loopholes in the substance of the existing legislation. Looking at the draft bill for the revision of the Financial Market Infrastructure Act (FMIA), this does not seem to apply to the Swiss government, which proposes to change the current regime of disclosure obligations of Swiss listed companies for the sake of changing it from self-regulation to government regulation.
As described in more detail in this edition of CapLaw, the Swiss legislator proposes inter alia to transfer the provisions governing the obligation to disclose price-sensitive information (ad hoc disclosure) and to report transactions of its management and its board of directors in shares and other equity securities (management transactions) from the self-regulation of stock exchanges to governmental legislation. The proposed rules are not only a shift of paradigm, but also a clear divergence of the core principle of self-regulation for trading venues stipulated in article 27 of the FMIA). The explanatory report of the Swiss Federal Department of Finance makes it clear that the only major shortcoming of the existing regulation, in the department’s opinion, is the fact that it was enacted by the stock exchanges themselves rather than the government.
The proposed change of regulation is explained as follows: “To strengthen the reputation of the financial centre, it is necessary to take measures to improve the prevention, detection and sanctioning of market-abusive conduct. This can be done in particular by transferring issuer obligations that are important for market integrity from the self-regulation of trading venues to government law.” (Amendment to FMIA, Explanatory Report (Erläuternder Bericht zur Vernehmlassung, Berne 19 Juni 2024 (p. 8)).
We are not aware of any allegations from abroad or within Switzerland that the current regime of self-regulation of issuer obligations, which appears to be the predominant regime worldwide outside the EU, has negatively impacted the reputation of the Swiss financial center. To the contrary, such reputation has rather been impacted by events like the allegations of money laundering against private banks or allegations of non-compliance with sanctions and anti-terrorist funding regulations of certain Swiss banks or – at least for some – also the write-down of AT1 bonds of Credit Suisse in the context of its merger with UBS. Banks and other institutions supervised by Federal regulators pursuant to governmental laws have been at the center stage of such allegations. No events or shortcomings with a comparable impact on the reputation of the Swiss financial center have been reported in the realm of the self-regulated supervision of listed companies. Yet, the government tries to portray the transfer to government regulation as a key necessity to safeguard the reputation of the Swiss financial center.
In the government’s view, ad hoc disclosure and the reporting of management transactions seem to be the cornerstones of market integrity on trading venues. However, they are not. Market integrity on trading venues is safeguarded by insider trading and market abuse prohibitions. While we believe the Swiss insider trading prohibition does not need a “stringency” overhaul, we see room for more rigor in the criminal offense of market manipulation whose scope should cover a broader set of patterns of market abuse. This could and should be addressed before dropping the current regime of self-regulation absent a sound basis. In contrast, the underlying purpose of ad hoc disclosure and the reporting of management transactions is to bring all interested market participants to the same level of information, i.e. shall ensure market efficiency. And even if ad hoc disclosure and market manipulation were, in addition to market efficiency, indeed the key elements of market integrity: why could such integrity not be safeguarded by a self-regulatory regime? Again, the explanatory report accompanying the draft bill for the revision of the FMIA fails to detail any shortcomings of the current regime.
The Swiss government appears to look to the European Union as sole role model where there is no room for self regulation in the thicket of financial market regulation. Regulation and the costs associated therewith are considered the main driver for de-listings, which in recent years have outnumbered listings significantly also in Switzerland. Yet, rather than enacting legislation or other measures to counter this trend, the government prefers to add another layer of regulation to an ever smaller number of entities to be regulated as a result of such regulation.
Sadly, one must conclude that an implied “superiority” of governmental legislation vis-à-vis self-regulation seems to have been the guiding principle for a shift of paradigm in Swiss financial market infrastructure regulation. Whether or not there is a need for such change appears to be irrelevant. Yet, self-regulation is not a weakness or even an illness that needs to be cured. On the contrary, the ability of a market to self-regulate is a strength in our view.
The editors