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Enforcement / Market Supervision

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» Market Supervision
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Enforcement

"Enforcement" is the generic term used to describe all the functions performed by FINMA when confronted with indications of violations of supervisory provisions, in order to establish, in accordance with the rules laid down in the Swiss Federal Administrative Procedure Act, whether such violations have actually occurred. If such a breach has occurred, FINMA will make a ruling, which may be appealed, regarding any enforcement measures that may be required to restore compliance with the law, or will impose sanctions for any impropriety that has been established.

Typical investigation process
FINMA typically conducts financial market enforcement proceedings in three stages: the first stage involves making preliminary enquiries before actual administrative proceedings and any appeal process are initiated in the second stage. Once a final and binding decision has been made, the third stage involves implementing the specific measures ordered by FINMA.

  • At the preliminary enquiry stage, FINMA seeks to establish if there are reasonable grounds for believing that a supervised company, or even an individual, has committed any supervisory breach such as to warrant a detailed and potentially extensive investigation of the case in the course of administrative proceedings.
  • If there is sufficiently strong evidence of a supervisory violation and there is no other way to rectify the situation, FINMA will initiate an investigation i.e. administrative proceedings. Notice of such proceedings is generally issued to the affected parties in writing (Art. 30 of the Swiss Financial Market Supervision Act ("FINMASA")). FINMA initially investigates the facts of the case and may take evidence from the parties and examine witnesses for this purpose. If appropriate, FINMA may make an interlocutory order at this stage, for example for the appointment of an investigating agent (Art. 36 FINMASA). Once FINMA has established the facts, it will invite the parties to comment. Having considered the submissions of the parties, the Enforcement section refers the matter to the Executive Board Enforcement Committee (ENA) or to the Board of Directors. If FINMA has made a ruling and an appeal against the decision is lodged with the Federal Administrative Court, the same person in charge of the litigation in the Enforcement section will monitor the appeal process until a final judgment on the matter is delivered by the Federal Administrative Court or Federal Supreme Court.
  • Once a final decision has entered into force and the administrative proceedings brought to a close, the decision must be implemented. Depending on the substance of the ruling, either the Enforcement section remains responsible for implementation or the matter is referred to the divisions in charge of ongoing regulatory activities.

Types of proceedings
FINMA distinguishes between the following types of administrative proceedings for the purposes of financial market enforcement:

  • Regulation of institutions: administrative proceedings against authorised institutions and companies (e.g. banks, securities dealers, fund management companies, distributors, insurance companies and self-regulatory organisations under the Anti-Money Laundering Act as well as approved audit companies).
  • Subordination process: proceedings against companies and individuals carrying on a business for which a FINMA licence, authorisation, registration or approval is required.
  • Insolvencies: bankruptcy proceedings including proceedings for the purpose of restructuring of ailing banks pursuant to the Swiss Banking Act and Swiss Stock Exchange Act.
  • Market supervision: investigative proceedings to establish whether market participants are in breach of FINMA Market Behaviour Rules.
  • Disclosure matters: proceedings to establish whether investors are in breach of stock exchange disclosure and reporting requirements. 
  • Product supervision: proceedings against approved fund products.
  • Watch list and undertaking letter: any action that may be required by FINMA in relation to legal disputes ranging from entries in the watch list to letters regarding undertakings given in respect of the proper conduct of business.

FINMA's enforcement actions are primarily taken against companies under supervision or carrying on business without the necessary licence or authorisation. However, where a serious supervisory breach is suspected, FINMA may in addition, or exclusively, initiate administrative proceedings against individuals, for example executive officers, proprietors or employees of supervised companies. Furthermore, FINMA may commence administrative proceedings against unsupervised individual investors in public companies if there is reason to suspect that they have failed to comply with their disclosure obligations.

Measures
In all administrative proceedings, FINMA will impose the measures it deems most appropriate to enforce compliance with the law, having regard to the principle of due proportionality. The measures available include a reprimand (declaratory ruling, Art. 32 FINMASA), specific orders to restore compliance with the law (Art. 31 FINMASA) and the authority to prohibit individuals from practising their profession (Art. 33 FINMASA) or dealers from carrying on business (Art. 35a Swiss Stock Exchange Act), to order a supervised institution to remove a person in a position of responsibility and to revoke licences (Art. 37 FINMASA). Depending on which law applies, the revocation of a licence may result in liquidation (e.g. Art. 23quinquies Swiss Banking Act) or, where there is an excess of debts over assets, bankruptcy proceedings (e.g. Art. 37 FINMASA in conjunction with Art. 25ff. of the Banking Act). FINMA may also confiscate any illegal gains or losses avoided (Art. 35 FINMASA) or order publication of a final and binding ruling (Art. 34 FINMASA).

Where there is risk in delay or special urgency, FINMA may make the necessary interlocutory order (Art. 31 FINMASA, Art. 25ff. Swiss Banking Act), for example for the appointment of an investigating agent (Art. 36 FINMASA).

Enforcement strategy
Enforcement is just one of several mechanisms for enforcing regulatory compliance. This can have a significant impact on the parties involved, and FINMA takes great care in considering how and when to apply such measures. Enforcement activities are also influenced by factors such as annual targets and the FINMA enforcement strategy, which will be formulated in the course of 2009.

Market Supervision

The stock exchanges, FINMA and (for matters of criminal law) the cantonal criminal prosecution authorities are regularly involved in proceedings relating to market supervision and the prosecution of stock exchange offences.

As self-regulating institutions, under Article 6 (1) of the Stock Exchange and Securities Trading Act (SESTA) Swiss stock exchanges must monitor their markets to discover insider transactions, price manipulation and other unlawful activity. Where there is any suspicion of such activity or other improprieties, exchanges must inform the supervisor, i.e. FINMA, promptly.
FINMA investigates the unlawful activity or other improprieties reported to it by the exchanges (Art. 6 (2) SESTA), or which FINMA itself suspects. The term "market supervision" has come into usage to refer to investigations into the market behaviour of supervised companies, executive officers and employees of these companies, and all other companies and individuals. However, note that in proceedings against supervised companies, no distinction is made between the terms "market supervision" and "regulation of institutions".

It is important to distinguish between two separate tasks when talking about market supervision. Firstly, FINMA has to investigate cases reported to it or which it has taken on, i.e. it must determine whether and to what extent initial suspicions prove to be justified. The preliminary enquiries cover all suspicious transactions and are not restricted to those carried out by regulated institutions or persons. At this stage the aim is to clarify who the actual investors behind the transactions in question are, whether they are subject to FINMA regulation and the nature of any improprieties. If these investigations lead to concrete suspicion that a criminal offence has been committed, FINMA is then obliged under Article 38 of the Financial Markets Supervision Act (FINMASA) to report this to the cantonal criminal investigation authorities. If it turns out that the suspicion relates to regulated institutions or persons, FINMA carries out regulatory proceedings against those financial intermediaries or persons which come under its authority and if necessary orders any appropriate action to be taken.

As fit and proper business is a condition of authorisation, FINMA applies higher standards to the financial institutions and persons that come under its authority than those set out in the definition of a stock exchange offence in Articles 161 and 161b of the Swiss Penal Code. This includes dealings that are not themselves punishable as stock exchange offences. The Federal Supreme Court has ruled that a regulatory breach of the principle of good faith can be present even where there has been no criminal offence. The requirements of FINMA regulatory law and its tightly-worded punishment guidelines ensure that institutions and persons regulated by FINMA are subject to stricter rules of behaviour overall in securities dealing than market participants who do not come under FINMA regulation.

Insolvency

As an insolvency authority, FINMA is responsible both for initiating and conducting restructuring and bankruptcy proceedings in relation to individuals and legal entities operating as a bank or as a securities dealer, for which a licence is required. FINMA may prescribe measures to be taken in advance or accompanying measures to protect investors. It also has a right, which the bankruptcy judge is obliged to respect, to participate in insolvency proceedings relating to insurance companies. Where FINMA is responsible for initiating bankruptcy or restructuring proceedings, it does not merely perform the function of judge and supervisory authority in relation to the appointed liquidators, committees of creditors and restructuring agents, but, in many areas, also discharges the duty of insolvency administrator. As a result, bank depositors, investors in relation to securities dealers, and policyholders of insolvent insurance companies benefit from special protective provisions (see also Investor protection and Tied assets).