Austrian Financial Markets - Reforms to Meet

UNCLAS SECTION 01 OF 03 VIENNA 000444

SIPDIS

STATE FOR EUR/AGS
TREASURY FOR OASIA/ICN/VATUKORALA
TREASURY ALSO FOR OCC/EILEEN SIEGEL
TREASURY ALSO PASS FEDERAL RESERVE AND SEC/E.JACOBS
SECDEF FOR OSD/ISP/EUR
USDOC PASS TO OITA
USDOC FOR 4212/MAC/EUR/OWE/PDACHER
PARIS FOR USOECD
FRANKFURT FOR TREASURY

E.O. 12958: N/A
TAGS: EFIN ECON PREL PGOV AU
SUBJECT: Austrian Financial Markets - Reforms to Meet
Future Challenges



1. SUMMARY: The GoA recently implemented important
legal changes to upgrade Austrian financial markets,
enhance financial market stability, and create a level
playing field for foreign investment funds. An amendment
to the Austrian Income Tax Act provides for equal tax
treatment of income derived from foreign investment
funds. A Stock Exchange Act amendment tightens
regulations on insider trading and introduces higher
penalties, and a new Financial Conglomerates Act
introduces an additional supervisory level for groups of
banks, investment and insurance companies. END SUMMARY.

Sound and Resilient Financial Sector, but . . . .
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2. The IMF's Financial Sector Stability Assessment
report of July 2004 stated that Austria's financial
sector is generally sound, has proved to be resilient to
external shocks, and enjoys a high level of observance of
internationally accepted financial sector standards.
Further, the report recommended inclusion of supervision
of conglomerates in the supervisory framework for the
banking sector and, a substantial increase of the fines
for violating securities market regulations.

. . . . Upgrades to Meet Future Challenges
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3. In past months, the GoA continued to implement
measures to strengthen Austrian capital markets, pursuant
to the government program. Recently implemented measures
also address the above-mentioned IMF recommendations,
constitutional concerns about the tax treatment of income
from foreign investment funds and a domestic insider
case. They also transpose EU Directives 2003/6/EC on
insider trading and market manipulation and 2002/87/EC on
the supervision of financial groups.

Equal Tax Treatment of Foreign Investment Fund Paper
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4. Tax wise, foreign investment funds will find a level
playing field in Austria starting June 30, 2005. On
December 9, 2004, Parliament approved a GoA amendment to
the Austrian Income Tax Act (Federal Law Gazette number
I/180 of December 30, 2004),which provides for equal tax
treatment of interest, profits and other income derived
from foreign investment funds. Holders of foreign fund
certificates then can authorize their depository bank to
withhold the applicable 25% capital gains tax, a form of
income tax, on all income derived from the fund, and with
no additional tax obligation. Until now, only holders of
domestic fund certificates could sign such a statement,
while holders of foreign fund certificates had to report
any profits as taxable income (taxed at the 25% capital
gains tax rate). However, to ensure that holders of
foreign fund certificates met their tax obligation and
disclosed their portfolio to the tax office, the GoA
collected a so-called "safeguard tax" (in German:
Sicherungssteuer),which obliged the depository bank to
pay a 1.5% tax from the current value of the deposited
fund certificates. The safeguard tax was offset against
the income tax bill. As of June 30, 2005, the safeguard
tax will only apply to holders of foreign fund
certificates not authorizing their depository bank to
withhold the 25% capital gains tax.

Stricter Regulations against Insider Trading
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5. Stricter regulations against insider trading and
higher penalties have been in place since January 1,

2005. On October 13, 2004, Parliament adopted the GoA
bill for a Stock Exchange Act amendment (Federal Law
Gazette number I/127 of November 16, 2004) to transpose
EU Directive 2003/6/EC on insider trading and market
manipulation. The amendment introduces detailed
definitions of insider information, market misuse and
manipulation, admissible market practice, etc. It covers
insider trading with both financial instruments and
commodities derivatives. It defines insiders as members
of administrative, management or supervisory bodies of an
issuer, and any other persons having access to insider
information through their profession or holding capital
of an issuer. The law also covers other people using
insider information that reached their attention to
obtain a profit or advantage or who use such information
with gross negligence even without the intent of
profiting.


6. Insider trading falls under the jurisdiction of the
courts. The maximum penalty for insiders is imprisonment
of up to 3 years or, if the profit or advantage obtained
exceeds Euro 50,000, imprisonment from 6 months to 5
years. (Until now, penalties were imprisonment of up to
2 years or a fine of up to Euro 117,720.) Penalties for
people, even if not insiders, using insider information
with the intent of obtaining a profit or advantage for
themselves or a third party are imprisonment of up to one
year or a fine of up to Euro 180,000. If the profit or
advantage obtained exceeds Euro 50,000, the penalty will
be imprisonment of up to 3 years. Penalties for all
others, insiders or not, using insider information with
gross negligence but without the intent of obtaining a
profit or advantage for their own or a third party are
imprisonment of up 6 months or a fine of up to Euro
180,000. The FMA will impose administrative fines of up
to Euro 35,000 for market manipulation, unless the
offense falls into court jurisdiction.


7. The new regulations expand FMA responsibilities
regarding market surveillance. The MFA can now
temporarily suspend trade with certain papers or
instruments, ban suspects from exercising their
professions for the duration of procedures, and disclose
information on insider and market manipulation offenses
and perpetrators to the public.


8. The FMA has to cooperate closely and exchange
information with supervisory agencies of other EU and EEA
(European Economic Area) member states, pursuant to the
law. Cooperation of the FMA with third country
supervisory agencies, including the SEC, remains
unchanged. Stephan Karas, head of the FMA's division for
international affairs and European integration, confirmed
that there is no Austrian-U.S. bilateral agreement to
facilitate FMA-SEC cooperation. Thus, bilateral
cooperation continues pursuant to paragraph 47 of the
Stock Exchange Act. This permits disclosure of official
information to foreign supervisory authorities under
certain conditions, such as reciprocity and the assurance
that there will be no violation of Austrian bank secrecy
rules.


9. The text of the Stock Exchange Act (in German:
Boersegesetz),as amended, is available on the website of
the Vienna Stock Exchange in German language under
http://www.wienerboerse.at/cms/1/81/118. The informal
English language version under
http://www.wienerboerse.at/cms/2/81/377 will be updated
soon to also reflect the latest amendment.

Additional Supervision of Financial Conglomerates
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10. A new law, the Financial Conglomerates Act (Federal
Law Gazette number I/70 of July 14, 2004),went into
effect January 1, 2005 and implements regulations on the
supervision of financial conglomerates. It applies the
first time to financial statements for business years
starting after December 31, 2004. The law defines
financial conglomerates as groups of companies, which
include at least one insurance company and at least one a
bank or investment services company. In Austria, several
heterogeneous financial groups are likely to qualify as
conglomerates. The law requires financial conglomerates
and groups with some cross-sectoral elements to
consolidate the capital of the group's banking,
investment and insurance entities to avoid double use of
the capital across the various financial sectors. It
also introduces an additional supervisory layer: in
addition to supervising a conglomerate's individual
banking, insurance or investment services entities, the
FMA will also exercise supervision at the conglomerate
level on a consolidated basis. The Austrian National
Bank is responsible for assessing the limitation of
market and credit risks of banks or banking groups with
conglomerates and will thus also play an important role
in supervising conglomerates. The supervisory
authorities will have to pay special attention to the
complexity of conglomerates, risk concentration and intra-
group transactions.

BROWN