For decades, the only ethics governing Germany's debt and equity markets was an informal code of honor drawn up by banks and bourses. Insider trading wasn't a crime, and corporate officers were under no compulsion to accept the code. "Fireside chats" were common, at which sympathetic German journalists and financial analysts heard market-moving information about listed companies before such information was public. And corporate raiders could pile up 25% equity stakes in potential target companies without reporting their purchases.
Suddenly, all that is set to change. Under pressure from the European Union, U.S. securities regulators, and international portfolio managers, German lawmakers this summer voted to set up a Federal Supervisory Office for Securities Trading, which will open in Frankfurt on Jan. 1 to police the financial markets and punish abuses. Headed by former Finance Ministry official Georg Wittich, the office has an $8 million budget and is hiring a squad of 100 financial cops. Insider trading has been made a criminal offense, with the guilty facing prison terms of up to five years. And new rules on disclosure of financial information will come into force: Companies that fail to make potentially market-moving data--from results and profit forecasts to comments on corporate strategy--available to all market players on an equal basis can be hit with fines of up to $2 million.
Germany's change of heart is due mainly to the exponential growth of global securities trading. In 1980, the Frankfurt bourse was a sideshow on world markets, with annual turnover barely topping $25 billion. By last year, trading reached nearly $1 trillion. Officials feared that lax policing of financial markets would drive that trading away, along with the jobs and tax revenues it generates. Says Lothar Klemm, who as economics minister of the Frankfurt bourse's home state campaigned for better regulation: "Effective supervision will protect and improve Frankfurt's position as the world's fourth-largest stock market."
Wittich's troops will have wide-ranging investigative powers to uncover leaks and questionable trades. Stock-tracking software, for example, will scan daily trading for questionable dealing patterns. And in a significant innovation for Germany, investigators can now compel the secretive banks to reveal names of customers whose share and bond trading comes under scrutiny.
Compared with regulatory structures in bigger securities markets, Germany's still looks weak. The U.S. Securities & Exchange Commission, for instance, has a $300 million budget and 2,600 people on its payroll. But even Germany's modest improvement is welcomed. The gentlemen's agreement had produced little more than a string of scandals.
"A JOKE." Only last year, for instance, Franz Steinkuhler, boss of the IG Metall labor union, resigned following revelations about his share dealings in companies connected with Daimler Benz, on whose supervisory board he served at the time. The transactions, which produced about $120,000 in profits, weren't illegal, and Steinkuhler denied any wrongdoing. But along with other incidents, plus frequent leaks of Economics Ministry statistics, they fueled a perception of corruption in German financial markets. Says one Frankfurt-based foreign banker: "It became something of a joke, seeing prices move first and then data being issued."
As large German companies, disgusted with local practices, increasingly tapped foreign markets for capital, the leaks stopped seeming funny. Now, listed companies must relay any statements promptly and simultaneously to all professional market participants. And journalists and analysts may no longer be given price-sensitive new information in background briefings. Says Wittich: "Fireside chats are a thing of the past."
Germany's big banks, the dominant financial-market players, are embracing the new rules--after arguing for years that self-regulation worked just fine. Deutsche Bank Chief Executive Hilmar Kopper, for instance, calls the disclosure requirements "absolutely necessary." Adds Dresdner Bank chief economist Klaus Friedrich: "Without [regulation], we'll be a backwater."
The dramatic cultural shift that the new rules call for is unlikely to happen overnight. Warns Sabine Kruger of Frankfurt-based financial publicist Charles Barker: "There's going to be a lot of confusion initially." That may annoy investors, but they are likely to tolerate early mistakes for the sake of ridding markets of suspected sleaze.