Capital Markets Board of Turkey
1. Capital Markets Board of Turkey (CMB) is the regulatory and supervisory authority in charge of the securities markets in Turkey. Empowered by the Capital Markets Law (CML), which was enacted in 1981, the CMB has been making detailed regulations for organizing the markets and developing capital market instruments and institutions.
2. Based on the main objectives of fair and orderly functioning of the markets and protecting the rights of investors, the CMB has a wide range of responsibilities. Depending upon the development stages of the markets and the state of the country's economy, the list of priorities changes from time to time. However the major objective remains the same: to take the necessary measures for fostering the development of capital markets, and hence to contribute to the efficient allocation of financial resources in the country while ensuring investor protection.
3. To make innovative regulations, and perform supervision with the aim of ensuring fairness, efficiency and transparency in Turkish capital markets, and improving their international competitiveness.
Goals and Objectives
4. Within the scope of its mission the CMB has established its main strategic objectives as to:
- enhance investor protection,
- adopt the norms of the international capital markets and fully integrate them into regulations,
- promote and enhance the effectiveness of both the supply and the demand side of the markets,
- promote transparency and fairness in the capital markets,
- facilitate modernisation of the market structure,
- enhance the infrastructure of the capital markets,
- enhance the quality of the work products and staff members of the Board.
Legal Framework of the Capital Markets in Turkey
5. The legal framework of the Turkish capital markets consists of three major legislations, one of which is specifically devoted to this area, the Capital Markets Law (CML). The others are the Decree with force of Law No. 91 concerning the securities exchanges and the Turkish Commercial Code.
6. The objective of the CML is to regulate and control the secure, fair and orderly functioning of the capital markets and to protect the rights and benefits of the investors. Following the enactment of the CML in 1981, the necessary regulations have been made by the CMB in order to organize the markets and the capital market institutions. Joint stock corporations with more than 100 shareholders or which offer their shares to the public were subject to the CML. According to the amendment to the CML made in 1999, t he shares of joint stock corporations having more than 250 stockholders are considered to have been offered to the public and such companies are subject to the provisions applicable to publicly held joint stock corporations. In addition to these, issuing of securities by the State Economic Enterprises (SEEs) -including those within the scope of the privatization program- municipalities and related institutions are subject to the disclosure requirements of the CMB as regulated by the amendments to the CML.
7. The principles for the establishment, operation and the auditing of the stock exchanges are determined by the Decree with force of Law No. 91 enacted in 1984. The legal structure pertaining to the operation of the secondary markets is formulated by this Decree.
8. The Turkish Commercial Code, enacted in 1956, regulates the establishment and operation of companies and defines and regulates financial instruments in general. Thus, joint stock corporations subject to the CML are required to comply with the provisions of the Commercial Code whenever there is no provision in the CML.
9. Apart from the above mentioned legislation, another important regulation affecting the development process of the securities markets is the Decree No. 32 about the Protection of the Value of the Turkish Currency. This Decree enacted in August 1989, aims at further liberalization of the financial system and allows not only nonresidents to invest in the Turkish securities, government bonds and Treasury Bills, but also permits the outflow of domestic capital into foreign securities etc. through financial intermediaries authorized by the CMB.
10. The recent piece of legislation that has been enacted in December 1999, namely the Law No. 4487 brought in a set of amendments to the Capital Market Law. The duties and the scope of authority of the CMB have been expanded through these amendments and the CMB is now empowered to carry out the following responsibilities in addition to the former ones:
- The new piece of legislation regulates the dematerialization of securities, which will be a very important step in the development of the Turkish capital markets. Capital market instruments and the rights associated with them will be registered electronically by a "central registry" to be established. The registration of the capital market instruments will take place under the name of each issuer, intermediary and owner. The new system will reduce issuing costs for the issuers, enable publicly owned companies to have access to information about their shareholders, increase efficiency in settlement procedures, and will ease the dividend payments for public companies.
- The CMB can decide on the "progressive liquidation" of the securities intermediaries whose financial standing weakens seriously. Progressive liquidation is an accelerated process for terminating the activities of a troubled intermediary that cannot continue its normal course of operations. The purpose of progressive liquidation is to settle the obligations of the intermediary with its customers before other claims are made on the assets of the intermediary.
- The Investor Protection Fund will carry out the progressive liquidation procedure when ordered by the CMB. This fund will facilitate the liquidation procedure and hence will make possible for the receivables of investors to be paid rapidly.
- Investor protection is enhanced by the introduction of the Investor Protection Fund. The progressive liquidation procedure of troubled intermediaries will be carried out by this fund. In doing this, the Investor Protection Fund will cover the obligations of the troubled securities intermediaries to the investors up to some limited amount if needed. This new institution is similar to the fund established by the Securities' Investor Protection Act in USA. The fund's income will be mainly based on intermediaries' contributions and thus it will lessen the burden on government sources.
- The new provisions allow corporations to pay interim dividends based on their quarterly financial statements. The amount of the interim dividend will not be more than one half of the previous year's profit. Given the short-term nature of financial investments in Turkey it is expected to stimulate interest in equities, allowing cash return realization in a shorter period of time.
- The Association of the Capital Market Intermediary Institutions is a professional organization and all intermediary institutions are required to be a member of the Association. The Association will set professional standards and rules of conduct for its members. It will also have the power to provide and enforce regulations for the conduct of business by the members, within the framework set by the CML.
- According to the Turkish Commercial Law minority shareholders are granted rights to protect themselves against larger shareholders. The Turkish Commercial Law defined minority shareholders as shareholders representing a minimum of 10 percent of the capital stock. With the new provision minority rights are now granted to the shareholders with 5 percent of the paid in capital.
- With the recent amendments to the CML the establishment of derivatives exchanges has been based on legal footing. The exchanges will be established as joint stock corporations. The derivative instruments, including futures and option contracts, to be traded on these exchanges can be based on economic and financial indicators, capital market instruments, commodities, and precious metals as well as on foreign exchange.
- With the amended law CMB is empowered to establish a center for training the staff of capital market institutions. This center will also be evaluating and certifying their professional competence.
The Capital Markets Board as a Regulatory Body
The Regulatory Framework
11. The CMB implements the duties vested by the CML with due diligence. The CMB, empowered by the CML, is authorized in and responsible for the following areas:
- regulation and supervision of the securities markets and institutions within the scope of the CML,
- determination of the operational principles of the capital markets,
- protection of the rights and interests of the investors.
12. In this framework, CMB regulates and supervises the following institutions:
- corporations offering their securities to the public,
- securities market intermediaries ,
- mutual funds and investment companies including real estate investment companies and venture capital investment companies,
- independent external auditing firms offering services to capital market institutions,
- stock exchanges and the secondary markets in general,
- precious metal exchanges and derivative exchanges,
- other related institutions operating on the capital markets such as rating agencies, clearing and depository institutions.
13. The regulation of the capital markets instruments including futures and options also falls under the regulatory scope of the CMB. Within this framework it also assumes the responsibility for introducing and developing new instruments.
Functions and Responsibilities of the CMB of Turkey
14. The areas within the responsibility of the CMB may be classified into three main groups: primary markets, secondary markets and financial intermediation.
15. While performing its functions, the CMB implements the provisions of the CML concerning insider trading and manipulation with utmost care, in order to protect the investors, especially the small investors, and to ensure market integrity.
Functions Related to the Primary Markets
16. The CMB registers the securities offered to the public and is responsible for the regulation and supervision of this entire process. The main functions of the CMB in this area are as follows:
- registration of the publicly held companies and the capital market instruments to be issued or offered to the public,
- ensurance of accurate and complete information dissemination in the markets in conformity with the disclosure system adopted by amendments to CML by law no. 3794,
- regulation of the establishment requirements and operating principles for independent external auditing companies,
- regulation of the standards for financial statements and reports to be prepared by the corporations and to determine the principles for their auditing and announcement procedure,
- determination of the standards for prospectuses and circulars published in the public offering of the capital market instruments,
- to oversee all kinds of announcements, advertisements and publications related to the capital markets in order to prevent dissemination of misleading information,
- determination of the principles for proxy voting in the general assemby of the publicly held companies,
- to regulate the issuing process of capital market instruments,
- to regulate the issues and public offerings of capital market instruments by nonresidents,
- to regulate margin trading on capital market instruments,
- to regulate rating of financial instruments,
- to regulate and supervise public offerings and capital market activities and transactions that are made by means of all kinds of electronic communication tools and media and similar tools including internet and pursuant to general rules to provide for and supervise the use of electronic signatures in activities within the scope of the CML.
Functions Related to the Secondary Markets
17. In the secondary markets, the CMB has the authority and the responsibility:
- to regulate and supervise both the organization and the operation of the stock exchanges and of the over-the-counter markets,
- to regulate and supervise the clearing, settlement and custody systems,
- to regulate and supervise precious metal exchanges,
- to regulate and supervise future contracts based on economic and financial indicators, capital market instruments, commodities, foreign currency and precious metals.
18. The CMB has the authority and responsibility to supervise both the organization and the operation of the stock exchanges. This responsibility was enhanced in time with the inclusion of other related regulations. Furthermore, the CMB undertakes the responsibility for the completion of the regulatory framework and the establishment of the necessary mechanisms for improving the efficiency of the stock exchange and the secondary markets.
19. Moreover, the CMB is appointed with the delegation of power by the ministry as the regulatory and supervisory authority for the establishment and functioning of the exchanges on which precious minerals and stones are traded.
20. The amendments made in the CML in 1999 gave the CMB the power to set the rules and principles for the establishment of the futures and option markets.
Functions Related to Financial Intermediation on the Capital Markets
21. The CML defines the capital market activities and the types of institutions allowed to operate in the capital markets, and empowers CMB for setting the necessary conditions to be met by these institutions.
22. The capital market institutions are defined in the CML. They are:
- Intermediary Institutions,
- Investment Companies (including real estate and venture capital investment companies),
- Mutual Funds, and
- Other institutions, which are regulated by the CMB.
23. The capital market activities within the scope of the Law are as follows:
- Financial intermediation for the public offering or issuing of capital market instruments which are to be registered with the CMB,
- Intermediation on the previously issued capital market instruments,
- Financial intermediation for trading in futures contracts based on economic and financial indicators, capital market instruments, commodities, foreign currency and precious metals,
- Repo and reverse repo agreements,
- Portfolio management and investment consulting,
- Margin trading and securities lending, and short selling of securities, and
- Capital market activities of other capital markets institutions.
24. Intermediary institutions are required to obtain a license from the CMB in order to be able to deal in securities transactions. CMB determines the minimum conditions for authorization and examines each application in detail for giving the licence based on these requirements.
Institutions under CMB Supervision
25. CMB licences intermediary institutions and collective investment institutions, registers corporations issuing securities, and additionally supervises the clearing organization and securities and precious metal exchanges established in Turkey. As at the end of 2002, the following were operating under the supervision of CMB:
- 875 corporations registered with CMB for shares issues, of which 301 were actively traded on the Istanbul Stock Exchange,
- 121 brokerage houses,
- 48 banks, which have licence to deal in off-exchange trading and repo transactions,
- 242 mutual funds,
- 40 foreign mutual funds,
- 22 securities investment companies,
- 9 real estate investment companies,
- 1 venture capital investment company,
- 20 portfolio management companies,
- Istanbul Stock Exchange,
- Istanbul Gold Exchange,
- Takasbank (Clearing and Settlement Bank).
Organizational Structure of The CMB
The Chairman and CEO
26. The Chairman and Chief Executive Officer (CEO) is at the top of the hierarchy and has two major responsibilities:
- Acting as the chairman of the decision making body, that is, the Executive Board, and
- Presiding over the executive vice-presidents under which the main Departments of the CMB are organized.
The Executive Board and the Chairman
27. The Chairman who is also the CEO is the top executive who is responsible for the administration and representation of the CMB. The Executive Board consists of seven Members/ Commissioners. The Council of Ministers appoints two members from four nominations by the Ministry of State Responsible for the Economy. The other five members are appointed from the nominations of the "Ministry of Finance", the "Ministry of Industry and Commerce", the "Banking Regulatory and Supervisory Board", the "Association of Trade Chambers and Exchanges", and the "Association of Capital Markets Intermediary Institutions". Each of these institutions nominates two candidates, one of whom is to be elected. All Commissioners are appointed by the Council of Ministers for a six-year period. The Council of Ministers appoints one of the members as the Chairman and the Board elects one member as the Vice Chairman.
28. The Executive Board is proclaimed by law to be at the highest level within the decision-making mechanism of the CMB and is empowered to decide on any issue within the authority of the CMB.
The Executive Vice Presidents
29. There are four Executive Vice Presidents who are authorized and responsible for the coordinated operation and administration of the entire organization.
The Departments of the CMB
30. There are ten main departments of the CMB, which are organized on the basis of their functions. These are as follows:
Department of Enforcement
31. The primary function of this Department is auditing of corporations, intermediary institutions, banks and other financial institutions operating in securities markets, and ensuring the conformity of their activities to the pertaining legislation. The Department is responsible for enforcing Capital Market regulations and investigating violations of the regulations.
Department of Corporate Finance
32. The Department of Corporate Finance examines and evaluates the registration applications of the corporations for their security issues. One of the major responsibilities of the Department is to review the disclosure materials and to develop standard application and disclosure forms in order to provide accurate and adequate information to the public. Other responsibilities include registering the publicly held corporations and the issuers of securities, providing interpretative and advisory services to help clarify the applications of institutions and individuals and the requirements of the CML, reviewing the quarterly and annual reports of corporations disclosed to the public and presented to the CMB.
Department of Intermediary Activities
33. This Department is authorized and responsible for reviewing and examining the applications of the intermediary institutions for operating in the capital markets. Among the responsibilities of the Department is to regulate the relationships of the intermediary institutions with issuing corporations and investors. The Department is also responsible to supervise the compliance of intermediary institutions to capital adequacy requirements and review the financial statements of these institutions.
Department of Institutional Investors
34. The Department is mainly undertaking the activities on the regulation and supervision of principles regarding the establishment and operation of collective investment institutions and on giving permission for them. The concept of institutional investors includes not only mutual funds and investment trusts engaging in securities trading, but also venture capital investment companies, real estate investment companies and social security funds. The regulation and supervision of the disclosure standards for collective investment institutions and portfolio management companies are also among the responsibilities of the Department.
Department of Market Regulation and Surveillance
35. This Department is responsible overseeing the secondary markets including the derivative markets. The Department's responsibilities are to develop necessary regulations for the secondary markets to operate efficiently and safely and also to develop surveillance systems for watching the trading in secondary markets.
Department of Research
36. The Department of Research undertakes economic and financial research studies for the CMB to develop long-term strategies and to take the appropriate actions on the basis of sound determinations. The Department analyzes and diagnoses the needs of the Turkish capital markets, the entire capital market system in general and makes policy recommendations for the development of new financial instruments, activities and markets and also for the amendments of the existing ones. Within this framework the Department carries out analytical studies on local markets, but also on the international financial system and foreign national markets.
37. Apart from these, the Department carries out the international relations of the CMB. The membership of the CMB to the International Organization of Securities Commissions (IOSCO) is the most important among them. Furthermore, the relationships with the relevant groups in the OECD and EC are continued.
Department of Accounting Standards
38. The Department of Accounting Standards carries studies on the establishment of general and private accounting standards related to the institutions subject to the CML, in harmonization with international standards. It is also responsible to evaluate the applications for establishing independent auditing firms and also rating firms that will operate in Turkey. The Department supervises the activities of independent auditing firms and the quality of the services they provide.
Department of Data Processing, Statistics and Information
39. It was determined as an absolute necessity to establish a well-organized and computerized surveillance system for the markets due to the development of the Turkish securities markets, which has increased the importance of the CMB's market surveillance in order to ensure fair and orderly functioning of the markets. Within this framework, the CMB carried out studies directed towards the reorganization of the Directorate of Data Processing and Statistics in the form of an individual Department. The main responsibilities and functions of this Department are to form a reliable and real database and to set up the system required for computerized data processing.
Department of Legal Consultancy
40. The major function of this Department is to be actively involved in the activities for the creation of regulations within the authority of the CMB. This Department provides legal consultancy services for the CMB.
41. The staff undertakes research studies concerning the legal aspects of the securities' markets and maintaining coordination with other related institutions in this field. This Department takes special care to establish a parallelism between the Turkish capital market legislation and general trends in the field. For that purpose, the legal affairs staff in coordination with the other Departments carefully observes the developments in the markets. The Department of Legal Consultancy also represents the CMB in any litigation.
Department of Administrative and Financial Affairs
42. With its three major directorates this Department provides services in keeping the accounts and preparing the financial statements, deals with the personnel matters of the CMB concerning their rights as employees, retirement and health care, social security benefits and other services offered to the personnel. Finally, the matters related to communications, buildings, repairs, purchases and maintenance of the equipment are conducted within the scope of authority of this Department.
The Istanbul Regional Office
The Istanbul Regional Office of the CMB is mainly in charge of relations with the corporations, intermediaries and other capital market institutions within the scope of the CML. The Regional Office is authorized to inform related organizations about the activities carried out by the CMB and to ensure the coordination with these organizations. The Office provides the CMB and other Departments with reports on the activities of the capital market institutions and makes comments on these issues.