French Watchdog Unit Polices Stock Market

PARIS —  Stung by insider traders and others slipping through its grasp, France will bring in a tough new law this month that gives its stock watchdog agency sweeping new powers to police the markets.

The Commission des Operations de Bourse will be able to raid offices, freeze assets, question suspects and impose fines--on paper making it one of the most powerful securities regulators in the world.

Some legal experts fear excessive power will be concentrated in the COB’s hands because it will be able to rule on cases investigated by its own inspectors. The COB replies that critics cannot judge until they see how the law will work.

“The whole problem is going to be to define, in fact, what actions and behavior will be punished by the COB,” said the watchdog agency’s chief inspector, Jean-Pierre Michau.

The government decided to tighten lax laws after a series of recent scandals highlighted France’s poor record on convicting offenders in financial cases, notably insider trading.

“The COB has existed for 22 years and passed to prosecutors less than 30 insider cases,” said Pierre Bezard, the public prosecutor who investigates such cases for the courts. “For anyone who knows French financial markets, that’s a low figure.”

He attributed this failure to a traditionally lenient French attitude toward financial scandal, poor COB funding and courts being reluctant to press charges in minor cases when major offenders were avoiding detection by trading abroad.

“Courts couldn’t make the Swiss banks talk,” Bezard noted. But international cooperation among regulators is increasing as world opinion swings against market corruption.

The new French legislation takes effect when an enlarged nine-man COB ruling “college” is set up, which Michau expects by the end of September.

With a legal framework designed to make it independent of government, the group can impose fines of up to 10 million francs ($1.5 million) or 10 times the profit made on an illegal deal on French stock, bond or futures markets.

“It’s a very powerful organization,” said a legal official, who declined to be identified. “It’s up to the courts to be extremely attentive about how these (COB) rules will be applied.”

“It’s not like a policeman imposing an on-the-spot parking fine,” added Jean-Francois Prat, a top corporate lawyer.

“We don’t like administrative authorities having direct powers of sanction--even if you can immediately appeal--especially on a law that requires as much interpretation as market regulations.”

No members of the new ruling college have yet been named, but Finance Minister Pierre Beregovoy said current COB head Jean Farge would step down.

Financial sources said Jean Saint-Geours, a former government adviser and banker, looked best placed to take over.

Lawyers said an early test of how the college sees the COB’s new role will be the question of rules on insider trading, the illegal practice of profiting from privileged information.

After a six-month inquiry into the latest market scandal during last year’s raid on privatized bank Societe Generale, the COB declared in July that the insider trading law is too vague.

“The present drafting doesn’t, in our view, allow us to draw with certainty a precise line between the legal and illegal,” it concluded in a report.

Even for Farge, that line is extremely fine.

“By definition, financial markets are markets of insider traders,” he said, noting the constant flow of price-sensitive data in the stock exchange. “Insider trading isn’t a question of essence but of degree.”

French insider trading rules were first written in 1967, but unsuccessful court cases exposed holes in the definitions. The new law, revising the rules for the seventh time, covers professionals who give price-sensitive data to third parties.

Some lawyers are angered about the prospect of yet another bid to rewrite the rules. “You can’t change the law each time there is a political scandal in France,” lawyer Jean-Michel Darrois said.