Sources inform ''Globes'' that the Israel Securities Authority is drawing up oversight rules for corporate governance at investment houses. Securities Authority chairman Shmuel Hauser wants to strengthen the oversight mechanism, which is currently only at the operating level (mutual funds, ETFs, and portfolio management), to expand it to the investment houses themselves. This will be accomplished by honing the oversight on corporate governance, because the Securities Authority says corporate governance is already written by the management of investment houses.
As part of the process, Securities Authority Investment Department Director Dudu Lavi will map corporate governance at investment houses, including the conduct of boards of directors and internal auditing. Afterwards, criteria and corporate governance rules will be established, which the investment houses must comply with. The will narrow the current regulatory gap in the supervision of investment houses, compared with insurance companies and banks, and investment houses will become more transparent.
"The time has come. This is a problem. It's wrong that a company that manages the public's money is not supervised," says a top market source, who welcomes the initiative. "Investment houses have been a kind of 'regulatory vacuum' for a long time, because there is no supervision over them, but only on the companies that they own."
Making more transparent
As a consequence of the regulatory distortion, supervisory authority over investment houses is not concentrated at a single agency: the Ministry of Finance Capital Markets, Insurance and Savings Supervision Department is responsible for the provident and pension fund business of investment houses, and the Securities Authority is responsible for supervising mutual funds, ETFs, portfolio management, and Tel Aviv Stock Exchange (TASE) membership. But in practice, there is no direct and orderly oversight of investment houses, some of which, like Psagot Investment House Ltd., Israel's largest investment house, are private companies.
The most prominent recent example of the difference in oversight is seen in executive compensation. Supervisor of Banks David Zaken has issued new and stricter instructions on executive compensation at the banks, which establish clear rules for bonuses, capping them at 100% of the base salary. As a result, the banks cancelled compensation plans, publishing new ones this week. Supervisor of the Capital Markets, Insurance, and Savings Dorit Salinger decided to follow suit, and issued similar compensation policy guidelines for insurance companies and investment institutions.
However, because no regulator is responsible for this subject at investments houses, their executives will continue to earn fat paychecks. For example, Psagot CEO Hagai Badash earns NIS 5 million a year, Yelin Lapidot Investment House Ltd. co-CEOs Dov Yelin and Yair Lapidot each earned NIS 5.3 million in 2012, and former DS Apex CEO Ido Neuberger earned NIS 7.3 million in 2012.
"Hauser has remembered too late to control the profligate salaries in the capital market," warns a top industry source. "Two other regulators have already published rules for compensation policy, but the Securities Authority is only now beginning to move this process forward, and who knows how long it will take."
Although the Securities Authority's measures will not turn it into the regulator of investment houses, they will offer a response to the current lack of transparency at some of these companies, which have hundreds of billions of shekels of the public's money under management.
Although this is an important step, it should be remembered that it relies on the Security Authority's discretion regarding the toughness of the criteria and rules for corporate governance, and how fast it will move forward on the matter. Presumably, the Securities Authority will set the same corporate governance rules that apply at public companies, but it unclear where this matter lies among Hauser's priorities.
Published by Globes [online], Israel business news - www.globes-online.com - on January 9, 2014
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