Authorities need to decide whether to specifically intervene to define acceptable forms of corporate structure for financial and mixed-activity conglomerates. Alternatively, they can permit structures to be determined by the market. The key supervisory concern in this regard is transparency: supervisors must be comfortable with their understanding of the corporate and managerial structure. Structures where it is not clear which shareholders (either legal entities or individuals) and which managers exercise control over the conglomerate and its component entities, and which parties have financial responsibility for the component regulated entities 28/, must be prohibited or discouraged. At the same time, the authorities need to be cognizant of the potential for regulation of structure to represent an impediment to competition and the prudent conduct of profitable business.

Several means exist by which to influence structure so as to promote transparency. The most flexible would be to grant supervisors the explicit power to deny structures which they view as not transparent. In principle, this authority would be exercisable at any time, and would be employed in conjunction with enforceable suitability standards applicable to significant shareholders, directors and managers. In practice, this authority most often would be relied upon by supervisors when deciding whether to grant authorization for the establishment of regulated entities, corporate acquisitions, mergers, transfers of ownership, changes in senior management and appointment of new directors.29/ But with the flexibility that this approach offers comes the risk that discretionary powers of this nature will be either under-utilized or abused.

Corporate transparency could be addressed more explicitly through legislation that specifies appropriate structure. For example. some countries require the use of holding companies, whereby all financial institutions within a group must be controlled (if not wholly-owned} by a parent company, whose shareholders must be registered and are subject to disclosure requirements intended to make transparent any individual or collective holdings in excess of certain thresholds (such as 5% or 10%}. Holding companies can be shell, non-operating entities, or one or more of any type of operating financial institution. The holding company structure may be a particularly appropriate solution in situations where individuals acting in concert own or control multiple financial entities in a non-transparent manner. 30/

Structure could be influenced indirectly through prudential requirements such as those defining regulatory capital and capital adequacy requirements, and establishing investment limitations. As noted, the structures that have emerged in some countries have been determined by such rules, although the rules often were not designed with the intention of promoting transparency, and therefore may not have that consequence.

The authorities will need to make a policy decision as to whether they will accept mixed-activity groups, thereby allowing members of the conglomerate to engage in significant commercial or industrial activities. Since such structures can exacerbate supervisory concerns regarding contagion and autonomy, they must be weighed along with concerns regarding transparency in making such a decision.

If mixed-activity groups are accepted, the authorities should adopt a legal provision requiring formation of a financial institution sub-group within mixed-activity groups. The sub-group would encompass all group. members engaged predominantly in financial services activities. Requiring a sub-group structure would circumscribe the relevant financial sector operations, thereby mimicking a financial conglomerate structure, which will facilitate the application of regulation and the conduct of supervision, and help create a more level playing field among financial and mixed-activity conglomerates.

Where mixed-activity groups are accepted, the authorities will need to determine acceptable structures for the ownership relationship between the financial institution subgroup and group members engaged predominantly in commercial or industrial activities. Requiring a structure whereby all group commercial and industrial entities are upstream of the financial sub-group may promote transparency, and would clarify the financial responsibility of those entities for the financial sub-group. If group commercial and t industrial entities are permitted to be held downstream of the financial entities, limits must be established on the portion of the financial entities' capital that can be invested in such subsidiaries. 31/