Recent developments in European Union securities law.

• Author: Wolff, Samuel

1. OVERVIEW

   The European Union (EU) is engaged in a major effort to develop the single financial market. The oddly named "Committee of Wise Men" ("Committee") published an influential report in February 2000 calling for reform of the lawmaking procedures in the EU. (1) One of the Committee's main objectives is to speed up legislative action needed to bring new life to the single financial market. (2) Despite the considerable and impressive work that the EU has already done in the area of listings and public offerings, true integration of European capital markets is not yet achieved, particularly in the area of corporate finance and capital formation. (3) In May 2001, the European Commission ("Commission") submitted a proposal to the European Parliament and the Council of Ministers for a new directive that would represent a combined version of the Prospectus (4) and Listing Particulars Directives, (5) which would later be repealed. (6) In March 2002, the European Parliament approved its own version of a new Prospectus Directive (7) and the measure was before the Council when the Commission, "to speed up the legislative process" published an amended proposal in August 2002. (8) Significantly, the new system would substantially rely upon the International Disclosure Standards promulgated by the International Organization of Securities Commissions ("IOSCO") in 1998. (9) The Commission also proposes to enact a registration system similar to shelf registration in the United States. (10) In addition, under the Prospectus/Listing Particulars Directive, as proposed, the host state would have less power to interfere with a prospectus that has been approved by the home state, which should facilitate cross-border securities offerings within the EU. (11) No longer would the prospectus necessarily have to be translated into the language of the host country, although it would be required to be drawn up in a language accepted by the competent authority in the home Member State. (12) In certain cases, it may be necessary to translate the prospectus into a language "customary in the sphere of international finance."

   The Commission also proposes to revise the mutual recognition provisions of the Prospectus and Listing Particulars Directives. (13) Although the current Prospectus and Listing Particulars Directives already contemplate the possibility of reciprocity for issuers located outside of the EU, both in the context of listings and public offerings, recognition throughout the EU on the basis of a prospectus of a non-EU issuer has failed to materialize. The proposed directive lays the foundation for an issuer from outside the EU to make an offering or effect a listing throughout the EU on the basis of a prospectus prepared in accordance with IOSCO standards and approved by one EU Member State. (14) Presumably, the exercise of this privilege will also depend upon the issuer's use of accounting standards acceptable to the member country supervising the offering. (15) In February 2001, the EU Commission presented a proposal, which will require a mandatory application of International Accounting Standards for listed companies in the EU by 2005. (16) Under the legislation, all companies listed on a regulated market in the EU, or offering securities publicly in tandem with a listing, must prepare their accounts in accordance with International Accounting Standards. (17) The proposal for mandatory applications of International Accounting Standards for listed companies in the EU was endorsed by the European Parliament, with amendments, in March 2002, and adopted in July 2002. (18) Conceivably, someday, an issuer from outside the EU preparing its prospectus in accordance with IOSCO standards will be able to make an offering throughout the EU on the basis of a single prospectus.

   A legislative dialogue is also being conducted in the EU with respect to amending the Investment Services Directive. (19) The most important area of reform in this regard is the diminution of power on the part of host member countries to impose conduct of business rules on investment firms authorized by their home states. In November 2002, as this article went to press, the Commission published a proposal for a new directive on investment services and regulated markets. In May 2000, the Commission issued a proposal for a new directive on insider dealing and market manipulation. (20) The main effect of this directive is to set minimum standards for market manipulation in the EU. (21) The EU already has a directive on insider trading, but a new one has been adopted to apply to it the same framework for allocation of responsibilities and enforcement as would apply to market manipulation and to simplify administrative matters. As this article went to press, the European Parliament approved the Commission Proposal on Insider Dealing and Market Manipulation, with substantial amendments, and the measure subsequently was adopted. (22) In early 2002, the EU adopted new directives on investment companies, amending prior EU legislation (23) on this subject. (24) The Undertakings for Collective Investment in Transferable Securities (UCITS) directive is beyond the scope of this article. The proposed Takeover Directive, also beyond the scope of this article, died by tie vote in the European Parliament in July 2001. (25)

2. BACKGROUND

   The EU is a supranational organization, its activities and relations governed by a system of European law. (26) The Council of Ministers, the principal decision-making body of the EU, consists of ministers from each Member State. (27) The Council may consider legislative proposals, which the European Commission presents, must consult with the Parliament, and is subject to review by the European Court of Justice. (28) The Commission is composed of members, at least one from each state, appointed by mutual agreement of Member States. (29) The members of the Commission may not receive instructions from any national government and are subject to the supervision of the European Parliament which is the only body that can force them collectively to resign. (30) The Commission proposes legislation to the Council, implements EU policies, and attempts to ensure that the rules of the EU are followed. (31) The EU's law making procedure is expedited through the "comitology" procedure described infra section IV, C. (32)

   There has been considerable discussion regarding both the merits and difficulties of creating an EU securities regulator to oversee the entire community. In a November 1999 "action plan," the European Commission discussed several of the shortcomings of the current regulatory environment. (33) The Commission recognized that the creation of a formal regulatory committee could be in the best interest of the EU securities markets and indicated a desire that further study should be made in this area. (34) The influential "Committee of Wise Men," however, did not endorse the idea of a "European SEC." (35) Some commentators, however, have argued in favor of an SEC-type institution for Europe, on grounds that a European SEC is necessary to foster a true pan-European securities market. (36) There also is the development of the Forum of European Securities Commissions ("FESCO"), but to date, this is merely an advisory body with no actual regulatory authority over the EU as a whole. (37)

   The major securities laws in the EU are comprised of a number of directives, which seek to harmonize the laws of the EU Member States by providing minimum standards to be followed by each Member State in the regulation of securities within its borders. (38) The principal EU securities directives are those, which govern stock exchange listing, prospectuses, reporting requirements, banking, investment services, capital adequacy, investment funds and insider trading. (39) The EU's two stock exchange directives are the Listing Conditions Directive (40) and the Listing Particulars Directive. (41) The Listing Conditions Directive sets forth minimum conditions for the admission of securities to listing on a stock exchange located in the EU. (42) The Listing Particulars Directive aims to coordinate the differences in Member State disclosure requirements applicable to stock exchange listing and to ensure that disclosure is made to the extent that it enables investors to make informed decisions regarding the financial position and prospects of the issuer. (43) The Prospectus Directive (44) provides that Member States must require that arty offer of securities to the public be subject to the publication of a prospectus by the offeror, (45) which must be published or made available no later than the time when the offer is made to the public. (46)

   The Second Banking Directive (47) establishes a single license applicable throughout the EU for the provision of banking and other financial services. (48) Banks operating under the Second Banking Directive may provide a wide variety of financial services, including investment services, authorized by the home Member State, without obtaining an additional license. (49) The Investment Services Directive (50) provides for a home state license that allows investment firms to provide, in any Member State, the investment services that are authorized by the home Member State. (51) Under this directive, an investment firm is able to provide investment services directly or by establishing a branch in another Member State. (52) The Capital Adequacy Directive (53) requires both investment firms and credit institutions to maintain a specified amount of capital for risks associated with certain activities, including trading. (54)

   The Insider Dealing Directive (55) prohibits specified persons who possess "inside information" from using that information "with full knowledge of the facts" by purchasing or selling transferable securities of the issuer to which the information relates. (56) This prohibition applies to any person who possesses...