The Law of Capital Markets in the EU

Disclosure and Enforcement

Konstantinos Sergakis

• Publisher: Hart Publishing
• Year: 2018
• Print ISBN:
  9781137518460
• Edition: 1
• eBook ISBN:
  9781509958498
• Topic: Law
• Subtopic: Finance
• Index: Law

This authoritative textbook offers a thorough, theoretical and practical overview of the current EU legal framework applicable to capital markets. It is intended to enable a critical analysis of the overall regulatory principles as well as the interaction between market actors and EU law which has shaped the regulatory agenda both at national and EU level. The book gives an overview of the foundations of EU capital markets and touches upon issuer disclosure obligations, inappropriate market practices and gatekeepers. EU law is the main focus, complemented by comparative analysis where applicable, primarily relating to UK, French and German laws. Ideal for upper-level undergraduate or graduate law students taking a module in Capital Markets Law, Securities Regulation, Corporate Finance Law or EU Company Law. Also useful for accounting, business or economics MSc students who need to broaden their understanding of the legal aspects of capital markets, and for academics and policy makers.

PART I

Introduction to the Law of Capital Markets in the EU

CHAPTER 1

The Foundations of the Law of Capital Markets in the EU

1.1INTRODUCTION

This chapter aims to provide an overall analysis of the historical foundations of capital markets legislative initiatives at the EU level, bringing us up to the most recent legislative initiatives. By following the evolution of the EU legal framework in this area, the analysis will touch on the market, political and legislative landmarks that were crucial to shaping the current regulatory spectrum. After a brief explanation of the first legislative approach at the EU level (1979–1999), this chapter will analyse the Financial Services Action Plan (FSAP) (1999), as well as the Lamfalussy report (2000), which gave birth to the most crucial EU (minimum and maximum) harmonization trends with a series of Directives and Regulations coming out in the following years.

The chapter will then present and explain regulatory decisions with regard to the outcomes of the global financial crisis, and will attempt to show the responsiveness of EU law and its aspects as a ‘financial scandal-driven’ regulation. This will aim to highlight not only the historical background of the first developments in capital markets but, most importantly, the driving forces behind the evolution of the legislative framework which has shaped and continues to influence the regulatory agenda.¹

At the same time, the chapter will provide a brief overview of the regulatory rationales for the creation and the continuous development of rules in the area of capital markets law and will also seek to challenge the choice of minimum or maximum harmonization as regulatory tools in various areas subject to EU rules. This analysis will shed light on the outcomes of both harmonization levels and will aim to propose overarching guidelines for the future shaping of EU capital markets rules.

1.2 A SHORT HISTORY

1.2.1 The Embryonic Stages

The Segré report launched the first sign of the creation of an EU capital market by recommending, inter alia, the use of disclosure, not only at the prospectus stage but also as a ‘continuous flow of information’ at the service of investors so as to familiarize them with issuers and the functioning of capital markets.² The report was considerably lengthy and provided various rationales for the creation of an EU capital market, mainly deriving its arguments from the apparent deficiencies and gaps observed during the past, notably in terms of market integration, harmonization of disclosed information and enforcement.

It is important to note that one of the main driving forces for such integration was – and remains – the attractiveness of capital markets for retail investors. Indeed, EU retail investors have traditionally been reluctant to invest their savings in capital markets, in the absence of a truly integrated regulatory and enforcement framework that inspires confidence in the markets and provides reassurance of appropriate compensation mechanisms in the event of investor losses. It therefore became vital to the success of any EU regulatory initiative to foster such confidence in the functioning of capital markets via the introduction of rules that strengthened the harmonization of informational requirements.³

Following the Segré report’s recommendations for setting rules for admission of securities to trading as well as for disclosure requirements in prospectuses, EU law attempted to draw a first picture of what EU capital markets should look like, at least at the entry level of securities, with the enactment of Directives 79/279/EEC⁴ and 80/390/EEC.⁵ Then came another Directive (82/121/EEC),⁶ introducing some common rules regarding information that would have to be disclosed to the market on a regular basis. These three Directives aimed to shape the applicable framework for the first time, by respecting the various differences among national laws and by opting for minimum harmonization of admission and disclosure requirements. Indeed, maximum harmonization at the embryonic stage was considered overly ambitious and unfeasible on a practical level.

1.2.2 The Decisive Steps Towards Harmonization

Following the publication of a White Paper entitled ‘Completing the Internal Market’,⁷ whose main aim, in relation to capital markets, was to highlight the existence of barriers between stock exchanges and the need to create an EU trading system for securities, EU law responded more drastically by gradually increasing the level of harmonization in the areas of disclosure of major shareholdings,⁸ prospectuses,⁹ insider dealing¹⁰ and investment services.¹¹ These Directives offered a strengthened regulatory framework in critical sectors of capital markets and aimed to convey the message of further integration to investors. Nevertheless, various differences among Member States persisted.

The Commission responded to the increasing need for modernization of capital markets law with the FSAP¹² in 1999. The FSAP, benefiting from the introduction of the euro that same year, had a Commission mandate for the elimination of the remaining capital market fragmentation, so as to reduce the cost of capital raised on EU markets; the free exploitation of opportunities offered by a single financial market for both users and suppliers of financial services; the closer coordination of supervisory authorities; and the development of an integrated EU infrastructure for retail and wholesale financial transactions.¹³ The FSAP therefore decided to recommend major changes to enable issuers to raise capital on competitive terms at the EU level; to provide investors and intermediaries with access to all markets from a single point of entry; to allow investment service providers to offer their services on a cross-border basis by eliminating administrative or legal obstacles; to establish a sophisticated prudential framework that asset managers can use effectively; and to create legal certainty in the area of security trade and settlement.¹⁴

These new objectives required revisions to existing Directives and Regulations (related to prospectus and ongoing information requirements, as well as accounting issues), along with the introduction of new measures (related, inter alia, to market manipulation and takeover bids). EU law was ready to modern-ize various areas of capital markets law but, admittedly, the problem was not the content of rules but the method of their design and the speed at which they were implemented, interpreted and effectively applied at national level. This was especially relevant in capital markets due to the constantly changing market trends and challenges that required quickly adaptable and sophisticated rules.

The next decisive step was made by the Lamfalussy Group, which focused on these problematic issues and proposed an alternative process for the enactment and implementation of EU legislation.¹⁵ The so-called ‘Lamfalussy process’¹⁶ introduced a four-level comitology approach for faster, more efficient law-making.

Level 1 refers to the enactment of Directives or Regulations that contain the main and broadly formulated rules in a specific area of capital markets law and that have been shaped by the Commission after an extensive consultation process, with the involvement of the European Parliament and the Council.

Level 2 refers to implementing measures that aim to further specify technical details to make the general Level 1 rules more concrete. Level 2 was therefore conceived to offer a more adaptable and quick regulatory response to new market challenges that would be able to trigger new rules in due time. The Lamfalussy Group also proposed the creation of two new Committees: the European Securities Committee (ESC), which would assume both regulatory and advisory capacities, and the Committee of European Securities Regulators (CESR),¹⁷ which was to assume a purely advisory capacity and would assist in the preparation of such implementing measures. The European Securities and Markets Authority (ESMA)¹⁸ has now absorbed CESR’s role and considerably expanded its own presence within this framework.

Level 3 deals with ESMA’s role in issuing guidelines and recommendations to ensure the uniform application of the Level 1 and Level 2 rules by national competent authorities (NCAs) or market participants. It must be noted that Level 3 tools do not have any binding force (these are soft law rules), but the sole aim to assist concerned parties in interpreting the applicable rules uniformly. A notion of indirect harmonization emerges at Level 3, aiming to further accentuate the creation of a level playing field among national frameworks.

Level 4 deals with the supervision of national laws in terms of enforcement of the applicable rules. The Commission retains the right to take the necessary measures if national laws have not complied with EU law.

ESMA has a key role to play in this framework in terms of the supervisory convergence that needs to be ensured among NCAs. This is undoubtedly a delicate task since, notwithstanding the ongoing efforts at the EU level, national differences still remain.¹⁹

The Lamfalussy process was – and remains – a very popular method that has received considerable political support. It has also managed to involve stakeholders since the initial stage of the comitology at Level 1 via extensive consultation processes, as well as at Level 2 with various stakeholder groups²⁰ assisting ESMA in an advisory capacity. ESMA in particular has a key role to play in the success of the existing and future regulatory initiatives, since it has been granted significant powers that enable it to accentuate harmonization among national frameworks.

Following the launch of the Lamfalussy process, and before the creation of ESMA, EU law benefited from the comitology framework by further modernizing disclosure obligations. The Prospectus Directive,²¹ the Market Abuse Directive²² and the Transparency Directive ²³ are the most notable examples of such reforms that allowed EU capital markets law to reach a more concrete operational framework. At the same time, EU law made a decisive step towards framing investment firms’ activities with Directive 2004/39/EC.²⁴ Another achievement of that period, albeit a more modest one, was the enactment of the Takeover Directive, which introduced a harmonized disclosure framework for takeovers as well as the well-known and largely debated board neutrality and breakthrough rules.²⁵

What can be already deduced from this second phase of EU capital markets law is the drastic shift from minimum harmonization to a much more increased harmonization and the steady removal of barriers among jurisdictions so as to facilitate access to capital markets for issuers and to achieve true market integration. At the same time, cooperation among national regulators was seen as crucial to resolve enforcement issues, a regulatory choice that has not yet resolved persisting discrepancies at the national level.

1.2.3The Refinement of EU Regulation

After the completion of these decisive regulatory steps, EU law stood at a good level with a series of successes in terms of both the creation of a legal framework adaptable to market needs and increasing attempts to boost the responsiveness of rules to new market challenges. Nevertheless, the global financial crisis alarmed regulators as to the deficient levels of supervision of financial products and of enforcement, the latter being an area that has yet to be developed suf...

Table of contents

• Cover
• Half Title
• Series Information
• Title Page
• Copyright
• Dedication
• Contents
• Preface
• Part I Introduction to the Law of Capital Markets in the EU
• Part II Listed Companies and Disclosure Obligations
• Part III Inappropriate Market Practices and Market Integrity
• Part IV Gatekeepers
• Bibliography
• Index