The European Union's Investment Services Directive
University of Pennsylvania Journal of International Law
THE EUROPEAN UNION'S INVESTMENT SERVICES DIRECTIVE
MANNING GILBERT WARREN III 0
0 Published by Penn Law: Legal Scholarship Repository
During the past fifteen years the European Union ("EU") has constructed, phase by phase, an increasingly detailed supranational securities regulatory structure for its twelve Member States.' The EU has become the world's primary actor in accomplishing multinational regulatory harmony in the field of securities regulation. In its recent adoption of the Investment Services Directive,' the EU has completed a critical chapter of its evolving regulatory code for the European capital markets. The Investment Services Directive has been described as granting a passport for EU securities firms to conduct cross-border operations anywhere in the EU based on a license issued by their respective home states.3 Laws: The Achievements of the EuropeanCommunities, 31 HARV. INT'L L.J. 185 (1990) [hereinafter GlobalHarmonization]. 2 Council Directive 93/22 on Investment Services in the Securities Field, 1993 O.J. (L 141) 27, corr. at 1993 O.J. (L 170) 32 and (L 194) 27 [hereinafter Investment Services Directive].
Appropriately, this description notes one of the Directive's
monumental achievements. The Directive's scope, however,
encompasses vast areas of complex regulatory concerns that go
far beyond the necessary expedient of a mutually-recognized
licensing scheme for the common market. The Directive's
multistate licensing scheme, while critical to the establishment
of an internal market for financial services, was from the
beginning based on an uncontested conceptual verity. After
all, the Treaty of Rome,4 as amended by the Single European
Act,5 mandates free movement of capital and services and the
right of establishment throughout the EU.6 No similar
consensus existed on a number of related controversies that
emerged, frustrating negotiations over the terms of the
UK SecuritiesIndustry, 60 FORDHAM L. REV. S285 (1992); Marc Dassesse,
The Investment Services Directive, 7 BUTTERWORTH'S J. INT'L BANKING &
FIN. L. 5 (1992); Annabelle Ewing, The Single Market of 1992: Implications
forBanking and Investment Services in the EC, 13 HASTINGS INT'L & COMP.
L. REV. 453 (1990); Leslie A. Goldman, The Modernization of the French
SecuritiesMarkets: Making the EEC Connection, 60 FORDHAM L. REV. S227
(1992); William Nicoll, Investment Services: Toward a Single Market in
Securities Transactions,2 Europe 1992 L. & Strategy (Leader) No. 10, at 1
(Oct. 1991); Norman S. Poser, Automation of Securities Markets and the
European Community's ProposedInvestment Services Directive, 55 LAW &
CONTEMP. PROBS. 29 (1992); Jackie Redhead, Liberalizationof theEuropean
Community's FinancialServices Sector, 12 WHITTIER L. REV. 185 (1991);
David Reid & Andrew Ballheimer, The Legal Framework of the Securities
Industry in the European Community Under the 1992 Program, 29 COLUM.
J. TRANSNAT'L L. 103 (1991); E. Waide Warner, "MutualRecognition" and
Cross-Border FinancialServices in the European Community, 55 LAW &
CONTEMP. PROBS. 7 (1992); Manning Warren, The Investment Services
Directive: The "North Sea Alliance" Victory Over "Club Med," 6 Int'l Sec.
Reg. Rep. (Buraff) No. 3, at 6 (Jan. 12, 1993); Samuel Wolff, Securities
Regulation in the European Community, 20 DENV. J. INT'L. L. & POL'Y 99
(1991); Kerry J. Houghton, Note, The Economic and PoliticalDebate Over
the Regulation of Off-Exchange Securities Trading in the European
Community's Single FinancialMarket, 32 VA. J. INT'L L. 747 (1992); Roberta
S. Karmel, The Stalled Investment Services Directive, N.Y.L.J., June 18,
1992, at 3.
4 TREATY ESTABLISHING THE EUROPEAN ECONOMIC COMMUNITY [EEC
TREATY] [hereinafter TREATY OF ROME].
' Single European Act, 1987 O.J. (L 169) 1, 5 [hereinafter Single
European Act]. See generally, Jules Lonbay, The Single EuropeanAct, 11
B.C. INT'L & COMP. L. REV. 31 (1988).
6 TREATY OF ROME, supra note 4, arts. 52-58. The Treaty provides a
right of primary establishment for legal or natural persons who are
nationals of any Member State, as well as a right of secondary
establishment for branches and subsidiaries. See id.
Directive, dividing the Member States into virulent northern
and southern camps, and delaying the Directive's adoption for
Arising from the inevitable clashes between twelve
differing regulatory cultures, these issues included: (1)
accommodation of the interests of Member States having
universal banking traditions with those Member States in
which commercial and investment banking are separated by
rule or practice; (2) reduction or elimination of the internal
market risk of "regulatory arbitrage"' and the accompanying
disparate economic effects of investment firms pursuing
licenses in the less-regulated Member States; and (3) whether
prudential rules and conduct-of-business rules should be
applied to investment firms by the home state where
authorization was required or, instead, by the host state where
business operations were conducted. In addition, fundamental
questions were raised regarding market structure and
transactional disclosure, including: (1) whether securities
markets should be divided into wholesale and retail segments;
(2) whether the markets should be quote-driven and
screenbased or order-driven and floor-based; and (3) whether
securities markets should be fully transparent, with real-time
reporting of price and volume information, or relatively
opaque, with minimal or delayed reports to protect investment
firms' market positions. Defying virtually all predictions, the
Member States resolved-or at least sidestepped-these issues
sufficiently to produce a comprehensive regulatory regime for
EU investment firms.
The EU Council of Ministers8 reached a consensus on the
Directive prior to the self-imposed deadline of December 31,
1992.9 After completing the required cooperation
' The concept of regulatory arbitrage reflects the debatable notion that
investment firms will migrate from one jurisdiction to another to avoid
markets subject to relatively more stringent rules. See Global
Harmonization,supra note 1, at 189-90.
8The Council of Ministers, established by the Treaty ofRome, makes the
final decision on legislative measures proposed by the Commission. TREATY
OF ROME, supra note 4, arts. 145-54; see infra note 20. The Council is
empowered under the Single European Act to adopt most measures by
"qualified majority" voting, based on a weighted voting formula which, in
the last decade, has greatly increased the EU's pace of unification. See
Single European Act, supra note 5, art. 5.
' The EU's 1992 program, including the deadline for its completion, was
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U. Pa. J. Int'lBus. L.
procedure,1" the Council finally adopted the Investment
Services Directive on May 10, 1993.11 Its major provisions
are intended to provide: (1) common minimum authorization
or licensing requirements among the Member States;12 (2)
mutual recognition of the license granted in the home state by
all other Member States or "host states";13 (3) prudential
rules establishing common minimum financial soundness
standards among the Member States; 4 (4) certain guiding
principles for adoption of conduct-of-business rules by the host
) direct access to each Member State's domestic
stock exchange for both outside investment firms and
banks;"6 (6) requirements for concentration of securities
trading in regulated markets which preserve investor choice to
trade in less-regulated off-exchange markets; 1 (7) minimum
transparency rules for regulated markets;" and (8)
reciprocity for non-EU firms to participate in the
newlyintegrated marketplace. 9
proposed originally in the COMMISSION OF THE EUROPEAN COMMUNITIES,
COMPLETING THE INTERNAL MARKET: WHITE PAPER FROM THE COMMISSION
TO THE EUROPEAN COUNCIL (1985). The Single European Act codified the
proposal and the December 31,-1992 goal for a single market "without
internal frontiers in which the free movement of goods, persons, services
and capital is ensured .... " Single European Act, supra note 5, art. 13.
See generally, MICHAEL CALINGAERT, THE 1992 CHALLENGE FROM EUROPE:
DEVELOPMENT OF THE EUROPEAN COMMUNITY'S INTERNAL MARKET (1988);
PAOLO CECCHINI, THE EUROPEAN CHALLENGE 1992: THE BENEFITS OF A
SINGLE MARKET (1988) [hereinafter CECCHINI REPORT].
"0The Single European Act, which introduced the EU's cooperation
procedure, provides the framework for the enactment of EU laws by the
Commission. Under this framework the Commission initiates all proposals
while the European Parliament acts solely in a consultative role. The
Council of Ministers has a dual function, as it first adopts a common
position with regards to the proposal and later makes the final decision
regarding adoption. Single European Act, supra note 5, art. 7.
" Investment Services Directive, supra note 2, art. 32.
12 Id art. 3.
13 Id. art. 14(1), (2).
14 Id. art. 10.
15 Id art. 11.
'6Id. art. 15.
17 Id. art. 14(3), (4).
18 Id. art. 21.
9Id. art. 7.
This Article will first describe briefly the EU's previous
achievements in the field of securities regulation, including the
policies underlying the proposal and adoption of the
Investment Services Directive. Then, it will survey the scope
and the major provisions of the Directive and discuss the more
controversial issues that divided the Member States into
opposing camps. In its analysis of the Directive's substantive
terms, this Article will note several of the Directive's
deficiencies, including the failure to establish minimum
commonality in the areas of administrative and judicial
remedies for investors, conduct-of-business rules and
transactional disclosure. The Article will conclude by noting
that the Directive, despite its limited success in achieving an
integrated European market system, represents a remarkable
advance in the development of the EU's multinational
2. THE LEGISLATIVE CONTEXT
The Investment Services Directive is the latest step the EU
has taken toward the creation of a single market for financial
services from a fractious complex of twelve disparate
regulatory systems. From the beginning, the EU
Commission ° faced a formidable task. Professor L.C.B.
Gower, whose work led to the United Kingdom's Financial
Services Act of 1986, observed recently that securities
regulation has been virtually nonexistent in continental
Europe.2 To illustrate, in the 1980's, seven of the twelve EU
countries did not require prospectus disclosure to investors in
public offerings,22 and none had a securities regulatory
agency to enforce the laws that did exist.2" As of five years
"0The Commission, comprising 17 members appointed by mutual
agreement among the Member States, is charged with the implementation
of the Treaty of Rome and is granted the sole power of initiative in
proposing and implementing legislation. TREATY OF ROME, supra note 4,
"' Interview with Professor L.C.B. Gower, in London, England (Nov. 21,
2223 ISde.eaGtl1o9b5a.lHarmonization,supra note 1, at 194-95.
ago, nine of the twelve Member States failed to impose any
criminal penalties for insider trading of securities. 4
This absence of regulation in Europe's domestic securities
markets had as its corollary a lack of free access to those
markets. Various regulatory controls relating to currency
exchange, capital market access and other protectionist
measures formed high non-tariff barriers to domestic market
entry by outside investors and investment firms.25 The
combination of de minimis regulation and the lack of access to
the EU's domestic securities markets constituted a marginally
rational substitute for more comprehensive regulation.
Minimum regulation, whether by government or industry, is
certainly more plausible in a closed market than in an open
market accessible to the rest of Europe and the world. For
socio-cultural reasons alone, it has to be assumed that a
nation's control of its own resident players is a far more facile
task than controlling an infinite variety of alien players.
Thus, common market accessibility created new regulatory
demands. This presented a dual risk of: (1) protectionist
regulatory discrimination against outsiders; and (2) enormous
compliance costs for investment firms in dealing with twelve
enhanced and contrasting regulatory schemes. The EU's
laudable achievement has been to force capital market access,
while at the same time creating a significant degree of
regulatory harmony by adopting common minimum standards
for all Member States. Additionally, implementation of the
standards has been achieved through the requirement of
2 4 See Manning G. Warren, The Regulation of Insider Trading in the
European Community, 48 WASH. & LEE L. REV. 1037, 1040-41 (1991)
[hereinafter Insider Trading]. In the absence of criminal prohibitions,
insider trading in Europe has been regarded as a major tenet of trading
strategy in the EU's securities markets, and may explain why comparatively
few Europeans are direct owners of equities. See Glenn Whitney, Europe
Moves to Curb Insider Trading, WALL ST. J., Nov. 4, 1993, at All. One
writer recently observed that "ridding Europe ofinsider dealing will require
a radical shift in the mindset of market participants" to develop a new
morality. Id. Even with new laws on the books of the Member States,
enforcement is likely to prove very difficult without "a unified EC financial
markets regulatory body to coordinate cross-border investigations." Id.
25 See INTERNATIONALIZATION OF THE SECURITIES MARKETS: REPORT OF
THE STAFF OF THE U.S. SECURITIES AND EXCHANGE COMMISSION TO THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS AND HOUSE
COMMITTEE ON ENERGY AND COMMERCE 23 (1987) [hereinafter SEC STUDY].
mutual recognition of each Member State's regime by all other
While various Member States exploded their respective "big
bangs" and "little bangs" of access deregulation, 7 the EU
Commission proposed a number of "directives," or mandatory
"model acts" which have been approved by the Council of
Ministers. These directives, the most common form of EU
legislation," required conforming legislation, or
transposition, by each Member State to implement the
common standards established by them within a prescribed
time period. Some of the more significant EU efforts to
harmonize the rules for the securities industry have included
the following directives:
(1) Admission Directive (1979).29
This directive established
common listing requirements for EU companies which
decide to list on any domestic stock exchange in the EU.
In addition to quantitative criteria, it also imposes
qualitative requirements, including a duty that listed
26 The term "mutual recognition" refers to the achievement of a
reciprocal agreement in which each Member State agrees to recognize and
accept for its own regulatory purposes the regulatory requirements applied
by the other states. The underlying political justification for this hybrid
reciprocity is that the regulatory regimes of each Member State must satisfy
EU-mandated minimum regulatory standards. In turn these standards are
intended to establish substantial equivalence among the various Member
States. See GlobalHarmonization, supra note 1, at 191-93; see generally
Warner, supra note 3.
27 The term "access deregulation," as coined by the author, refers to the
reduction or elimination of various regulatory barriers to domestic market
entry in order to facilitate foreign participation. See GlobalHarmonization,
supra note 1, at 187.88.
2 The EU's directives have been described as "the classic method of
integrating [European] Community policy into the national law of the
member states." Patrick E. Thieffry, et al., The Single EuropeanMarket:
A Practitioner'sGuide to 1992, 12 B.C. INT'L & COMP. L. REV. 357, 360
(1989). The Treaty of Rome provides that "[dlirectives shall bind any
Member State to which they are addressed, as to the result to be achieved
while leaving to domestic agencies a competence as to form and means."
TREATY OF ROME, supra note 4, art. 189.
2" Council Directive 79/279 on Coordinating the Conditions for the
Admission of Securities to Official Stock Exchange Listing, 1979 O.J. (L 66)
21 [hereinafter Admission Directive]. The Admission Directive was
amended in 1982 by Directive 82/148, 1982 O.J. (L 62) 22. See Global
Harmonization,supra note 1, at 209-11.
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companies publish, on a timely basis, all material
developments which might affect share prices. °
(2) Information Directive (1980)."' This directive requires all
companies which decide to list on any domestic stock
exchange in the EU to file with the exchange a disclosure
document called "listing particulars." It was subsequently
amended by two Mutual Recognition Directives 2
providing that once they are approved in any Member
State, the listing particulars of a given company must be
recognized by all other Member States without any
significant additional approval requirements."
(3) Interim Reports Directive (1982). 3' This directive requires
all companies listed on a domestic stock exchange in the
EU to publish, on a comparative basis, biannual reports on
their activities, profits and losses, along with a "soft
information" statement of prospects for the following six
(4) Mutual FundsDirective (1985). 3' This directive, amended
in 1988,36 established common standards for open-ended
30 Admission Directive, supra note 29, art. 17(1) and schedule C.
8' Council Directive 80/390 on Coordinating the Requirements for the
Drawing Up, Scrutiny and Distribution of the Listing Particulars to be
Published for the Admission of Securities to Official Stock Exchange Listing,
1980 O.J. (L 100) 1. See generally, Morton A. Pierce, The Regulationof the
Issuanceand Tradingof Securities in the U.S. and the EuropeanEconomic
Community: A Comparison,3 J. COMP. CORP. L. & SEC. REG., 129, 132-133
(1981); Patrick Merloe, Internationalization of Securities Markets: A
CriticalSurvey of United States and EEC Disclosure Requirements, 8 J.
COMP. Bus. & CAP. MKT. L. 249 (1986). See also Global Harmonization,
supra note 1, at 211-14.
32 Council Directive 87/435, 1987 O.J. (L 185) 81; Council Directive 90/
211, 1990 O.J. (L. 112) 24.
" Id. See Global Harmonization,supra note 1, at 213-14.
14 Council Directive 82/121 on Information to be Published on a-Regular
Basis by Companies the Shares of Which Have Been Admitted to Official
Stock Exchange Listing, 1982 O.J. EUR. COMM. (No. L 48) 26 (1982) 1. See
GlobalHarmonization,supra note 1, at 214-215.
" Council Directive 85/611 on the Coordination of Laws, Regulations and
Administrative Provisions Relating to Undertakings for Collective
Investment in Transferable Securities, 1985 O.J. (L 375) 3. See Global
Harmonization, supra note 1, at 218-219; Patrick J. Paul, Note, The
European Community's UCITS Directive: One Model for United States
Regulatory Change in a Globalized Securities Market, 25 VAND. J.
TRANSNATL L. 61 (1992).
" Council Directive 88/220/ECC, 1988 O.J. (L 100) 31.
collective investments in transferable securities, including
harmonized rules pertaining to authorization, supervision,
structure, activities and disclosure obligations of mutual
funds. Once the mutual fund is authorized in the Member
State where its management company has its registered
office, the mutual fund may be marketed in any of the
) Major Shareholdings Directive (1988)." This directive,
sometimes referred to as the "anti-raiders directive,"
requires shareholders to disclose the extent ofvoting rights
in EU companies whenever purchases or sales of equity
securities meet specified percentage thresholds.
(6) Prospectus Directive (1989).3" This directive established
a prospectus requirement and general disclosure standards
in connection with public offerings of securities in the EU.
If the prospectus is prepared in accordance with the
Information Directive and is approved by one Member
State's competent authority, the prospectus must be given
full recognition by all other Member States where the
securities are offered to the public.
(7) Insider Trading Directive (1989)." This directive
established a Union-wide prohibition against the trading of
securities or tipping others on the basis of non-public
material information. The directive defines the term
"insider dealing" and extends the trading and tipping
prohibitions to "primary insiders," a term which includes
all insiders and outsiders who come into possession of
nonpublic material information by virtue of their position. The
trading, but not the tipping, prohibition is also extended to
"secondary insiders," a term which includes all other
outsiders who come into possession of the information.
(8) Second Banking Directive (1989)."o This directive
established common standards for bank authorization by
any bank's home state and mutual recognition of that
authorization by all Member States where a bank decides
to engage in specified activities. These specified activities
include not only the traditional banking services of
accepting deposits and lending but also most ofthe services
traditionally provided by investment firms. These services
include trading and underwriting securities, portfolio
management, corporate finance, and merger and
acquisition services.41 Thus, the banks in Member States
permitting universal banking are able to provide both
commercial banking and investment services with a single
license throughout the EU.
(9) Capital Adequacy Directive (1993).42 This directive
established the minimum capital requirements applicable
both to investment firms and to the portfolios or trading
books of banks. The directive sets levels for initial capital
investment, defines admissible regulatory capital, details
minimum capital requirements for specific financial risks
and contains measures addressing large exposure to single
With these securities law directives in place, the EU has
established a far-reaching regulatory framework for
implementation by the Member States, and, at least for duly
authorized banks, an accessible, integrated marketplace for
the provision of investment services. It was understood, of
course, that the Second Banking Directive, without similar
legislation for non-bank investment firms, would give the EU's
banking industry a considerable competitive advantage. ' In
order to create parity for investment firms, the EU
Commission modeled the Investment Services Directive after
the Second Banking Directive and intended it to take effect at
the same time: January 1, 1993." The first day following
the deadline for implementation of the Investment Services
Directive is January 1, 1996,"5 with the resulting delay in
harmonization giving banks a three-year head start.
According to one writer, "the field will indeed be single, but
still sloping from one end to the other."'6
The EU's legislative program to unify the financial markets
of the twelve Member States has been premised largely, if not
completely, on economic rather than political considerations.
A report prepared for the Commission conservatively
estimated that the economic gains from a single market in
financial services would exceed $26 billion.4" Nowhere is the
need for integration more evident than in the EU's securities
markets. The forty stock exchanges in the twelve Member
States, if combined into an integrated European market
system, would have a market capitalization rivaling that of the
New York Stock Exchange.48 As one European financier
observed several years ago, "the costs of a fragmented
European equities market are bankrupting the industry."'9
"' Investment Services Directive, supra note 2, pmbl. See also Redhead,
supra note 3, at 199; Wolff, supra note 3, at 126.
44 See DEPARTMENT OF TRADE AND INDUSTRY, EC INVESTMENT SERVICES
DIRECTIVE: A CONSULTATIVE DOCUMENT 2 (1990) [hereinafter DTI
41 Investment Services Directive, supra note 2, art. 15.
4"FinancialServices in Europe: Single, ButNot Level, ECONOMIST, Feb.
23, 1991, at 83.
41 CECCHINI REPORT, supra note 9, at 37.
48 See A Survey of Europe'sCapitalMarkets, ECONOMIST, Dec. 16, 1989,
at 5-6 [hereinafter CapitalMarkets Survey].
4, Id at 27. The EU's securities markets suffer from geographic
fragmentation that has resulted from the political boundaries of the 12
Member States and the efforts of each to protect its own market from
competition. Moreover, similar to the SEAQ International, which ultimately
may develop into "a full scale European Interprofessional Market ("EIM"),
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Clearly, a unified financial market would generate economies
of scale necessary for greater efficiency and liquidity.
Until recently, only London's International Stock Exchange
and its SEAQ International could rightfully assert claims to an
international marketplace. After abandoning the floor-based
London Stock Exchange for the first screen-based, quote-driven
market in Europe, the London markets currently dominate
international securities trading in European securities5. 0
Most of London's domination has been in the wholesale
market, with SEAQ International being utilized primarily by
large professional and institutional investors. According to
estimates, SEAQ International, with its fifty-five market
makers quoting some 750 international stocks, handles 95%
of Europe's cross-border equity trading5 and roughly
twothirds of the world's cross-exchange trading (i.e., the buying
and selling of foreign equities in one's home market).52
Moreover, it attracts over 50% of all trades in French and
Italian equities and a third of the trades in German blue chip
companies.53 Thus, the United Kingdom's SEAQ
International has become a major rival to the domestic
exchanges of the other Member States.
Understandably, the Member States on the continent have
targeted the London markets in order to bring the trading in
their equity securities back home. More importantly, they
recognize that their secondary markets must be equally
accessible and more fully integrated to facilitate capital
formation by issuers, to attract capital investment and,
consequently, to increase overall market depth and liquidity.
The United Kingdom, on the other hand, with its considerably
stronger reputation, experience and dominance in
international securities markets, is likely to maintain and
even improve its position due to its greater access to issuers
the EU's securities markets are also fragmented into wholesale and retail
markets." Unsettled Controversies,ECONOMIST, Sept. 5, 1992, at 84. By
segregating wholesale and retail customers, the EIM might seriously reduce
liquidity and worsen prices for retail investors. Id.
50 The Battle of the Bourses, ECONOMIST, Feb. 1, 1992, at 81.
5 EuropeanFinancialServices: DelayedHarmony, ECONOMIST, July 4,
1992, at 68, 70.
52 InternationalEquities: TradingPlaces,ECONOMIST, Jan. 11, 1992, at
78. 53 Id
and investors in the other Member States. The difficult and
protracted debate over the Investment Services Directive prior
to its adoption demonstrates that no true consensus has
developed regarding the necessity of a single central market,
whether in the form of an EU-wide screen-based secondary
market for all major European securities or an interlinked
network of national stock exchanges. Despite the progress of
the EU thus far, financial nationalism remains a major force.
It is inevitable, however, that in the long run "the need for
liquidity, high-quality prices and a common body of accepted
dealing procedures will help some sort of central market to
emerge."" By providing critical cross-border access in the
EU and common minimum standards for investment firms, the
Investment Services Directive represents a major advance
towards an integrated European securities market.
3. THE MAJOR TERMS OF THE DIRECTIVE
As originally proposed by the Commission to the Council,
the Investment Services Directive basically tracked the Second
Banking Directive in order to provide investment firms similar
free access to the securities markets of the Member States.
Although it was intended to achieve the radical goal of
breaking down the various Member States' protectionist,
nontariff barriers to domestic market entry, the Directive did not
become radically controversial until the French proposed
amendments introducing market transparency standards,
concentration requirements and direct access for universal
banks to stock exchange membership." It was primarily
these issues which stalled adoption of the Directive, thus
providing banks with an advantageous three-year head start
in entering the domestic securities markets of the Member
States. These issues, more than. any others, divided the
Member States into opposing camps andbegan the deliberative
war between the so-called Club Med, comprising France, Italy,
Spain, Portugal, Greece and Belgium, and the North Sea
Alliance, comprising the United Kingdom, Germany, Ireland,
Luxembourg, the Netherlands and Denmark. These two
U. Pa. J. Int'l Bus. L.
groupings of Member States finally reached compromises in
the summer of 1992, thereby removing the major obstacles to
the Directive's adoption.5" These compromises will be
discussed further in the following analysis of the major
provisions of the Directive. In order to gauge the impact of
those provisions, however, one must first examine the scope of
3.1. Scope Of The Directive
The general approach of the Directive is set forth in one of
its initial recitals:
[T]he approach adopted is to effect only the essential
harmonization necessary and sufficient to secure the
mutual recognition of authorization and of prudential
supervision systems, making possible the grant of a
single authorization valid throughout the Community
and "the application of the principle of home Member
State supervision; [and] by virtue ofmutual recognition,
investment firms authorized in their home Member
States may carry on any or all of the services covered
by this Directive for which they have received
authorization throughout the Community by
establishing branches or under the freedom to provide
The breadth of this approach and the single license that it
envisages is dependent on how broadly the term "investment
firm" is defined and the types of services and investment
instruments covered by the Directive.
The term "investment firm" is defined to include "any legal
person58 the regular occupation or business of which is the
provision of investment services for third parties on a
professional basis."59 The "investment services""0 covered
6See EC FinanceMinisters Reach Agreement on Investment Services,
CapitalDirectives, 5 Int'l Sec. Reg. Rep. (Buraff) No. 16, at 1 (July 14,
6' Investment Services Directive, supra note 2, pmbl.
58 The Directive also permits Member States to extend the passport to
natural persons, subject to specified conditions. See id. art. 1(2).
60 Id. art. 1 (1).
by the single license, as set forth in an annex to the
include: (1) the reception and transmission of
orders on behalf of investors 2 as well as the execution of
those orders; (2) dealing for one's own account; (3) managing
portfolios for investors on a discretionary client-by-client basis;
and (4) underwriting or placing issues.63 These services must
relate to certain investment instruments, also set forth in the
annex to the Directive.64 These instruments include: (1)
transferable securities 5 and mutual fund units; (2)
moneymarket instruments; 66 (3) financial futures contracts,
including equivalent cash-settled instruments;"7 (4) forward
interest-rate agreements; (
) interest-rate, currency and equity
swaps; and (6) options to acquire or dispose of any of the
e1 See id. annex, § A.
62 See id. pmbl. Concern was expressed regarding the imprecision ofthis
language; a preference was expressed instead for inclusion of the term
"brokerage services." See THE LAW SOCIETY, EC INVESTMENT SERVICES
DIRECTIVE COMMENTS ON THE DTI CONSULTATIVE DOCUMENT, (Sept. 1990)
at 3-4 [hereinafter LAW SOCIETY COMMENTS]. The term "investment
services" does include "bringing together two or more investors thereby
bringing about a transaction between those investors." Investment Services
Directive, supra note 2, pmbl. But note, the Directive specifically excludes
from its scope firms which receive and transmit orders to specified types of
counterparties and which do not hold client funds or securities. See id.
pmbl., art. 2(2)(g).
63 It was suggested that sub-underwriting be specifically excluded. See
DTI CONSULTATIVE DOCUMENT, supra note 44, at 6.
64 See Investment Services Directive, supra note 2, annex, § B.
6 See id. art. 1(4). The Directive defines "transferable securities" as:
shares in companies and other securities equivalent to shares in
companies, bonds and other forms ofsecuritized debt which [shares
and bonds] are negotiable on the capital market, and any other
securities normally dealt in giving the right to acquire any such
transferable securities by subscription or exchange or giving rise to
a cash settlement, excluding instruments of payment.
66 See id. art. 1(
). The directive defines "money-market instruments"
as "those classes of instruments which are normally dealt in on the money
67 It was suggested that the term be restricted to those that are actually
investment-related, including interest rate, exchange rate and other
exchange-traded instruments. See LAW SOCIETY COMMENTS, supra note 62,
at 5. "Instrument equivalent to a financial-futures contract" is defined as
a contract settled by a cash payment calculated by reference to interest or
exchange rate fluctuations. Investment Services Directive, supra note 2,
Published by Penn Law: Legal Scholarship Repository, 2014
covered instruments. In addition, the annex sets forth
"noncore services""8 which are covered by the single license but
are required to be ancillary to the primary investment services
for which home state authorization must be sought under the
Directive. 9 These non-core services include, among others,
safekeeping and safe custody services, margin lending services,
corporate finance advisory services, underwriting services,
investment advisory services and foreign exchange services.
After defining the term "investment firm" by reference to
the services and investments listed in its annex, the Directive
then sets forth numerous exclusions. 1 As a result, the
Directive does not apply to: (1) insurance companies; (2)
firms which provide investment services solely to affiliated
entities" or to employee-participation schemes 4 (or
both); 5 (3) incidental investment services provided by
regulated professionals, presumably lawyers and
accountants; 6 (4) central banks;77 (
) firms which do not
hold client funds or securities and which do not provide
investment services except to receive and transmit
transferable securities or mutual fund units only to authorized
investment firms, credit institutions, mutual funds and
investment companies; 8 (6) mutual funds and their
managers and depositaries; 9 (7) commodities traders; ° and
88 Investment Services Directive, supra note 2, annex, § C.
o The Directive provides that an investment firm which intends to
provide any of these ancillary services cross-border under the single
passport must obtain home state authorization of at least one primary
investment service as well as the ancillary services to be provided. See id.
70 See id. annex, § C.
7V See id. art. 2(2).
71 See id. art. 2(2)(a).
73 See id. art. 2(2)(b).
71 See id. art. 2(2)(d).
71 See id. art. 2(2)(e).
76 See idU art. 2(2)(c). The exclusion for members of the professions was'
supported by the rationale that lawyers and accountants normally provide
investment services incidental or subordinate to their primary professional
services. See DTI CONSULTATIVE DOCUMENT, supra note 44, at 11.
17 See Investment Services Directive, supra note 2, art. 2(2)(f).
78 See id. art. 2(2)(g). The exclusion further requires that these firms'
activities be governed at a national level by rules of ethics. See id.
78 See id. art. 2(2)(h).
(8) certain financial-futures and options market dealers."1
Despite these exclusions, the Directive's scope remains
remarkably broad in its coverage and hence provides a single
passport for a wide array of investment services. Moreover, it
should be noted that the failure to cover, or the explicit
exclusion of, investment activities by the Directive does not
bar those activities from being provided by a Member State
The inclusion of investment advisory services among
"noncore services" is of particular interest because it results in the
denial of an EU-wide license to investment advisers who only
provide investment advice and none of the listed core
investment services. The United Kingdom's Department of
Trade and Industry ("DTI") advanced the position, without
success, that investment advice should be an authorizable
service in its own right in order to make the single license
available to pure investment advisers.82 The Commission
excluded investment advisers from the scope of the Directive
based on its view that investment advice is not generally
practiced in Europe as a separate profession but usually is
incidental to brokerage and portfolio management services."3
Thus, under the Directive, investment advisers will not be able
to avail themselves of the passport and will not be subject to
the EU's common minimum authorization and prudential
rules. In cases where it is already possible for a firm to
provide advisory services in other Member States, the host
states may not impose new restrictions under the Treaty of
80 See id art. 2(2)(i). This exclusion is limited to "persons whose main
business is trading in commodities amongst themselves or with producers
or professional users of such products and who provide investment services
only for such producers and professional users to the extent necessary for
their main business." See id.
8' See id. art. 2(2)j).
82 See DTI CONSULTATIVE DOCUMENT, supra note 44, at 7-8. The United
Kingdom's Department of Trade and Industry recommended that the
Directive regulate, with the exception of investment advice made by or
through broadcast or print media, the activities ofinvestment advisers. Id.
83 EC Commission Discussion Document, Provision of Investment
Services in the Securities Field (May 16, 1988) at 2 [hereinafter EC
PublishedDbiysPceunsnsLioawn: DLergaafltS]c.holarship Repository, 2014
Rome, absent proof that those restrictions were objectively
The Investment Services Directive applies not only to
investment firms but also to banks and other credit
institutions that provide investment services. Banks already
covered under the Second Banking Directive,8" however, do
not have to reapply for authorization under the Investment
Services Directive.8" These banks already have a Union-wide
license. The major provisions of the Investment Services
Directive applicable to banks are those relating to home state
prudential rules, host state conduct-of-business rules, investor
compensation plans, the concentration requirement, access to
membership in stock exchanges, regulatory enforcement, and
3.2. Major Operative Provisions
The following discussion addresses the more significant and
controversial operative provisions of the Directive. One should
not assume that various other provisions treated only in
passing or excluded from the analysis entirely are unimportant
or ultimately may not be greater sources of controversy. The
major provisions discussed below proved to be the most critical
in the development and eventual adoption of the Directive.
These major provisions include those relating to home-state
authorization, mutual recognition, prudential rules,
conduct-ofbusiness rules, access to stock exchange membership,
concentration, market transparency, and reciprocity for
3.3. Home-State Authorization
The Directive embraces the principle of home country
control and prescribes the Union-wide minimum criteria that
must be satisfied before a firm may be authorized by the home
84 See DTI CONSULTATIVE DOCUMENT, supra note 44, at 3.
85 See supra note 40.
" See Investment Services Directive, supra note 2, art. 2(1). It should
be noted that Article 3 of the Directive, requiring home state authorization
of investment firms, is not among the specified provisions applicable to
Member State. The five minimum conditions for home-state
authorization of investment firms include the following:
(1) The firm must have its head office in the Member
State where it seeks authorization," thus assuring
that the authorizing Member State is the home
state and preventing circumvention of home-state
(2) the firm must demonstrate sufficient initial capital,
as specified in the Capital Adequacy Directive,89
with respect to the investment services to be
(3) the firm's management, directed by at least two
persons,9 1 must be shown to be of "sufficiently good
repute" and "sufficiently experienced;"92
(4) the firm must submit a business plan or
"programme of operations" setting forth the types of
business envisaged and the firm's organizational
) the firm must disclose "the identities of
shareholders or members, direct or indirect,
whether natural or legal persons, that have
'qualifying holdings' and the amounts of those
holdings," 4 and it must demonstrate that those
persons satisfy the home state's "suitability"
88 Id. art. 3(2). This anti-circumvention rule is intended to reduce
possibilities for regulatory arbitrage within the EU. The Directive requires
Member States to deny authorization where it is clear that "an investment
firm has opted for the legal system of one member state for the purpose of
evading the stricter standards in force in another member state." Id pmbl.
8 See Capital Adequacy Directive, supra note 42, pmbl.
90 Investment Services Directive, supra note 2, art. 3(3).
9 Id. The Directive does grant Member States authority to except from
this two-man management, or "four eyes" rule, those firms, including
partnerships, whose single manager satisfies similar reputation and
experience standards. Id.
" Id. art. 3(4).
94 Id. art. 4. The Directive extends these disclosure requirements to
proposed acquisitions of investment firms, as well as increases and
decreases of qualifying holdings that would meet or cross thresholds of 20%,
33% or 50% of the voting rights or capital of an investment firm. Id. arts.
Published by P9en(3n).Law: Legal Scholarship Repository, 2014
standards.9" Similar to criteria for "controlling
person" and "associate" status under the federal
securities law of the United States, 6 the term
"qualifying holding" is defined to mean "any direct
or indirect holding ... which represents 10% or
more of the capital or voting rights or which makes
it possible to exercise a significant influence over
the management of the investment firm....""
The most problematic aspect of these authorization
conditions is the indeterminate nature of the terms "good
repute" and "suitability." Neither term is defined in the
Directive. Obviously, both go beyond financial capability since
minimal capitalization is a separate requirement incorporating
the newly-adopted Capital Adequacy Directive.98 Both terms
are likely to take on different meanings in the different
regulatory cultures of the Member States. Despite those
differences, under the new single license, the good repute and
suitability determinations made pursuant to home-state
standards are required to be respected by host-state
authorities even if those standards are deplorably low in
comparison to those of a particular host state.
For an authorized investment firm to maintain its
authorization, it must meet certain continuing obligations
established by the home state.9 These continuing
obligations, which must be satisfied at all times to avoid
withdrawal of the firm's authorization by the home state,
include the following:
(1) The firm must make actual use of the authorization
within twelve months; 00
Id- art. 4. The "suitability" standard is to be determined by the
competent authorities of each authorizing home state based upon "the need
to ensure the sound and prudent management of an investment firm .... "
96 See, e.g., 17 C.F.R. § 230.405 (Rule 405). See generally LouIs Loss &
JOEL SELIGMAN, SECURITIES REGULATION 1691-1727 (3d ed. 1990 & supp.
Investment Services Directive, supra note 2, art. 1(10).
98 See Capital Adequacy Directive, supra note 42.
g See Investment Services Directive, supra note 2, art. 3(7).
.00 See id. art. 3(7)(a).
(2) the firm must not have obtained authorization by
misrepresentation or "other irregular means;""1
(3) the firm must continue to fulfill the initial
authorization conditions;. 2
(4) the firm must continue to comply10 w3ith the provisions of
the Capital Adequacy Directive;
) the firm must not have "seriously and systematically"
violated the applicable prudential and
conduct-ofbusiness rules; '°4 and
(6) the firm must comply with all other home state laws
that provide for withdrawal of a firm's
The home state is charged by the Directive with the
responsibility of requiring compliance with these authorization
conditions, including the capital requirements imposed by the
Capital Adequacy Directive, and of supervising compliance
with the applicable prudential rules."0 6 Only the home
state's competent authorities have the power to withdraw an
investment firm's authorization.
3.4. Mutual Recognition And The Passport
The Directive provides a Union-wide passport or single
license by requiring mutual recognition by host states of all
home state authorizations.0 7 This mandatory deference to
the home state constitutes the heart of the Directive. Thus,
once an investment firm is authorized by its home state to
provide specified investment services, the firm may establish
a branch in any other Member State or otherwise provide
services in any other Member State.' The other Member
States, as host states, are expressly prohibited from making
the establishment of a branch office or the provision of services
U. Pa. J. Int'l Bus. L.
within their borders subject to any authorization
requirements.0 9 The investment firm previously authorized
by its home Member State does not need to incorporate a
subsidiary in the host state or satisfy any further licensing
requirements of the host state. This holds true even though
the authorization requirements of the host state are
considerably more rigorous than those of the home state that
granted the investment firm's authorization. The authorized
investment firm desiring to commence business operations in
other Member States need only comply with the Directive's
relatively simple notification requirements.110
The Directive requires, in essence, that a previously
authorized investment firm simply notify the competent
authority of the home state of its plans to establish a
branch.1 1 or provide services in another Member State."2
The home state will then notify the intended host state of the
firm's plans to establish a branch or otherwise provide
previously authorized investment services in the host
state.1 For the establishment of a branch, the firm must
either receive a notice from the host state or wait two months
following the home state's notice.'14 For the provision of
services in the host state without the establishment of a
branch office, the investment firm may commence its business
in the host state immediately following the home state's notice
to the host state. 1 5
"9 See id. art. 14(2). The mutual recognition required by the Directive
is subject to a potentially far-reaching obstacle in the form of host state
imposition of laws protecting the "general good." Id. pmbl. See also id. art.
13 (regarding host state "general good" regulation of advertising); id. arts.
17, 18(2) (regarding the host state's imposition of "general good" conditions
in addition to conduct ofbusiness rules); id art. 19(6) (regarding host state
enforcement of "other legal or regulatory provisions adopted in the interest
of the general good"). Under EU jurisprudence, however, "general good"
regulations applied by host states must be proportionate, non-discriminatory
and non-duplicative of home state regulation. See Redhead, supra note 3,
at 188 & n.13; Warner, supra note 3, at 17-19.
110 See Investment Services Directive, supra note 2, arts. 17, 18.
. See id. art. 17(1), (2).
112 See id. art. 18(1).
"1 See id. arts. 17(3), 18(2).
114 See id. art. 17(4).
's See id. art. 18(2).
Directive establishes a common set of minimum
financial soundness standards, referred to as prudential rules,
applicable to all authorized investment firms."' Each
Member State, in its role as the home state of the investment
firms it has authorized, is required to impose and supervise
compliance with these rules. 7
The Directive requires that
each home state draft and enact rules which require, among
other things, that each authorized investment firm complies
with the following:
(1) The firm
must have sound administrative and
(2) the firm
must maintain controls and safeguards
over electronic data processing;
(3) the firm
must have adequate internal control
transactions by its employees;
(4) the firm
must safeguard investors' rights in their
securities and funds, and, more particularly, it must
have arrangements for segregation of accounts to
prevent the firm from using investors' securities and
funds for its own account (except funds held by
116 See id. art. 10.
117 See id. art. 8(3).
The Commission recently has proposed an
amendment to the Investment Services Directive intended to facilitate
prudential supervision of investment firms by the competent authorities of
the Member States. See Proposal for a Council Directive Amending
Directive 93/22 in the Field of Investment Firms in Order to reinforce
Prudential Supervision, 1993 O.J. (C 229) 10, COM (93) final - SYN 468.
The amendment, precipitated in part by the Bank of Credit and Commerce
International ("BCCI") scandal, would require disclosure of group structure
by investment firms belonging to a group of affiliated entities in order to
allow effective supervision. See id. pmbl. and arts. 1, 2, 4. A "group" is
defined as two or more companies that are linked by "participation,"
meaning the ownership of at least 20% of voting rights or capital, or by
"control." See id. art. 1. In addition, the proposal would require auditors
to report to competent authorities any matters which are likely to endanger
the investment firm or its clients or which involve violation of sound
management principles. See id. art. 5. See also EC ProposesAmendments
to Several FinancialDirectives, 6 Int'l Sec. Reg. Rep. (Buraff) No.19, at 2
(Aug. 14, 1993).
Published by Penn Law: Legal Scholarship Repository, 2014
U. Pa. J. Int'l Bus. L.
) the firm must maintain records of all transactions
sufficient to enable the home state's competent
authority to monitor compliance; and
(6) the firm must be structured and organized in a
manner sufficient to minimize the risk of conflicts of
interest between the firm and its clients."18
In its first discussion draft of the Directive, n 9 the
Commission originally characterized these rules as
conduct-ofbusiness rules rather than prudential rules, but they were
nevertheless to be administered by the home state of
authorized investment firms. The imposition of supervisory
responsibilities on the home state, rather than the host state,
with respect to the segregation and conflict-of-interest rules
which clearly implicate a firm's business conduct in the host
state, is likely to generate considerable enforcement problems.
Moreover, the Directive provides no common private cause
of action to investors for breach of the home state's prudential
rules or the host state's non-uniform conduct-of-business rules.
Although the Directive authorizes the Member States to adopt
penalties and other measures to enforce the regulations
applicable to investment firms, 2 ' it fails to specify remedial
measures necessary to protect aggrieved investors. Shortly
before adoption of the Directive, an attempt was made to
include a requirement that each investment firm participate
in the host state's investor compensation fund, with
contribution amounts to be calculated on the basis of income
derived from investment services provided by the firm in the
host state.' 2 ' The EU Commission did not support these
last-gasp efforts to protect retail investors, preferring to
s See id. art. 10. In establishing minimum standards, the directive
permits a home state to adopt rules that are stricter than those provided.
See id. pmbl.
119 See EC Discussion Draft, supra note 83, at 6. Some commentators
have expressed concern that home states might adopt various measures,
under the guise of prudential rules, in order to achieve home state
regulation of conduct of business through the back door. See Redhead,
supra note 3, at 204.
120 See Investment Services Directive, supra note 2, art. 27.
121 See EC Commission Rejects Amendments to ISD Offered by Euro
Parliament,5 Eurowatch (Buraff) No. 2, at 5 (Apr. 19, 1993); EC Securities
Investment Directive Gets FinalApproval from Parliament,25 Sec. Reg. &
L. Rep. (BNA) No. 10, at 377 (March 12, 1993).
submit to the Council of Ministers its own proposal for a
separate directive to harmonize compensation systems among
the Member States.122 The Investment Services Directive
requires only that investment firms disclose to investors
whether and to what extent a compensation fund or equivalent
protection is afforded, if at all.'23 For the time being,
investors and their newly-integrated marketplace will suffer
from the absence of any remedial commonality among the
The Directive does not establish common minimum
conduct-of-business rules for investment firms, primarily
because the development of rules for the protection of investors
threatened to derail progress towards adoption of the entire
Directive." Considerable differences among Member States
emerged as to the coverage of these kinds of rules and their
manner of application.' 25 The United Kingdom's Law
Society, in comments concerning the draft Directive, stated:
We think it is premature to attempt to harmonise
conduct of business rules and it would have a
disastrous effect on the timetable for the
implementation of the directive if attempts were made
now. We are of the view that these matters should be
left for a further directive. We therefore see no
alternative at the present time but for the directive to
leave such rules as a matter for the host state, thus
12 See Investment Services Directive, supranote 2, art. 12 (codifying the
Commission's commitment to propose an investor compensation directive
that would be transposed into the national laws of the Member States at the
same time as the Investment Services Directive). In accordance with this
commitment, the Commission recently approved a proposed directive for
adoption by the Council of Ministers. See Directive to Require Mandatory
Securities CompensationSchemes, 6 Intl Sec. Reg. Rep. (Buraff) No. 21, at
5 (Oct. 5, 1993). The proposal requires each investment firm to participate
in its home state's compensation system, with coverage for both the firm's
home state and host state clients at a minimum level of ECU 20,000
($23,500) in the event of the firm's insolvency or its inability to return
investors' funds or securities. See id.
123 Investment Services Directive, supra note 2, art. 12.
124 See Nicoll, supra note 3, at 2.
125 See Bradley, supra note 3, at 552.
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U. Pa. J. Int'l Bus. L.
leaving it open for a host state to apply its conduct of
business rules in its own market as regards investment
firms authorized in another Member State, even though
those rules may be more stringent than those operating
in the investment firm's home state.'2 8
Thus, development of harmonized conduct-of-business rules
has been deferred by the Commission. In lieu of specific,
detailed conduct-of-business rules, the Directive sets forth
seven common principles.
Member States are required to draw up and enact
conductof-business rules incorporating the following general
(1) The firm must act honestly and fairly in conducting
its business activities in the best interests of its
clients and the integrity of the market;
(2) the firm must act with due skill, care, and diligence;
(3) the firm must employ the resources and procedures
necessary for proper performance of its business
(4) the firm must obtain from its clients information as
to their financial position, investment experience,
) the firm must make adequate disclosure of relevant
material information in its dealings with clients;
(6) the firm must try to avoid conflicts of interest and,
when they exist, must ensure the clients' fair
(7) the firm must comply with all regulatory
requirements applicable to its conduct of
While compliance with these prudential rules is to be
supervised by the home state, compliance with the
conduct-ofbusiness rules is to be supervised by the host state. 28 Until
126 LAW SOCIETY COMMENTS, supra note 62, at 15.
12 Investment Services Directive, supra note 2, art. 11(1).
128 See id. art. 11(1), (2). The Member States are required to apply their
conduct of business rules "in such a way as to take account of the
professional nature of the person for whom the service is provided." Id. art.
11(1). See also id. art. 11(3).
these conduct-of-business rules are harmonized by a separate
directive, twelve different sets of conduct-of-business rules will
be adopted by Member States and applied by each host state.
According to one investment firm executive, this scheme will
result in a "compliance nightmare," with investment firms
struggling to familiarize themselves with rule variations
among the twelve Member States.2 9 It must be noted that
this "nightmare" predated the Directive. It should be relieved
somewhat by the implementation of common guiding principles
and, ultimately, by the adoption of a conduct-of-business rules
directive. Even with the harmonizing impact of a
comprehensive directive, however, the EU regulatory scheme
enforced by host states will be fragmented by scope and
stringency variations and by the range of enforcement
intensity among the Member States."'
3.7. Access To Stock Exchanges
In one of its more hotly-contested provisions, the Directive
provides expanded ability for investment firms and banks
authorized by their respective home states to become members
of the regulated markets of the host states.' Firms
authorized to act as brokers or dealers by their home states
must be allowed the free choice of becoming members of, or
having access to, the host states' regulated markets. This
access must be either "directly," by setting up branches in the
host states, or "indirectly," by incorporating subsidiaries in the
.2 Robert K. Steel, European Securities Markets-The Way Ahead,
Paper Presented at Financial Times Conference, London, England, May 10,
1993, at 3. Apparently, the investment banking community preferred home
state control over authorization, prudential rules and conduct of business
rules. Id. Thus, an investment firm engaged in cross-border activities
would be subjected to only one set of rules-those of its authorizing home
state. In other words, in the absence of harmonization of rules throughout
the EU, at least single firm harmonization could be achieved. This
arrangement, of course, could wreak havoc among investors and regulatory
authorities in the host states, who would confront their own nightmare in
determining which rules applied to each of the various investment firms
operating in the same host state market. The "compliance nightmare" is
likely to become even more frightening as a result of host state imposition
of various "general good" regulations in addition to its formalized conduct
of business rules. See supra note 108.
130 See Global Harmonization,supra note 1, at 231.
131 See Investment Services Directive, supra note 2, art. 15.
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U. Pa. J. Int'l Bus. L.
host Member States or by acquiring firms which are already
members of the host states' regulated markets or already have
access to those markets.'32 If the host state's regulated
market has numerical limitations on exchange membership,
the host state must abolish those restrictions or adjust them
to satisfy demand. 3' The expanded access provided by the
Directive also extends to the clearance and settlement systems
provided for members of host states' regulated markets."M
Credit institutions, unlike other investment firms, are
denied direct access until various transitional periods have
expired. The Directive provides for variable speeds of bank
access by establishing a staggered timetable for giving banks
direct access to the domestic stock exchanges of those Member
States not permitting direct bank access but requiring
separately capitalized investment firm subsidiaries. France,
Italy and Belgium are allowed to deny access until December
31, 1996, and Spain, Greece and Portugal are permitted to
extend that period until December 31, 1999.135 These
extensions accommodate the Club Med's understandable
opposition to Germany's desire for direct bank access to the
domestic stock exchanges of the other Member States.'36
Prior to reaching the compromise of transitional effectiveness,
the Club Med group insisted that Member States should be
allowed to require all banks to incorporate and separately
capitalize investment firm subsidiaries as a precondition to
access to their domestic stock markets. When the Directive
finally becomes fully effective for banks, it should prove
particularly beneficial to French and German universal banks,
which are already authorized by their home state authorities
to provide investment services. Not only will those banks be
free of any requirement to obtain additional authorization in
132 Id art. 15(3).
13 Id. art. 15(1). The opportunity for banks to become members of host
state regulated markets directly, without incorporating separate
subsidiaries, is hailed by the Directive as "a significant reform." Id. pmbl.
13 Id- art. 15(1).
'13 Id. art. 15(3).
136 See Dassesse, supra note 3, at 7. Professor Dassesse has concluded
that Germany, with all of its finance and universal banks engaged in
banking and investment services activities under one roof, joined the North
Sea Alliance in order to protect the direct access of its banks to the
regulated markets of the other Member States. Id. at 5, 7.
other Member States, but they will also have direct access to
membership in the regulated markets of the other Member
States, even if those host states do not provide similar access
for their own domestic banks.
The liberalized access provided by the Directive is further
enhanced by a provision allowing cross-border access through
electronic facilities,"'7 bringing markets closer to "the end of
geography.""3 ' In cases where a host state's regulated
market does not require a physical trading floor, the Directive
requires that investment firms be permitted to become
members or have access to that host state's regulated market
through remote electronic terminals. 3 ' To ensure this
crossborder access, the Directive obligates home states to allow the
host state's regulated market "to provide appropriate facilities
within the home Member States' territories." 40 Accordingly,
in such cases, the home state of the prospective member firm
must allow local installation in its territory of the required
hardware and software systems to enable the firm to transmit
business across borders through the host state's regulated
market. This provision is likely to have significant
ramifications for the United Kingdom and its floorless,
screenbased International Stock Exchange and SEAQ International.
British authorities have conceded that this provision would
prevent imposition of their 1986 Financial Services Act
U. Pa. J. Int'l Bus. L.
authorization requirements on other Member States' stock
exchanges operating through remote terminals in the United
Although the Directive frees authorized investment firms
from having to obtain host state authorization, it does impose
certain regulatory conditions on those firms in connection with
securing membership in or access to the host states' regulated
markets. Investment firms from other Member States must
comply with the rules concerning transactions in that host
state market, including the applicable professional
standards." In addition, these firms must comply with the
rules and procedures for clearing and settlement of securities
trades.'4 3 The absence of harmonized clearance and
settlement mechanisms in-the EU continues to pose a severe
restraint on the full integration of the EU securities markets
and on the internationalization of securities markets
generally."' The Commission should assign the highest
141 DTI CONSULTATIVE DOCUMENT, supra note 44, at 23.
142 Investment Services Directive, supra note 2, art. 15(2) ("Access to a
regulated market, admission to membership thereof and continued access
or membership shall be subject to compliance with ... the professional
standards imposed on staff on and in conjunction with the market.").
'44 Clearance and settlement procedure has been described as "the black
spot of European securities." CapitalMarkets Survey, supra note 48, at 27.
According to one study, the absence of automated clearance and settlement
systems for international equity transactions has limited the flow of equity
capital across national borders. SEC STUDY, supra note 25, at 11-57.
Whether these systems are standardized and integrated is critical to the
globalization of the world's securities markets. Id. at V-61. The major
problems result from a lack of international clearance and settlement
crossborder linkages and the existence of widely-varying clearance and
settlement procedures in the world's securities markets. Id. See generally
David E. Van Zandt, The Regulatory and Institutional Conditions for an
InternationalSecurities Market, 32 VA. J. INTL L. 47 (1991); Richard P.
Bernard, InternationalLinkages Between Securities Markets: "A Ring of
Dinosaurs JoiningHands and Dancing Together"?, 1987 COLUM. BUS. L.
REV. 321 (1987); Samuel E. Hunter, The Status and Evolution of
TwentyFour Hour Trading: A Trader's View of International Transactions,
Clearance,and Settlement, 4 B.U. INT'L L.J. 15 (1986).
The settlement system of the Member State with the most developed
international securities market, the United Kingdom, has been described as
"one of the worst settlement systems in the developed world." What is a
Stock Exchange For?, ECONOMIST, Mar. 13, 1993, at 93. After six years of
work and an estimated $600 million of costs, London's International Stock
Exchange recently scrapped its never-completed Taurus computerized
priority to the elimination of this barrier to
ConcentrationAnd Off-Market Trading
The issue that proved the most troublesome in achieving
Member State consensus on the Directive was the issue of
"concentration." Basically, the term refers to a requirement
that trades in a given security must be executed solely on the
regulated market of a Member State where that security is
listed, to the exclusion of off-market execution in an
unregulated market. The concentration issue, as well as the
related transparency issue, was proposed by the French, and,
as a result, the debate over the Directive was expanded from
its central theme ofmarket access through mutual recognition
to include the more contentious and divisive themes of market
structure and regulation. 4 5
France, with the support of its Club Med Member States,
insisted on a concentration requirement as a way to ban
lightly-regulated, quote-driven, screen-based markets,
including London's SEAQ International and the London-based
off-exchange Eurobond market, in favor of the more
tightlyregulated, order-driven, floor-based markets on the continent.
The Club Med countered that this restraint on free markets
was necessary to protect widows, orphans and other retail
investors, to which one critic replied: "How touching. The
simpler truth is that southern Europeans want to protect their
exchanges from competition."'46 One commentator recently
observed that the "reluctance on the part of the Paris market
to encourage off-exchange trading at the expense of the highly
regulated retail [exchange] markets is related to the
apprehension among Europe's exchanges that London's SEAQ
I[nternational] will run them out of business even sooner
settlement system. See London Stock Exchange: System Down, ECONOMIST,
June 12, 1993, at 90.
145 See Pan-EuropeanMarkets, supra note 55, at 86.
14 Setting Europe'sStockmarkets Free, ECONOMIST, Sept. 7, 1991, at 18.
Another writer has stated: "The Club Med had argued strongly for
concentrating business on regulated markets, allegedly to protect investors,
but in fact to protect their own inefficient stock exchanges." European
PublisFheidnbaynPcenianlLSaewr:vLiecgeasl:ScDhoelalrashyiepdRHepaosritmoroy,n2y0,14ECONOMIST, July 4, 1992, at 70.
U. Pa.J. Int'l Bus. L.
under the [Investment Services Directive's] passport
system."'47 In the end, the North Sea Alliance's fierce
opposition, led by the British and Germans, resulted in a
substantially watered-down version of the concentration
The final version of the concentration requirement does
permit a Member State to require that securities transactions
be carried out on a "regulated market,"' which is defined
by the Directive as a market designated by a Member State on
a prescribed list of approved exchanges that functions
regularly and complies with the Directive's minimum reporting
and transparency standards and the listing standards imposed
by the Admission Directive.'49 The concentration
requirement is significantly weakened, however, by the
requirement that four conditions be satisfied before the rule
may be applied by a Member State:
(1) The investor must be "established" or be a
continuous resident of that Member State; 50
(2) the transaction must be executed by the investment
firm through its main office, through a branch
located in that Member State or under the freedom
to provide services in that Member State;' 5'
(3) the transaction must involve securities that are
actually listed on a regulated market in that
Member State;152 and
(4) the investor must not have exercised the right
granted by the Directive to opt for an off-exchange
147 Houghton, supra note 3, at 772.
14 Investment Services Directive, supra note 2, art. 14(3).
149 Id. art. 1(
150 I. art. 14(3).
'3 I& art. 14(4). The Directive requires each Member State to afford
investors, who are "habitually resident" or established in that Member
State, the right not to comply with the concentration requirement, thus
permitting those investors to have transactions executed in non-regulated
markets. Id. Nonetheless, Member States are authorized to condition
investor opt-out rights on "express authorization," and, in doing so, they are
to consider the differing needs for protection among retail, professional and
institutional investors. Id. It is unclear whether Member States could
The opt-out provision obviously represents a vital feature of
the Directive's concentration rule. In preserving investor
choice, the opt-out clause protects retail, investors in their
efforts to achieve best execution in a competitive market
environment. Moreover, it protects the professional and
institutional investors' access to wholesale, off-exchange
markets. Investor choice, however, requires regulatory
reassessment. While the British were arguing strenuously for
the preservation of market choice, the United Kingdom's
Department of Trade and Industry expressed concerns that
"some member states appear to have no regulatory oversight
of off-market transactions." 54 It would be a disaster laced
with irony if the EU's effort to integrate its regulated
securities markets resulted in a mass exodus to a "wild west"
of opaque markets free of regulatory scrutiny.
The most virulent criticism of the diluted concentration
provision has come from participants in the Eurobond market,
which has an estimated annual turnover in its secondary
market of approximately $9 trillion.'55 They fear that
investors' ability to opt out may be complicated by Member
State restrictions, and, accordingly, they would have preferred
a specific exemption from the Directive.'56 Unlike SEAQ
International, which is likely to be designated a "regulated
market,""' the Eurobond market is not a regulated market
and clearly falls outside the Directive's definition.' It has
been suggested that Member States "could use the directive to
boost business levels on domestic exchanges through a strict
interpretation of the measures and insistence that retail bond
require an investor's written opt-out for each trade, as opposed to a blanket
authorization, but the Directive does state that any required authorization
must "not jeopardize the prompt execution of investors' orders." Id.
'6 DTI CONSULTATIVE DOCUMENT, supra note 44, at 24.
...See London ObserversFearECDirective CouldDriveAway Eurobond
Business, 6 Int'l Sec. Reg. Rep. (Buraff) No. 17, at 3 (July 28, 1992)
[hereinafter London Observers].
16 Id. See also Olivia P. Adler, Progress on EC CapitalAdequacy and
Investment Services Directives, 5 Intl Sec. Reg. Rep. (Buraff) No. 18, at 6
(Aug. 11, 1992); Steel, supra note 129.
167 Telephone Interview with Paul Smee, Head of Public Policy and
International Relations, London Stock Exchange (Nov. 8, 1993).
Published by P.e.n.nSeLaewL:LoengdaloSncholarship Repository, 2014
Observers, supra note 155, at 3.
U. Pa. J. Int'l Bus. L.
business be conducted on a regulated market."'59 Although
this suggestion is unlikely to be implemented, it is hard to
disagree with the conclusion that the Directive has created
"unnecessary legal uncertainty" for the Eurobond market. 60
Clearly related to the concentration rule-and equally
controversial-is the Directive's creation of minimum
transparency rules for the regulated markets of the Member
States. As originally proposed by the French and supported by
the Club Med Member States, the combination of
concentration and transparency rules would have forced
investors to conduct their securities trades in "transparent"
regulated markets. The French proposed detailed
transparency rules, which would have required the immediate
disclosure of price and volume information for all regulated
market securities transactions.'6 1 The Club Med advanced
the position that stringent transparency rules were critical to
ensuring an adequate level of investor protection and reducing
risks of distortion among competitive markets. 2 Most
commentators have concluded, however, that the underlying
motivation for the concentration and transparency rules was
"swiping business both from SEAQ International and from
free-wheeling international bond dealers."'63 The British
and Germans, backed by the North Sea Alliance, insisted that
limited secrecy regarding trading transactions was essential to
the protection of market makers transacting business in
quotedriven, off-exchange wholesale markets dominated by
professional and institutional traders, markets where
transparency may be less important than liquidity.' They
' See Struggling Through the Wire, ECONOMIST, Aug. 3, 1991, at 69;
Pan-EuropeanMarkets, supra note 55, at 86.
62 See Houghton, supra note 3, at 773-74.
1.3 Europe'sShare Markets: BrusselsBabble, ECONOMIST, June 1, 1991,
164 See CapitalMarkets Survey, supra note 48, at 28. According to one
writer, "liquidity and transparency are often trade-offs," given the
preference of institutional investors for liquidity sufficient to execute large
trades and retail investors' desire for full disclosure. Id. See also Poser,
argued that "the immediate release of detailed information
regarding securities transactions would adversely affect the
liquidity of their trading firms."" In the end, a compromise
was reached that resulted in delayed transparency, thus
ameliorating fears that the French proposal would "regulate
away existing markets.""'
As finally adopted, the Directive requires the competent
authorities of each Member State to adopt for their respective
regulated markets the following minimum transparency rules:
(1) Publication at the market opening of the weighted
average price, the high and low prices, and the
volume during the preceding day of each security
traded on the regulated market;' and
(2) publication, based on a two-hour calculation period,
of the weighted average price and the high and low
price after a one-hour delay, to be updated every
twenty minutes until the market closes. 6 '
Assuming a 9:00 a.m. opening, the weighted average price, the
high and low prices and the volume during the preceding day
must be published at the commencement of the trading day.
The current day's weighted average price as well as the high
and low prices for the period 9:00 a.m. to 11:00 a.m. must be
published at 12:00 p.m. and updated every twenty minutes
thereafter to cover a two-hour period on a one-hour delayed
basis. The Directive leaves to Member State discretion the
means of dissemination. 9 In addition, the Directive
permits Member States to exclude from their transparency
rules transactions involving large blocks of securities and
illiquid securities and to apply "more flexible provisions" for
transactions involving bonds and other forms of securitized
debt.7 In stark contrast to the U.S. securities markets'
realsupra note 3, at 45-47.
16 EC Finance Ministers Reach Agreement on Investment Services,
CapitalDirectives, 5 Int'l Sec. Reg. Rep. (Buraff) No. 16, at 1, 7 (July 14,
16 See London Observers, supra note 155, at 3.
167 Investment Services Directive, supra note 2, art. 21(2)(a).
168 Id. art. 21(2)(b).
169 Id. art. 21(1).
170 Id art. 21(2).
Published by Penn Law: Legal Scholarship Repository, 2014
time reporting standards, the Investment Services Directive's
market transparency standards are remarkably opaque. If
true integration of the Member States' securities markets into
a single "Euromarket" is to be achieved, both regulators and
market participants should seriously pursue the development
of a 'Eurotape," providing real-time reporting on a
consolidated basis of all transactions in the, EU's
3.10. Reciprocity ForNon-EU States
The Investment Services Directive does answer "fortress
Europe" claims that the EU will somehow manage to exclude
the United States, Japan and other non-EU states from the
single passport scheme. 1 Access for outsiders was one of
the issues discussed most during the debates concerning the
Second Banking Directive.'72 As a result, this battle did not
have to be fought again with the Investment Services
Directive. As originally proposed, both directives arguably
required strict or "mirror image" reciprocity. In other words,
the initial proposals conditioned reciprocity on non-EU states
providing EU firms with competitive opportunities equivalent
to those afforded in the EU. This condition would have denied
U.S. banks the benefits of the EU's single market because U.S.
law does not authorize universal banking. Due to this
limitation, U.S. commercial banks may not engage in the
underwriting ofsecurities distributions, and they may not offer
various other investment services that EU banks are allowed
to provide. Ultimately, the objections of the United States
persuaded the EU to adopt a "national treatment" approach in
the Second Banking Directive, "a substantial achievement for
United States financial diplomacy and a substantial step
towards international free trade in services. ,,173
171 See Michael J. Levitin, The Treatment of United States Financial
Services Firms in Post-1992Europe, 31 HARV. INT'L L.J. 507, 521-24 (1990).
172 See supra note 40.
...Levitin, supra note 171, at 507. Conversely, pending legislation
supported by the Clinton administration would permit the United States to
block expansion of foreign banks and investment firms into the United
States ifit is determined that the home state of those firms restricts access
of U.S. firms. See Kenneth H. Bacon, Bentsen Wants Law Aiding U.S.
Banks and OtherFinancialFirms Overseas, WALL ST. J., Oct. 26, 1993, at
To satisfy the national treatment condition imposed by the
Investment Services Directive, the non-EU country must afford
EU investment firms the same competitive opportunities
available to domestic investment firms.1 "4 The Directive
does provide for continuing review to determine whether
nonEU states are providing national treatment and "effective
market access" to EU firms. 7 If the Commission should
determine that such treatment is not being afforded EU firms,
it is empowered by the Directive to negotiate with the
offending non-EU state and to limit or suspend both
authorization of EU subsidiaries of that country's firms and
acquisitions by that country's firms of previously authorized
EU firms. 7 ' Despite the notable improvements in the
Directive's third-country reciprocity provisions, concerns
remain as a result of the Commission's considerable discretion
in interpreting the ambit of the terms "national treatment"
and "effective market access" as used in the Directive. 7 Of
course, even with reciprocity, non-EU firms, unlike Member
State firms, suffer the disadvantage of having to incorporate
and capitalize an EU subsidiary separately in order to secure
the benefits of the single passport.
Fortunately, the Directive does incorporate a grandfather
clause for investment firms already authorized by a Member
State to provide investment services before December 31,
1995.178 EU subsidiaries of non-EU firms that have obtained
authorization prior to the effective date of the Directive are
thus automatically entitled to authorization under the
Directive and permitted to use the EU single passport. This
entitlement is particularly advantageous to the major
investment banks in the United States, most of which have
incorporated investment firm subsidiaries in one or more
Member States during the past decade or earlier.
174 Investment Services Directive, supra note 2, art. 7.
176 Id. art. 7(3).
176 Id. art. 7(
177 See Reid & Ballheimer, supra note 3, at 122.
178 Investment Services Directive, supra note 2, art. 30.
Published by Penn Law: Legal Scholarship Repository, 2014
The Investment Services Directive is to be enacted by each
of the Member States into their respective laws on or before
July 1, 1995, and these laws must become effective no later
than December 31, 1995.17" Like all other EU legislation in
directive form, the Investment Services Directive does not
require verbatim enactment by the Member States; rather, it
requires national legislation which achieves the same
result.8 This latitude accorded the Member States
virtually always results in significant substantive variations
from state to state, and, accordingly, an overall scheme which
is hardly harmonious. In addition, the national laws that are
adopted will be enforced in widely-varying degrees ofintensity.
The success of the Directive depends largely on a convergence
of the Member States' regulatory philosophies, attitudes and
commitments as well as vastly improved interstate regulatory
cooperation.' Although a securities committee would
promote that cooperation, 2 the necessary convergence
17 Id. art. 31.
180 The Treaty of Rome states that "[d]irectives shall bind any Member
State to which they are addressed, as to the result to be achieved, while
leaving to domestic agencies a competence as to form and means." TREATY
OF ROME, supra note 4, art. 189.
181 See RegulatorsMust Trust Each Otherfor ISD to Work, U.K. Official
Says, 5 Eurowatch (Buraff) No. 7, at 7 (June 28, 1993). The Directive does
require collaboration among competent authorities in discharging their
respective responsibilities, including the provision of information necessary
for effective monitoring and supervision of investment firms. Investment
Services Directive, supra note 2, art. 23.
182 An EU mandate for cooperation between the Member States and the
Commission in the application and development of EU law eventually may
result in significant further achievements in the integration of the EU's
securities markets. The EU principle of comitology requires consultation by
the Commission with a committee of experts from the Member States in the
development of community legislation. See Council Decision 87/373, 1987
O.J. (L 197) 33. Thus, the Investment Services Directive insists upon
cooperation between the Commission and the Member States in addressing
problems that arise in the application of the Directive and proposals for
closer coordination in the future. Investment Services Directive, supra note
2, pmbl. The Directive requires the Commission, after consultation with a
Securities Committee, to propose amendments necessary to address new
developments in the investment services field. Id. art. 29.
The Securities Committee, to be created by a separate directive and to
be comprised of representatives from each Member State and the
Commission. The Committee will: (1) assist the Commission in developing
INVESTMENT SERVICES DIRECTIVE
remains in the realm of hopes and dreams. Moreover, the
regulations of the EU's emergent single market will not be
guided by a centralized regulatory agency with EU-wide
jurisdiction. There have been numerous calls for its creation,
but no Euro-SEC currently exists or is likely to exist in the
Despite this and other criticisms discussed in this Article,
the Investment Services Directive does represent a remarkable
advance toward regulatory harmony and more accessible
securities markets in the Member States. It should lead to
substantial uniformity among the twelve Member States as to
authorization standards, financial soundness and related
prudential rules, and, ultimately, to roughly equivalent
conduct-of-business rules. In a victory for financial
nationalism, the Directive did not succeed, as it might have, in
altering the structure of the various domestic markets. These
markets remain not integrated but fragmented. This outcome
particularly favors London's SEAQ International and the
Euromarkets based there. The Directive's new transparency
rule, perhaps better described as an "opacity rule," and the
critical "opt-out" escape hatch from the concentration
technical adaptations to both the Investment Services and Capital Adequacy
Directives, (2) advise the Commission on matters related to the application
of the directives, (3) advise the Commission in developing new proposals in
the securities field and (4) serve as a vehicle for continuous cooperation
between the Commission and the competent authorities of the Member
States. See Ruben Lee, Securities Regulation in the EC: Some Problems
and Solutions, 6 Intl Sec. Reg. Rep. (Buraff) No. 19, at 9, 10 (Aug. 24,
183 See GlobalHarmonization,supra note 1, at 231-32. See also Jan De
Bel, Automated Trading Systems and the Concept of an "Exchange"in an
InternationalContext;ProprietarySystems: A Regulatory Headache!,14 U.
PA. J. INT'L Bus. L. 169, 203 (1993) (advocating integrated EU securities
regulation); Bradley, supra note 3, at 550, 557; Roberta S. Karmel,
Regulatory Aspects of Securities Trading: Can Regulators of International
CapitalMarketsStrike a BalanceBetween CompetingInterests?,4 B.U. INT'L
L.J. 105, 106 (1986) (noting the difficulties in establishing a Euro-SEC);
Peter E. Millspaugh, Global Securities Trading: The Question of a
Watchdog, 26 GEO. WASH. J. INT'L L. & ECON. 355 (1992) (commenting on
international securities regulation); David S. Ruder, Effective International
Supervision of Global Securities Markets, 14 HASTINGS INT'L & COMP. L.
REV. 317, 323 (1991) (same); Stanley Sporkin, Securities and Financial
Market Regulation in the 1990's, 18 SEC. REG. L.J. 414, 415-16 (1991)
(discussing an international SEC).
requirement which accompanied it, should preserve London's
continued dominance over its continental competition. Finally,
the Directive's mutual recognition provisions, providing, in
effect, a single multistate license, should greatly facilitate
EUwide operations for investment firms and, hence, significant
integration and efficiency improvements, The extent of this
integration, while hardly creating a true, single market,
should serve as a powerful catalyst for the eventual
development of a European securities market system.
17 Council Directive 88/627 on the Information to be Published When a Major Holding in a Listed Company is Acquired or Disposed Of, 1988 O .J.
(L 348) 62 . See GlobalHarmonization , supra note 1 , at 202.
" Council Directive 89 / 298 on Coordinating the Requirements for the Drawing-up, Scrutiny and Distribution of the Prospectus to Be Published When Transferable Securities Are Offered to the Public, 1989 O.J. (L 124) 8 . See Manning G. Warren, The Common Market Prospectus,26 COMMON MKT . L. REV. 687 , 695 - 97 ( 1989 ).
"' Council Directive 89/592 on Coordinating Regulations on Insider Dealing , 1989 O.J. (L 334) 30 . See Insider rading, supra note 24. Published by Penn Law: Legal Scholarship Repository , 2014
40 Council Directive 89 /646 on the Coordination ofLaws, Regulations and Administrative Provisions Relating to the Taking Up and Pursuit of the Business of Credit Institutions and Amending Directive 77 /780/EEC, 1989 O.J. (L 386) 1 . See George S. Zavvos , Towards a EuropeanBankingAct, 25 COMMON MKT . L. REV. 263 , 266 - 70 ( 1988 ). See generally ROSS CRANSTON , 1992 : THE LEGAL IMPLICATIONS FOR BANKING ( 1989 ).
41 Council Directive 89 /646, supra note 40, arts. 4- 7 .
42 Council Directive 93/6 on the Capital Adequacy of Investment Firms and Credit Institutions , 1993 O.J. (L 141) 1 [hereinafter Capital Adequacy Directive] . See generally Nancy Worth, HarmonizingCapitalAdequacy for InternationalBanks and SecuritiesFirms,18 N.C. J. INT'L L . & COMP . REG. 133 ( 1992 ). Former Chairman of the SEC Richard Breeden harshly criticized the Directive's capital adequacy standards, particularly for holdings of equity securities. Breeden's stance has been credited with thwarting efforts to achieve international harmonization . See U.S., Europe Split on CapitalAdequacyStandards; BreedenFirmlyRejects U.K Approach as "Unsafe," 5 Intl Sec . Reg. Rep. (Buraff) No. 23, at 1 , 8 ( Nov . 3, 1992 ); Accord on Global CapitalRules Still Distant ,BreedenDeclares,24 Int'l Sec. Reg. Rep. (Buraff) No. 3, at 1511 (Sept. 25 , 1993 ). http://scholarship.law.upenn.edu/jil/vol15/iss2/1 4CapitalMarkets Survey, supra note 48, at 28.
5 Pan-European Share Markets , Needed: More Matter, Less Art, ECONOMIsT, Dec. 8 , 1990 , at 86 [hereinafter Pan-EuropeanMarkets]. Published by Penn Law: Legal Scholarship Repository , 2014 13 Investment Services Directive , supra note 2 , art. 15 ( 4 ).
138 Glenn Whitney , TakingStock: Turmoilin Europe'sFinancialMarkets Will ProduceBoth Big Winners andLosers , WALL ST. J., Feb. 3 , 1993 , (supp.
section) at R3 . According to Richard O'Brien, chief economist at American Express Bank in London, "Europe is the example par excellence of the end of geography .... Unlike in the rest of the world, there are strong political forces bringing the economies together." Id. Thus, the particular geographic location of a market and its particular nationality-if it has one at all-may become insignificant. Moreover, electronic off-exchange proprietary trading systems, already developed in the wholesale Euromarkets, are "standing free" markets, free from the constraints of geography, politics, and regulation. They are likely to proliferate. Whether and how these markets can be captured by national or international regulatory systems are issues that must be resolved. According to one writer, if international regulatory cooperation is not achieved because exchanges and their governments remain "stuck behind national boundaries," securities business will move to newly-developing proprietary trading systems . The Battleof the Bourses,ECONOMIST, Feb. 1 , 1992 , at 82.
13 See Investment Services Directive , supra note 2 , art. 15 ( 4 ).
140 Td Published by Penn Law: Legal Scholarship Repository , 2014