COMMISSION RECOMMENDATION of 25 July 1977 concerning a European code of conduct relating to transactions in transferable securities (77/534/EEC)

EXPLANATORY MEMORANDUM

1. The objectives set out in Article 2 of the Treaty of Rome, particularly the harmonious development of economic activities in the Community, can only be achieved if sufficient capital is available, and the sources of capital are sufficiently diversified to enable investments in the common market to be financed as rationally as possible.

The role of the securities markets is to permit a very free interplay at all times between supply and demand for capital. Consequently, the proper working and the interpenetration of these markets must be regarded as an essential aspect of the establishment of a "common market" in capital.

2. Although the existing differences between the various financial markets in the nine Member States have not so far constituted an insuperable barrier to a number of international transactions, the lack of full information on the securities themselves and ignorance or misunderstanding of the rules governing the various markets have certainly helped to confine the investments of the great majority of savers to the markets of the countries in which they live or to a few well-known major international securities.

A reduction in these disparities would therefore tend to encourage the interpenetration of the member countries' markets, particularly if this is accompanied by improving the safeguards available to savers.

I. The European code of conduct in the context of approximating the laws of the Member States

3. On the basis of a Decision adopted in 1968 on the provision of information to the public on securities and conditions governing transactions in them, the Commission has already carried out a certain amount of harmonization work in this sector, covering various specific aspects such as "the content, checking and distribution of the prospectus to be published when securities issued by companies ... are admitted to official stock exchange quotation" (1) and coordination of "the conditions for the admission of securities to official stock exchange quotation" (2).

4. In parallel with the work of harmonization by Directives, and without prejudice to this method which is the only one capable of attaining the objective of true European integration, the Commission is of the opinion that it could recommend to the Member States - in a document covering a range of problems connected with dealing in securities - that they should ensure the observation of certain basic principles. These principles are already widely recognized in all the countries of Europe, but restating and applying them will help to create a common set of professional ethics in an ever-changing field ; this, in its turn, will considerably facilitate the process of harmonization through Directives by making clear in advance the approach the Commission will be adopting. (1)OJ No C 131, 13.12.1972. (2)OJ No C 56, 10.3.1976.

5. This code of conduct, to be issued in the form of a Commission recommendation, must be seen separately from the Commission's other harmonization work in this sector: - because the ethical approach has been given priority over the legislative approach;

- because the Commission is anxious to take full account of the dynamics of the financial market and of business life, and consciously to adopt a positive attitude which seeks to improve the machinery of the market and the effectiveness of those operating on it;

- because some of the topics dealt with in a very general way in the code may be, and in some cases already are, the subject of proposals for Directives where a strict legal framework will be appropriate.

II. Juridicial scope of the Commission's recommendation

6. The purpose of the present recommendation to the Member States is that they should ensure that those who are in a position to influence the workings of securities markets comply with the principles of the code of conduct ; the Commission has consulted those involved and has ascertained that there is already broad support for the principles of the code.

7. Although most States are now conscious of the need to supervise financial markets, it is only too obvious that methods of supervision still differ widely.

The recommendation allows for these differences ; it does not require the Member States to create special supervisory authorities, but merely to coordinate at national level the action of the various associations and bodies concerned.

8. It must, however, be stressed that the introduction of a code of conduct for securities transactions by means of a recommendation can in no way be an obstacle to the subsequent adoption of Directives or Regulations in one or other of the fields covered by it. A number of such instruments are in fact already under preparation.

9. In the same light, it is not impossible that certain States may feel legislation on some or all of the subjects covered by the code is necessary in order to comply with the recommendation.

III. The content of the code

10. The code sets out a fundamental objective, certain general principles and a number of supplementary principles.

11. The general principles are the key provisions of the code and are of overriding importance.

They take priority over and go well beyond the detailed principles which follow them, and which are merely illustrations of them.

It is the general principles which will enable the fundamental objective of the code to be complied with ; the content of the code must be understood and interpreted in the light of the general principles and not only by reference to the letter of the various supplementary principles. A. The first general principle emphasizes the importance of this aspect of the interpretation of the code. It recalls that any transaction on the securities market must be carried out in compliance with the rules and practices in each State designed to ensure the proper working of the markets, the principles of the present code supplementing or strengthening such rules and practices.

B. The second general principle is that information provided to savers must be complete and accurate, since lack of knowledge is a source of imperfection in any market.

If the information is not provided, or if it is incomprehensible or wrongly interpreted by those for whom it is intended, or if it is deliberately slanted or distorted, the prices quoted may well become completely artificial and the market may cease to fulfil its role. Consequently, a large number of principles, in the second part, have been worked out to cover this problem (supplementary principles 7 to 15).

The need for properly distributed information covers a wide range of situations, as different as the issue or the negotiation of securities. Proposals for Directives have also been made in this connection (including a proposal concerning rules for admission to quotation).

C. The third general principle relates to equality of treatment for shareholders. Despite some criticism, the Commission has taken the view that the principle of equality of treatment should be retained, illustrating its application by two supplementary principles, with the accent mainly on a specific obligation to disclose information.

Supplementary principle 17 mentions equality of treatment for other shareholders where a controlling holding is transferred, but accepts that the protection of such shareholders could be achieved by other means ; this takes account of the existence in Germany of a law limiting the powers of the dominant shareholder. It is important to realize that the fundamental principle of the equality of shareholders goes well beyond the scope of the code. It is not confined, even in the code, to the transfer of blocks of shares or to the few supplementary principles in the second part which may refer to this principle, such as the use of undisclosed information to the detriment of those not having access to it or the compartmentation of markets making it possible to give advantages to certain purchasers or sellers of securities over others.

Obviously, only a few of the situations in which such a principle might be relevant can be mentioned ; any attempt to give a more detailed list of the cases in which the principle would involve the risk of leaving loopholes which would probably soon be exploited. This principle lays down an approach and a spirit in which certain transactions must be carried out.

D. The fourth, fifth and sixth general principles are more particularly concerned with certain categories of persons the importance of whose role in the realization of the code's objectives is beyond doubt, namely the members of companies' supervisory boards, company directors and company managers (principle 4), financial intermediaries and persons concerned professionally in transactions in securities (principles 5 and 6).

The fourth general principle recalls first that the code applies in particular to the members of companies' supervisory boards, company directors and company managers and then mentions more particularly their duty to refrain from any action liable to hamper the proper working of the market in their security or to harm the other shareholders.

Objectionable action on the market in the securities of a company by directors or managers is a term to be interpreted in the broad sense, since there may well be instances of failure to act which are just as reprehensible, or more reprehensible, than positive action.

The fifth general principle recommends that persons professionally engaged in stock exchange transactions, or at least all "persons dealing regularly on the securities markets", avoid jeopardizing, by seeking immediate and unfair profit, the credibility and the effectiveness of the market which it is in their own interest to foster.

Conflicts of interest liable to arise, e.g. in the various departments of a bank, because of the diversity of the roles which a banker has to play for his various customers, led to the enunciation of the sixth general principle.

While conceding that it is very difficult to lay down precise limits as far as discretion is concerned, it should be emphasized that ways and means must be sought of avoiding conflicts of this nature. An example will illustrate how difficult it is to define the scope of this rule : should confidential information be kept so secret in a financial establishment that it would be wrong to advise against an investment (through without saying why the investment would be a bad one) when the aim would be not to achieve a gain but to avoid a loss ? In such a case, the banker should be free to give such informed advice to the customer, and this does indeed seem to be a reasonable solution ; however, only practice will show whether this interpretation of supplementary principle 8 can become the source of impropriety, and whether the Commission's recommendation will have to be strengthened on this specific point.

12. The supplementary principles

As their name suggests, their purpose is to supplement the general principles by making them clearer and illustrating them. They are not exhaustive ; they can be supplemented through the meetings of the liaison committee responsible for applying the code, in the light of actual situations encountered on the various European markets. The supplementary principles can be divided into two parts. A. The first supplementary principles indicate a number of aspects of what the expression "fair behaviour" by financial intermediaries is to be taken to mean.

In addition to compliance with laws, regulations and current practice, supplementary principles 1 to 6 describe a number of rules of conduct specific to intermediaries.

The main rule concerns, of course, the recommendation to carry out orders on an organized market and the limits set to acting as counterparty and to offsetting orders. The Commission's recommendation does not advise formally against these operations, but it is felt that they should be brought under the supervision of the supervisory authorities where these authorities can in fact assume responsibility for them.

B. The following supplementary principles from rule 7 onwards until the end refer to the need for information.

It is clear that many improprieties would be avoided if accurate information were disclosed very quickly and the time during which important information was kept secret were thus cut to a minimum.

The principles relating to information can themselves be divided into several parts depending on whether they refer: (a) to the creation of an artificial market (principle 7);

(b) to the improper use of price sensitive information (principles 8 to 10);

(c) to information to be provided to the public by the market authorities and companies (principles 11 to 14);

(d) to equality of information to which all investors must be entitled (principles 15 and 16) ; and lastly,

(e) to information to be provided where there is acquisition or, where appropriate, sale of a holding conferring de jure or de facto control of a company (principles 17 and 18).

IV. Implementation of the European code of conduct

13. In recommending the European code of conduct to the Member States, the Commission is of course well aware that a recommendation does not bind the States as to the results to be achieved ; the successful implementation of the code will therefore depend to a great extent on the active cooperation of those affected by it, in particular on the authority of the body or bodies which are to supervise implementation.

14. An essential feature is that, on the basis of existing structures, there should be in each Member State at least one body (supervisory authority, professional association, etc.) responsible for supervising the implementation of the code at national level.

However, the choice of the appropriate body is a matter for the Member State concerned.

The code does not require that these supervisory bodies should have the power normally vested in public authorities, since the code will not carry penal sanctions.

15. However, since the code should be complied with throughout the Community, it will be desirable that representatives of each of the supervisory bodies should come together in a liaison committee.

The committee could advise the Commission on the development of the code, in the light of the problems and practices encountered in its application.

For these reasons, under the provisions of the Treaty establishing the European Economic Community, and in particular Article 155 thereof, the Commission recommends the Member States, without prejudice to the Regulations or administrative provisions already in existence: 1. to ensure that those who operate on securities markets, or who are in a position to influence the working of these markets, respect the fundamental objective, the general principles and the supplementary provisions of the European code of conduct annexed hereto;

2. to this end, to coordinate the action of the professional associations and the national authorities charged, in each State, with the supervision of the proper functioning of the market and the conduct of those who operate on it;

3. to appoint one or more representatives from these associations or authorities who shall be responsible for informing the Commission each year, beginning one year after the transmission of this recommendation, of any measures adopted to implement it and of the experience in applying them, of any difficulties encountered and of any suggestions for additions or amendments to the European code of conduct;

4. to take any other measures they may consider necessary to promote the principles of the code and to supervise their application.

Done at Brussels, 25 July 1977.

For the Commission

Christopher TUGENDHAT

Member of the Commission

ANNEX EUROPEAN CODE OF CONDUCT RELATING TO TRANSACTIONS IN TRANSFERABLE SECURITIES

Fundamental objective

This code of conduct is to be seen in the general context of the development and integration of securities markets within the European Community, and seeks to establish certain general principles, supported by supplementary guidelines.

The code's objective is to establish standards of ethical behaviour on a Community-wide basis, so as to promote the effective functioning of securities markets (i.e. by creating the best possible conditions for matching supply and demand for capital), and to safeguard the public interest.

Definitions

In the code, the following expressions shall have the meanings ascribed to them below: - "transferable securities" shall mean all securities which are or may be the subject of dealings on an organized market;

- "financial intermediaries" shall mean all persons professionally concerned in transactions in transferable securities;

- "principals" shall mean all persons occupying a strategic position with regard to a security and the market in it (e.g. company directors or managers, holders or acquirers of major shareholdings) and all those who are in a position to influence public opinion (e.g. financial analysts and journalists);

- "securities markets" shall mean the official stock exchange and all the markets organized by or under the supervision of the competent authorities and also all transactions in transferable securities as defined above including privately negotiated dealings between individuals in transferable securities - the word "market" (in the singular) being used only for the official stock exchange and the organized markets;

- "competent authorities" are those who have the tasks of ensuring the proper working of the market and the proper flow of information for the market at national level - principally the stock exchange authorities and supervisory agencies.

General principles

1. The objective of this code and the general principles should be observed even in cases not expressly covered by supplementary principles. Every transaction carried out on the securities markets should be in conformity with not only the letter but also the spirit of the laws and regulations in force in each Member State, and also the principles of good conduct already applying to these markets, or recommended by this code.

2. Information should be available to the public which is fair, accurate, clear, adequate and which is given in good time.

The information should be provided in such a way that its significance and intent can be easily understood. Any person, who by virtue of his profession or duties has the duty or the means of informing the public, is under a special obligation to ensure that it is kept properly informed, and that no particular class of persons attains a privileged position.

3. Equality of treatment should be guaranteed to all holders of securities of the same type issued by the same company ; in particular, any act resulting directly or indirectly in the transfer of a holding conferring de jure or de facto control of a company whose securities are dealt in on the market, should have regard to the right of all shareholders to be treated in the same fashion.

4. When the securities of a company are dealt in on the market, the members of its supervisory board, its directors, managers, and persons exercising de jure or de facto control, should act in such manner as to ensure that the fundamental objective of this code of conduct is realized. They have a particular duty to avoid any action which would operate to the detriment of fair dealings in the securities concerned, or prejudice the rights of other shareholders.

5. Persons dealing regularly on the securities markets should act fairly in accordance with the code's objective, even if this could in certain cases result in their having to forgo short-term gains.

6. Financial intermediaries should endeavour to avoid all conflicts of interest, whether as between themselves and their clients or other persons with whom they have a fiduciary relationship, or as between these two last-mentioned categories of persons. If, however, such a conflict arises, they should not seek to gain a direct or indirect personal advantage from the situation, and should avoid any prejudice to their clients or other persons with whom they have a fiduciary relationship.

Supplementary principles

1. All persons dealing regularly on the securities markets have a duty to promote investors' confidence in the fairness of the market by observance of the best standards of commercial probity and professional conduct.

2. Financial intermediaries have a special responsibility to observe the fundamental objective and the general principles of this code of conduct.

In particular, they should not connive at any breach by other persons of the provisions and principles referred to in the second paragraph of general principle 1, and they should not engage in manipulation which could distort the normal operation of the market.

3. No person should incite another person, whether or not an intermediary, to contravene the provisions and principles referred to in the second paragraph of general principle 1, nor exert pressure to obtain: (1) information which is not public and which cannot be divulged without contravening rules relating to such information, or

(2) the carrying out of an irregular or dishonest transaction.

4. Financial intermediaries should seek out and recommend the best conditions for their clients for the execution of orders which are given to them, while observing the fundamental objective and general principles of the code.

They should execute the orders which they are given on an organized market, unless the principal has given express instructions to the contrary. However, if the circumstances of the transaction or the nature of the securities makes it difficult even impossible to execute orders on an organized market, financial intermediaries may act as counterparties to their clients or offset orders outside the market, provided that they ensure that this does not prejudice their clients' interests, and provided that they are in a position to reply to any request on the part of the competent authorities as regards the justification for, the number of, and the conditions applying to, transactions carried out in this manner.

5. Financial intermediaries should refrain from encouraging sales or purchases with the sole object of generating commission.

6. Financial intermediaries should not disclose the identity of their principals except in cases when this is required by national regulations or the control authorities (and also in the investigation of crimes or other serious misdeeds).

7. Any attempt or manipulation by persons acting separately or in concert with others, which aims at or results in the rise or fall in the price of securities by fraudulent means, is contrary to the fundamental objective of this code.

Fraudulent means are considered in particular to be the publication or diffusion of information which is false, exaggerated or tendentious, and also the use of other devices aimed at disrupting the markets' normal operation.

Financial intermediaries and members of the supervisory board, the directors and managers of companies whose securities are dealt in on the securities markets, who become aware of any such attempt or manipulation should endeavour to take the necessary steps to thwart it. They should inform the competent authorities and the companies concerned without delay.

8. Financial intermediaries should endeavour to keep secret, even as between different departments or services of the same organization, information which they acquire in the course of carrying out their duties which is not yet public and which is price-sensitive.

In particular, financial intermediaries should not use such information in transactions which they carry out for their own account on the securities markets, nor in transactions upon which they advise their clients or carry out for their account.

9. Any person who comes into possession of information, in exercising his profession or carrying out his duties, which is not public and which relates to a company or to the market in its securities or to any event of general interest to the market, which is price-sensitive, should refrain from carrying out, directly or indirectly, any transaction in which such information is used, and should refrain from giving the information to another person so that he may profit from it before the information becomes public.

10. Securities markets should be sufficiently open to prevent their being fragmented, whereby the same security can be dealt in at the same time on different markets at different prices.

11. When a security is dealt in on the market the public should be informed not only of the different prices at which transactions take place, but also of the volume of dealings, unless the organization of the market makes it possible for the public to assess the liquidity of its investment by some other means.

12. Every company whose securities are dealt in on the market should publish periodically, and at least every six months, information which is clear, precise, complete and up-to-date concerning its business operations, results, and financial position. Any fact or important decision capable of having an appreciable effect on the price of securities should also be made public without delay.

13. When a fact or important decision, referred to in the preceding provision, cannot be made public without delay, for example because certain formalities have not yet been completed or because the company would be seriously prejudiced as a result, but the company nevertheless considers that there is a risk of leaks, the company should inform the competent authorities of the position. The latter should take the necessary steps to safeguard the market's proper operation until the relevant fact or decision can be made public. In particular they may, if this step appears unavoidable, suspend transactions for the necessary period.

14. It is desirable that a public issue of securities should be preceded by the publication of a prospectus. The existence of the prospectus and the place or places where it may be obtained should be indicated in any publicity concerning such issue.

15. No investor or group of investors should be given more favourable treatment as regards information than other investors or the public. All investors should have free access to information.

16. On the occasion of each issue of securities of the same type which are or may be dealt in on several markets at the same time, the issuer should endeavour not to give more favourable treatment to one market than to another.

17. Any transaction resulting in the transfer of a holding conferring control in the sense referred to in general principle 3 should not be carried out in a surreptitious fashion without informing the other shareholders and the market control authorities.

It is desirable that all the shareholders of the company whose control has changed hands should be offered the opportunity of disposing of their securities on identical conditions, unless they have the benefit of alternative safeguards which can be regarded as equivalent.

18. Any acquisition, or attempted acquisition on the market, separately or by concerted action, of a holding conferring control in the sense referred to in general principle 3, without informing the public, is against the objective of this code.