COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)

2001/0118 (COD)

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC Treaty concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)

1- BACKGROUND

Date of transmission of the proposal to the EP and the Council (document COM(2001) 281 final - C5/2001/262 - 2001/0118(COD)) [1]: // 1 June 2001

[1] OJ C 240 E, 28.8.2001 p. 265.

Date of the opinion of the Economic and Social Committee [2]: // 17 January 2002

[2] OJ C 80, 3.4.2002 p. 61.

Date of the opinion of the European Parliament, first reading [3]: // 14 March 2002

[3] OJ C ..., ..., p. ...

Date of adoption of the common position [4]: // 19 July 2002

[4] OJ C ..., ..., p. ...

2- OBJECTIVE OF THE COMMISSION PROPOSAL

The aim of the proposed Directive is to ensure the integrity of European financial markets, to establish and implement common standards against market abuse throughout Europe, and to enhance investor confidence in these markets.

Markets in transferable securities are playing a more and more important role in the EU in financing companies and the economy as a whole. The valuation of transferable securities plays an important role in determining the cost and volume of the credit market and the appropriate collateralisation of bank loans. High growth enterprises depend on the efficiency and transparency of financial markets in order to raise capital. Indeed, the smooth functioning of financial markets and public confidence in them are prerequisites for sustained economic growth and wealth. Market abuse not only increases the cost for companies to finance themselves but also harms the integrity of financial markets and public confidence in securities and derivatives trading. Such practice dissuades new investors and can have severe consequences. Therefore, it undermines economic growth and European economic policy. Recent events in the United States have shown how important these parameters are.

The existing European legal framework to protect market integrity is incomplete :

- At European level, there are no common provisions against market manipulation. The Insider Dealing Directive (89/592/EEC) [5] limits itself to preventing the misuse of privileged information.

[5] OJ L 334, 18.11.1989, p. 30 - 32

- At Member State level, there is a great variety of rules dealing with market abuse. Legal requirements differ according to the different jurisdictions.

To ensure that integrated European financial markets will be well protected, a common legal framework is needed on the prevention, detection, investigation and punishment of market abuse. Such a framework needs to ensure certainty among market participants over concepts and enforcement, thereby setting a level playing field for all economic actors in each Member State.

Therefore, the main objectives of the Directive are:

- establishing a European wide effect based regime against market abuse;

- committing professionals strongly to transparency and equal treatment;

- establishing a single administrative authority in each Member State;

- introducing a minimum set of powers for administrative authorities;

- introducing administrative sanctions in each Member State;

- a comprehensive framework for co-operation of competent authorities.

3- COMMENTS ON THE COMMON POSITION

3.1 General comments on the common position

The Belgian and Spanish Presidencies have treated the Commission's proposal for a Directive on insider dealing and market manipulation as a matter of priority. Following the Report of the European Parliament (First Reading) on 14 March 2002, the ECOFIN Council adopted a Common Position on 19 July 2002. The European Commission is in a position to accept the Common Position. At the BARCELONA European Council, Heads of State and Government called for this Directive to be adopted by the end of this year.

3.2 Specific comments on individual provisions

- Preamble

Recitals 6, 9, 40 and 41 embody the EP amendments (amendments 1, 2 partially, 16, 17 and 69) about comitology procedure. Recitals 34 and 35 are in line with EP amendments on a single competent authority (amendments 11 and 12). Recitals 36 and 37 include the EP amendments on sanctions (amendments 13 and 14). Recital 38 embodies the EP amendment on co-operation (amendment 15), Recital 42 the EP amendment on respect of Human Rights (amendment 18). Recital 14 contains the line of the EP on terrorist attacks (amendment 3). Recitals 22, 23, 24 and 25 embody EP amendments on transparency, equal treatment and preventative measures (amendments 5, 6 and 78). Recitals 17, 19 and 29 are in line with EP amendments on 'insider dealing' (amendments 8, 9 and 77). Recital 27 is in line with the EP amendments on take-over cases (amendments 7 and 30 ). Recital 33 takes on board the elements of EP amendment on the territorial scope of the Directive (amendment 10). Finally, Recital 18 incorporates the wish of the EP to introduce "frontrunning" into the scope of this Directive (amendment 19, last sentence).

- Article 1 (1)

Regarding the general definition of 'inside information' applicable to all financial instruments, the introduction of a specific definition in relation to commodity derivatives had been proposed by the European Parliament in first reading (amendment 19).

- Article 1 (2)

Regarding the definition of 'market manipulation', the Common Position takes into account the European Parliament's view (amendment 79/rev.) to reduce the broad scope of application of an effect based definition by introducing two cumulative defences (legitimate reasons and accepted market practices).

Regarding the sub-definition of 'dissemination of false or misleading information', the European Parliament (amendment 79/rev) proposes the introduction of knowledge and profit tests for any person concerned. The Council introduced a knowledge test in the definition applicable to anybody and a profit test applicable to journalists only. Therefore, any possible exemption for journalists by Member States, as initially proposed in Article 5, was deleted. The Commission believes that this compromise fully complies with the objective of the European Parliament's amendment.

The Common Position takes also into account European Parliament's amendments (amendments 79/rev.and 74) by incorporation of the initially annexed list of non-exhaustive examples of market manipulation into the Article itself.

- Article 1 (3)

Regarding the definition of 'Financial Instruments', the Common Position takes into account the European Parliament's view (amendment 23 and 73) to incorporate the initially annexed list of financial instruments into the Article itself and to extend it to any future instrument which will be admitted on a regulated market.

- Article 1 (5)

The Common Position takes largely into account the European Parliament's view on the definition of 'market practices' (amendment 81).

- Article 1 (6 and 7)

The Common Position integrates the European Parliaments introduction of a definition of 'Person' and of 'Competent authority' (amendments 24 and 25).

- Final sentence of Article 1

The Common Position fully respects wishes of the European Parliament regarding comitology (amendment 86).

- Article 2

Following the 11 September events, the Common Position includes persons having criminal activities into the circle of 'primary insiders', as endorsed by the European Parliament in first reading (amendment 28).

The Common Position is in line with the European Parliament's amendment (amendments 27 and 29), integrates attempts and provides for exempting transactions based on obligations resulting from agreements concluded before becoming insider. The Commission believes that this addition will help to separate clearly legitimate trades from prohibited insider dealing.

- Articles 3, 4 and 5

Articles 3, 4 and 5 incorporate European Parliament's amendments (amendments 31, 32, 33 and 34).

- Article 6 (1)

In order to reduce the broad scope of inside information to be publicly disclosed by issuers of financial instruments, the Common Position limits the obligation to information which directly concerns such issuers (amendment 35).

The Common Position introduces as well the European Parliament's amendment (amendment 36) about web-posting of inside information by issuers.

- Article 6 (2)

Concerning delaying public disclosure of inside information, the Council decided to follow partially the European Parliament's amendment (amendment 41) about prior information to the competent authority by the issuer of this delay. The European Parliament had asked for mandatory information of this delay to competent authority. Instead, the Common Position leaves discretion to Member States to provide for such a prior information. The Commission thinks this is a sensible compromise between the wishes of the European Parliament and the Commission's initial proposal (no provision on this aspect).

- Article 6 (3)

The Common Position is in line with the European Parliament's amendments (amendments 37 and 38), clarifies the non-application of the selective disclosure rule and deletes the initially proposed exemption for credit rating agencies. The Commission thinks these changes being an improvement to the initial proposal.

- Article 6 (4)

The Common Position takes largely on board the European Parliament's amendment on mandatory disclosure of trades by corporate insiders (amendment 40).

- Article 6 (5)

In line with the European Parliament (amendment 85), the Common Position introduced the possibility for Member States to take into account specific regulation (including self-regulation) to ensure fair presentation of research and disclosure of interests or conflicts of interest.

- Article 6 (6)

The Common Position takes on board the principle of a European Parliament's amendment (amendment 80) on structural measures to be taken by market operators against market abuse. However, there is no obligation of result anymore (only obligation of means). The Commission had initially not proposed any similar provision. However, it thinks this is a sensible compromise as market operators cannot guarantee ex ante that market abuse would not occur.

- Article 6 (7)

The Common Position embodies the European Parliament's amendment (amendment 43) on introducing a general clause for competent authorities to intervene in order to guarantee that the public are correctly informed. The Commission believes that the introduction of this clause will increase transparency standards for market participants.

- Article 6 (8)

The Common Position follows in part amendment 82 from the European Parliament, by introducing an obligation of dissemination of statistics by public institutions in a fair way. However, the requirement of the European Parliament of equal access to such statistics has not been explicitly introduced into the Common Position. The Commission believes that, although the Common Position does not follow word by word this particular aspect, the essence of the European Parliament's amendment has been respected.

- Article 6 (9)

The Common Position deletes the Commission's proposal to forbid financial intermediaries to enter into suspicious transactions. Instead, the Common Position takes into account the European Parliament's amendment (amendment 45) about mandatory notification of suspicious trades by intermediaries to the competent authority. However, the Commission believes that its aim of involving market participants in the fight against market abuse has been kept.

- Article 6 (10)

The Common Position takes into account the EP amendment on comitology (amendment 46).

- Article 7

The Common Position incorporates the European Parliament's amendment to extend the exemption from the application of the Directive to local authorities in order to carry out their debt management (amendment 47).

- Article 8

The Common Position takes into account European Parliament's amendment on comitology in order to define the application of safe harbours (amendment 48).

- Article 9

In line with the European Parliament (amendment 49), the Common Position has introduced the exemption of public disclosure of inside information for issuers who did not request or approve admission to trading in a Member State. The Commission recognises that it is difficult to require issuers not being listed on a voluntary basis to respect stringent rules of disclosure.

- Article 10

In line with the European Parliament (amendment 50), the Common Position clarifies the territorial scope of powers of competent authorities.

- Article 11

The Common Position takes into account European Parliament's amendment (amendment 51) on consultation of market participants by the competent authority.

Moreover, the Common Position clearly states, in line with the European Parliament's amendment (amendment 51), that the competencies of judicial authorities are not put into the scope of the Directive.

The Commission thinks that these clarifications do not depart from its initial proposal.

The Common Position does not follow explicitly the wording of the European Parliament's amendment (amendment 51) about adequate financing of competent authorities. However, the Commission believes that the substance of this amendment has been kept by a declaration of the Council to the minutes. [6]

[6] "The Council states that the achievement of an effective system of securities markets supervision requires that adequate resources are allocated to the competent authorities to allow them to discharge their legal duties".

- Article 12

The Common position states that supervisory and investigatory powers of the competent authority can be delegated to other entities or authorities, in line with an European Parliament's amendment (amendment 52).

The Common Position adds, in line with the European Parliament (amendment 53), two powers as compared to the original proposal of the European Commission: power of injunction and suspension of trading. It also is in line with the European Parliament's amendments 54, 55, 56 and 57.

The Commission thinks that these additions reinforce its initial proposal.

- Article 13

The Common position incorporates the spirit of the European Parliament's amendment 59.

- Article 14

In line with the European Parliament (amendment 60), the Common Position clarifies that criminal sanctions can still be provided by Member States, but are not dealt by this Directive (principle of subsidiarity).

Following European Parliament's amendment (amendment 61), the Common Position requests the Commission to draw up an informative list of administrative measures and sanctions. The Commission believes such a list could be helpful for reaching more homogeneous European standards.

In line with the European Parliament (amendment 62), the Common Position provides for exemption of public disclosure of administrative measures or sanctions in case of serious jeopardy of the markets. The Commission thinks this amendment keeps the substance of its initial proposal.

- Article 16

In case of non-compliance from a competent authority to co-operate with the competent authority of another Member State, the Common Position provides for discussion of such case in the Committee of European Securities Regulators (CESR). Although the amendment of the European Parliament (amendments 83 and 84) to establish a system of arbitration has not been taken on board, the Commission thinks the Common Position has found a fair compromise, increasing pressure on competent authorities to comply with the co-operation requirements.

In line with the European Parliament (amendment 66), the Common Position clarifies the relationship between competent authorities for cross-border cases. The Commission believes this clarification could improve efficiency of cross-border co-operation between different competent authorities.

- Article 17

With regard to the use of comitology, the Common Position has introduced European Parliament's amendment (amendment 69) regarding the non-modification of essential principles of the Directive through comitology as well as a so-called 'sunset' provision, following discussions between the three institutions (European Parliament amendment 70).

- Article 19

The Common Position is in line with the European Parliament's amendment (amendment 71) related to arrangements concerning overseas European territories.

- Article 20

The Common Position incorporates the European Parliament's amendment to repeal certain rules of existing Directives (amendment 72).

3.3 New provisions introduced by the Council

- Article 18

The Common Position has extended the period of transposition for Member States from twelve to eighteen months. The Commission recognises that some Member States need an extended transposition period due to their constitution.

4- CONCLUSION

The Commission considers that the Common Position adopted by the Council on 19 July 2002 is faithful to the objectives and the spirit of the Commission proposal of 30 May 2001. The Commission also considers that the Common Position meets the main concerns of the European Parliament and follows the key elements of Parliament's amendments. In short, the Commission believes that the Common Position achieves a good balance. The Commission hopes that the Directive can be approved by the end of the year, in line with the deadline Heads of State and Government set at BARCELONA European Council. If this can be achieved, and it must, it will remove loopholes in European financial market legislation and increase investor confidence in financial markets. This has never been as important as it now is.

The Commission therefore recommends this Common Position to the European Parliament.