No C 298/6 Official Journal of the European Communities 27. 11. 89 
Opinion on the proposal for a Council Directive on investment services 
in the securities field (1) 
(89/C 298/03) 
On 16 January 1989 the Council decided, in accordance with Article 57(2) of the Treaty 
establishing the European Economic Community to ask the Economic and Social Committee 
for an Opinion on the abovementioned proposal. 
The Section for Industry, Commerce, Crafts and Services, which was responsible for the 
preparatory work on this matter, adopted its Opinion on 5 September 1989. The rapporteur 
was Mr Pardon. 
At its 269th plenary session (meeting of 27 September 1989), the Economic and Social 
Committee adopted the following Opinion nem. con., with 3 abstentions. 
1. General comments 
1.1. Aim of the Directive 
The aim of the proposed Directive is to facilitate access 
to investment activities and the exercising of these 
activities, either by established or unestablished firms, 
on the basis of a single authorization granted by the 
supervisory authority of the home Member State, and 
the mutual recognition of the quality and suitability of 
the supervision carried out by that authority alone. 
1.2. Activities concerned 
The activities exercised by investment firms consist of 
operating, as an intermediary, on the primary securities 
market (see Annex, Section A, No 5) and on the second­
ary securities market (Annex, Section A, Nos 1 to 3), 
managing, safeguarding and administering securities 
portfolios, and providing advice for investment in such 
securities (Annex, Section A, Nos 4, 6 and 7). The supervision of organized markets is, of necessity, 
a matter for the market authority. The present proposal 
only deals with this question in passing in Article 10(4) 
(see point 2.24 below). The proposal should be more 
explicit on this point and, in particular, set out clearly 
the limits of the powers of the market authorities and of 
the authorities responsible for supervising the economic 
agents, the investment firms. 
1.4. Limits of the Directive: supervision of the econ­
omic agent 
The proposal basically seeks to harmonize the rules for 
supervising economic agents operating in this area so 
as to enable the right of establishment and of the free 
provision of services in the common market to be 
exercised, and thus create a single financial area subject 
to free competition on the basis of a certain number of 
common rules. 
The Committee fully approves this aim. 
1.3. A vulnerable and highly regulated area 
All the Member States have adopted laws, regulations 
and administrative provisions in this area, so as to (a) 
ensure that investors are protected and informed and 
(b) enable the financial system to operate harmoniously 
in the interests of the economy. 
These regulations cover three different subjects: the 
supervision of financial instruments, the supervision of 
organized markets and the supervision of economic 
agents operating in this area in a professional capacity. 
The supervision of financial instruments is covered by 
company law and by the provisions applicable when 
securities are issued and admitted for quotation on an 
organized market. 
(!) OJ No C 43, 22. 2. 1989, p. 7. 1.5. Inadequacy of the Directive 
However, as the text stands at present, the Committee 
considers that the harmonization proposed is not suf­
ficient 'to secure mutual recognition of authorization 
and of supervisory systems, thus enabling the appli­
cation of the principle of home country control and the 
granting of a single authorization recognized through­
out the Community' (2nd recital). 
Among the points where this is the case are: 
— the financial resources required, 
— compensation schemes: nothing is known about 
how these operate or even if they exist in all the 
Member States, 
— the assessment of an investment firm's financial 
soundness in the light of the risks involved, 
especially the risks of the market, 
27. 11. 89 Official Journal of the European Communities No C 298/7 
— prudential rules, and 
— the conduct of business rules pertaining to the 
activity under consideration. 
1.5.1. Prudential rules and conduct of 
business rules 
Strict prudential rules and conduct of business rules 
should be laid down, and the boundary between the 
two set out very clearly. This is especially necessary as 
the responsibility for the enactment of the former, and 
for monitoring compliance with them, lies with the 
competent authority in the home Member State, while 
for the latter these duties are incumbent upon the host 
Member State. 
Both sets of rules must be drafted carefully—the Com­
mittee gives below, in point 2.19.5, examples of pruden­
tial rules which, moreover, could be adopted as com­
mon rules—and the boundaries between the two laid 
down strictly, in particular so as to avoid conflicts of 
jurisdiction between supervisory authorities. Obvi­
ously, such rules must be harmonized more fully, so as 
to prevent anyone using them as a means of arbitrary 
discrimination or hidden restriction in order to protect 
a given market. 
1.6. Capital adequacy 
As regards credit institutions which carry out the oper­
ations covered in the proposal, the question of having 
adequate capital to cover market risks poses a particular 
problem, which the Commission will have to take into 
account when it prepares a directive on this matter. 
These institutions will in future have to comply with 
common capital and solvency ratio requirements. All 
the positions of credit institutions will have to be com­
prehensively envisaged and a ratio drawn up which 
covers all their activities, including the market (see 
point 2.8 below). 
1.7. Fairness in commercial transactions and the pro­
tection of consumers. Conduct of business rules 
In its Opinion of 29 September 1988 [}) on the proposal 
for a second banking Directive, the Committee urged 
that account be taken of the laws in force in each of 
the Member States to ensure fairness in commercial 
transactions and the protection of consumers (points 
1.6.3 and 1.6.4). 
(}) OJ No C 318, 12. 12. 1988, p. 42. The conduct of business rules relating to the activity 
considered here are also intended to achieve these two 
aims. 
Some clarification on this matter seems absolutely 
essential, when legislators in almost all the Member 
States have laid down special rules to protect the public 
in the field of securities trading and dealing. 
The Committee considers that the proposed Directive 
can have neither the aim nor the effect of changing 
these laws: they must, in the absence of harmonization, 
remain applicable, in their existing form, in each of the 
Member States with respect to investment firms subject 
to the jurisdiction of another Member State, whether 
the latter operate under the freedom of establishment 
or under the freedom to provide services. 
1.8. Concepts to be explained 
Certain concepts should be explained more clearly. 
1.8.1. Unlisted activities 
There is complete confusion as regards the situation, 
with respect to the host country's authorities, of an 
investment firm which wishes to carry out activities in 
the host country which it is permitted to carry out in 
its home country but which are not listed in the Annex 
to the proposed Directive [see last sentence of Article 
11(3)]. 
1.8.1.1. The Committee intends to state its view on 
how it sees the problem. 
1.8.1.2. Any EEC natural or legal person has the 
rights of freedom of establishment and of the freedom 
to provide services; in the present state of the common 
market these rights are, in principle, directly applicable 
by virtue of the Treaty itself, and do not require any 
act of the Council for their implementation. 
1.8.1.3. However, the Court of Justice considers 
that, bearing in mind the particular nature of certain 
services, specific requirements imposed on the provider 
of the services cannot be considered to be incompatible 
with the Treaty where they have as their purpose the 
application of rules governing such activities (see court 
judgement of 4 December 1986, freedom to provide 
services—insurance, case No 205/84, Commission of 
the European Communities v. the Federal Republic of 
Germany, point No 27). The freedom of establishment 
and the freedom to provide services, as fundamental 
principles of the Treaty, may be restricted only by 
provisions which are justified by the general good and 
No C 298/8 Official Journal of the European Communities 27. 11. 89 
which are applied to all persons or undertakings operat­
ing within the territory of the State in which the service 
is provided insofar as that interest is not safeguarded 
by the provisions to which the provider of a service is 
subject in the Member State of his establishment. In 
addition, such requirements must be objectively justi­
fied by the need to ensure that professional rules of 
conduct are complied with and that the interests which 
such rules are designed to safeguard are protected (see 
court judgement of 4 December 1986, op. cit., point 
No 27). 
1.8.1.4. In other words, in some areas there may be 
pressing reasons connected with the general good which 
may justify such restrictions, provided that the rules of 
the home Member State are not sufficient to provide 
the level of protection necessary and the requirements 
of the host Member State do not go beyond what is 
necessary. 
1.8.1.5. In sensitive areas like banking, insurance or 
the stock market, when there is sufficient harmoniz­
ation of the rules for supervising the activities of firms 
in all the EEC Member States, then, but only then, may 
the Member States no longer cite the general good 
as embodied in their own legislation with respect to 
supervising these firms; in such a case each Member 
State is bound by the obligation to recognize the quality 
and suitability of the supervision carried out in each of 
the other Member States. So when the present proposed 
Directive comes into force, no Member State will be 
able any longer to cite its own concept of the general 
good in the area dealt with here with respect to the 
activities listed in the Annex. 
1.8.1.6. If an investment firm wishes to carry out in 
a host Member State an activity which it is allowed to 
do in its home Member State under the rules in force 
there but which is not included in the list annexed to 
the proposal for a Directive, the host Member State 
will still be able to cite its rules concerning the general 
good in order to oppose the carrying-out of such activi­
ties, or at least it will be able to require that the 
investment firm in question should comply with local 
rules on the supervision of such activities. 
1.8.1.7. The only aim of the present text, it seems, 
is to allow host Member States in this particular case to 
check whether a firm's planned activities are consistent 
with their own concept of the general good. A more 
appropriate wording should be adopted (see point 2.26 
below). 1.8.2. Powers of the host Member State 
The powers of the host Member States as regards 
investment firms from other Member States which pro­
vide services or set up branches, as defined in Article 
13, are not clearly determined. 
1.8.2.1. From the point of view of methodology, four 
different areas should be distinguished: 
a) supervision of the economic operator as such, as 
regards access to a professional activity and the 
carrying-out of it; 
b) supervision of the workings of the markets; 
c) legal provisions in force in each of the Member 
States to ensure the fairness of commercial trans­
actions and the protection of the public; these pro­
visions form part of the policing of the economy; 
d) private law provisions applicable to contractual 
relations between an investment firm and its client, 
when such provisions concern public policy or are 
directly applicable. 
1.8.2.2. The conduct of business rules mentioned in 
point 1.5.1 above are influenced by the nature of the 
areas mentioned above in b), c) and d). 
1.8.2.3. As regards each of these areas, Article 13 
seems to be unnecessary except for monitoring an 
investment firm which is not authorized in its home 
Member State or which, having received authorization, 
carries out in the host Member State operations which 
are not listed in the Annex to the proposed Directive. 
This is because these areas are covered exclusively by 
the supervisory authority in the host Member State and, 
more generally, by that State's law, legislation, customs, 
etc. The host Member State will normally apply its law 
and its legislation and it will require compliance with 
them by applying professional, administrative, civil 
and, possibly, penal sanctions provided for by its own 
legal and administrative system, on the understanding 
that this system should not be used as a means of 
arbitrary discrimination or as a hidden restriction aimed 
at protecting its markets. 
The Committee considers that Article 13 should be re­
drafted, bearing in mind what has been said above (see 
too point 2.29 below). 
27. 11. 89 Official Journal of the European Communities No C 298/9 
1.8.3. Financial activities of credit insti­
tutions 
In general, the financial activities covered by the pro­
posed Directive and listed in its Annex are, by tradition, 
'banking activities', i.e. activities carried out by 'credit 
institutions' within the meaning of Directive 77/780/ 
EEC and the proposed second banking Directive, 
although the laws of some Member States prohibit the 
exercising of one or another of these financial activities 
by 'credit institutions' under their jurisdiction, and these 
same 'credit institutions' generally do not have a mon­
opoly on such activities. To see this, one merely has to 
compare the Annexes of the proposed second banking 
Directive and the present proposal. 
1.8.3.1. Consequently, a 'credit institution' which is 
allowed in its home Member State to carry out the 
financial activities listed in the present proposal does 
not have to obtain recognition as an 'investment firm', 
as this is covered by its status as a 'credit institution'. 
1.8.3.2. The Committee considers that the Com­
mission should adopt an approach based on the idea 
that any economic agent, whether 'credit institution' 
or 'investment firm', carrying out identical operations 
should be able to do so without competition being 
distorted by such factors as the application of different 
supervisory and operating rules. 
1.9. Penalties for unauthorized firms 
Finally, the proposed Directive should lay down the 
general principle that no one, whether investment firm 
or credit institution, can pursue a professional invest­
ment activity in the Community without being author­
ized to do so. 
The Member States must be obliged to provide for 
penalties to ensure compliance with this principle. 
1.10. Taxation 
As regards the fiscal effects of the proposed Directive, 
the Communittee would repeat what it said in its 
Opinions of 27 April 1988 (!) on the creation of a 
European financial area and 29 September 1988 (2) on 
business of credit institutions (point 1.9). It wishes to 
stress once more its concern at the risk of certain 
(') OJNoC 175,4.7. 1988, p. 1. 
(2) OJ No C 318, 12. 12. 1988, p. 42. financial activities being shifted elsewhere solely 
because of differences in Member States' tax laws. It 
considers that an effort must be made to harmonize the 
whole taxation system and that, whatever happens, 
appropriate measures must be studied, proposed, exam­
ined, debated and adopted quickly in order to resolve 
the problems mentioned here. 
1.11. Social aspects 
The Committee also wonders about the social impact 
of the proposed Directive, especially on jobs. It again 
refers to its Opinion of 29 September 1988 on the 
proposed second banking Directive (points 1.6.5 and 
1.8). 
The Committee particularly emphasises that in the 
event of restructuring, vocational training programmes 
should be adopted, after consultation, to promote better 
adapted qualifications and that it is essential for man­
agement and labour to be informed and consulted and 
for the social dialogue to be stepped up, so as to find 
the best way of solving the employment problems that 
are likely to arise. 
1.12. Collaboration between Member States' supervis­
ory authorities 
In its Opinion on the proposed second banking Direc­
tive, the Committee pointed out that allowing approval 
and supervision solely by the appropriate authority in 
the home country meant there had to be close collabor­
ation between the authorities in each Member State. 
The Committee would repeat this view here, and all 
the more forcefully because the situation will be even 
more complex, with the economic agent as such being 
supervised by the home country's authority while the 
conduct of business rules will be those of the host 
country. Consequently, these authorities must keep 
each other informed, cooperate with each other, 
especially when defining standards for supervision, 
coordinate their actions and try, under the auspices of 
the Commission, to reach some degree of agreement on 
the most appropriate techniques to use to ensure the 
level of safety which is essential (see ESC Opinion of 
29 September 1988 op. cit. point 1.4.4). 
1.13. Conclusions 
In conclusion, the Committee fully approves the Com­
mission's aim. However, it feels that the proposal 
No C 298/10 Official Journal of the European Communities 27. 11. 89 
should be amplified substantially to take account of the 
comments made above and below. 
2. Specific comments 
2.1. Article 1, third indent, first sub-paragraph 
As regards natural persons operating as an 'investment 
firm', the Commission is asked to consider whether it 
would not be preferable for the home Member State to 
be that where the person has his main centre of business 
activity, rather than that where he has his residence. 
2.2. Article 1, third indent, second sub-paragraph 
2.2.1. In the case of legal persons, a distinction 
should be drawn between those which are subject to 
Community law and those which are not. In principle, 
only the former, as defined by Article 58 of the Treaty, 
are, like natural persons, beneficiaries of the right of 
establishment and the right to provide services freely 
within the Community. 
2.2.2. Article 58 lays down the two criteria which 
determine whether a legal person comes from the Euro­
pean Community: 
a) it must be formed in accordance with the law of a 
Member State; and 
b) it must have either its registered office, or its central 
administration or its principal place of business 
within the Community. 
2.2.3. The Commission is asked to re-examine the 
text of the proposal in the light of the above consider­
ations. 
2.3. Article 1, fifth indent 
A distinction should be drawn between branches of 
firms which are subject to Community law and 
branches of firms which are not. 
2.4. Annex, Section A, point 1 
The text ought to distinguish between three different 
legal positions: 'brokerage', 'commission' and, possibly 
the 'power of attorney'. 
'Brokerage' is a paid contract through which one person 
brings together two or more other persons for the 
purpose of enabling them to conclude a given contract. 
In this case, the contract is concluded directly between 
these persons, and the broker does not intervene. 'Commission'—which is the only legal form mentioned 
by the proposal, several languages using an incorrect 
term—is a contract through which a person, known as 
the 'agent', in return for payment, undertakes to carry 
out one or more legal operations involving the circu­
lation of goods either on his own behalf or on behalf 
of someone else, who is bound by the agent's pledge. 
A 'power of attorney' is a contract through which one 
person—the principal—authorizes another—the at­
torney—to carry out a legal operation on his behalf but 
using his own name. The power of attorney should 
only be covered by the proposed Directive if the 
attorney carries out such duties on a professional basis. 
2.5. Annex, Section A, point 4 
The term 'payment' must be understood to apply to 
whatever procedures are used, e.g. whether based on 
the amount of capital managed, the income produced 
by the portfolio, etc. 
2.6. Annex, Section A, point 5 
2.6.1. The text should distinguish between three 
legally different procedures for carrying out 'investment 
in transferable securities'. 
2.6.2. In the first case, the intermediary should 
merely receive subscriptions on behalf of the issuer, as 
the latter's attorney. 
2.6.3. The second case would be that of 'underwrit­
ing'. This consists of an agreement concluded by a 
financial institution—the underwriter—with (i) the 
future founders of a company with share capital, (ii) a 
company which is proposing to increase its capital or 
(iii) an entity which wishes to issue a loan security to 
the public. Under such an agreement the underwriter 
undertakes, upon payment of a commission, to sub­
scribe for all or some of the shares or bonds and then 
offer them for sale to the public at a specified price and 
by a certain date. 
2.6.4. The third case would be that of a promise to 
buy. This consists of an agreement whereby a person 
undertakes to subscribe to new share or bond issues if 
these are not bought by a certain date. 
2.6.5. More generally, this point should encompass 
all the techniques likely to be used by a financiary 
intermediary to place securities issued by companies or 
the public authorities among the public. In economic 
terms this constitutes intermediation in the primary 
market open to the public. 
27. 11. 89 Official Journal of the European Communities No C 298/11 
2.7. Annex, Section B, point 1 
2.7A. It is understood that Undertakings for Collec­
tive Investment in Transferable Securities (UCITS) may, 
in accordance with the UCITS Directive of 20 December 
1985 (85/611/EEC) take the form of a 'trust' ('unit 
trust'). 
2.7.2. It could be useful for the application of the 
Directive to define 'transferable security' so that this 
term has the same meaning in all the Member States. 
2.8. Article 2 
Generally, the investment activities covered by the pre­
sent proposal, as listed in the Annex, are carried out 
by 'credit institutions' within the meaning of the first 
banking Directive of 12 December 1977 (77/780/EEC). 
Steps should therefore be taken to avoid the present 
proposed directive duplicating the provisions applicable 
to 'credit institutions' under Directive 77/780/EEC and, 
when they are in force, the second banking Directive 
amending Directive 77/780/EEC (COM(87) 715), the 
Council Directive on the own funds of credit insti­
tutions (COM(88) 15) and the Council Directive on a 
solvency ratio for credit institutions (COM(88) 194) 
(see point 1.5 above). 
The second sentence of Article 2 should be worded as 
follows: 
'However, only Articles 3, 4, 5, 8, 9, 10 and 21 shall 
apply to credit institutions which carry out activities 
listed in the Annex to this Directive.' 
2.9. Article 3 
This provision, which is also to be found in Article 3 
of the UCITS Directive (85/611/EEC), 'is designed to 
prevent the use of 'letter box' companies in a given 
Member State' (COM(88) 778, explanatory memor­
andum, p. 4). It seems to constitute a negation, or at 
least a qualification of the principle of 'mutual recog­
nition', to the extent that it seems to presume that the 
controls in each of the Member States are not of the 
same quality or impose the same degree of restriction, 
and that it could be advantageous to place oneself under 
the jurisdiction of one Member State rather than that 
of another. The Committee finds such an eventuality unacceptable; 
it is up to the Commission and Council to bring in 
such a degree of harmonization that there is absolutely 
nothing to be gained in using a letter box company. 
The Committee notes that such a provision cannot be 
found—and quite rightly—either in the first banking 
Directive (77/780/EEC) or in the second Directive cur­
rently in preparation (COM(87) 715). 
Therefore, Article 3 of the present proposal should, in 
all cases, be made inapplicable to credit institutions 
within the meaning of Directive 77/780/EEC. 
2.10. Article 4(1) 
2.10.1. Not all the investment activities covered by 
the proposal and listed in the Annex present the same 
degrees of risk for the public, and so do not need to 
comply with the same requirements as regards financial 
resources, organization, etc. Provision should therefore 
be made for several classes or categories of authoriz­
ation depending on the nature of the activities to be 
carried out. 
2.10.2. The expression 'ancillary activities' is not 
clear. It should be left out or defined more clearly. 
2.11. Article 4 (2) 
2.11.1. The harmonized minimum conditions for 
authorization are insufficient. 
2.11.2. The proposed Directive, or another Directive 
which should enter into force at the same time, should 
lay down the minimum initial financial resources for 
each class of authorization requested, depending on the 
nature of the activities to be carried out. 
2.11.3. The qualifications necessary to be of suf­
ficiently good repute and experience should be speci­
fied. 
2.11.4. The same applies to the suitability require­
ment for holders of qualified participations. 
2.11.5. In the case of certain types of activity—such 
as the 'placing of transferable securities'—consideration 
should be given to requiring the presence of at least 
two persons to determine the actual direction of the 
investment firm's activity, as provided for in the last 
paragraph of Article 3.2 of Directive 77/780/EEC. 
2.11.6. For some types of investment activity, includ­
ing partnerships, consideration should be given to 
requiring that the investment firm should take the form 
of a company having sufficient initial capital laid down 
in the Directive in the light of the activities carried out, 
as provided for in Article 3 of the proposed second 
No C 298/12 Official Journal of the European Communities 27. 11. 89 
banking Directive (COM(88) 715). It is essential that a 
capital adequacy Directive be proposed by the Com­
mission as soon as possible and that the investment 
services Directive and the capital adequacy Directive 
come into operaton at the same time. 
2.12. Article 4 (3) 
The text should be tighter and more precise, and 
require, in particular, an adequate administrative 
organization, the keeping of proper accounts, effective 
financial control, etc. 
2.13. Article 4 (4) 
It should be laid down that the absence of a decision 
within the prescribed deadline shall mean that author­
ization has been granted; this will encourage the com­
petent authorities to examine applications rapidly 
within the deadline of six months, which is already 
long, and prevent the lack of an answer being used as 
a means of avoiding the obligation to give a reason for 
refusing authorization. 
2.14. Article 4 (5) 
2.14.1. The provision is justified by the arguments 
set out in point 2.8 above. 
2.14.2. It should be borne in mind that in certain 
Member States the authorization granted to credit insti­
tutions does not expressly include authorization to car­
ry out investment activities, although by custom and 
tradition such institutions do this. In this case too, an 
additional authorization should not be required, since 
the authorization granted to credit institutions in this 
situation implicitly includes authorization to carry out 
investment activities. 
Therefore, an additional authorization would only be 
required in cases where the authorization normally 
granted to credit institutions expressly excludes invest­
ment activities. The additional authorization would 
only include these activities. The examination of an 
application for additional authorization should take 
account of the requirements laid down with respect to 
credit institutions by Directive 77/780/EEC and by the 
other Directives in preparation, especially as regards initial capital, own funds, the solvency ratio, adminis­
trative organization and accounts, so as to avoid dupli­
cation and injustified additional restrictions. 
2.14.3. Steps should be taken to ensure the simul­
taneous entry into force of the second banking Direc­
tive, the own funds Directive (COM(88) 15), the sol­
vency ratio Directive and the Directive being examined 
here, or at least to ensure that the present Directive 
does not come into force before the others. 
2.15. Article 5 
In the Dutch version the verb dienen should be replaced 
by niet toelaten. 
2.16. Article 6 
While recalling the position it adopted in point 2.5 of 
its Opinion of 20 September 1988 on the proposed 
second banking Directive the Committee considers that, 
as regards 'reciprocity' in the investment services field, 
it is up to the Council to adopt a solution which is 
consistent with that which will apply to credit insti­
tutions. 
2.17. Article 7 
2.17.1. This Article is a reproduction of Article 9 
of the proposal for a second banking Directive. The 
Committee would refer here to its Opinion of 29 Sep­
tember 1988 on this proposal (op. cit.). 
2.17.2. The criteria for the 'suitability' referred to in 
Article 7 (1) should be harmonized or, failing that, 
the criteria chosen by the Member States should be 
coordinated and the criteria adopted made known in 
the meantime by the supervisory authorities to each 
other, as part of the coordination which they have to 
carry out (point 2.4). 
2.17.3. The same applies to the concept of 'prudent 
and sound management' referred to in Article 7 (3) 
(point 2.7). 
2.17.4. As regards Article 7 (2), provision should be 
made for the real shareholders or members to be made 
known, where appropriate, in cases where partici­
pations are held for the account of third parties. 
2.18. Article 8 
The Committee regrets that the rules on making pro­
vision against market risk are not included in the pre­
sent proposal. 
It would be unacceptable if the present proposal were 
to come into force before the adoption and entry into 
force of the rules to be prescribed in the further coordi­
nating Directive. 
27. 11. 89 Official Journal of the European Communities No C 298/13 
2.19. Article 9(1) 
2.19.1. In general, there is insufficient coordination 
of the prudential rules to be observed by investment 
firms. 
Apart from the initial financial resources laid down in 
Article 4, requirements should be laid down, at least 
for certain types of activity, as regards own funds in 
relation to the volume of operations carried out and 
the risks they involve. 
Such requirements exist for credit institutions; so, when 
investment activities and the risks they involve are taken 
into account in the rules to be applied, there should be 
no question of overlapping and the requirements laid 
down for investment firms being applied unnecessarily 
to credit institutions. 
2.19.2. The wording of the second indent in 
Article 9 (1) is unsatisfactory. 
2.19.2.1. It is obvious that steps should be taken 
to avoid any confusion arising between securities and 
money belonging to investors and those belonging to 
the investment firm, and between operations carried 
out by the firm on behalf of its clients and those carried 
out on its own account. The essential thing is that the 
securities and money should be recorded in the firm's 
accounts under the names of these investors, and should 
thus be itemized. Having sound administrative and 
accounting procedures and adequate internal control 
mechanisms means keeping separate accounts for each 
client, security and currency. 
2.19.2.2. It should be stipulated that the investment 
firm cannot, under any circumstances, use securities 
belonging to investors for its own account, in any way 
whatsoever. 
Measures should therefore be taken to see that all 
Member States adapt their legislation in such a way 
that investors have the rights of an owner, and not 
of a creditor, with respect to securities entrusted to 
investment firms. So, in the event of bankruptcy, inves­
tors, as owners, would be given possession of securities 
recovered in kind. In the event of shortages occurring— 
which would necessarily be fraudulent—the securities 
recovered would be shared out among their owners on 
a pro rata basis. 
2.19.2.3. As regards money belonging to investors, 
it should be remembered that only a credit institution 
within the meaning of Directive 77/780/EEC is entitled to 'receive deposits or other repayable funds from the 
public and to grant credits for its own account' (Article 
1, first indent). 
In its Opinion on the proposed second banking Direc­
tive, the Committee considered that 'the text of the 
Directive should make it clear that only credit insti­
tutions which are licensed and subject to scrutiny in 
one of the Member States are permitted to take deposits 
from the public in the form of repayable funds. All the 
Member States should be required to prescribe penalties 
for infringements of this rule, applicable immediately 
an unlicensed institution bids for deposits from the 
public' (point 1.6.1). 
Therefore, unless they first get themselves authorized 
status as a credit institution, investment firms should 
not receive funds from their clients and use them on 
their own account. 
The fact is that investment firms establish a current 
account relationship with their clients. 
To overcome the difficulty without ignoring reality, 
it should be specified in the proposed Directive that 
investment firms cannot hold funds other than those of 
their clients while waiting to acquire securities or to be 
reimbursed. These funds may not attract any form of 
remuneration. These funds cannot be used either for 
the granting of credit or on the investment firm's own 
account. They must therefore always be represented by 
liquid and safe assets. 
Similarly, it should be specified in the Directive that 
investment firms may only offer advances and credits 
if these are directly linked to operations negotiated on 
behalf of their clients. The question of repayment 
within a certain period after the conclusion of an oper­
ation should be examined. Whatever happens, such 
advances and credits should come out of the investment 
firm's own funds or from funds borrowed on the mar­
ket, and not from clients' funds. 
2.19.3. The third indent of Article 9 (1) introduces 
'pending futher harmonization of compensation 
schemes' the solution adopted for credit institutions: 
namely that branches should be covered by the host 
Member State's compensation scheme. 
This calls for four comments: 
2.19.3.1. If the compensation schemes by which 
credit institutions are covered provide for the reim­
bursement not only of depositors, in accordance with 
the Commission Recommendation of 22 December 1986 
on the setting-up of deposit guarantee schemes in the 
Community (87/63/EEC), but also of other clients, 
No C 298/14 Official Journal of the European Communities 27. 11. 89 
including investors, then account should be taken of 
this fact. Membership of two compensation schemes 
which duplicated each other would impose an unnecess­
ary burden on credit institutions. 
2.19.3.2. When the Commission began to study the 
question of deposit guarantees, the European financial 
market was still relatively compartmentalized. The 
supervision of financial institutions, including branches, 
was the exclusive preserve of the host country's auth­
orities. It could therefore seem advisable for compen­
sation schemes to present national features. In particu­
lar, it could be felt that, for reasons of competition, 
any financial institution operating in a given Member 
State should operate the same compensation scheme. 
Now the situation has completely changed, or at least 
is in the process of doing so. The liberalization of 
capital flows will be an accomplished fact on 1 June 
1990. The second banking Directive is based on the 
principle of 'mutual recognition', the single authoriz­
ation and on supervision being carried out by the home 
Member State's authorities. The Directive being exam­
ined here is largely based on the same principle. 
The question therefore arises of whether branches of 
both credit institutions and investment firms situated 
in a Member State other than that of the headquarters 
should not be able in the future to offer the compen­
sation scheme in force in their home Member State. 
The question deserves all the more consideration 
because credit institutions and investment firms will, of 
necessity, be covered by their home Member State's 
compensation scheme when they offer their services 
under the freedom to provide services. Moreover, the 
degree of supervision depends on the home Member 
State's authorities. 
In the longer term, the Commission should study the 
possibility of standardizing compensation schemes. 
Such a solution would have the advantage of allowing 
a greater spreading of risks, more in line with insurance 
techniques. 
2.19.3.3. The proposal states that 'payment or con­
tribution to such a compensation scheme shall be calcu­
lated by reference to their income in respect of invest­
ment activity carried out in that State.' 
The term 'income' seems ill-chosen. Does it mean profit 
or turnover? 
What is necessary is that branches of investment firms 
with their headquarters in another Member State 
should not be discriminated against in favour of firms 
with their headquarters in the Member State concerned when contributions to the compensation scheme are 
calculated. Having said this, it seems that the contri­
bution will depend on the risk involved in the activity 
offered, and not on the 'income' from such an activity. 
2.19.4. As regards the fourth and fifth indents of 
Article 9 (1), the nature of the information required, 
the criteria for assessing financial soundness—es­
pecially the procedures for measuring the adequacy of 
the provisions in respect of market risk—the prudential 
rules to be applied, and the length of time that records 
relating to transactions should be kept should all be 
coordinated, in order to ensure consistency with the 
principle of 'mutual recognition'. 
2.19.5. The sixth indent of Article 9 (1) wrongly does 
not lay down any standards. 
Certain principles should be expressed in the proposed 
Directive in the form of common standards, in particu­
lar the absolute primacy of the client's interests; the 
execution of transactions on the best available terms; 
the knowledge of the personal and financial situation 
of the client seeking advice; providing the client with 
complete information; being acquainted with the nature 
of the instruments being dealt in, their quality and the 
risks which they involve; being acquainted with the 
nature and organizational structure of the market or 
markets where the instrument could normally be sold; 
and the obligations to be obeyed to avoid the inappro­
priate circulation of confidential information within the 
investment firm. 
The Committee would refer here to the Commission 
Recommendation of 25 July 1977 concerning a Euro­
pean code of conduct for transactions relating to trans­
ferable securities (79/279/EEC). 
2.20. Article 9 (2) 
If the Member States can adapt the rules laid down in 
Article 9 (1) or simply not apply them if they feel 
that the rules are not appropriate to the nature of the 
investment service in question, this is as good as saying 
that the provisions of Article 9 (1) are completely volun­
tary as far as the Member States are concerned. This 
is unacceptable. 
On the other hand, it is perfectly feasible for the planned 
rules to be tailored to the type of activities carried out, 
in line with the view expressed in point 2.10.1 above. 
However, leaving it up to the Member States to 
implement such adjustments would be at odds with the 
aim of adequate harmonization, and thereby constitute 
an obstacle to 'mutual recognition'; there would also 
be an obvious risk of discrimination. The Directive 
27. 11. 89 Official Journal of the European Communities No C 298/15 
itself will therefore have to lay down the classes or 
categories of authorization, depending on the nature 
of the activities to be carried out, and specify what 
adaptations are permitted and in which cases. Allo­
cation to a given class could, for example, be based on 
certain objective criteria such as the degree of invest­
ment risk offered by a firm, whether or not a firm 
manipulated clients' assets, etc. 
2.21. Article 9 (3) 
2.21.1. The second indent in Article 9 (1)—as the 
Committee understands it (see point 2.19.2.1 
above)—should express a principle of sound adminis­
trative and accounting procedures and impose adequate 
internal control mechanisms. There should be no 
exemptions under any circumstances. 
2.21.2. It can be accepted that the compensation 
scheme set up in accordance with the third indent of 
Article 9 (1) should not cover professional investors, 
who are naturally better informed as regards the quality 
of the investment firms they deal with, the nature of 
the financial instruments involved and the peculiarities 
of the market. 
2.22. Article 10(1) 
2.22.1. As regards the expression 'ancillary activi­
ties', see point 2.11.2. 
2.22.2. The words 'and whose authorization does 
not prohibit the exercise of such activities' (Translators 
note: The French version of the Commission proposal 
says literally: '... by any investment firm authorized by 
the competent authorities of its home Member State, 
in accordance with this Directive, and whose authoriz­
ation does not prohibit the exercise of such activities') 
are unfortunate: an authorization allows either 
explicitly or implicitly access to certain activities and 
the exercising of them. 
2.23. Article 10 (3) 
2.23.1. After 'broking' insert 'commission' (see point 
2.4 above). 
2.23.2. Enjoying the same 'privileges' assumes that 
such firms must also be subject to the same obligations. 
2.23.3. It does not seem correct to speak of 'privi­
leges'. The text should read: 
'... can enjoy the full range of opportunities for 
trading on the stock exchanges and organized 
securities markets of host Member States where 
similar services are provided.' 
2.24. Article 10 (4) 
2.24.1. The proposal rightly draws a distinction 
between the supervision of economic operators, the 
investment firms, and the supervision of organized mar­
kets. Such a distinction seems absolutely essential. One inevitably arrives at a situation where supervision 
of the economic operator is the province of the com­
petent authority in the home Member State, whose 
authorization and quality control are recognized in all 
the Member States, while supervision of the operations 
of the markets is the job of the authority competent 
locally. 
The Committee would recall here that, according to 
point 11A of the explanatory memorandum of the 
Commission Recommendation of 25 July 1977 (77/534/ 
EEC), '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 ...'. 
2.24.2. Logically, therefore, the present proposal 
should normally lay down that access to stock exchange 
membership may be obtained in one of the following 
three ways, depending on the choice of the investment 
firm: 
i) the investment firm itself becomes a member by 
setting up a branch in the host country; or 
ii) the investment firm creates a subsidiary in the host 
country; or 
iii) the investment firm acquires an existing member 
firm. 
2.25. Article 10 (5) 
2.25.1. The proposed Directive takes account of the 
situation which exists in certain Member States. Under 
these States' regulations, credit institutions do not have 
direct access to organized markets. When this situation 
arises, indirect access must be permitted in all cases, 
i.e. a credit institution should merely have to create a 
specialized subsidiary or acquire a holding in an existing 
stock exchange member to be able to enjoy indirect 
access. 
2.25.1.1. The Directive respects these regulations. 
Thus in Member States where such rules exist, credit 
institutions will not have direct access to the local stock 
exchange, even if they have direct access in their own 
Member State; they will have to form a subsidiary or 
acquire a member firm in the host country. 
2.25.1.2. The Committee wonders about the sound­
ness of this solution. In fact it poses an obstacle to the 
freedom of establishment, by way of a branch, of a 
credit institution whose supervisory legislation does 
not prohibit if from having direct access. Freedom of 
establishment is a right of which any person or company 
No C 298/16 Official Journal of the European Communities 27. 11. 89 
within the meaning of the Treaty may make use; a 
Directive may be intended to facilitate the exercising of 
this right; it should not prevent it. Such is the case here. 
2.25.1.3. A distinction must be drawn here between, 
on the one hand, the prohibition of direct access con­
tained in the legislation of certain Member States, which 
is one of the prudential rules governing credit insti­
tutions, and, on the other, the obligation, imposed 
by the relevant market authority, to operate through 
specialist firms in order to have direct access to certain 
organized markets. 
2.25.1.4. Bearing in mind the degree of harmoniz­
ation which will be achieved as regards the prudential 
rules for credit institutions through the proposed second 
banking Directive and the Directives on own funds 
and solvency ratios, the Directive being examined here 
should make the Member States abolish the prohibition 
of direct access as the result of prudential rules. 
2.25.1.5. If, however, access to certain organized 
markets is limited by rules issued by the relevant market 
authority to specialist firms which may be subsidiaries 
of investment firms or credit institutions, such rules 
should not, under any circumstances, be of an arbitrary 
nature. 
2.25.2. It will also be observed that the approach 
adopted by the Commission has been applied only to 
the free provision of services in the field of stock 
exchange transactions, since some sort of establish­
ment, either a branch or a subsidiary, will be required 
in the host country. 
According to the case law of the Court of Justice, a 
firm which maintains a permanent presence in a Mem­
ber State comes under the Treaty's provisions on the 
right of establishment and not those on the freedom to 
provide services (court judgement of 4 December 1986, 
freedom to provide services — insurance, case No 205/ 
84, Commission of the European Communities v. the 
Federal Republic of Germany). 
2.25.3. The Commission's approach prompts two 
questions: 
— Can a directive prevent the exercising of a right laid 
down in the Treaty: the freedom to provide services? 
— What will happen if, in the future, securities trans­
actions are performed through data transmission, 
so that the market no longer has a geographical 
location? 
The Committee asks the Commission to examine these 
two questions carefully and come up with some suitable 
answers. 2.26. Article 11 (3) 
The last sentence is difficult to understand as it is 
worded at present (see point 1.8.1 above). 
The only aim of the present text, it seems, is to allow 
Member States to check whether a firm's planned activi­
ties are consistent with their own concept of the general 
good in the sole case where an investment firm wishes 
to carry out in a host Member State an activity which 
it is allowed to do in its home Member State under the 
rules in force there but which is not included in the list 
annexed to the proposal for a Directive. 
One wonders whether it would not be better for the 
host Member State to be obliged to take a decision on 
this question ('must decide') instead of simply being 
allowed to do so ('may decide'). 
The text should therefore read as follows: 
'If an investment firm proposes to carry out in 
the host Member State certain additional activities 
which are not contained on the list in the Annex 
but which are normally authorized in its home 
Member State, it shall inform the competent auth­
orities of the host Member state. Those authorities 
shall decide whether they consider that, in the area 
in question, there are any pressing reasons connec­
ted with the general good which may justify restric­
tions being placed on the carrying-out of such activi­
ties and, if so, they shall indicate the provisions 
which are justified by the general good and which 
are applied to all persons or undertakings carrying 
out an identical activity within its own territory, 
and with which they intend to make the investment 
firm comply under their supervision.' 
2.27. Article 12 
2.27.1. The French version should read: toute 
entreprise d'investissement and not tout etablissement 
de credit. 
2.27.2. One wonders why a firm operating in another 
Member State under the freedom to provide services 
does not first have to inform the host Member State, 
as is the case for opening a branch. 
27. 11. 89 Official Journal of the European Communities No C 298/17 
2.28. Article 13 
This Article is particularly obscure and the explanatory 
memorandum gives no clear explanation (see point 
1.8.2 above). tecting the general good, and insofar too as such a 
firm does not have to comply with equivalent laws 
or regulations in its home Member State (see the 
proposal for a second Directive referred to above, 
explanatory memorandum, page 16, and the ESC 
Opinion of 29 September 1988, point 2.13.5). 
The Committee asks the Commission to re-examine the 
matter, drawing a distinction between four different 
areas as indicated in point 1.8.2 above. 
a) As regards supervision of the economic operator, a 
distinction must be drawn between two situations: In this case, but in this case alone, provision may 
be made for some sort of intervention procedure. 
The procedure in the present proposal seems to 
be extremely complicated and apparently does 
not take account of the fact that failure to com­
ply with a host Member State's laws will gener­
ally constitute an offence punishable by pros­
ecution. 
Either an investment firm is duly authorized in its 
home Member State and it is carrying out, in the 
host Member State, activities which are on the list 
in the Annex to the proposal. b) Under the present proposal, supervision of the 
workings of the markets is a matter for the host 
Member State's supervisory authority (see point 
2.24.1 above). 
— In this case, once in force, the effect of the 
proposed Directive will be to oblige each Mem­
ber State to recognize the financial supervision 
exercised over investment firms in other Mem­
ber States to be equivalent. It will also prevent 
the Member States—where services appearing 
on the list in the Annex are concerned—from 
invoking the general good to apply national laws 
on the supervision of economic operators to all 
persons or firms carrying out that activity on 
their territory. By adopting the Directive in 
Council, the Member States will be deemed to 
have recognized once and for all that, where 
licensed investment firms and the listed services 
are concerned, the general good, as defined in 
their domestic administrative provisions cover­
ing the supervision of investment firms, is 
adequately protected by the rules, which are 
deemed to be equivalent, in force in this particu­
lar field in the other Member States (see ESC 
Opinion op. cit. of 29 September 1988 on the 
proposal for a second Council Directive on the 
coordination of laws, regulations and adminis­
trative provisions relating to the business of 
credit institutions and amending Directive 77/ 
780/EEC (COM(87) 715 final). 
In this instance Article 13 is unnecessary. In this case, Article 13 is unnecessary, since only the 
market authority is empowered to act. 
In each of the Member States, as regards dealings 
in tansferable securities, there are legal provisions 
to ensure the fairness of commercial transactions 
and the protection of the public. For example, the 
information provided for the public and advertising 
generally in the securities field are subject to regu­
lation. Obviously, it will be up to an investment 
firm, whether it operates under the freedom of 
establishment or the freedom to provide services, to 
comply with the rules in force in the host Member 
State. One should take as one's guide here, and 
include in the present proposal, Article 44 of the 
UCITS Directive of 20 December 1985: 
'Article 44 
1. A UCITS which markets its units in 
another Member State must comply with the 
laws, regulations and administrative provisions 
in force in that State which do not fall within 
the field governed by this Directive. 
If an investment firm is not authorized in its home 
Member State or if, having received authorization, 
it carries out in the host Member State operations 
which are not listed in the Annex, then the host 
Member State may indeed require compliance with 
specific provisions in its own national laws or regu­
lations insofar as such provisions are compatible 
with Community legislation and are aimed at pro-2. Any UCITS may advertise its units in the 
Member State in which they are marketed. It 
must comply with the provisions governing 
advertising in that State.' 
Similarly, in each of the Member States there are 
provisions concerning the canvassing of securities, 
No C 298/18 Official Journal of the European Communities 27. 11. 89 
hawking, betting and gaming. All these rules to 
protect the public in general and the consumer in 
particular remain in force in each of the Member 
States and must be respected by investment firms, 
whether they operate under the freedom of estab­
lishment or the freedom to provide services. 
The Committee would particularly refer here to 
point 1.6.3 (fairness in commercial transactions) 
and point 1.6.4 (protection of consumers) of its 
Opinion of 29 September 1988 on the proposal for 
a second banking Directive. 
In the cases examined here, Article 13 of the pro­
posal is unnecessary, since this area is under the 
legal jurisdiction of the host Member State and only 
the latter's bodies, notably its courts, are em­
powered to act. 
d) As regards private law provisions relating to public 
policy or those which are directly applicable, one 
may quote the example of the agreement to pay 
differences which is applicable to stock exchange 
operations in certain Member States, notably West 
Germany. In the Koestler judgement of 24 October 
1978 (case No 15/78), the Court of Justice decided 
that a provision of this kind invoked before a 
German court in accordance with German law 
against a French bank, when the operations con­
cerned were carried out in France in accordance 
with French law and the investor was living there 
at the time, w?s not incompatible with the Treaty 
of Rome. 
For the rest, the Committee would refer to its 
Opinion of 29 September 1988 on the second bank­
ing Directive (ESC, Opinion, point 1.6.4). 
In the present cas too, Article 13 of the proposal is 
unnecessary. Only the courts are competent to act. 
The problem should be resolved by a Directive 
aimed at approximating the private law of Member 
States in this area, on the basis of Treaty Articles 
100 and 100A. 
2.29. Article 15 
The respective roles of the different authorities should 
be clearly defined, so that there are no omissions or 
cases of duplication. 
Done at Brussels, 27 September 1989. 2.30. Article 16 
When the cost of checks is borne by the firms being 
checked in a Member State, the supervisory authorities 
in the host country, when they are carrying out legit­
imate checks as provided for by the proposed Directive 
on branches or unestablished providers of services, must 
be able to receive a fee in keeping with the cost of such 
checks, on the understanding that such a fee should 
not, under any circumstances, be of a discriminatory 
nature. 
2.31. Article 17 (5) 
The information likely to be revealed must be kept to 
what is strictly necessary with regard to the objective 
being pursued. 
2.32. Article 20 
The Commission gives itself the power, in accordance 
with certain procedures, to make 'technical amend­
ments' to the proposed Directive. These 'technical 
amendments' are listed as covering: 
— extension of the activities on the list set out in the 
Annex, and 
— the fields in which the competent authorities must 
exchange information, as enumerated in Article 15. 
These terms of reference in effect give the Commission 
the power of an executive authority. 
2.33. Article 21 (1) 
If investment firms which are already authorized in 
their home Member State are deemed to be authorized 
for the purposes of the present proposed Directive, this 
can only be on condition that they fulfil the require­
ments of this same Directive. 
2.34. Article 22 
The proposed Directive should not come into force 
unless the necessary Community provisions relating in 
particular to sufficient initial financial resources and 
the own funds necessary in relation to the operations 
to be carried out, and especially market risks, also come 
into force at the same time. 
The Chairman 
of the Economic and Social Committee 
Alberto MASPRONE