WRITTEN QUESTION P-3932/00

by Francesco Turchi (UEN) to the Commission

(6 December 2000)

Subject: Conflict of interests on the stock market

Brokerage firms and merchant banks which place securities on the stock market often produce information leaflets of questionable accuracy as regards both analyses, future prospects, management background and solvency. One can understand that these analyses, devoid of any indication of critical value, are influenced by the broker's desire to see the security do well, revealing an obvious conflict of interests with those companies which are assessed favourably. Furthermore, merchant banks which are concerned with increasing the capital of companies quoted on the stock market and suggest that investors buy shares, and banks which have granted loans to companies launched on the stock market by the same credit institution clearly show how widespread and influential the conflict of interests on the stock market is. It is also well-known that no financial institution ever openly admits to holding shares in the companies analysed, and no efficient system of verification and checks has been introduced.

In the light of the above, does the Commission:

1. wonder about the accuracy of the prospectuses published when companies are floated on the stock market;

2. wonder how independent the advice or recommendations issued in the reports drawn up by analysts are;

3. consider that this conflict of interests inevitably jeopardises investors and the integrity and credibility of the market;

4. intend to take any steps to safeguard savers and investors on the stock market?

Answer given by Mr Bolkestein on behalf of the Commission

(9 January 2001)

In order to create a common European market for capital and securities, several directives have been adopted to harmonise the standards in the national securities legislation.

Investment firms providing investment services (among which underwriting and placing) are obliged to respect national legislation implementing Council Directive 93/22/EEC of 10 May 1993 on provision of investment services in the securities field(1) (investment services Directive). Article 11 of the said Directive expressly requires that the intermediary acts honestly and fairly in conducting its activities in the best interest of its client, makes adequate disclosure of material information in its dealing with its client and tries to avoid conflicts of interest and, when these cannot be avoided, ensures that its clients are fairly treated.

As far as prospectuses are concerned, Council Directive 80/390/EEC of 17 March 1980, coordinating the requirements for the drawing up, scrutiny and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing(2) requires that the prospectus contain the information which is necessary to enable the investors and their advisors to make an informed assessment of the assets and the liabilities, financial position, profit and losses and prospect of the issuer and of the right attaching to the securities. The listing particulars have to be approved by the competent authorities. However, the responsibility for their content is on the persons responsible for drafting the prospectus. Those persons are required to declare that to the best of their knowledge, the information given in the prospectus is in accordance with the facts and contains no omissions likely to affect the assessment of the issuers or the securities. Violations to these obligations are sanctioned according to national legislation.

Publication of financial research and analysis falls, however, outside the scope of the above directives, because it cannot be qualified as provision of investment services to the public.

No other provisions have been agreed on rules for publication of financial research and analysis by financial intermediaries.

According to the financial services action plan the Commission is required to put forward a new prospectus directive and to upgrade the investment services Directive (93/22/EEC) as well as a new directive to improve investor protection. The Commission has recently published a communication on upgrading the investment services Directive(3). This communication is intended to open a wide debate on several issues including the question of the definition of investment services and conduct of business rules.

The action plan provides also for an updating of the directive on prospectuses.

In addition, the Commission is drafting a proposal for a new directive on market abuse which should also cover the provision of false information affecting the price of the securities traded on regulated markets.

(1) OJ L 141, 11.6.1993.

(2) OJ L 100, 17.4.1980.

(3) COM(2000) 729 final.