European Community liberalizes financial services market to become more competitive

Business America, Feb 8, 1993 by Bob Straetz

The proposed capital adequacy directive sets capital standards for investment firms and is designed to provide a broad level playing field between investment firms and banks as to securities trading activity. The directive requires investment firms to be backed by a certain amount of capital depending on the firm's range of activities. Required capital varies from Ecu 50,000 ($60,000) for a firm which does not hold customer funds or securities, does not trade for its own account and does not underwrite securities on a firm commitment basis; to Ecu 730,000 ($876,000) for an investment firm which holds customer funds or securities, trades for its own account and underwrites securities.

* Undertakings for Collective Investment in Transferable Securities (UCITS)--The UCITS directive, implemented in 1989, enables mutual fund companies, once established in an EC member state, to sell their products throughout the EC. Marketing and advertising are controlled by the host country.

* Other Directives--Another part of the investment services program is designed to make capital markets more efficient. A directive harmonizing rules for prospectuses permits the distribution of a prospectus, once approved in one EC member state, throughout the Community. A firm can tap a much larger group of potential investors. The directive aims at ensuring that consumers have sufficient information for making investment decisions.

The EC directive on insider trading, which became effective in June 1992, sets up rules to give the public a level playing field in stock market investing. The directive prevents someone from giving or receiving inside information to make stock trades. Insider trading is defined as "non-public information of a precise nature concerning one or more issuers, or securities, which if made public would likely have a significant effect on the price of a transferable security." Each member state designates competent authorities to conduct investigations and determine penalties for parties found guilty of insider trading. Member states cooperate through information exchange.

A directive on major shareholder disclosure serves to increase investor protection and warn companies of possible takeover attempts. Shareholders acquiring or selling stock exceeding or falling below thresholds of 10, 20, 33, 50, and 66 percent must within the period of seven days notify the company and the member state in which the company is incorporated.

A third-country investor in a Community firm listed on a member state stock exchange is required to notify the company and competent member state authority of major acquisitions and sales of shareholdings. U.S. companies with substantial ownership of companies organized in EC member states must comply with reporting requirements.

The EC proposed a directive on indirect taxes on transactions in securities which would harmonize rates intermediaries can charge for the sale or acquisition of bonds and stocks and seeks to prevent double taxation within the Community. Because the directive involves taxation, it will require a unanimous Council vote and may be difficult to adopt.