Abstract
This chapter makes suggestions with regard to the principal objectives of the ESR, its competence and its tasks that might constitute its legitimate regulatory, executive, supervisory and judicial functions and its relationship with Member States supervisory authorities and EU institutions. In the same context, arguments for potential problematic parameters will be identified and analysed.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
Notes
Article 107(2) (former Article 106) EC Treaty; for a legal approach to the ECB, see Zilioli, C. and Selmayr, M., The Law of the European Central Bank (Oxford: Hart Publishing, 2001).
On the question, whether the ECB constitutes a Community institution or not, see Dutzler, B., OLAF or the Question of Applicability of Secondary Community Law to the ECB (European Integration online Papers No 1, http://eiop.or.at /eiop/texte/2001-001a.htm, 2001) 7.
Gros, D., ‘Delivering Price Stability in EMU: the European System of Central Banks’, in Franke, H.H. (ed.), Europäische Währungsunion: Von den Konzeption zur Gestaltung (Berlin: Dunker & Humblot 1998) 356. The Council can only make minor technical amendments, but changes in ECB’s powers or objectives requires Treaty amendment; Article 111 (former Article 109) EC Treaty.
For some examples of ECB Regulations, see Thieffry, G., ‘After the “Lamfalussy” Report: the First Step towards a European Securities Commission (ESC)?’ in Andenas, M. and Avgerinos, Y., Financial Market Supervision in Europe: Towards a Single Regulator? (London: Kluwer, forthcoming 2003).
See Leino, P., The European Central Bank and Legitimacy: Is the ECB a Modification of or an Exception to the Principle of Democracy? (Cambridge: Harvard Jean Monnet WP 1/01, 2001) 4.
See, for instance, Magnette, P., ‘Towards “Accountable Independence”? Parliamentary Controls of the European Central Bank and the Rise of a New Democratic Model’ (2000) 4 ELJ 326;
Buiter, W., ‘Alice in Euroland’ (1999) 2 JCMS 181;
Issing, O., The Euro — Four Weeks After the Start (Speech delivered to the European-Atlantic Group, House of Commons, London, 28 January 1999).
Both theoretical and empirical research supports the view that central bank independence is a desirable institutional device because it is associated on average with lower inflation and no lower growth. See Cukierman, A., Accountability, Credibility, Transparency and Stabilization Policy in the Eurosystem (mimeo, January 2000) 2.
See, for instance, Brentford, P., ‘Constitutional Aspects of the Independence of the European Central Bank’ (1998) 47 ICLQ 75, 108;
Kirchgässner, G., ‘Constitutional Economics and its Relevance for the Evolution of Rules’ (1994) 47 Kyklos 321, 329.
European Ombudsman, Annual Report 1996 (OJ C 272/1, 8 September 1997) 30.
See also European Ombudsman, Special Report to the European Parliament following the own-initiative inquiry into public access to documents (OJ C 44/9, 10 February 1998).
For the time being, even all voting records and motivations remain confidential. See ECB, Rules of Procedure of the European Central Bank (OJ L 125/34, 19 May 1999) Article 23.
ECB, Decision of 3 November 1998 concerning public access to documentation and the archives of the European Central Bank (OJ L 110/30, 28 April 1999) Preface.
For such an analysis, see Chryssochoou, D., Democracy in the European Union (London: Tauris Academic Studies, 1998) 69.
The economic rationale lies in the perception that a pan-European monetary institution may be more effective than its national-level predecessors; see Oatley, T., Monetary Politics: Exchange Rate Cooperation in the European Union (Ann Arbor: University of Michigan Press, 1997) 143 et seq.;
Gros, D. and Thygesen, N., European Monetary Integration (Harlow: Longman, 2nd ed., 1998) 261 et seq.;
Frieden, J. and Jones, E., ‘The Political Economy of EMU: A Conceptual Overview’, in Frieden, J. et al (eds), The New Political Economy of EMU (Boston: Rowan & Littlefield, 1998) 168. The decision to complete the internal market lent strength to the belief long held by many Europeans that closely integrated national economies like those at the core of the EC have more to gain from exchange rate stability than from occasional realignments. It was argued that the EC countries could not reap the full gains of the internal market unless they banished the exchange rate risks and conversion costs arising from the use of separate national currencies;
see Kenen, P., Economic and Monetary Union in Europe: Moving beyond Maastricht (Cambridge: Cambridge University Press, 1995) 9. The strongest statement of this view was made later on, in the European Commission’s statement of the case of EMU, aptly titled ‘One Market, One Money’ (European Economy, 44). Concerns were also vividly put by Padoa-Schioppa, who warned against trying to pursue an ‘inconsistent quartet’ of policy objectives: free trade, full capital mobility, fixed exchange rates and independent national monetary policy. ‘In the long run’, he argued, ‘the only solution to the inconsistency is to complement the internal market with a monetary union’;
Padoa-Schioppa, T., ‘The European Monetary System: A Long-Term View’, in Giavazzi, F., Micossi, S. and Miller, M. (eds), The European Monetary System (Cambridge: Cambridge University Press, 1988) 376.
See McNamara, K., ‘Managing the Euro: The European Central Bank’, in Peterson, J. and Shackleton, M., The Institutions of the European Union (Oxford: Oxford University Press, 2002) 168;
Dyson, K., The Politics of the Euro-Zone: Stability or Breakdown? (Oxford: Oxford University Press, 2000) 260 et seq.
See Economic and Financial Committee, Report on Financial Stability (EFC/ECFIN/240/00, 8 April 2000, ‘Brouwer Report’) 6.
Between 1 September 1929 and 1 July 1932, the value of all stocks listed on the New York Stock Exchange shrank from a total of nearly $90 billion to just under $16 billion, a loss of 83%; for details on the Great Crash, see Galbraith, J., The Great Crash 1929 (Boston: Houghton Mifflin, 1997).
For an excellent historical description of the US securities market in the early twentieth century and the reasons that led to federal regulation and the establishment of the SEC, see McCraw, T., Prophets of Regulation (Cambridge: Harvard University Press, 1984) 162 et seq.
‘Stock Exchange Practice’: Hearings before the Senate Banking Committee (72nd and 73rd Congress, 1932–34). The purpose of the Stock Exchange Hearings, which lasted nine days, was to determine why these staggering decreases in securities values had occurred and to propose legislation to prevent another stock market crash. They also had an obvious political purpose. During the preceding twelve years, a majority of the country’s voters had supported the laissez-faire economic policies followed by President Calvin Coolidge. The revelations of the Pecora Hearings were intended to diminish that faith and transform the national sentiment to a regulatory-reform ideology associated with President Roosevelt’s New Deal; see Seligman, J., The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston: Houghton Mifflin, 1982) 2.
The Pecora Hearings, the crash of the stock market, the around 8000 bank failures, the huge unemployment figures, the dismal picture for economic growth, the thousands of Americans who had lost their life savings through no fault of their own and a desire to prevent a total collapse of the banking system, led President Roosevelt to declare a national bank holiday and to draft new regulations to restore financial confidence and safety; see Gart, A., Regulation, Deregulation, Reregulation: The Future of the Banking, Insurance and Securities Industries (New York: John Wiley & Sons, 1994) 34. The Glass-Steagal Act required, inter alia, private banks to limit themselves either to receiving deposits or to providing investment services. As a consequence, the financial industry was divided into two by separating the business of receiving deposits and making loans (commercial banking) from that of underwriting or acting as a dealer or market maker (investment banking).
President Roosevelt stated: ‘The new law will safeguard against the abuses of high-pressure salesmanship in security flotations. It will require full disclosure of all the private interests on the part of those who seek securities to the public. The Act is thus intended to correct some of the evils which have been so glaringly revealed in the private exploitation of the public’s money’; Roosevelt, F., Public Papers and Addresses vol. 2 (New York: Random House, 1938) 213–14.
Roosevelt had already drafted Frankfurter as legal advisor and ‘recruiting officer’ for the New Deal; see Ritchie, A., James M. Landis: Dean of the Regulators (Cambridge: Harvard University Press, 1980) 40. Landis was Frankfurter’s protégé, a unique academic scholar who became professor at the Harvard Law School at the age of twenty-seven. His advance thereafter was ‘meteoric, almost unheard of’, as Dean Roscoe Pound would concede; see Seligman, op. cit., note 37, 61.
On the interesting correspondence between Roosevelt and Frankfurter, see Freedman, M., Roosevelt and Frankfurter: Their Correspondence 1928–1945 (Boston: Little, Brown & Company, 1967).
See Landis, J., ‘The Legislative History of the Securities Act of 1933’ (1959) 28 George Washington Law Review 29, 30–4;
Moley, R., The First New Deal (New York: Harcourt, 1966) 306–15; Ritchie, op. cit., note 41, 43.
For the history of the writing of the basic securities legislation, see Parrish, M., Securities Regulation and the New Deal (New Haven: Yale University Press, 1970) chapters 3–5;
Bedts, R., The New Deal’s SEC: The Formative Years (New York: Columbia University Press, 1964) chapters 2–3; Seligman, op. cit., note 37, 39–100.
Loss, L. Fundamentals of Securities Regulation (Boston: Little, Brown & Company, 1983) 792.
After the adoption of the Gramm-Leach-Bliley Act of 1999, which repealed the Glass-Steagall barriers between commercial and investment banking, the SEC has also supervisory authority over banks and other financial institutions engaged in securities activities. For an analysis of the Gramm-Leach-Bliley Act, see Malloy, M., ‘Banking in the Twenty-First Century’ (2000) 25 The Journal of Corporation Law 789.
Pub. L. No. 101–429, 104 Stat. 931, 15 U.S.C. 78a. On the features of this legislation, see Barnard, J., ‘The Securities Law Enforcement Remedies Act of 1989: Disenfranchising Shareholders in order to Protect Them’ (1989) 65 Notre Dame Law Review 32;
Newkirk, T., McKown, J. and Corso, L., The SEC’s Enforcement Program under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (American Bar Association Continuing Legal Education, 17 Tune 1994).
See Benston, G., ‘Consumer Protection as Justification for Regulating Financial Services Firms and Products’ (2000) 3 Journal of Financial Services Research 277, 278.
See Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the EC (Luxembourg, April 1989, hereinafter ‘Delors Report’) Paragraph 62.
For example, the words ‘European Central Bank’ did not appear in the Delors Report. See Louis, J.V., ‘A Monetary Union for Tomorrow?’ (1989) 26 CMLRev 301, 311.
See EP, Report on the Implementation of Financial Services Legislation (A5-0011/2002 final, 23 January 2002) 15.
See Breuer, R., Convergence of Supervisory Practices — a Banker’s View (Paper presented at the Conference of European Banking Supervisors, Copenhagen, 20 November 2000).
See FESE, Report and Recommendations on European Regulatory Structures (September 2000) 12.
See Committee of Wise Men, Final Report on the Regulation of European Securities Markets (15 February 2001) 18. Furthermore, one of the major institutional problems facing the EU today is that the structure of the Commission has remained unchanged for more than forty years, and is proving increasingly inadequate to manage the growing complexity of its tasks; see Majone, G., ‘Functional Interests: European Agencies’, in Peterson and Shackleton, op. cit., note 30, 323.
Articles 251 and 252 EC Treaty (former Articles 189b and 189c). This will remain even with the ‘new’ regime proposed by the Wise Men Committee, as the ESC’s regulatory power is limited to non-essential implementing rules; see Avgerinos, Y., ‘Essential and Non-essential Measures: Delegation of Powers in EU Securities Regulation’ (2002) 2 ELJ 269.
Parliament and Council Directive 2001/34/EC of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities (OJ L 184/1, 6 July 2001) Article 108.
See European Commission, Proposal for a Regulation on the Application of International Accounting Standards (COM(2001) 80 final, 13 February 2001) Article 6.
For an analysis of different types of implementation activities, see Schäfer, G., ‘Linking Member State and European Administrations — The Role of Committees and Comitology’, in Andenas, M. and Türk, A. (eds), Delegated Legislation and the Role of Committees in the EC (London: Kluwer, 2000) 6.
The Bingham Report on the BCCI is explicit in that respect: ‘the problem nonetheless remains that it is one thing to preach high supervisory standards and maybe another thing to practice them. The Treasury and Civil Service Select Committee has urged that the BIS should expand its role to encompass the monitoring of supervisory standards. This, plainly, is one possibility and other international bodies have been suggested as candidates to perform the task (…). It makes very good sense that supervision should be primarily conducted by the home supervisor, who is closest to the bank and best placed to monitor but if host supervisors are increasingly to rely on the home supervisor they must be reassured by some form of independent verification that the home supervisor is really doing its job’; Bingham, Lord Justice, Inquiry into the Supervision of Bank of Credit and Commerce International (HMSO, October 1992) 186.
Mayes et al., Improving Banking Supervision (Basingstoke: Palgrave, 2001) 80.
See, for instance, Welteke, E., Regulating European Financial Markets (Speech delivered at the European Banking Conference, Frankfurt, 17 November 2000).
See, for instance, Deutsche Bank, Regulation and Banking Supervision: Caught Between the Nation State and Global Financial Markets (Frankfurt: EMU Watch No. 86, 29 June 2000) 7.
The hybrid system is not a new concept in European financial services. A similar regime has been recently proposed by the EP in the Huhne Report on the POP II Directive, which exempts from the scope of the directive issuers SMEs of national reach; EP, Report on the proposal for a directive on the prospectus to be published when securities are offered to the public or admitted to trading (A5-0072/2002, 27 February 2002) 32.
Market discipline is one of the three major elements adopted by the New Basel Capital Accord. The increased reliance on disclosure of information regarding risk assessment methods and capital adequacy calculations is intended to shift some of the role of regulation on to ‘market discipline’. ‘Meaningful disclosures inform market participants and facilitate market discipline’; see Basel Committee, Overview of the New Basel Capital Accord (Consultative Document, January 2001) 33.
For the advantages of market discipline, see Caprio, G., Bank Regulation: The Case of the Missing Model (World Bank Policy Research WP No 1574, January 1996);
Evanoff, D., ‘Preferred Source of Market Discipline’ (1993) 10 Yale Journal on Regulation 347. Minimum capital requirements and supervisory review process are the two remaining pillars that form the heart of the new Basel proposal. In a significant departure from the existing Capital Accord, new minimum capital requirements apply not only to market and credit risk as previously, but also to operational risk. Supervisory review, on the other hand, would allow regulators to adjust a bank’s capital requirement in response to ‘soft factors’, such as the perceived quality of its internal risk assessment and would necessitate mechanisms that ensure comparable implementation across countries. Self-regulation plays an increasingly significant role in highly technical areas of regulation, such as financial services, and offers a number of advantages;
see Majone, G., Regulating Europe (London: Routledge, 1996) 23;
Ogus, A., Regulation — Legal Form and Economic Theory (Oxford: Clarendon Press, 1994) 107. In the United States, for instance, the NASD registers member firms, writes rules to govern their behaviour, inspects their offices, books and records for violations of SEC regulations, and disciplines those that fail to comply, which is more efficient than direct governmental regulation.
Enron was perceived as a highly successful company and owed much of its initial success to deregulation, both in the gas and electricity and in a variety of other areas. More specifically, it was the product of reduced accounting regulation and supervision by the SEC. Inadequate accounting rules were partly responsible for the failure to disclose complex off-balance-sheet transactions and to uncover highly risky operations. Enron filed a petition for relief under Chapter 11 of the US Bankruptcy Code on 2 December 2001. Only then did market analysts react and shareholders and creditors became aware of its vulnerabilities. For an initial reflection, see Padoa-Schioppa, T., Reflections on Recent Financial Incidents (Speech at the Third Joint Central Bank Research Conference on Risk Measurement and Systemic Risk, Basel, 8 March 2002). When Enron filed at the end of 2001, nobody expected there would be an even bigger bankruptcy within the next year. However, after the disclosure of a $3.9 billion accounting fraud, WorldCom, once the second largest long-distance telecommunications provider in the United States, filed for bankruptcy under Chapter 11 on 22 July 2002. On 27 June 2002, the SEC had filed a civil action in the federal district court in New York charging WorldCom with a massive accounting fraud totalling more than $3.9 billion. The SEC’s complaint alleged that WorldCom fraudulently overstated its income before income taxes and minority interests by approximately $3.055 billion in 2001 and $797 million during the first quarter of 2002; see SEC, Litigation Release No. 17588 and Accounting and Auditing Release No. 1585 (27 June 2002). The sudden collapse of WorldCom deepened concerns about accounting, corporate governance and the quality of earnings;
see Larsen, P. and Chaffin, J. ‘WorldCom board agrees to file for bankruptcy’ (22 July 2002) FT 1 and 27;
The Economist, ‘When something is rotten’ (27 July 2002) 61–3.
Although there are differences, there were echoes of the 1930s when, in the aftermath of the Great Crash of 1929, Wall Street became public enemy number one; see Hill, A., ‘Greed and fear return’ (8 June 2002) FT 12;
The Economist, ‘The value of trust’ (8 June 2002) 63.
The SEC has recently published a series of releases modifying, in a manner appropriate for the protection of investors, the requirements for including audited financial statements in registration statements under the Securities Act of 1933 and filings required by the Trust Indenture Act of 1939; see SEC Release Nos. 33-8070, 34-45590, 35-27503, 39-2395, IA-2018, IC-25464 and FR-62 (18 March 2002). Furthermore, on 20 June 2002 the SEC proposed rules to reform oversight and improve accountability of auditors of public companies, thereby enhancing the reliability and integrity of the financial reporting process. The proposed rules establish the framework for a Public Accountability Board (PBA), a system of ‘private sector’ (but not ‘self’) regulation that would not be under the control of the accounting profession. The structure is intended to supplement the SEC’s oversight and enforcement efforts by expanding the opportunities to detect and remedy ethical lapses or deficiencies in competence, thereby complementing the Commission’s enforcement efforts. The rules were based on months of extensive public input, including comments received during a series of SEC-sponsored Roundtables and the SEC’s first Investor Summit. In order to receive additional public input, the rules remained open for comments for two months before being published in the Federal Register. Finally, on 13 February 2002 SEC Chairman Harvey Pitt asked the New York Stock Exchange (NYSE) to review its corporate governance listing standards. In conjunction with that request, the NYSE appointed this Corporate Accountability and Listing Standards Committee to review the NYSE’s current listing standards, along with recent proposals for reform, with the goal of enhancing the accountability, integrity and transparency of the Exchange’s listed companies. The proposals include a few gestures towards the corporate social responsibility lobby, such as the requirements that listed companies should publish corporate governance guidelines and a code of ethics on their websites. The main focus, however, has been on ideas for strengthening the role of independent (non-executive) directors, by demanding that a majority of the board consists of independent directors, that audit and remuneration committees be composed only of such directors, and that they meet each other and company managers without the chief executive being present; see New York Stock Exchange Corporate Accountability and Listing Standards Committee Report (6 June 2002); The Economist, ‘Designed by committee’ (15 June 2002) 69–71. 99 See Jachtenfuchs, M., ‘The Governance Approach to European Integration’ (2001) 2 JCMS 245, 252.
For the pros and cons of incentive versus rule-based regulation, see Dhumale, R., ‘Incentive v. Rule-Based Financial Regulation: A Role for Market Discipline’, in Ferran E. and Goodhart, C. (eds), Regulating Financial Services and Markets in the Twenty First Century (Oxford: Hart, 2001) 66.
For an analysis on the costs and benefits of disclosure, see Basel Committee, Enhancing Bank Transparency (September 1998).
Regretfully, only investment firms engaged in systematic order-matching (ATS) are proposed to adopt these systems (emphasis added); European Commission, Revision of ISD: Second Consultation (25 March 2002) 24.
Tyco is a former New England electronics maker that has turned into a high-powered conglomerate. Its chairman and chief executive was forced to resign after allegations and charges of misuse of loans from the conglomerate and tax evasion; see The Economist, ‘Taxing times’ (8 May 2002) 57. WorldCom is the second largest long-distance telecommunications provider in the United States. For Enron and WorldCom, see supra, note 96.
European Commission, A first EU response to Enron related policy issues (Note for the informal ECOFIN meeting, Oviedo 12–13 April 2002). The Commission strongly promotes a strategy based on a principles-based approach to financial reporting, designed to reflect economic reality and so giving a true and fair view of the financial position and performance of a company. In this light, auditing standards, transparency and effective corporate governance are crucial to providing high quality audits. Various international fora are also studying the issues raised by Enron and other corporate failures. The March 2002 Financial Stability Forum meeting in Hong Kong discussed weaknesses in accounting and corporate governance. IOSCO has created a high-level subcommittee to assess accounting standards, disclosure and transparency practices, the role of ratings agencies, and the treatment of off-balance-sheet transactions. The Basel Committee on Banking Supervision is addressing banks’ use of special purpose vehicles. The OECD plans to discuss corporate governance. Finally, the recent IMF Quarterly Report on Market Developments and Issues highlighted a number of weaknesses in accounting rules and their implementation, corporate governance, and lax market discipline;
see IMF, Global Financial Stability Report (June 2002) Chapter II.
There is no provision that would permit states or individuals to claim that they have been affected in a discriminatory manner by an act of general application; see Dunnett, R., ‘Legal and Institutional Issues Affecting Economic and Monetary Union’, in O’Keeffe, D. and Twomey, P. (eds), Legal Issues of the Maastricht Treaty (Bath: Chancery Law Publishing, 1994) 145.
See European Commission, Financial Services: Implementing the Framework for Financial Markets: Action Plan (COM(1999) 232, 11 May 1999) 10. Indeed, Member States have declared their intent to cooperate on a cross-border basis by agreeing on the Memorandum of Understanding on a Cross-Border Out-of-Court Complaints Network for Financial Services in the European Economic Area (1 February 2001), which is based on the Commission Recommendation 98/257/EC on the principles applicable to the bodies responsible for out-of-court settlement of consumer disputes (30 March 1998). On 2 September 2002, the Commission launched a consumers’ guide to FIN-NET, which aims to help European citizens to understand and use the FIN-NET network. The Guide gives consumers information about: (a) what to do if they have a complaint against a financial services provider in another Member State, (b) procedures for setting consumer financial services disputes out of court in the EEA, (c) how FIN-NET works, and (d) how to contact the national complaint schemes participating in the FIN-NET.
See FESCO, Market Conduct Standards for Participants in an Offering (22 December 1999).
See Harding, C., ‘Member State Enforcement of European Community Measures: The Chimera of “Effective” Enforcement’ (1997) 4 Maastricht Journal of European and Comparative Law 5, 22.
See Hertig, G., ‘Regulatory Competition for EU Financial Services’ (2000) 2 Journal of International Economic Law 349, 374
For a balance of powers between EU institutions and national authorities based on the doctrine of separation of powers, see Kirchhof, P., ‘The Balance of Powers between the National and European Institutions’ (1999) 3 ELJ 225.
Copyright information
© 2003 Yannis V. Avgerinos
About this chapter
Cite this chapter
Avgerinos, Y.V. (2003). Structure and Operation of the European Securities Regulator. In: Regulating and Supervising Investment Services in the European Union. Palgrave Macmillan, London. https://doi.org/10.1057/9780230286870_8
Download citation
DOI: https://doi.org/10.1057/9780230286870_8
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-51091-7
Online ISBN: 978-0-230-28687-0
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)