February 22, 1989
TO: INVESTMENT ADVISER MEMBERS NO. 13-89
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 12-89
RE: PROPOSED EC DIRECTIVE ON INVESTMENT SERVICES
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The European Community Commission, representing the twelve-
nation common market, has proposed the attached directive on
investment services in the securities field. This proposed
directive follows very closely a 1988 proposal covering the
banking sector.
The investment services proposal covers all non-banking
firms involved in stockbroking, portfolio management, dealing,
market making, options and futures, as well as investment advice.
Of most interest to our members is the fact that the coverage of
this directive would include investment advisers. It seeks to
establish uniform registration requirements for all EC member
countries so that a single license for investment firms would be
valid throughout the EC. The proposal would also introduce
standards on competence and conduct of business as well as
capital adequacy requirements in each member state (common
capital requirements will be proposed at a later date). The
proposed directive covers various securities instruments
including transferable securities, money market instruments,
financial futures and options, and exchange rate and interest
rate instruments.
One of the most controversial provisions in the proposed
directive, found in Article 6, concerns the proposed
international reciprocity requirement. Reciprocal access to
investment markets and stock exchanges would be a prerequisite
for foreign-based firms seeking to do business in the EC. Non
EC-based firms already established in the EC at the time the
directive becomes operative would be grandfathered. These
provisions are parallel to the reciprocity requirements in the
proposed 1988 second banking directive. Members interested in
establishing an EC presence prior to the adoption of the
directive should consult counsel as to what steps would be
necessary to establish an appropriate presence.
The U.S. position, with regard to the reciprocity
proposals, is that EC countries should permit "national
treatment" for non-EC investment firms providing services in EC
countries and that non-EC firms should be subject to the same
laws and given the same opportunities as host country investment
firms. Otherwise, U.S. firms argue, any final rules adopted by
the EC could place U.S. firms at a disadvantage in trying to
export investment products.
The proposed directive has two interrelated goals. First,
it is designed to establish one procedure for all persons wishing
to provide one or more of the services described above. Second,
the proposed directive seeks to liberalize access to stock
exchange membership in host member countries for investment firms
authorized to carry out investment services in their own country.
Under the first objective concerned with establishing one
uniform procedure, four rules are proposed. First, credit
institutions receiving banking authorization under the proposed
1988 second banking directive, scheduled to go into effect on
January 1, 1990, are not required to obtain second authorizations
if they are engaging in investment activities. Second, host
country regulators will initially have concurrent jurisdiction
with home country regulators regarding compliance for capital
requirements. Third, a compensation fund, to protect investors
against default or bankruptcy byan investment business
(apparently similar to SIPC), would be governed by home country
regulators although host country compensation rules would be
applicable to branches of investment businesses authorized in
other countries. Fourth, conduct of business rules, which
regulate the relationship between investment firms and their
clients, would be left to host country regulators for the time
being.
We will keep you informed of developments.
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment