European Union Securities
An Introduction for U.S. Asset Managers
THE PROBLEM | It’s Complicated
U.S. asset managers are often baffled by securities rulemaking in the European Union.
The language describing the E.U.’s
rulemaking process is different.
The United States and the European
Union may use different names for what
is essentially the same thing: comment
period vs. consultation is one example
Or the same term may mean different
things in the United States and the
European Union. For example, a
regulation is a type of legislation in
Europe, but an act of the executive
branch in the United States.
U.S. securities rulemaking takes place
almost exclusively at the Federal level,
with limited state involvement.
By contrast, in the European Union, the
national governments of E.U. member
states are tightly integrated into the
• Their representatives participate in
E.U.-level decision making.
• Member states may be wholly
responsible for implementing E.U.
Comparisons between U.S. and E.U.
rulemaking can be very difficult. There’s
often no U.S. equivalent for an E.U.
entity or process.
E.U. securities rulemaking has been
• The European Union itself has been
changing, with integration among
member states gradually increasing
over time. This has had a knock-on
effect on rulemaking.
• The financial crisis led to significant
change in securities rulemaking. For
example, the European Securities and
Markets Authority – known as ESMA
and one of the key players in E.U.
rulemaking – was established just 4
years ago, in 2011, in the wake of the
Yet understanding – and anticipating – the rulemaking process is essential for asset managers looking to gather assets in Europe.
OUR AGENDA | Who, How and Why
This presentation aims to demystify E.U. securities rulemaking by describing who, how and why.
Whenever we refer to Europe in this presentation, we’re talking exclusively about the European Union and
its member states. We exclude Norway, Switzerland and other non-member states, which have their own
The parties involved in E.U. securities rulemaking
The process of E.U. securities rulemaking
Key E.U. legislation governing securities and treaties governing E.U. rulemaking
THE PLAYERS | A Simplified View
The European Council
Sets Overall Policy and Priorities
Council of the
European Securities &
Prepares Legislation Debate & Approve Legislation Implement Legislation
THE PLAYERS | The European Council
The European Council provides high-level leadership, establishing political direction and priorities.
It is not directly involved in legislation.
The National Governors Association is the closest U.S. equivalent to the European Council. However, the National Governors
Association is an informal organization, while the European Council has an official role in E.U. government.
The European Council is composed of:
• The heads of state or of government of all E.U. member
• The President of the European Council (see “Leadership”)
• The President of the European Commission
The European Council meets 4 times a year, usually in Brussels.
The European Council elects a
President to serve a 2-1/2 year term.
The President chairs meetings.
The current President of the
European Council is Donald Tusk of
THE PLAYERS | The European Commission
The European Commission drafts legislation and proposes the E.U.’s annual budget. It manages
funding for policies and programs, enforces laws and represents the European Union internationally.
The European Commission has a large permanent staff. It
is the E.U.’s civil service.
The European Commission is organized in departments,
called Directorates General, or DGs.
The Directorate General for Financial Stability, Financial
Services and Capital Markets Union oversees securities
rulemaking. The current leadership of DG FISMA is:
• Commissioner Jonathan Hill of the United Kingdom
• Director General Jonathan Faull of the United Kingdom
The European Commission is based in Brussels and
The current President of the European Commission is
Jean-Claude Juncker of Luxembourg.
The President of the European Commission has been
called the most powerful officeholder in the European
The President nominates Commissioners – one from each
of the other members states – to serve a concurrent 5-year
term. Both the European Council and the European
Parliament must approve the slate of Commissioners.
The European Council
nominates a candidate to
serve as President of the
European Commission for a
5-year term. The European
Parliament must ratify the
THE PLAYERS | The European Parliament
The European Parliament is one of the 2 parties that must approve legislation and the E.U. budget.
(The other is the Council of the European Union.)
Members of the European Parliament, or MEPs, are directly
elected by E.U. voters every 5 years.
The number of MEPs for each country is determined by the
terms of the Treaties governing the European Union and is
based on population. The European Parliament currently has
over 700 MEPs.
The European Parliament meets in Strasbourg, France, and in
The European Parliament’s administrative head office, or
General Secretariat, is based in Luxembourg. The services
linked to the legislative process and MEP offices are de facto
based in Brussels.
The powers of the European Parliament are much more limited than those of the U.S. House of Representatives.
The European Parliament doesn’t have authority over foreign policy, defense policy or direct taxation. All of these issues are controlled by
the national governments of E.U. member states.
Parliament elects a President to serve a 2-
1/2 year term.
The current President of the European
Parliament is Martin Schulz of Germany.
THE PLAYERS | The Council of the European Union
The Council of the European Union is one of the 2 parties that must approve legislation and the E.U. budget.
(The other is the European Parliament.) The Council also helps coordinate foreign policy and defense policy.
The Council of the European Union is composed of ministers
from E.U. member states with authority over the topic being
discussed. As a result, this body is sometimes called the
Council of Ministers.
For example, if the Council is discussing economic and
financial affairs, the economic minister for each member state
will participate, and the meeting will be known as the
Economic and Financial Affairs Council, or Ecofin Council.
Each council establishes its own meeting schedule. The Ecofin
Council generally meets monthly.
The Council of the European Union meets in Brussels and
Council meetings are in general chaired by the minister from
the country holding the E.U. presidency.
The E.U. presidency rotates every 6 months on a pre-
determined scheduled. For example, ministers from Latvia
will chair meetings for the first half of 2015. The Presidency
will be transferred to Luxembourg for the second half of 2015.
Exception: The permanent chair of the foreign minister’s
council is the E.U.’s High Representative for Foreign Affairs
and Security Policy.
Beginning in 2014, for a proposal to pass, it must be approved
by a qualified majority, meaning ministers representing:
• At least half of E.U. member states
• At least 65% of the E.U. population
Don’t confuse the Council of the European Union with the European Council!
THE PLAYERS | European Securities and Markets Authority
Better known as ESMA (ess-ma), the European Securities and Markets Authority is responsible for
safeguarding the European financial system. It’s part of the European System of Financial Supervision.
ESMA is part of the E.U.’s civil service and has a substantial
ESMA was established in 2011, as part of the response to the
financial crisis. It replaced the Committee of European
Securities Regulators, or CESR, known as Caesar.
ESMA is based in Paris.
ESMA is an independent authority.
It is overseen by a Board of Supervisors consisting of one
representative from each E.U. member state. In addition,
representatives from the following entities are invited to
meetings as observers:
• The European Commission
• 3 states in the European Economic Area not in the European
Union (Iceland, Liechtenstein and Norway)
• Other E.U. supervisory authorities (European Banking
Authority, European Insurance and Occupational Pensions
Authority, European Systemic Risk Board)
The Board of Supervisors appoints the Chair, though
Parliament may reject the appointment. The Chair serves on
the European Systemic Risk Board. A subset of the Board of
Supervisors forms ESMA’s Management Board.
ESMA is roughly equivalent to the U.S. SEC, though ESMA doesn’t have the SEC’s enforcement powers.
The current Chair of ESMA is
Steven Maijoor of the Netherlands.
THE PLAYERS | Member States
Even though today securities rulemaking is largely driven at the European Union level, the E.U. member
states continue to play a critical role.
Member states are responsible for the implementation of
directives adopted at the European Union level.
These directives must be transposed into national law --
through the adoption of implementing measures -- before
they can become effective.
Member states may add requirements, in a practice known as
gold plating. These additional requirements may be
prohibited if maximum harmonization among member states
is required; they may also be specifically permitted.
Member states may also establish rules for activities that are
not covered by E.U. legislation.
For example, before the passage of AIFMD, most member
states had established local regulations for hedge funds,
generally referred to as private placement regimes.
Under the principle of subsidiarity, the European Union may
take action on an issue only if:
• The issue is an area where exclusive authority has been
given to the European Union or
• The European Union can act more effectively than national
Directives vs. Regulations
The European Union has two types of legislation. Directives bind member states to achieving a particular objective. Member states are
responsible for implementation through national law. Regulations are directly binding on member states, without the need for
transposition into national law. Because of the concerns about systemic risk, legislation related to securities is increasingly
in the form of regulation.
THE PROCESS | The 4-Level Framework
Securities rulemaking within the European Union takes place in 4 stages.
The History of the Jargon
This framework is often referred to as the Lamfalussy Process, named after the chair of the Committee of Wise Men that created it.
The process was modified after the financial crisis in the Treaty of Lisbon, based on recommendations put forth in the De Larosière
Report. This 4-level process is unique to rulemakings affecting the financial services industry.
Level 4Level 2Level 1
THE PROCESS | Level 1: Legislative Acts
European Union securities rulemaking ordinarily begins with passage of legislation.
All E.U. legislation must be based on a
proposal from the European
Commission. Members of Parliament
may ask the Commission to present a
proposal to the Council of the European
Union. Only the Commission has the
right to initiate legislation.
The European Commission often starts
the legislative process by issuing a green
paper that launches a consultation
process (essentially a request for
comments). The Commission may hold
hearings as part of this process.
When the Commission is ready to move
forward, it will generally produce a
white paper explaining the proposals.
ESMA may provide the Commission
with technical advice on securities-
Under ordinary legislative procedures,
legislation must be approved by both:
• A majority of the members of the
• A qualified majority of the members of
the Council of the European Union
(representing at least half of E.U.
member states and at least 65% of E.U.
The European Union also has special
legislative procedures, though these
generally don’t apply to securities
rulemakings. These special procedures
limit the role of the European
Coming to Agreement
Informal mechanism: Representatives of
the European Parliament and of the
Council – with the help of the
Commission – may meet informally to
iron out differences on legislation. These
sessions are known as trialogues.
Formal mechanism: If agreement still
can’t be reached, a Conciliation
Committee can be convened. If it is,
representatives from the Parliament and
the Council – with the assistance of the
Commission – have 6 weeks to agree
upon the text of the legislation.
The agreement reached in the
Conciliation Committee needs to be
confirmed separately by the Parliament
and the Council.
THE PROCESS | Level 2: Non-Legislative Acts
Legislation adopted by the European Parliament and the Council of the European Union may delegate
authority for follow-up to the European Commission.
In the case of non-legislative acts, the follow-up work is done directly by the European Commission. There are
two types of non-legislative acts:
The European Commission may be given authority to develop
Level 2 acts and other non-essential elements of legislation.
These are known as delegated acts.
The Commission must present the delegated acts that it has
developed to the European Parliament and the Council.
These delegated acts are deemed effective unless the
Parliament or the Council actively objects to them.
The European Commission may be given authority to develop
implementing acts that ensure uniform implementation of the
legislation throughout the European Union.
In this case, the comitology procedures require that the
Commission consult with committees composed of
representatives from member states before implementing
measures are adopted.
Support of a majority of committee members is required for
significant implementing measures.
THE PROCESS | Level 2: Binding Technical Standards (BTS)
Alternatively, the European Commission may be given authority to adopt technical standards that have been
prepared by ESMA (or any other European supervisory authority).
Binding technical standards are different from delegated acts
and implementing acts because they “should be technical,
shall not imply strategic decisions or policy choices and their
content shall be delimited by the legislative acts on which they
There are two types:
Regulatory technical standards: Details of rules broadly
outlined in legislation
Implementing technical standards: Forms, filing procedures,
1. ESMA engages in a public consultation procedure on the
2. ESMA prepares a draft of the technical standards and
submits it the European Commission
3. The Commission may adopt or reject the standards in
whole or in part. However, the Commission may not
change the standards without ESMA’s agreement.
THE PROCESS | Level 3: Comply or Explain
ESMA (and the other European supervisory authorities) have general responsibilities for ensuring the
consistent, efficient and effective supervisory practices and application of securities-related legislation.
ESMA may advise the Commission on the preparation of
Level 2 non-legislative acts.
ESMA consults with the users and providers of financial
services, as appropriate.
Comply or Explain
ESMA will develop guidelines for the consistent
implementation of securities-related legislation throughout the
European Union. In developing these guidelines, ESMA must
use cost-benefit analysis.
Member states must make every effort to comply with these
guidelines – or must explain if they do not intend to comply.
Financial market participants may be required to report
publicly whether they do comply.
THE PROCESS | Level 4: Enforcement
Both the European Commission and ESMA are, at their respective levels, responsible for ensuring that
directives are correctly transposed into national law and that E.U. legal requirements are applied. There are 2
remedies available should that not be the case:
Court of Justice
The European Commission can refer a case of failure to fulfill
an obligation against a member state to the Court of Justice of
the European Union.
The Court interprets E.U. law to ensure that it is applied
uniformly in all member states.
European Court of Justice actions normally take years.
Fast Track Procedure
At the request of a national competent authority, a stakeholder
group, or the European Parliament, Council, or Commission –
or on its own initiative -- ESMA can launch an enquiry into the
ESMA will make a recommendation to the member state
within 2 months.
Only under well-defined conditions is ESMA empowered to
take actions with regard to a specific financial institution.
Not the SEC’s Kind of Enforcement
Enforcement actions in the European Union are normally against member states, not against individuals or companies. Enforcement with
respect to specific parties remains largely with member states. However, E.U. legislation has begun to stipulate that member states
impose penalties for certain violations.
THE PLAYBOOK |Securities-Related Legislation
Approved Legislation Major Goal
1985 UCITS I (Undertaking for Collective Investment in
Establish regime for cross-border sales of mutual funds for
2000 CRD I (Capital Requirements Directive) Primarily focused on banking, but with implications for asset
managers owned by banks
2002 UCITS III Expand investment capabilities of retail funds. Decrease
barriers to cross-border sales.
2004 MiFID 1 (Markets in Financial Instruments Directive) Establish framework for regulation of securities trading and
sales of securities to retail investors
2009 UCITS IV Increase efficiency of asset manager operations across borders
2009-2013 CRD II-IV Respond to issues raised by the financial crisis
2011 AIFMD (Alternative Investment Fund Managers
Create framework for regulation of cross-border sales of
private investment funds to E.U. investors
2012 EMIR (European Market Infrastructure Regulation) “The Dodd-Frank of Europe.” Requires central trading and
clearing of derivatives.
2014 UCITS V New requirements for custodians and remuneration policy.
Requires member states to impose sanctions on certain
2014 MiFID 2 Respond to issues raised by high frequency trading. Reduce
conflicts of interest in retail sales by banning commissions in
THE PLAYBOOK |Securities-Related Legislation
Signed Treaty Major Goal
1951 Treaty of Paris Establish the European Coal and Steel Community
1957 Treaties of Rome Establish the European Economic Community
1967 Merger Treaty (Brussels Treaty) Create a single Commission and Council
1986 Single European Act Prepare for the single market
1992 Treaty of Maastricht (also known as the Treaty on
Create the European Union
1997 Treaty of Amsterdam Prepare for entry of new member countries
2001 Treat of Nice Adapt to significant expansion number of member states
2007 Treaty of Lisbon Make the EU more democratic and efficient
The European Union was formed through a series of treaties.
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