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Both the United States and the European Union are embarked on projects to reform public company disclosure and to streamline securities offerings. The pace and quantity of rule making in both jurisdictions has been hectic and could be viewed as an exercise in competitive regulation. Nevertheless, the regulatory reform on both sides of the Atlantic is being driven by different political imperatives. Although regulators are aware of global needs and market pressures, their decision making is based more on national than international considerations. FINANCIAL SERVICES ACTION PLAN In the United States, much of the reform of the past few years has been driven by market place scandals. More recently, the Division of Corporation Finance of the Securities and Exchange Commission is returning to the job of streamlining the offering process because of changing technology. In Europe, the driving force for reform was the perceived need to harmonize disclosure policy and to create a European-wide capital-raising mechanism before enlargement of the EU made such a task even more difficult. This push for reform led to the development of the Financial Services Action Plan in 1999 and its implementation in accordance with the Lamfalussy process. The FSAP is intended to open up a single market for financial services in the EU. It is comprised of 42 separate measures designed to harmonize EU member states’ regulation of securities, banking, insurance, mortgages, pensions and all other forms of financial transactions. By the end of 2004, 40 of the 42 measures had been adopted at the European Commission level. [FOOTNOTE 1] These measures include a harmonized financial disclosure regime for listed issuers based on common international accounting standards, [FOOTNOTE 2] the Prospectus Directive [FOOTNOTE 3] and the Transparency Directive. [FOOTNOTE 4] This column will briefly explain the FSAP and the Lamfalussy process and then summarize the EU’s Prospectus Directive and Transparency Directive. The FSAP consists of a series of policy objectives and specific measures to improve the single market for financial services in the EU. Its goal is to create integrated, efficient, deep and liquid financial markets in the EU in order to deliver a broad range of safe and competitive products to consumers and achieve easier access to a single market for investment capital. Among the priorities of the FSAP are: revising the common legal framework for integrated securities and derivatives markets; removing outstanding barriers to raising capital on an EU-wide basis; ensuring the continued stability of the European markets; moving toward a single set of financial statements for listed European companies; creating a secure and transparent environment for cross-border restructuring; and providing legal security for cross-border security trading. [FOOTNOTE 5] COMMITTEE OF WISE MEN The usual legislative processes of the EU are complex. Most laws take the form of directives which are not self-executing and which originate with the commission, are then vetted by the parliament, and then finally adopted by the EU Council. To facilitate the implementation of the FSAP in Member States, the European Council of Economics and Finance Ministers established a Committee of Wise Men, chaired by Baron Alexandre Lamfalussy. The Lamfalussy Committee recommended that new securities regulation be adopted in Member States in four stages, and the Lamfalussy Process is being followed. Level 1 consists of directives or regulations issued by the EU Parliament and Council. These “framework directives” are drafted at a level of generality, concentrating on key issues of principle and outlining areas where more detailed rules are required. The passage of these more detailed rules takes place at Level 2 and involves consultation with various groups and committees. Specifically, the Lamfalussy Committee proposed that rule making authority for financial services be delegated to some extent to a newly created European Securities Committee, composed of representatives of the finance ministries of member states. First, however, the European Securities Committee must consult with the Committee of European Securities Regulators, which in turn must consult with investors, issuers and market professionals. Then CESR submits technical advice in the form of draft rules to the commission for its consideration and its transmission to the European Securities Committee for approval. [FOOTNOTE 6] At Level 3, the securities regulators within the member states work with the relevant EU institutions and within CESR to produce greater co-ordination of regulations and the development of common standards and approaches. Level 4 involves continuing monitoring and enforcement by the Commission to ensure that the EU laws passed at Levels 1 and 2 are implemented. [FOOTNOTE 7] Although this sounds even more cumbersome than the normal convoluted EU legislative processes, it was meant to be a fast-track process and it worked surprisingly well in terms of generating framework directives to implement the FSAP. Nevertheless, the European Securities Committee is far from an EU-wide regulator or SEC. It has no administrative or enforcement powers, and the directives which have been passed to implement the FSAP still need to be adopted in the national laws of the 25 EU Member States. The Prospectus Directive is intended to play a key role in creating a single market for financial services in the EU. It seeks to impose a comprehensive disclosure regime on all EU jurisdictions of uniform application. Member States may not impose additional requirements. This has therefore been called a “maximum harmonization” initiative. [FOOTNOTE 8] The Prospectus Directive overhauls two prior prospectus directives which were largely unsuccessful in facilitating the raising of capital across borders in the EU because of an absence of harmonized procedures and inconsistent interpretations and implementations in Member States. The aim of the directive is to ensure investor protection and market efficiency, in accordance with high international regulatory standards. Although the structure of the directive is similar to the structure of the Securities Act of 1933, the United States and EU legal regimes have not been harmonized. PROSPECTUS REQUIRED The Prospectus Directive identifies two circumstances where a prospectus is required to be published: first, before an offer of securities is made to the public and second, before securities are admitted to trading on a regulated market. Prior to this Prospectus Directive, there were different definitions across the EU as to what constituted a “public offer.” There is now a pan-European definition which is “a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities.” [FOOTNOTE 9] Resales are regarded as separate offers. The Prospectus Directive does not apply to certain securities, for example, nonequity securities issued or guaranteed by a Member State, or a Member State’s regional or local authority, offerings by central banks or certain offerings by credit institutions. [FOOTNOTE 10] Offerings to “qualified investors,” or to fewer than 100 natural or legal persons per Member State, other than qualified investors are exempt from prospectus obligations, as are offerings where the minimum subscription commitment is EUR 50,000. Additionally, small offers are exempt, defined as offers where the total consideration is less than EUR 2.5 million within a 12-month period, or for the publication of a prospectus within a single state, offers of securities with a total consideration of less than EUR 100,000 within a 12 month period. [FOOTNOTE 11] The Prospectus Directive does not specify the detailed form and content of prospectuses, but an EU Implementing Regulation prescribes content and format schedules for equity, debt and other types of securities. [FOOTNOTE 12] This is a Level 2 regulation developed pursuant to the Lamfallusy Process, and it is what gives teeth to the maximum harmonization concept because EU regulations, unlike directives, are self-executing. The EU disclosure standards thus put in place are intended to be in accordance with the International Disclosure Standards approved in 1998 by the International Organization of Securities Commissions, and already adopted by the SEC in revisions to its Form 20-F. [FOOTNOTE 13] One of the ways in which the new Prospectus Directive is designed to achieve better harmonization than past efforts is that EU member states cannot compel issuers from another state to translate their prospectuses. Prospectuses can be issued in the language of the issuer’s home state regulator, or a language accepted by such regulator or in a language customary in the sphere of international finance. Most cross-border prospectuses therefore presumably will be published in English. [FOOTNOTE 14] Another significant change wrought by the Prospectus Directive is that stock exchanges were deprived of their prior role in many European countries in vetting prospectuses. This is because the Prospectus Directive requires that only one supervisory authority in each Member State be designated to review and approve prospectuses, and that authority should be “independent from economic actors” so as to guarantee the avoidance of conflicts of interest. [FOOTNOTE 15] Since EU member states now have government securities regulators who are members of CESR, these regulators presumably will process prospectuses. TRANSPARENCY DIRECTIVE The Transparency Directive establishes requirements regarding the disclosure of periodic and ongoing information by issuers whose securities (equity or debt) are admitted to trading on a regulated market. It is therefore in some ways more limited in its scope than the Prospectus Directive, even though various “new markets” in Europe, as well as traditional stock exchanges, are considered regulated markets. In other ways, the Transparency Directive captures more issuers than the Prospectus Directive because it applies to non-EU issuers which have securities listed on an EU market. The Transparency Directive establishes uniform financial reporting standards and publication requirements among the Member States requiring EU issuers to publish financial reports within four months after the end of the financial year. The reports must remain publicly available for at least five years. [FOOTNOTE 16] The Transparency Directive also prescribes the contents of the annual financial report to include audited financial statements, a management report and a statement by responsible persons within the issuer certifying the accuracy of the financial statements and management report. [FOOTNOTE 17] The Transparency Directive as proposed would have required quarterly reporting, but as adopted it only requires half-yearly reporting. A troubling issue for United States and other non-EU issuers is whether they will be compelled to report financial information according to international financial reporting standards or they will be allowed to continue to use U.S. generally accepted accounting principles. This will depend on whether the EU will deem U.S. GAAP “equivalent” to IFRS. [FOOTNOTE 18] CESR has published a draft concept paper with regard to this matter, [FOOTNOTE 19] but the politics of this decision make predictions difficult. MORE TO DO Although much has been accomplished in Europe to implement the FSAP over the past five years, much remains to be done. The numerous directives adopted pursuant to the FSAP still need to be implemented in the 25 countries which make up the EU. Furthermore, when the directives become the law of these countries, the laws will have to be enforced. In addition, since the capital markets are global, securities regulators and supervisors will have to work together more closely and more cooperatively than has been the case in the past in order to achieve true convergence of disclosure regulation. [FOOTNOTE 20] As long as securities regulators are more attuned to the politics and economic developments in their own countries, rather than developments in the global marketplace, convergence of disclosure policy will remain a distant goal. Roberta S. Karmel is Centennial Professor of Law and chairwoman of the steering committee of the Center for the Study of International Business Law at Brooklyn Law School. She is a former Securities and Exchange Commission commissioner. Nima Ashok, a Brooklyn Law School student, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 See Charlie McCreevy, Press Conference on the Internal Market Strategy Implementation – Scoreboard (Jan. 27, 2005). FN2 See Commission Regulation 1606/2002 of 19 July 2002 on the Application of International Accounting Standards, 2002 O.J. (L243) 1. FN3 Council Directive 2003/71, 2003 O.J. (L345) 64. FN4 Council Directive 2004/109, 2004 O.J. (L390) 38. FN5 See Securities Expert Group, Final Report, Financial Action Plan: Progress and Prospects 5, 6 (May 2004). FN6 Manning Gilbert Warren III, “The Harmonization of European Securities Law,” 37 Int’l Law. 211, 219 (2003). FN7 See Financial Services Authority et al., “ The EU Financial Services Action Plan: A Guide 12, 13” (July 2003). FN8 See Eilis Ferran, “Building an EU Securities Market,” ch. 5 (2005). FN9 Council Directive 2003/71, art. 2(1)(d), 2003 O.J. (L345) 64, 69. FN10 Id. at art. 2. FN11 Id. at arts. 1(2) (h), 3(2)(d). FN12 See Ferran, note 8, supra. FN13 International Disclosure Standards, Securities Act Release No. 7745, 64 Fed. Reg. 53900 (Oct. 5, 1999). This form applies to foreign issuers in the SEC disclosure regime. The SEC believed that its requirements for U.S. issuers exceeded IOSCO’s international standards. FN14 See Ferran, note 8, supra. FN15 Council Directive 2003/71, preamble (37), 2003 O.J. (L345) 64, 67. FN16 Council Directive 2004/109, art. 4(1), 2004 O.J. (L390) 38,44. FN17 Id. at art. 4(2). FN18 Id. at art. 23(4). FN19 Committee of European Securities Regulators, “ Concept Paper on Equivalence of Certain Third Country GAAP and on Description of Certain Third Countries Mechanisms of Enforcement of Financial Information,” (October 2004). FN20 See Alexander Schaub, Address at the Euro Symposium, (Nov. 11, 2004).

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