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Survey on the Effect of the Investment Services Directive on the Regulation of Firms Established Outside the European Economic Area
(originally published May 14, 1998)
The information provided in this document is a summary of the responses submitted by various European regulatory authorities to a survey prepared by staff of the Office of International Affairs. The information provided has not been reviewed or approved by the Commodity Futures Trading Commission ("CFTC"). Accordingly, this document does not represent the views of the CFTC nor should the information be deemed interpretative advice by staff of the CFTC. Although this document is based on information submitted by staff of the participating foreign authorities, it should not be used or relied on for legal purposes.
Survey on the Investment Services Directive
This document is intended as a brief introduction to the effect of the Investment Services Directive on the regulation of firms established outside the European Economic Area. This document is not intended as a legal guide to providing investment services in the European Economic Area. Users of this document are advised to consult the relevant local law of the European Economic Area member for definitive answers to questions on the implementation and application of the Investment Services Directive in such jurisdiction. Jurisdictions for which staff of the CFTC maintains copies of national implementing legislation, as of this survey, are designated with the ‘*’ character.
Background
Investment Services Directive ("ISD"): The ISD is the European Union's ("EU") directive which creates a European Economic Area ("EEA") wide authorization known as the "single passport." The passport enables a firm incorporated in a Member State (i.e., the "home" Member State) to engage in investment services throughout the EEA without separate authorization by the Member State in which the firm does business (i.e., the "host" Member State). Generally, under the passport a firm may establish a branch in another Member State to provide investment services or may conduct investment services into another Member State on a cross-border basis without an establishment in the host state. The passport does not permit an investment firm to establish a subsidiary in another Member State. Moreover, the passport only allows a firm to provide in a host Member State those investment services which have been authorized by that firm's home Member State authority.
Under the ISD, no Member State can treat branches of non-EEA firms (i.e., third country branches) more favorably than branches established by firms according to the European passport.
EEA: The EEA came into existence in 1994 and comprises the 15 Member States of the EU 1 and three additional states in the former European Free Trade Area ("EFTA") 2. Under the Porto treaty, all EEA states which adopt the ISD and Capital Adequacy Directive ("CAD") will be treated as members of the EU for purposes of the Directives. The ISD was required to be implemented by each EU Member State's legislation no later than December 31, 1996. With the exceptions of Liechtenstein, whose national legislation is not expected to go into effect until 1999, and Spain, for which additional legislation is necessary, all jurisdictions in the EEA, including Luxembourg as of April 1998, have implemented the ISD into national legislation. Only investment firms originating from jurisdictions which have fully implemented the ISD and the CAD may invoke the European passport.
Regulation under the ISD: Under the ISD, home Member State authorities remain responsible for prudential requirements, which include fitness, authorization, capital requirements and protection of client assets. Host Member State authorities are responsible for conduct of business rules such as disclosure and sales practices. Minimum capital requirements for firms covered by the ISD are set by the CAD which harmonized capital requirements across the EU Member States. Although conduct of business rules have not been harmonized yet in the EU, the Forum of European Securities Commissions (FESCO) is expected to commence a comparative exercise with a view to identifying areas for possible future harmonization.3
Host Member States may impose on investment firms using the European passport the rules and regulations which, "in the interest of the general good" apply, to the business of these firms carried on in their State.4 According to the ISD, the host Member State must indicate to the firms concerned the conditions, including the rules of conduct, under which, in the interest of the general good, their business must be carried on in the host Member State. The scope of these rules is broader than disclosure and sale practice rules, and can extend to other matters, such as Chinese walls, related to the fair treatment of investors.
Regardless of the choice of entity, the investment firm, wherever registered within the EU, must comply with provisions in the interest of the general good defined in each Member State, in compliance with the Convention of Rome, and with the decisions of the European Court of Justice. Although the responsibility for determining the "general good" requirements is vested in the host country, the ECJ has determined such rules have to comply with basic principles established via a "test of the general good."5 In many Member States, the "general good" requirements reference several regulations established to protect investors and ensure a smooth functioning of financial markets.
The competent authorities in each Member State keep records of all firms which are authorized within its jurisdiction and are authorized to operate in another jurisdiction under the European passport. The competent authorities in each Member State also keep records of all firms which are licensed by other Member States but have been permitted to operate within its jurisdiction pursuant to the European passport. There is no EU-wide register of authorized firms.
Previously, the EU Commission required notification when non-EU firms established branches within the EU. However, this is no longer a requirement under recent World Trade Organization agreements.
Investment services: The ISD applies to all investment firms established in the EEA, whose regular occupation or business is considered to be a core investment service, as set forth in the Annex to the ISD:
1. reception and transmission of orders in relation to one or more "financial instruments" (as defined below), and bringing two or more investors into contact to carry out a transaction in relation to a financial instrument;
2. execution of such orders other than for an investment firm's "own account";
3. dealing in any financial instrument for an investment firm's "own account," including market making and principal dealing;
4. managing portfolios of investments in financial instruments on a discriminatory [discretionary], client-by-client basis; and
5. underwriting in respect of issues of any financial instruments and/or the placing of such issues.
"Financial instruments" are generally defined as:
1. transferable securities; e.g., shares in companies and other equivalent securities, bonds and other forms of securitized debt, which are negotiable on the capital market, and any other securities normally dealt in giving the right to acquire any such financial instruments giving rise to a cash settlement, excluding instruments of payment;
2. units in collective undertakings;
3. money-market instruments;
4. financial futures contracts;
5. forward interest-rate agreements;
6. interest-rate, currency and equity swaps; and
7. options to acquire or dispose of any of the above.
A firm solely providing non-core investment services is not an investment firm, and will not be eligible for an ISD passport. Non-core investment services consist of:
1. safekeeping and administration in relation to one or more financial instruments;
2. safe custody services;
3. granting credits or loans to an investor to allow him to carry out a transaction in a financial instrument where the firm granting the credit or loan is involved in the transaction;
4. advice to undertakings on capital structure, industrial strategy and related matters and advice and service relating to mergers and the purchase of undertakings.
5. services related to underwriting.
6. investment advice concerning one or more financial instruments
7. foreign-exchange services where these are connected with the provision of "investment services."
The fact that non-core services may be covered by the ISD passport does not affect the need for a non-ISD firm to seek authorization when those services fall within the scope of the Act.
Derivatives activity: Commodity derivatives are not considered financial instruments according to the ISD. Consequently, the ISD does not apply to investment firms which restrict their business solely to commodities or commodity derivatives, and these firms cannot benefit from the European passport. Financial futures do, however, constitute financial instruments.
Investment advice: Unlike portfolio management, investment advice also is not an investment service under the ISD. Therefore, whether authorization is required for firms solely providing investment advice is determined according to the law of the Member State where such services are provided.
Responses to Survey Scenarios
U.S. entity with subsidiaries or affiliates established w/in jurisdiction 6
Authorization: All jurisdictions require that subsidiaries, affiliates or branches of U.S. companies located within their jurisdiction be authorized by the appropriate authority in order to offer to or to solicit customers for investment services. Currently, however, Spain does not allow branches of companies incorporated outside of Spain to operate in its jurisdiction.
Requirements
Authorization requirements generally address, among other things, minimum capital, fitness and properness of the management and organizational structure. In the case of branches, separate branch capital may be required (e.g., Sweden) or the EU Member may defer to U.S. requirements (e.g., U.K.).
European passport: All jurisdictions responded that investment firms incorporated under their local law (i.e., subsidiaries or affiliates of U.S. firms within their jurisdiction) may invoke the European passport and establish a branch in another Member State or offer cross-border investment services into another Member State. The subsidiary must actually be doing business in the EU and not just from the U.S. Moreover, a branch of a U.S. firm located in the EU may not take advantage of the European passport nor does the passport permit an EU firm to establish a subsidiary in another EU state without separate authorization.
Requirements
In each case, the investment firm must notify its home Member State authority of its intention to provide cross-border investment services or to establish a branch in another Member State under the European passport. The home Member State authority will in turn provide this information to the host Member State authority and may refuse such branching if it does not believe the firm has the necessary financial or managerial capability.
Some jurisdictions condition provision of cross-border services to activities which are "in the public interest." Generally, the laws we have reviewed do not make explicit what these activities may be.
U.S. entity with subsidiaries or affiliates established in another Member State
European passport: In general, jurisdictions responded that if the subsidiary or affiliate of a U.S. firm is authorized by the competent authority of another Member State, such entity may establish a branch or conduct cross-border investment services activities into their jurisdiction under the European passport. Currently, however, Spain does not allow branches of companies incorporated outside of Spain to be established in its jurisdiction, notwithstanding the European passport.
Requirements
The firm must notify its home Member State authority of its intention to provide cross-border investment services or to establish a branch in another Member State under the European passport. With respect to a branch, within three months, the home Member State authority will provide this information to the host Member State authority, or question the applicant firm about the adequacy of its financial condition to branch.
The host Member State has two months to review any received information and issue conditions to the firm proposing the branch. If no statement from the host Member State is received, the branch is free to commence business. With respect to the "freedom to provide services," the time frame for notifying the host Member State and commencing cross-border services is one month.
Some jurisdictions condition provision of cross-border services to activities which are "in the public interest." Generally, the laws we have reviewed do not make explicit how this language would limit permitted activities.
U.S. entity not located in any Member State but conducting investment services business in the EU
U.S. entities which are not located in one of the EU Member States may only conduct investment services in the EU according to the law of the Member State in which they operate.
Norway, Portugal and Spain responded that a U.S. entity may not conduct business without a permanent presence or continuing contacts with that Member State and an authorization from the Member State authorities. In France, the 1885 French Law allows for third country firms, recognized in compliance with Section 18, to provide business services in France without being registered within the EU. This is typified by U.S. futures commission merchants operating under the U.S. Commodity Futures Trading Commission-Commission des Opérations de Bourse Mutual Recognition Memorandum of Understanding.
Austria, Finland and the Netherlands allow firms located outside the EU to provide investment services in their jurisdictions so long as such firms obtain licenses.
Denmark, Ireland, Sweden and the U.K. stated that the U.S. entity may conduct investment services business in their jurisdiction without authorization, depending on the type of activity undertaken and/or the type of customer solicited and the extent and type of presence in their jurisdiction. If investment business is fully conducted from offshore with professional customers, these jurisdictions may not require authorization. In Belgium, a non-EU firm may, without soliciting the public, provide investment services on condition that it notifies the competent authority in advance.
Regulatory distinctions based on the nature of the customer
The requirement that firms consider distinctions based on the nature of the customer is generally imposed by a jurisdiction's conduct of business rules. This requirement is less commonly contained in a jurisdiction's authorization rules.
Some jurisdictions responded that their legislation does not require firms to take into account the nature of the customer. Other jurisdictions permit firms more flexibility or opportunity to deal with professional investors.
AUSTRIA
Applicable law / Responsible authorities
Austria has implemented the ISD. Implementation of the ISD is the responsibility of two authorities: the Ministry of Finance ("MOF") and the Austrian Securities Authority ("ASA"). The MOF is the competent authority for legislation.
The MOF licenses firms that conduct investment business as a banking activity within the scope of a banking license (e.g., credit institutions). Banking licenses are issued pursuant to the Banking Act (Bankwesengesetz), and because banks are considered "universal," they are automatically authorized to provide investment services.
The ASA licenses non-bank investment firms (e.g., investment service providers or counsellors) pursuant to the Securities Supervisory Act (Wertpapieraufsichtsgesetz).
U.S. entity with subsidiaries or affiliates established within jurisdiction
The subsidiary or affiliate of a U.S. entity conducting investment business from within Austria must register either as a credit institution under the Banking Act or, if a non-credit institution, as an investment services provider under the ASA. An Austrian firm may take advantage of the European passport subject to notification of ASA or MOF.
Requirements
Credit Institution: Credit institutions are licensed by the MOF and must show, among other things, that they are a stock corporation, cooperative or a savings bank; persons holding qualifying positions are subject to fitness and properness criteria; initial capital is at least 70 million Austrian schillings; and managers are subject to professional qualification and trustworthiness criteria. While such entities are licensed by MOF, ASA supervises compliance with notification duties, prudential rules and organizational and recording duties.
Non-credit institutions: Non-bank investment service providers must apply for a license with the ASA. Licensing requirements are similar to those for credit institutions except that the initial capital has to be at least 650,000 Austrian schillings if the entity only offers brokerage and portfolio advice and 1,750,000 Austrian schillings if the entity also offers administration of client money. ASA supervises compliance with notification duties, prudential rules, organizational and recording duties and accountancy. ASA may impose fines on non-credit institutions.
U.S. entity with subsidiaries or affiliates established in another Member State
Under the European passport, the subsidiary or affiliate of a U.S. entity located in another Member State may establish a branch in Austria to conduct investment services or may conduct cross-border investment services activities to the extent such activity is permitted by the home Member State without separate authorization.
Requirements
The home Member State must authorize the subsidiary or affiliate to provide investment services in Austria via the European passport. ASA supervises these entities with respect to conduct of business.
U.S. entity not located in any Member State but conducting investment services business in the EU
Such U.S. entity is considered an "investment firm" and must be licensed.
Requirements
The license must be granted by ASA if the entity only provides brokerage services. The provision of additional financial services would require a banking license from MOF.
Specific procedures applicable to offering or advising with respect to futures and commodity options
The requirement concerning the amount of the initial capital of the investment service providers could be different.
Special procedures applicable to U.S. entities conducting investment services business
No special procedures.
Regulatory distinctions based on the nature of the customer
All bank and non-bank investment service providers must take into account the professional nature of the person for whom the service is provided.
BELGIUM*
Applicable law / Responsible authorities
Belgium has implemented the ISD. The Law of April 6, 1995 ("Law") on secondary markets, the legal status and supervision of investment firms and intermediaries and investment advisors and the Royal Decree of December 20, 1995 on foreign investment firms ("Royal Decree") have incorporated the ISD into Belgian legislation.
The Royal Decree governs the legal status and supervision of the operation of branches and the provision of investment services in Belgium by: (1) investment firms governed by the law of another EU Member State and (2) investment firms governed by the law of another non-EU Member State.
The Banking and Finance Commission ("BFC") administers these laws.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: A subsidiary must be authorized by the BFC as either a stockbroking firm, a portfolio management company or a financial instruments broking firm. Investment firms incorporated under Belgian law may invoke the European passport under the ISD and establish a branch in another Member State to conduct investment services or may conduct cross-border investment services activities without separate authorization.
Requirements
Authorization requirements are established by Articles 57-65 of the Law and relate to capital and fitness. Operational requirements are established by Articles 66-91 of the Law. In accordance with the European Directives, the BFC imposes ratios governing own funds and risk concentration. In accordance with the ISD, the Law has also laid down conduct of business rules including, among other things, due care, diligence and acting in the client's interest. Investment firms may not receive deposits; only stockbroking firms may receive clients' deposits which are intended to be used to purchase financial instruments or are awaiting repayment.
To invoke the European passport, a Belgian firm must notify the BFC of the activities it wishes to carry out in another Member State by way of a branch or cross-border services. The firm remains subject to the supervision of the BFC.
• Branch: A branch of a U.S. entity is considered an independent entity (i.e., as if it were a subsidiary). The same authorization rules, operating criteria, conduct of business rules and BFC supervision which govern incorporated firms also apply to branches. Additional requirements may apply if the obligations of the branch are not covered by an investor protection scheme equivalent to that under Belgian law. A branch of a U.S. entity may not benefit from the European passport.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: A subsidiary of a U.S. entity established in another Member State may offer investment services in Belgium through the European passport by establishing a branch in Belgium or by providing cross-border services without separate authorization.
Requirements
The subsidiary may establish a branch in Belgium provided its home Member State authority has submitted the file provided for in the ISD. A registration (i.e. not an authorization) of the branch by the BFC takes place. In order for the subsidiary to provide investment services in Belgium on a cross-border basis, the subsidiary must notify its home Member State authority which will in turn notify the BFC. Prudential supervision lies with the home Member State authority.
• Branch: A branch of a U.S. entity established in another Member State may not benefit from the European passport.
U.S. entity not located in any Member State but conducting investment services business in the EU
A U.S. firm may, without soliciting the public, provide services in Belgium, upon condition that such firm notify the competent authority in Belgium in advance.
Special procedures with respect to investment advice provided by intermediaries other than authorized banks or investment firms
Unlike portfolio management, investment advice in Belgium is not an investment service under the ISD. A Belgian investment advisor cannot dispose of client assets. Also, specialized investment advice companies may not invoke the European passport.
The Law regulates investment advice only to the extent that the service is offered to the public. Investment advisors not established in Belgium may not solicit the public in Belgium. Investment advisors only soliciting professional clients are not covered by the Law.
Requirements
An investment advice company wishing to establish in Belgium must be authorized by the BFC. A foreign investment advice company may set up a branch in Belgium provided it is subject in its home country to an equivalent set of provisions as a Belgian investment advisor.
Specific procedures applicable to offering or advising with respect to futures and commodity options
Specific legislation deals with the activities of and the regulations applicable to professional intermediaries in commodities trading. Royal Decree 72 of 30 November 1939 prohibits these intermediaries from accepting orders from customers as brokers, agents or otherwise, with respect to forward trading in commodities, unless such intermediaries have been duly authorized. New regulations can be undertaken on the basis of the Law of 6 April 1995.
Special procedures applicable to U.S. entities conducting investment services business
No special procedures.
Regulatory distinctions based on the nature of the customer
No distinctions are made with respect to authorizations except for firms providing investment advice. However, rules of conduct are provided, which take into account the professional knowledge of the clients.
DENMARK*
Applicable law / Responsible authorities
Denmark has implemented the ISD. The ISD was implemented by the Investment Companies Act ("Act") and the Securities Trading etc Act. The ISD articles that deal with investment firms were implemented by the Act except for ISD article 10 and 11 which were implemented by the Securities Trading etc Act. The Act applies to investment companies, including stockbroker companies.
The Finanstilsynet ("FSA") is the authority with supervisory responsibilities under the Act.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: Subsidiaries of U.S. entities are required to obtain authorization with the FSA in order to carry on investment business in Denmark. Such firms may take advantage of the European passport and establish a branch or conduct cross-border investment services activities into another Member State without separate authorization.
Requirements
The authorization requirements for U.S. investment companies and branches situated in Denmark may be found in Part 3 and Part 2 of the Act. Applications for authorization must provide information on, among other things, the types of business, organizational structure, fitness of management or the Board and qualified shareholders. Managing directors; deputy directors; assistant directors and persons of equal status; branch managers; other executive officers in charge of securities trading, derivatives trading or forex trading; and company auditors cannot participate in speculative transactions for their own account or in transactions covered by their authorization through another securities dealer. Capital requirements are found in Part 2 of the Act.
An investment company authorized in Denmark and intending to establish a branch or conduct cross-border investment services activities in another Member State under the European passport must inform the FSA. The FSA will forward the information to the supervisory authorities in the host Member State. The FSA may refuse to forward the information to the host Member State if there is reason to doubt that the administrative structure and financial situation of the investment company provide a safe basis for the intended branch.
• Branch: Branches of U.S. entities are required to obtain authorization with the FSA in order to carry on investment business in Denmark.
Requirements
The authorization requirements for branches of U.S. entities situated in Denmark may be found in Part 2 of the Executive Order on Branches of Investment Companies having their Registered Office in a Country Outside the European Union or EEA. These authorization requirements are the same as those for subsidiaries.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: Subsidiaries of U.S. entities authorized in another Member State may take advantage of the European passport and establish a branch in Denmark or conduct cross-border investment services activities into Denmark without separate authorization.
Requirements
These subsidiaries may commence business in Denmark though a branch two months after the FSA is notified by the supervisory authorities in the Member State. In addition, these subsidiaries may commence business in Denmark by way of cross-border services once the FSA has been informed by the supervisory authorities in the home Member State.
• Branch: Branches of U.S. entities located in another Member State may not establish a branch or carry on cross-border investment services into Denmark under the European passport.
U.S. entity not located in any Member State but conducting investment services business in the EU
U.S. entities without a Danish location may conduct investment services business from the U.S. into Denmark on a cross-border basis without authorization. Cross-border services offered from countries outside the EU/EEA are not subject to regulation in Denmark.
Requirements
U.S. entities must conform to the legal and regulatory provisions adopted in the interest of the general good, such as the Danish Marketing Practices Act and the Securities Trading, etc. Act which contain rules of business conduct.
Specific procedures applicable to offering or advising with respect to futures and commodity options.
No specific procedures.
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
The FSA intends to develop an order on rules of conduct that will consider whether and how distinctions based on the nature of the customer should be made.
FINLAND
Applicable law / Responsible authorities
Finland has implemented the ISD. The ISD was implemented by the Act on Investment Firms (579/96), the Act on the Right of a Foreign Investment Firm to Provide Investment Services in Finland (580/96), the Securities Markets Act (459/89) and the Act on Trading in Standardized Options and Futures (772/88).
All investment firms in Finland are subject to the supervision of the Financial Supervision Authority ("FSA").
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: An investment firm established in Finland may provide investment services subject to applicable Finnish law and to the supervision of the FSA.
Requirements
Under the Act of Investment Firms, an investment firm established in Finland must apply for an authorization from the Council of State (Ministry of Finance). The application must contain a sufficient account of the applicant, the most important shareholders of the applicant, the holdings of the shareholders as well as the place of business, the nature of the operations to be carried out as well as the persons in charge of the management of the investment firm. The application must also include information on the reliability, good reputation, experience and other suitability of the shareholders, persons comparable with shareholders and management. The firm must have minimum share capital of 5 million Finnish markka unless it is involved in securities brokerage, asset management or emission arrangement then it must have minimum share capital of 1 million Finnish markka.
Such firm is subject to conduct of business rules in Chapter 4 of the Securities Market Act which include, among other things, due diligence, providing adequate information to clients and acting in the best interest of the client.
• Branch: Under the Act on the Right of a Foreign Investment Firm to Provide Investment Services in Finland, a U.S. entity must apply for an authorization from the Council of State (Ministry of Finance) for a branch (affiliate) to be established in Finland. This firm must show that the operating conditions and management fulfill the requirements set for provision of reliable investment services. A branch is also subject to the conduct of business rules in the Securities Market Act and some regulations and guidelines of the FSA.
Requirements
A U.S. entity whose economic operating conditions and management fulfill the requirements set for the provision of reliable investment services shall be granted the authorization for establishing a branch in Finland.
U.S. entity with subsidiaries or affiliates established in another Member State
A U.S. investment firm authorized in another Member State may establish a branch in Finland or may provide investment services in Finland by way of cross-border services without separate authorization.
Requirements
The appropriate authority of the Member State in which the U.S. investment firm is authorized must provide the FSA with information on the firm's business activity, administration, principal place of business and proposed location in the host country, among other things. The FSA may impose conditions as necessary. The branch may commence business within two months from FSA's receipt of such information.
With regard to cross-border investment services, the appropriate authority of the Member State in which the U.S. investment firm is authorized must provide FSA with information on the investment services which the foreign investment firm intends to provide in Finland. The FSA may issue to the firm any conditions relating to the provision of investment services it deems necessary for the public interest.
U.S. entity not located in any Member State but conducting investment services business in the EU
A U.S. entity located outside the EU may, with a license from the Ministry of Finance, provide investment services in Finland without establishing a subsidiary or branch.
Special procedures applicable to the offering or advising with respect to futures and commodity options
A U.S. entity may offer services in Finland with respect to standardized options and futures. An option exchange may, under the terms determined by the Ministry of Finance, grant the rights of an intermediary or a foreign corporation corresponding to an authorized securities intermediary, which home state is not in the EEA.
Certain principles of the Securities Markets Act (Chapter 4) related to conduct of business also apply to non-standardized derivatives transactions undertaken by a foreign firm. These products may not be offered to retail clients.
Special procedures applicable to U.S. entities conducting investment advisory business
There are no special procedures.
Regulatory distinctions based on the nature of the customer
No distinction exists. However, the Ministry of Finance is drafting an amendment which introduces a difference between professional and non-professional investors. Professional investors would include, for example, banks, investment firms, mutual funds, insurance companies and pension funds.
FRANCE
Applicable law / Responsible authorities
France has implemented the ISD. The ISD was implemented by the Law of July 2, 1996 ("Law"). Under the Law, two types of firms may conduct investment services in France: investment firms (i.e., legal persons whose main activity is to provide investment services) and credit institutions (i.e., legal persons who carry out bank operations as their main activity but which may conduct investment services).
Authorizations are granted either by the Comite des etablissements de credit et des entreprises d'investissement ("CECEI") or by the Commission des Operations de Bourse ("COB") depending on the investment service provided.
U.S. entity with subsidiaries or affiliates established within jurisdiction
A U.S. subsidiary or affiliate located in France must be authorized by the French competent authorities.
Requirements
In order to apply for authorization, a firm should provide fully detailed information on the supervision to which it is subject, the structure of the group to which it belongs and the nature and scope of the authorization that this company has been given.
U.S. entity with subsidiaries or affiliates established in another Member State
A U.S. firm authorized by another Member State and benefiting from the European passport may provide in France the investment services for which it has obtained an authorization, either by the establishment of a branch or by cross-border investment services without separate authorization.
Requirements
The firm notifies its home Member State competent authority that it wishes to operate in France under the European passport by establishing a branch or by cross-border investment services activities. The home Member State competent authority provides the French competent authorities with such notification from the firm. The French authorities inform the firm of the Conduct of Business Rules and of "any other provision in the interest of the general good with which it must comply." There does not appear to be any description in the Law as to what activities meet the "general good" requirement. As noted in the general ISD considerations, however, although the responsibility for determining the "general good" requirements is vested in the host country, the ECJ has determined such rules have to comply with basic principles established via a "test of the general good."
U.S. entity not located in any Member State but conducting investment services business in the EEA
As a general rule, only French investment providers duly authorized by the French competent authorities, and the EEA investment firms authorized in their home Member State and benefiting from the European passport system may provide investment services related to financial instruments in France.
Solicitation, however, is not covered by the ISD. To solicit the French public for investment in a foreign security, futures or other financial product (that is, to provide services without an establishment), the following conditions must be met: the foreign market must be recognized by the Ministry of the Economy; reciprocity must be granted; the foreign entity soliciting must be authorized by the competent authority in its country; and the requirement for authorization in the other country must be equivalent to those in France. These provisions apply only to non-EEA markets. In this connection, the Mutual Recognition Memorandum of Understanding between the COB and Commodity Futures Trading Commission is intended to permit U.S. firms wishing to operate in France to meet these requirements.
Special procedures applicable to the offering or advising with respect to futures and commodity options
Commodity derivatives are outside the scope of the ISD. The Law excludes EEA investment firms which exclusively conduct commodity derivatives business from operating in France under the European passport. However, such business may be carried out by French investment providers. US firms recognized by French authorities are entitled to offer commodities contracts traded on a market recognized by the French Ministry of Finance, without being established or registered in France.
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
There are no explicit distinctions, although consideration is given to the nature of the customer.
GERMANY*
Applicable law / Responsible authorities
Germany has implemented the ISD. The law which fully implemented the ISD in Germany is the so called "Law Implementing EC Directives for the Harmonisation of Regulatory Provisions in the Field of Banking and Securities Supervision as of 22 October 1997, published in the Federal Law Gazette Part 1, page 2518." This law contains amendments to the Banking Act (i.e. the sixth amendment to the German Banking Act) and amendments to the Securities Trading Act. An "Accompanying Law" has been passed to amend inter alia the Exchange Act and the Stock Corporation Act.
The Bundesaufsichtsamt fur das Kreditwesen (Federal Banking Supervisory Office) ("BAKred")is the competent authority in Germany for all licensing and passporting matters in Germany. The Bundesaufsichtsamt fur den Wertpapierhandel (Federal Securities Supervisory Office) ("BAWe") is in charge of supervising compliance of these firms with the organizational requirements and the rules of conduct.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: German subsidiaries of U.S. entities must obtain a license from the BAKred and comply with the laws of Germany like any other German company. Subsidiaries incorporated under German law and having a registered office in Germany may take advantage of the EU passport and establish branches or provide cross-border investment services according to the relevant provisions (notification procedure) in other Member States without separate authorization.
Requirements
A license from the BAKred requires proof of, among other things, compliance with the requirements of the Capital Adequacy and Solvency Ratio Directives, good standing and professional qualifications of the firm's proprietors and designated managers; scheduled organizational structure with particular emphasis on internal control procedures; and information about qualifying holdings in the firm.
Notification of the opening of a branch in another Member State under the European passport must include, among other things, the name of the member State where the branch will be located together with its address for service of process; a business plan regarding the organizational structure and the type of investment business the branch will conduct; and the name of the branch manager.
• Branch: Branches of U.S. entities granted German banking licenses or investment services licenses cannot take advantage of the EU passport system because they are not independent legal entities and as such not fully licensed and supervised according to German Laws.
Requirements
A license from the BAKred requires proof of, among other things, compliance with the requirements of the Capital Adequacy and Solvency Ratio Directives, good standing and professional qualifications of the firm's proprietors and designated managers; scheduled organizational structure with particular emphasis on internal control procedures; and information about qualifying holdings in the firm.
U.S. entity with subsidiaries or affiliates established in another Member State
Subsidiaries of U.S. entities located and incorporated in other EU Member States which are authorized as banks or investment firms in the relevant other EU Member State(s) may render cross-border investment services into or establish branches in Germany without separate authorization after having complied with the relevant notification procedure.
Requirements
As compliance is a matter of home state supervision, the U.S. subsidiaries established in EU Member States according to their national law have to comply with the compliance rules of the EU Member States where they are incorporated. However, if they render securities services on a cross-border basis to customers located in Germany, i.e. if they conduct securities services business in Germany, they must comply with the German rules of conduct (found in Part 5 of the German Securities Trading Act (Wertpapierhandelsgesetz)) in regard to this business in Germany. If applicable, the reporting requirements found in Section 9 of the German Securities Trading Act must be met.
U.S. entity not located in any Member State but conducting investment services business in the EU
U.S. entities which are not located in one of the EU Member States may conduct investment services in an EU Member State if so authorized by the supervisory authorities of such EU Member State. This authorization is, however, only valid for this particular EU Member State, and passporting into other EU Member States is not possible.
Special procedures applicable to the offering or advising with respect to futures and commodity options
Special rules apply to derivative transactions that are regarded as exchange forward transactions. Exchange forward transactions include, among others, option transactions and financial futures. These are regulated by the Exchange Act and the Civil Code. Regulations mainly deal with the speculative aspects of such transactions and the protection of the individual and render the transactions unenforceable if they are not complied with.
Special procedures applicable to U.S. entities conducting investment advisory business
If the advisory business is conducted with the managing of portfolios (see Annex to the ISD, Section A no.3) it is a core-service of the ISD and as such a regulated business. Furthermore, if an advisor enters into a civil agreement with its customer, i.e. if this agreement is governed by Germany law, the advisor has to meet the civil requirements relating to such contracts.
Regulatory distinctions based on the nature of the customer
Section 31, paragraph 2 of the German Securities Trading Act provides that rules of conduct take account the nature of the customer. Under this section, securities services enterprises are required to act in the interest of their customers with the necessary expertise, care and soundness, and to provide all useful information to their customers.
GREECE*
Applicable law / Responsible authorities
Greece has implemented the ISD. Greek Law n.2396/96 enacted the ISD into Greek legislation.
The Capital Market Committee ("CMC") is the authority which supervises investment firms in Greece. A credit institution which operates in general as an investment firm must be authorized by the Bank of Greece ("Bank").
U.S. entity with subsidiaries or affiliates established within jurisdiction
A firm which regularly provides investment services to third parties on a professional basis in Greece must be authorized by the competent Greek authority. A firm authorized in Greece may provide investment services business under the European passport by establishing a branch outside Greece or by cross-border investment services without separate authorization.
Requirements
In examining an application for authorization, the CMC examines, among other things the organization and structure of the firm; its technological and financial means; the reliability, the experience, the professionalism and the integrity of the persons managing the company; and the suitability of the shareholders with a qualifying holding in order to ensure the efficient management of the firm. The CMC's authorization to the investment firm will list the core and non-core services that the company will be able to provide.
An investment firm wishing to establish a branch outside Greece under the European passport must seek approval by notifying the CMC and indicating, among other things, the Member State in which it plans to establish a branch, branch managers and program of operations. With respect to cross-border services, the firm must also seek approval and provide notification to the CMC. The CMC may refuse permission to a branch if it does not consider the applicant firm's administrative structure or financial situation to be adequate.
If the firm is a credit institution, the required notification for activity under the European passport must be provided to the Bank.
U.S. entity with subsidiaries or affiliates established in another Member State
An investment firm established and authorized in another Member State may establish a branch in Greece or may provide investment services in Greece on a cross-border basis under the European passport without separate authorization.
Requirements
The home Member State authorities must notify the CMC of an investment firm's intention to establish a branch in Greece and indicate, among other things, branch managers and program of operations. Branches must comply with the rules of general interest and the rules of conduct in Greek law. With respect to cross-border services, the home Member State authorities must also provide notification to the CMC that such investment firm wishes to operate in Greece without a branch and provide "the necessary particulars and information to ensure their sufficient monitoring.".
If the firm is a credit institution, the required notification for activities under the European passport must be given to the Bank.
U.S. entity not located in any Member State but conducting investment services business in the EU
[It appears that if investment services business is offered, the firm must be authorized by the competent Greek authorities.]
Specific procedures applicable to offering or advising with respect to futures and commodity options
[No specific procedures.]
Special procedures applicable to U.S. entities conducting investment advisory business
[No special procedures.]
Regulatory distinctions based on the nature of the customer
[No distinctions.]
Other rules
Over the counter transactions in securities listed on Athens Stock Exchange ("ASE") are prohibited. If the investment firm is authorized to trade over the counter securities listed on regulated markets in their home Member States, it must provide, among other things a prospectus and the last two interim financial reports required to be published by companies issuing these securities.
ASE members located outside Greece may branch into Greece or operate by representative under specified conditions. If such members are legally established in Greece (by branch or otherwise) they must 1) participate in the compensation scheme covering stock exchange principals or 2) be insured against failure to comply with their contract to the same extent as provided by ASE members' guarantee fund.
ICELAND*
Applicable law / Responsible authorities
Iceland has implemented the ISD. Iceland is a party to the European Economic Area Agreement and as such has adapted its legislation to conform with the directives and regulations of the EU, including the ISD.
The legal framework in which Iceland's financial institutions operate is based on EU directives which automatically apply under Iceland's membership of the EEA. Icelandic financial institutions are obliged to meet the same security provisions as EU companies, including capital adequacy of banks and securities houses.
The Central Bank of Iceland ("Bank") supervises almost all financial institutions in Iceland through its Bank Inspectorate.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Credit institution: The operations of a credit institution may not commence unless an operating license has been granted by the Minister of Commerce. Credit institutions which are licensed may operate branches in another EEA country or provide services in another EEA country on a cross-border basis without separate authorization under the European passport.
Requirements
Applications shall include the articles of association of the credit institution; a description of operations setting out, inter alia, the types of business envisaged and the organizational structure of the credit institution; information on the founders; share capital; the size of each shareholder's holding. Before processing an application for an operating license, the Minister shall consult with the Bank Inspectorate.
The credit institution must notify the Bank Inspectorate if it wishes to operate branches in another EEA country or provide cross-border investment services pursuant to the European passport. If the firm is establishing a branch, such notification must include information on, among other things, the country in which the branch will be established; a description of the branch's structures and proposed activities in Iceland; address of the branch; names of branch managers.
• Securities undertakings: The firm must fulfill the requirements of the Act on Securities Transactions and obtain an operating license from the Minister of Commerce. Securities firms which are licensed may operate branches in another EEA country or provide services in another EEA country on a cross-border basis without separate authorization under the European passport.
Requirements
Applications shall include the articles of association of the credit institution; a description of operations setting out, inter alia, the types of business envisaged and the organizational structure of the credit institution; information on the founders and qualifying shareholders; and confirmation of the amount of paid-in share capital. Before processing an application for an operating license, the Minister shall consult with the Bank Inspectorate.
The firm must notify the Bank Inspectorate if it wishes to operate branches in another EEA country or provide cross-border investment services pursuant to the European passport. If establishing a branch, the firm must provide information on, among other things, the state in which it is establishing a branch; description of the branch structure; address of the branch; and names of branch managers.
U.S. entity with subsidiaries or affiliates established in another Member State
• Credit institutions: Foreign credit institutions based within the EEA and holding operating licenses from the competent authorities in those countries may establish branches in Iceland or may provide services in Iceland on a cross-border basis under the European passport without separate authorization.
Requirements
The Bank Inspectorate must receive notification from the competent authorities in the home EEA country that the credit institution wishes to take advantage of the European passport. A branch may provide any of the services covered by the Act on Credit Institutions other than Commercial Banks and Savings Banks provided such institutions are authorized to provide such services in their home countries. An institution may provide on a cross-border basis any of the services covered by the Article 8 of the Act on Credit Institutions other than Commercial Banks and Savings Banks provided the authorities of such institutions confirm that the operating licenses include such services.
• Securities undertakings: Foreign undertakings established in and holding licenses in states within the EEA may establish branches in Iceland or may provide services in Iceland on a cross-border basis under the European passport without separate authorization.
Requirements
The Bank Inspectorate must receive notification from the competent authorities in the home EEA country that the undertaking wishes to take advantage of the European passport. Such notification must include information on, among other things, a description of the firm's structures and proposed activities in Iceland, confirmation that the proposed activities are permitted in the home state; address of the branch; names of managers; and details of any compensation scheme intended to protect the branch's customers.
Authorized securities undertakings may provide any of the services covered by the Act on Securities Transactions provided such firms are authorized to provide such services in their home countries.
U.S. entity not located in any Member State but conducting investment services business in the EU
• Credit Institutions: Authorization for foreign credit institutions in Iceland which are not based in an EEA country shall be subject to rules set by the Minister of Commerce after he receives a proposal from the Bank Inspectorate.
• Securities undertakings: The Minister of Commerce, may authorized an undertaking engaged in securities services established in a state outside the EEA to establish a branch in Iceland or provide services in Iceland on a cross-border basis.
Requirements
The Bank Inspectorate must submit a proposal to the Minister of Commerce recommending authorization. A condition of such authorization is that the firm holds a license to engage in similar services in its home state as it intends to engage in Iceland and that its home state operations are subject to supervision.
Specific procedures applicable to offering or advising with respect to futures and commodity options
[No specific procedures.]
Special procedures applicable to U.S. entities conducting investment advisory business
[No special procedures.]
Regulatory distinctions based on the nature of the customer
Undertakings engaged in securities services must take into account the respective customers' knowledge of the subject and provide detailed information on the various options available.
IRELAND*
Applicable law / Responsible authorities
Ireland has implemented the ISD. The Investment Intermediaries Act, 1995 ("IIA") and the Stock Exchange Act, 1995 ("SEA") together transpose the obligations arising from the ISD into Irish law.
The Central Bank of Ireland ("Bank") is the competent authority responsible for the authorization and supervision of investment business firms in Ireland.
U.S. entity with subsidiaries or affiliates established within jurisdiction
A subsidiary or affiliate of a U.S. firm must be authorized under the IIA in order to provide investment services activities in Ireland. An investment firm authorized in Ireland may conduct investment business in any other Member State through the establishment of a branch or on a cross border basis, without the requirement for further authorization. This right is commonly referred to as the "single passport."
Requirements
A firm established in Ireland and providing investment services is required to be authorized under Section 10 of the IIA. A proposed investment business firm must provide the Bank with information on the proposed operation, including details on the company's legal structure, capital, directors and managers and organization structure.
An investment firm wishing to become a member of the Irish Stock Exchange requires authorization pursuant to Section 18 of the SEA.
An authorized investment firm wishing to establish a branch outside Ireland under the single passport must comply with certain notification requirements involving both the home and host competent authorities. The investment firm must provide information including details of the Member State in which it plans to establish a branch, a program of operations and the names of those responsible for the management of the branch.
The prudential requirements of the ISD are the responsibility of the home Member State (i.e. the Member State in which the entity is authorized), and the conduct of business rules are the responsibility of the host Member State (i.e. the Member State in which the investment service is provided).
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: A subsidiary or affiliate of a U.S. entity authorized in another Member State in accordance with the provisions of the ISD may conduct investment business in Ireland through the establishment of a branch or on a cross-border basis without separate authorization from the Irish authorities.
The passporting provisions of the ISD do not extend to firms establishing subsidiaries in other Member States as these would be subject to local authorization in the Member State in question.
If the ISD has not been implemented in the other Member State, a firm from that Member State may not avail of the single passport.
Requirements
In order to take advantage of the single passport, the investment firm must comply with certain notification requirements involving both the home and host competent authorities. These notification requirements are found in Section 12 of the IIA.
• Branch: A branch of a U.S. entity may not avail of the single passport.
U.S. entity not located in any Member State but conducting investment services business in the EU
Generally, such U.S. entity would require an authorization under the IIA to conduct investment business in Ireland. However, the entity may be exempted from the authorization requirement.
Requirements
Section 9(2) of the IIA contains an exemption from authorization for an entity providing investment services in Ireland if the entity does not have a physical presence in the State and provided that it is not providing investment services to individuals.
Special procedures applicable to the offering or advising with respect to futures and commodity options
Unlike derivative contracts based on financial instruments and the financial instruments themselves, commodities and commodity derivatives are not investment instruments for the purposes of the ISD and , therefore, firms providing services in these instruments cannot avail of the passporting provisions of the ISD. Such products are, however included in the definition of "investment instruments" in the IIA and, therefore, firms providing services relating to these instruments would require authorization unless they can avail of an exemption.
Requirements
A firm providing investment advice or investment services relating to derivative contracts in Ireland would require authorization by the Irish authorities, unless it is 1) exempted under Section 9(2) of the IIA (i.e., the firm has no presence in Ireland and does not deal with individuals) or unless it is specifically excluded from the scope of the Act under Section 2(6).
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
Generally, the IIA does not distinguish between firms on the basis of the nature of the customer to which investment services are provided. However, there are some exceptions, such as Section 9(2) and 2(6) (discussed above). The code of conduct for investment firms drawn up by the Bank requires firms to assess whether or not a client is a professional client and some of the rules in the code reflect this distinction.
The Bank believes this is an evolving area and expects to issue amended versions of some rules in due course.
ITALY
Applicable law / Responsible authorities
Italy has implemented the ISD. In Italy the ISD was implemented by Legislative Decree No. 415/1996.
The Commissione Nazionale per le Societa e la Borsa ("CONSOB") and the Bank of Italy are the relevant supervisory authorities in Italy.
U.S. entity with subsidiaries or affiliates established within jurisdiction
Where a U.S. entity sets up a subsidiary in Italy, fitness and properness of the shareholders, directors and managers is the primary issue. CONSOB may authorize the subsidiary only if it is sure that sound and prudent management is found within the company.
A subsidiary of a U.S. entity authorized in Italy may provide investment services business under the European passport by establishing a branch outside Italy or by cross-border investment services without separate authorization.
Requirements
An investment firm wishing to establish a branch outside Italy under the European passport must notify the Bank of Italy and provide the requisite information. With respect to cross-border services, the firm must also provide notification to the Bank of Italy.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: A subsidiary of a U.S. entity established in another Member State may offer investment services in Italy through the European passport by establishing a branch in Italy or by providing cross-border services without separate authorization provided it is doing real business in the Member State and is not just a shell.
Requirements
The subsidiary of a U.S. entity may establish a branch in Italy provided its home Member State authority gives its approval. In order for the subsidiary to provide investment services in Italy on a cross-border basis, the subsidiary must notify its home Member State authority which will in turn notify the Italian authorities. Prudential supervision lies with the home Member State authority.
• Branch: A branch of a U.S. entity established in another Member State may not benefit from the European passport.
U.S. entity not located in any Member State but conducting investment services business in the EU
If the entity is providing general information about an intermediary without offering investment services to a person in Italy, such activity does not constitute "doing investment business" in Italy. Otherwise, the entity must be authorized by the appropriate authority.
Specific procedures applicable to offering or advising with respect to futures and commodity options
The authorization rules that govern investment services in general also apply to services with respect to futures and options.
Special procedures applicable to U.S. entities conducting investment advisory business
If an authorized or required to be authorized broker or intermediary conducts investment advisory business, it is subject to regulation as an ancillary investment services activity. Pure investment advisory activity which does not involve accepting customer funds is unregulated.
Regulatory distinctions based on the nature of the customer
There is no distinction based on the nature of the customer with respect to authorization requirements. Once an entity is authorized, the conduct of business rules for dealing with sophisticated persons are different from those involving retail customers.
LUXEMBOURG*
Applicable law / Responsible authorities
Luxembourg has implemented the ISD. Luxembourg law dated March 12, 1998, modifying the Law of April 5, 1993, has implemented the ISD.
The Institut Monetaire Luxembourgeois ("IML") supervises all Luxembourg domiciled credit institutions and investment firms.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: An investment firm must be authorized by the Minister of Finance after examination by the IML for compliance with the conditions in part 1 chapter 2 of the law of April 5, 1993 on the financial sector (as modified). Luxembourg firms are automatically entitled to take advantage of the European passport to operate in other jurisdictions.
Requirements
An investment firm managing third party funds must be incorporated in the form of a public law institution or in the form of a commercial company. The firm must have minimum capital of 25 million Luxembourg francs. The IML must also be satisfied as to the suitability of the shareholders in order to ensure sound and prudent management of the investment firm. These shareholders and the board of directors must be fit and proper; that is, "have the necessary professional repute." The central administration of the firm must be located in Luxembourg.
The conduct of business rules will apply to all investment firms and credit institutions operating in Luxembourg, irrespective of their place of incorporation. Credit institutions are authorized under the Banking Directives.
• Branch: An investment firm must be authorized by the Minister of Finance after examination by the IML for compliance with the conditions in part 1 chapter 3 of the law of April 5, 1993 on the financial sector (as modified).
Requirements
Branches of non-EU investment firms are subject to the same authorization requirements as investment firms incorporated in Luxembourg. Branches must have an adequate administrative infrastructure in Luxembourg. Branches must have an endowment capital of at least 5 million Luxembourg francs, but if their activities involve the management of third party funds then the branch must have endowment capital of at least 25 million Luxembourg francs.
U.S. entity with subsidiaries or affiliates established in another Member State
EU investment firms in one Member State are able to obtain a "passport" to establish branches or provide cross-border investment services in another Member State without separate authorization.
Requirements
"EU investment firm" means an entity incorporated under the laws of an EU Member State, the regular occupation of which is the provision of investment services to third parties on a professional basis. The European passport which is limited to certain categories of activity and product, enables EU investment firms to do business throughout the EU, free from host state licensing requirements. However, it does not exempt firms from the application of the host Member State's conduct of business rules.
U.S. entity not located in any Member State but conducting investment services business in the EU
A non EU investment company that intends to approach actively private investors in Luxembourg has to establish a branch in Luxembourg.
Specific procedures applicable to offering or advising with respect to futures and commodity options
A public offering of securities, bonds and other investment products is submitted to legal procedures controlled by the Commission to the Stock Exchanges ("Commissariat aux Bourses").
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
No distinction.
NETHERLANDS*
Applicable law / Responsible authorities
The Netherlands has implemented the ISD. Provisions implementing the ISD may be found in the Act on the Supervision of Securities Trade 1995 ("ASST 1995").
Investment firms (securities institutions) in the Netherlands are supervised by the Securities Board of the Netherlands ("STE").
U.S. entity with subsidiaries or affiliates established within jurisdiction
A U.S. securities institution with an affiliate established in the Netherlands or a securities firm established in the Netherlands which is a subsidiary of a U.S. entity will need a license from the STE on the basis of Section 7 of the ASST 1995.
A firm licensed by the STE may take advantage of the European passport and establish a branch in another EU Member State or provide cross-border investment services into another EU Member State.
Requirements
The firm must comply with the Dutch rules and regulations concerning expertise and integrity; financial guarantees, on a consolidated basis or otherwise; management and establishment of the head office; information to be supplied to the public; guarantees for adequate supervision of compliance with the provisions of the ASST 1995 or regulations thereunder. In the case of a U.S. securities institution offering or performing its services through an affiliate, the STE takes into consideration the supervision of the firm in the U.S.
The following are the equity capital requirements for securities institutions: a) the firm must have equity capital of ECU 35,000 if it introduces clients' orders and holds no client funds and does not trade for itself; b) the firm must have equity capital of ECU 50,000 if in addition to the above it also performs portfolio management services; c) the firm must have equity capital of ECU 125,000 if in addition to the above two activities, it also holds client funds or property; d) the firm must have equity capital of ECU 730,000 in all other cases.
A firm wishing to operate under the European passport must notify the STE of its intention to conduct investment services in other Member States. If the firm is establishing a branch in another Member State under the European passport, the firm must provide to the STE the name of the Member State where it will establish a branch; a program of activities stating the proposed activities and the organizational structure of the branch office; the address of the branch office; and identity of the branch management. If the firm intends to provide investment services in another Member State on a cross-border basis, the firm must provide to the STE the name of the Member State and the activities which the firm will undertake.
U.S. entity with subsidiaries or affiliates established in another Member State
• Affiliate: A U.S. entity with an affiliate in another Member State which is conducting investment services through that affiliate in the Netherlands will need a license on the basis of Section 7 of the ASST 1995.
Requirements
Such firm will have to comply with the Dutch rules and regulations concerning expertise and integrity; financial guarantees, on a consolidated basis or otherwise; management and establishment of the head office; information to be supplied to the public; guarantees for adequate supervision on the compliance with the rules to be laid down by or pursuant to the provisions of the ASST 1995 or regulations based on the ASST 1995.
• Subsidiary: A securities institution established in another EU Member State which is a subsidiary of a U.S. entity must comply with the authorization/licensing requirements of that other EU Member State. Once authorized/licensed, such firm may take advantage of the a European passport and establish a branch in the Netherlands or conduct cross-border investment services into the Netherlands without separate authorization. However, if the EU Member State has not implemented or not fully implemented the ISD or CAD, the securities institution may not take advantage of the European passport to provide investment services activities in the Netherlands.
Requirements
A firm wishing to operate under the European passport must notify its home Member State regulatory authority of the firm's intention to conduct investment services in the Netherlands. The home Member State regulatory authority in turn would notify the STE. If a firm intends to establish a branch in the Netherlands under the European passport, the STE must receive information on the branch's program of activities specifying the proposed activities and the organization structure of the branch office; branch office address; identity of the branch managers; and applicability of a guarantee regulation to the obligations of the branch. If the firm will be providing investment services into the Netherlands on a cross-border basis, the STE must receive a statement of the firm's proposed activities.
If a securities institution providing investment services activities in the Netherlands under the European passport does not fully comply with Dutch rules and regulations, the Minister of Finance may forbid such firm to offer or perform investment services in the Netherlands.
U.S. entity not located in any Member State but conducting investment services business in the EU
A U.S. securities institution which is conducting services on a cross-border basis will need a license from the STE on the basis of Section 7 of the ASST 1995.
Requirements
This firm must comply with the Dutch rules and regulations concerning expertise and integrity; financial guarantees, on a consolidated basis or otherwise; management and establishment of the head office; information to be supplied to the public; guarantees for adequate supervision of compliance with the provisions of the ASST 1995 or regulations thereunder. The STE also takes into consideration the supervision of the firm in the U.S.
Specific procedures applicable to offering or advising with respect to futures and commodity options
[No specific procedures.]
Special procedures applicable to U.S. entities conducting investment advisory business
[No special procedures.]
Regulatory distinctions based on the nature of the customer
Under Article 24 of the Decree on the Supervision of Securities Trade 1995, a firm must take into consideration the financial position, experience and investment objectives of its customers and act in the best interest of its customers. Additionally, the firm is prohibited from supplying incorrect or misleading information to its customers.
NORWAY
Applicable law / Responsible authorities
Norway has implemented the ISD. The ISD was implemented by the Norwegian Act no. 79 of 19 June 1997 on Securities Trading ("STA").
Investment firms in Norway are supervised by the Kredittilsynet (Banking, Insurance and Securities Commission of Norway).
U.S. entity with subsidiaries or affiliates established within jurisdiction
A U.S. subsidiary established in Norway may apply for authorization from the Ministry of Finance. Investment services activity of a U.S. subsidiary in Norway is regulated by the STA to the same extent as a Norwegian undertaking. A company which has authorization to conduct investment services in Norway may also conduct investment business in another Member State under the European passport by opening up a branch or on a cross-border basis without separate authorization.
Requirements:
The authorization procedures are described in chapters 7 and 8 of the STA. A firm applying for authorization in Norway must show, among other things: a registered office and head office in Norway; fitness and experience of persons directing the activity of the firm; sound and prudent management; maintenance of adequate capital. An investment firm that is not a credit institution must have initial capital of at least the equivalent of ECU 730,000 in Norwegian currency. Kredittilsynet may authorize lower starting capital, but not lower than the equivalent of ECU 125,000 in Norwegian currency. Rules on conduct of business are in chapters 2, 8, 9 and 11 of the STA. The regulation of 14 October 1996 relates to investor protection arrangements, such as compensation.
A firm wishing to operate under the European passport must notify Kredittilsynet of its intention to conduct investment services within other Member States. The investment firm if undertaking business on a cross-border basis should provide Kredittilsynet with information on the location of where the firm intends to do business and a program of operations specifying which investment services will be provided. If the firm is establishing a branch in another Member State, it must also provide information on the organizational structure of the branch, the address in the host state from which documents may be obtained and the names of branch management. Kredittilsynet may refuse to allow a firm to establish a branch in another Member State under the European passport if it has reason to doubt the adequacy of the administrative structure or the financial situation of the firm.
U.S. entity with subsidiaries or affiliates established in another Member State
A U.S. subsidiary established in another Member State and authorized to conduct investment business in its home Member State may conduct such business in Norway by establishing a branch or by providing cross-border investment services without separate authorization.
Requirements
The appropriate authorities in the other Member State must notify Kredittilysnet before the investment firm may conduct cross-border investment services activity into Norway. With respect to establishing a branch in Norway, authorities of the other Member State must also notify Kredittilysnet.
After receiving the required notification, Kredittilsynet will inform the firm of the conditions, including the rules of conduct, that apply to pursuit of activity in Norway.
If the U.S. subsidiary established in another Member State wishes to establish a subsidiary in Norway, such subsidiary must obtain authorization from Kredittlysnet via the EU notification procedure after consultation with the authorities in the subsidiary's home Member State. Section 7-9 of the STA specifies the provisions of the STA applicable to passported firms: "The King (Ministry of Finance) may make exceptions . . . where the activity is limited or where the firms' activity is regulated by corresponding provisions laid down by the authorities in the firm's home state."
U.S. entity not located in any Member State but conducting investment services business in the EU
Sections 7-8 and 7-9 address cross border investment services provided by an investment firm with a head office in a non-EU Member State. A firm with its head office in a non-EU Member State may be authorized by the Ministry of Finance to provide investment services in Norway through a branch.
Requirements:
Authorization by the Ministry of Finance may only be given to firms that are authorized to provide investment services and are subject to satisfactory supervision in their home jurisdiction. The Ministry of Finance may make exceptions to authorization where the activity is limited or where the firms' activity is regulated by corresponding provisions laid down by the authorities in the firm's home jurisdiction. Only in special cases may an investment firm with its head office outside the EEA, be authorized to provide services directly from a place of business outside the EEA.
Specific procedures applicable to offering or advising with respect to futures and commodity options
[No specific procedures.]
Special procedures applicable to U.S. entities conducting investment advisory business
[No special procedures.]
Regulatory distinctions based on the nature of the customer
The STA does not in general distinguish between sophisticated, institutional versus retail and public customers.
PORTUGAL
Applicable law / Responsible authorities
Portugal has implemented the ISD. The ISD was implemented by the Decree-Law no 232/96 of the 5th December.
Investment firms in Portugal are supervised by the Comissao do Mercado de Valores Mobiliarios ("CMVM") and the Banco de Portugal.
U.S. entity with subsidiaries or affiliates established within jurisdiction
The establishment in Portugal of an affiliate or subsidiary of a U.S. investment firm is subject to authorization by the Minister of Finance. A company which has authorization to conduct investment services in Portugal may also conduct investment business in another Member State under the European passport by opening up a branch or on a cross-border basis without separate authorization.
Requirements:
An application for authorization in Portugal must set forth, among other things, the type of company; draft of the memorandum and articles of association; prospective accounts; program of operations; and declaration that the amount of capital stock required by law has been deposited with a credit institution.
A Portuguese firm wishing to operate under the European passport must notify the CMVM and Banco de Portugal of its intention to conduct investment services within other Member States. The investment firm should wait for two months or for a communication indicating any conditions before commencing business. The CMVM or the Banco de Portugal may refuse to allow a firm to establish a branch in another Member State under the European passport if it has reason to doubt the adequacy of the administrative structure or the financial situation of the firm.
Whenever providing services in another Member State, an investment firm must comply with the rules of conduct of the host Member State.
U.S. entity with subsidiaries or affiliates established in another Member State
A U.S. subsidiary or affiliate incorporated under the jurisdiction of another Member State and authorized to conduct investment business may conduct such business in Portugal by establishing a branch or by providing cross-border investment services without separate authorization.
U.S. entity not located in any Member State but conducting investment services business in the EU
Portuguese law does not allow investment services in Portugal by an entity of a third country other than through the creation of a subsidiary or affiliate subject to specific authorization. Branches are allowed through a specific authorization by the Minister of Finance.
Specific procedures applicable to offering or advising with respect to futures and commodity options
Authorization is necessary, and firms must comply with domestic rules of conduct.
Special procedures applicable to U.S. entities conducting investment advisory business
Authorization is necessary, and firms must comply with domestic rules of conduct.
Regulatory distinctions based on the nature of the customer
Portuguese law states that in applying rules of conduct, the professional nature of the investor shall be assessed.
SPAIN
Applicable law / Responsible authorities
Spain has not fully implemented the ISD yet. However, though most of the ISD requirements are contained in the Securities Markets Act of 1988 ("Act"), there are still many pending issues to be addressed in a special law in 1998 (in particular, procedures to set up branches of EU investment firms).
Apart from the specific regime applicable to credit institutions, so far, only broker firms and broker-dealer firms are authorized to carry out in Spain investment services activities. Brokers and broker-dealers are authorized by the Ministry of Economy and Finance at the proposal of the Comision Nacional del Mercado de Valores ("CNMV").
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: Presently, Spanish law allows U.S. investment firms to establish only subsidiaries or affiliates in Spain. The fact that a U.S. firm has subsidiaries established either in Spain or any other EU country only grants a passport to the subsidiary and does not grant any right to the U.S. parent firm to provide investment services in Spain. Activities solely involving advisory services have not been subject to specific requirements or authorization.
Requirements
The requirements for authorization are found in article 66 of the Act including, among other things, compliance with the Act; corporate form; minimum capital stock; managers with recognized professional or commercial integrity; and suitable knowledge and experience. In addition, the company must meet capital, liquidity, large exposures reporting, accounting, internal controls and recordkeeping requirements established by Spanish legislation.
• Branch: Spanish law currently does not allow foreign investment firms to establish branches in Spain.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: Subsidiaries of U.S. entities established in other Member States and meeting all the ISD and CAD requirements may provide investment services in Spain but only on a cross-border basis without separate authorization. At this time, such subsidiaries may not establish branches in Spain under the European passport.
• Branch: Branches of U.S. entities established in other Member States may not operate under the European passport in Spain.
U.S. entity not located in any Member State but conducting investment services business in the EU
This U.S. entity may not operate in Spain. Such entity should establish an authorized subsidiary or affiliate in Spain or otherwise acquire a registered broker or broker-dealer.
Special procedures applicable to the offering or advising with respect to futures and commodity options
When firms wish to carry out activities in derivatives markets they must have broker or broker-dealer status.
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
Regulatory distinctions based on the nature of the customer have not been articulated yet.
SWEDEN*
Applicable law / Responsible authorities
Sweden has implemented the ISD. The ISD was implemented in Swedish legislation through an amendment to the Securities Business Act (1991:981) ("Act").
Firms undertaking securities business are required to be licensed by the Finansinspektionen ("FI").
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: A U.S. subsidiary requires an authorization by FI in accordance with the Act in order to conduct investment business in Sweden. A company which has authorization to conduct investment services in Sweden may also conduct investment business in another Member State under the European passport by opening up a branch or on a cross-border basis without separate authorization.
Requirements
The conditions for licensing a firm are found in Chapter 2 of the Act, regulations issued by FI and general guidelines. The FI may grant a license if, among other things, the articles of association are not in conflict with the Act or any other legal statute, the planned operations can be expected to meet the requirements of a sound securities business, and any party owning a qualified holding in the company cannot obstruct the sound development and operations in the company.
An investment company authorized in Sweden and intending to establish a branch or conduct cross-border investment services activities in another Member State under the European passport must inform the FI. The FI will forward the information to the supervisory authorities in the host Member State. The FI may refuse to allow a firm to establish a branch in another Member State if there is a question as to the fitness of the company's administrative structure or the company's financial strength.
• Branch: A branch from a third country also requires an authorization by FI in accordance with the Act in order to conduct investment business in Sweden.
Requirements
A branch is subject to the same procedures under the Act as a subsidiary but is not subject to the same minimum capital requirements.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: A subsidiary of a U.S. entity licensed in another EU Member State in accordance with the ISD is allowed to conduct business in Sweden through a branch or by way of cross-border investment services without separate authorization.
Requirements
The services provided by the subsidiary of the U.S. entity must be covered in its authorization by the other Member State. With regard to establishment of a branch, notification must be sent by the home Member State authority to FI. The firm may conduct business from the branch two months after the FI has received such notification. With regard to cross-border investment services, the firm may offer investment services as soon as the FI has received notification from the home Member State authority.
U.S. entity not located in any Member State but conducting investment services business in the EU
If the purpose of the business only is to market the services in Sweden, no license is required. However, such business must comply with the Swedish Marketing Act. A license is required if a U.S. entity sets up a representative office in Sweden, sets up a branch in Sweden or sends a representative to Sweden on a regular basis to conduct any of the securities business activities listed in Chapter 1 Section 3 of the Act.
Specific procedures applicable to offering or advising with respect to futures and commodity options
No specific procedures.
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
No distinction.
UNITED KINGDOM
Applicable law / Responsible authorities
The U.K. has implemented the ISD. The ISD was implemented in the U.K. through amendments to the Financial Services Act 1986 and Consumer Credit Act 1974.
Investment firms are currently authorized by the Securities and Futures Authority (for firms engaged in primarily brokerage activities) and the Investment Management Regulatory Organisation (for firms engaged in primarily collective investment activities). Subsequent to full implementation of the merger of various regulatory agencies in the U.K., investment firms will be supervised by the Financial Services Authority.
U.S. entity with subsidiaries or affiliates established within jurisdiction
• Subsidiary: A firm which is incorporated, has its head office and is authorized in the U.K. will be entitled to the benefits of the single passport if it conducts core investment services, irrespective of whether it is a subsidiary of a U.S. corporation or part of a U.S. group.
Requirements
The subsidiary of a U.S. entity must be authorized under the Financial Services Act ("Act") to be entitled to carry on investment business in the U.K. The subsidiary must meet all requirements related to authorization, fitness and conduct of business within the U.K.
• Branch: A U.S. investment firm may establish a branch in the U.K. However since such branch fails to qualify as an ISD firm, the branch is not automatically entitled to passport into other EU Member States.
Requirements
A branch of a U.S. entity must be authorized under the Act to be entitled to carry on investment business in the U.K.
U.S. entity with subsidiaries or affiliates established in another Member State
• Subsidiary: A subsidiary of a U.S. entity may conduct core investment services in the U.K. and in other Member States under the European passport without separate authorization.
Requirements
The subsidiary of a U.S. entity must be incorporated and have its head office in a Member State, must be authorized by the home Member State authorities and must notify the home Member State authorities of its intent to branch into other EU Member States.
U.S. entity not located in any Member State but conducting investment services business in the EU
A U.S. firm which does not have a place of business in the U.K. may still conduct investment business with U.K. residents.
Requirements
Such U.S. firm may conduct investment business in the U.K. so long as it does not obtain U.K. customers in breach of the advertising or cold-calling sections in the Act. Advertising and cold-calling are almost free of regulation where the U.K. customers are "ordinary business customers" (e.g., U.K. authorized investment firms and companies over a certain size).
Special procedures applicable to the offering or advising with respect to futures and commodity options
The ISD does not cover commodities or commodity derivatives business and, therefore, a firm incorporated or established in the U.K. is not entitled under the ISD to carry on its commodity business in another EU Member State. The ISD does, however, apply to financial and equity derivatives.
Special procedures applicable to U.S. entities conducting investment advisory business
No special procedures.
Regulatory distinctions based on the nature of the customer
Except for advertising and cold-calling, the nature of the customer involved does not affect the need for authorization.
1 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom.
2 Iceland, Liechtenstein and Norway. Liechtenstein is currently in the process of amending its Banking Act to implement the ISD into national law.
3 FESCO is comprised of the chairs of the securities commissions of the EEA, and has its Secretariat located in Paris. Tommaso Padoa Schioppa, Chairman of the Italian Commissione Nazionale per le Societa e la Borsa ("CONSOB"), is the current Chairman, and Fabrice Demarigny of France is the Secretary General.
4 To facilitate a better understanding of "general good requirements," we have included brief descriptions from several jurisdictions in the appendix to this report. (Appendix 2) [Included only in the paper version of the report.]
5 We have appended relevant extracts the United Kingdom provided from the European Commission Interpretive Communication on Cross-Border Services and the General Good in the Second Banking Directive, which shed some light on the definition of "general good" and "proper conduct of business requirements." (Appendix 1) [Included only in the paper version of the report.]
6 "Established" when referring to a subsidiary or affiliate means a firm that is incorporated within the Member State. "Established" when referring to a branch means a firm that is authorized to do business within the Member State.