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Supervision of securities markets in the Member States of the European Economic Community

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224 pages
Individual country studies
Approximation of legislation
Competition policy
Financial integration - free movement of capital
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COMMISSION OF THE EUROPEAN COMMUNITIES
studi es
Supervision
of the securities markets
in the Member States
of the European Community
REPORTS
ON THE NATIONAL SYSTEMS OF CONTROL
PART II : United Kingdom
Italy
Luxembourg
Netherlands
Annex: USA
COMPETITION - APPROXIMATION OF LEGISLATION SERIES 33 Commission of the European Communities
Supervision
of the securities markets
in the Member States
of the European Community
Reports
on the national systems of control
Part II : United Kingdom
Italy
Luxembourg
Netherlands
Annex: USA
Report on a comparative law study submitted by
Prof. E. Wymeersch
Universitaire Instelling Antwerpen
STUDIES COLLECTION
Competition - Approximation of legislation series No 33
Brussels. 1980 NOTICE TO THE READER
The first volume of this study 'Supervision of the securities markets in the Member
States of the European Community - Reports on the national systems of control :
Belgium, Federal Republic of Germany, Denmark, Ireland, France' was published in
the Competition - Approximation of legislation series (No 32, catalogue number :
CB-NP-79-032-EN-C).
This publication is also available in the following languages :
FR ISBN 92-825-2288-1
NLN 92-825-2289-X
Cataloguing data can be found at the end of this publication
The foil Dwing currency abbrev ations are used in this report:
= BFR Belgische frank / franc beige
DKR Dansk krone =
DM Deutsche Mark =
FF Franc français =
IRL Irish pound =
LIT Lira italiana =
LFR Franc luxembourgeols =
HFL Nederlandse gulden (Hollandse florijn) =
UKL Pound sterling =
USD United States dollar —
Luxembourg : Office for Official Publications of the European Communities, 1981
ISBN 92-825-2290-3
Catalogue number : CB-NP-79-033-EN-C
© ECSC - EEC - EAEC, Brussels · Luxembourg, 1 979
Printed in Luxembourg Chapter VI
Supervision of the securities markets in the United Kingdom
Parti
The primary market
§1. Forms of intervention
167. Interventions relating to the primary securities market can be classified according to
whether they are concerned with legislative or regulatory measures or with rules of a
corporative or self-disciplining nature. The objectives of these interventions are on the
one hand of a socio-economic nature (mainly foreign currency control) and on the
other for the structuring of issues. A characteristic feature of the regulatory system
under examination is that the rules applying to the primary and secondary securities
markets are very much interwoven. Although they market is governed by its
own rules, it is in fact subject to norms prepared by the Council of the Stock Exchange
from the point of view of the secondary market.
The public authorities intervene on the primary market to promote the smooth running
of the capital market and to protect monetary interests. These powers are embodied in
the law and are vested in the Treasury, although for day-to-day purposes they are
transferred to the Bank of England. The latter is not empowered to issue regulations but
in individual cases or in general terms can grant exemptions and permits. Directives
explaining the policy on permits have developed into quasi-statutory instruments.
The economic and monetary measures are contained in the following laws:
1. Borrowing (Control and Guarantees) Act, 1946, which empowers the Treasury to
take regulatory action over all borrowings, in whatever form.
2. The Exchange Control Act, 1947, which makes financial transactions with foreign
countries subject to permit.
3. The Banking and Financial Dealings Act, 1971, which gives the Treasury emergency
powers.
The structure of the primary securities market is determined mainly by the following laws:
4. The Prevention of Fraud (Investments) Act, 1958, which embodies two measures for
the prevention of fraudulent or sharp practice in the investment world, in particular limiting stockbroking — as distinct from independent securities operations -- to
'recognized' stockbrokers who are subject to one or other form of regulation
involving public or corporative supervision, as well as the institution of a monopoly
for the distribution of circulars for securities operations for the benefit of these
brokers. This legislation applies both to the primary and the secondary market.
5. The Companies Acts of 1948. 1967 and 1976. which create the basic pattern for the
issue of shares and bonds, and establish obligations of disclosure, among other
things, by way of a prospectus, when there is a public issue of shares or bonds.
168. Apart from these statutory interventions, mention must be made of the disciplines and
rules of conduct imposed and enforced by the Council of the Stock Exchange and the
standards of conduct accepted in the City of London generally or in certain circles.
These last mentioned standards will be referred to hereafter as 'self-discipline'. These
corporative or self-disciplinary rules are in fact of greater importance than the statutory
ones which essentially create the general framework within which corporative bodies
can take action.
As a corporative body the Stock Exchange authorities exercise control over its
members. Although its activities relate mainly to the secondary market, it makes
admission to the stock market contingent upon the observance of certain standards
relating to the primary market. In this way the Stock Exchange in fact regulates a large
section of they. This regulatory position is recognized by the legislature
itself, which acts only in a supplementary capacity: e.g. with respect to sanctions
(liabilities, penalties), governed by the general rules of law or int of areas outside
the scope of the Stock Exchange (off-the-floor markets). The interventions of the Stock
Exchange relate not only to disclosure, but also impose certain rules of conduct with
respect to disclosure. The Stock Exchange requires the publication of a prospectus
which is more closely adapted to the needs of the investors, more flexibly imposed but
nonetheless not less exacting than the Companies Act prospectus. The Stock Exchange
also imposes periodic disclosure rules on all companies listed on the exchange. With
respect to rules of conduct, the very strict respect of preemptive rights on subsequent
share issues can be mentioned. All these interventions are based on self-regulation
imposed by the Stock Exchange on members, brokers and companies seeking admission.
It is difficult to evaluate the importance which should be ascribed to the above-
mentioned self-discipline. In the United Kingdom it is usual for securities to be issued
by, or at least with the assistance of, an 'issuing house", a merchant banker having
sufficient financial or commercial resources to make a success of the public issue.
Issuing houses are very actively involved with preparations for an issue, not least in
reaching the decision to issue securities, in determining the price, the method and the
cost of raising new capital and in preparing all the formalities and files, including those
for the Stock Exchange. Over the years these institutions have acquired a wealth of
financial, commercial and technical experience of public issues, before the First World
War for foreign governments, now on the Eurobond market. The activities of the
issuing houses in regard to public issues of securities are self-disciplinary: anxious for
their good name and for the success of the issue operations for which they are
responsible, they maintain strict standards as to the quality of the security offered and
as to the information to investors. Each works on its own and the Issuing Houses
Association, by virtue of an informal rule, does not exercise any supervision over its
members; the Association is denied any intervention which might hinder its members or
impose rules of conduct. In the case of take-over bids alone the members have accepted
the code of conduct and the jurisdiction of the Take-over Panel. Mention must be made of the financial press in this context. Perhaps more than in any
other European country, the British press shows a great interest in financial matters
which are examined, discussed and assessed. Shortcomings are publicly censured and,
depending on how serious they are, this may give rise to inquiries by the Stock
Exchange (e.g. in cases of insider trading) or by the Department of Trade. Issue
prospectuses are studied, discussed and, above all, critically assessed by the journalists
of the specialized press.
In recent years this self-regulatory approach in the City of London has been criticized.
The basis of this criticism was not so much the inadequacy of the supervision as the
absence of guiding forces in the financial system other than the market process itself.
Proposals for reform are being studied in two committees.1
In Table 1 an attempt is made to give statistics for issuing activities in the United
Kingdom. It will be noticed that central government is the biggest issuer and gross local
government borrowings are also substantial. The issue of shares is considerable, except
in the crisis years 1973 and 1974, and in any case much greater than issues of bonds.
On the whole these are placed privately, particularly in the non-financial sector. These
data also show that the London merchant bankers are very active on the Euro-issues
market, which has become a more important source of finance for British firms than the
local bond market.
§ 2. Government intervention in the economic and monetary field
1. Control of borrowing — Borrowing (Control and Guarantees) Act, 1946
169. This legislation from the period immediately following the war was intended to direct
the flow of capital to the purposes which were economically and socially the most
desirable. The Treasury is, in general, empowered to regulate any borrowings, by public
or private, British or foreign, organizations, regardless of how the money is borrowed
(e.g. bank loan, capital formation in private limited companies, public issue of shares or
bonds, etc.). Under the Implementing Order of 1958 2 most operations are exempt
under a blanket permission. In the case of operations which are not exempt, applica­
tion for authorization must be made to the Bank of England, to which the Treasury has
delegated this power. When the authorization is given it may be made subject to
conditions relating to time, revocation, etc. The authorization system has ceased to
affect British issues,3 but it can be made effective again by means of an Amending
Implementing Order.
As the regulations stand at present, the authorization system can be summarized as
follows. Foreign government securities are always subject to authorization if they are
issued in the United Kingdom.4 The issue or the offer of securities issued by foreign
local authorities or by foreign companies is not subject ton unless the
securities are payable in sterling as regards either principal or interest. If the securities
are expressed in sterling, authorization is necessary, regardless of the amount of the
1 See also point 205.
; Control of Borrowing Order. 1958. promulgated by the Treasury. The order comes into effect immediately, It must be brought to
the knowledge of Parliament. If no criticism is expressed within 40 days and neither House decides to quash it. the Order has the
force of law·.
' For example, Gower, Modern Company Law. 3rd edition, p. 290: Palmer's Company Law, 22nd edition. Vol. 1, p. 255.
4 S.5. Order 1958.
1 S.8A. (1) (9). Order 1958. Table 1 : The issue of securities in the United Kingdom
in million UKL
1971 1972 1974 1977 1973 1975 1976
I. Government securiiies
1. British Government
gross 5 486 1 570 3513 2 126 7 725 8 338 12 648
net 3 500 95 1 756 1 107 5 684 5 922 9 998
2. Local authorities
gross 622 592 503 661 1001 1060 1 310
net 247 82 -16 30 205 105 237
//. Foreign issuers
i. Bonds: Gross
— public issue 14 9 — — - - -
— private placing 27 10 5 - - - -
Net -12 -34 -33 -59 -51 -76 -42
2. Shares 2 6 4 14 2 - -
III. Companies
I. Shares 252 680 136 120 1 271 1054 789
2. Debentures
2.1. Financial sector
— gross 73 110 31 47 82 29 75
27 27 incl. private placings 30 89 8 8 25
— net 70 105 26 45 62 7 25
2.2. Non-financial sector
272 152 — gross 269 76 20 170 51
incl. private placings 255 223 62 1 124 31 12
— net 214 261 52 -58 50 23 -84
IV. Euro-issue market
1. Issues by residents
— bonds 94 153 353 37 46 230 438
— share of British members
in the issuing syndicate 28 60 121 11 25 130 274
2. Issues by non-residents
share of British members
in the issuing syndicate
— bonds 225 330 144 100 620 2 104 3 768
— shares 8 8 1 8 31 — —
Source: OECD Financial Statistics 1977, Supplement lOC.TableA 163-17. The regulations for British issuers are more flexible. Securities issued by central
government are naturally exempt from these regulations.6 Local authorities are required
to obtain authorization.7 No authorization or other intervention is required for the
issue of company securities unless these are substantial issues expressed in sterling. In
that case, and particularly for all sterling issues exceeding UKL 3 million, authorization
i no longer required but an issue calendar is established so as to maintain an orderly
market. The Bank of England must be consulted in order to determine the date of issue.8
In fact this date, the 'impact date', is determined by the Government Broker, who is in
close touch with the market process and has the confidence of the Bank. The Stock
Exchange makes this consultation a condition of admission.9
The sanctions applicable to this legislation are largely penal.10 To this end the Treasury
has ample means of investigation and obtaining information." Sanctions under civil
law are explicitly precluded.12
2. Exchange control
170. Government interventions by virtue of the Exchange Control Act, 1947, are much
further-reaching. This Act empowers the Treasury to control payment transactions
with foreign countries by allowing or disallowing such operations or determining the
condition on which they may be carried out. Operations between residents n are not
subject to any obligations except to produce evidence that the parties are indeed
residents.
The Treasury pursues a policy geared to the changing development of the external
financial state of the country.14 This policy is executed in part by granting general
permits for operations which meet the established conditions.15 If a party cannot
invoke a general permit, application for a specific permit must be made to the Bank of
England, which is responsible for the day-to-day operation of these regulations. To this
end the Bank makes use of 'authorized depositaries', mainly banks, securities dealers
and solicitors, whose intervention, chiefly as holders of the securities and of the
documents used in the operation, is obligatory. These depositaries must also see to the
exact application of the regulations, including those relating to the use of foreign
currency reserves held for investment purposes.
2.1. Sterling securities
171. The technical basis of the British regulations relating to foreign currency is that any
issue of securities requires authorization from the Bank of England unless it is proved
British government securities are acquired en bloc by the Bank of England at the time of issue and put on the market through the
Government Broker.
S.8A. (1) (c). Order 1958.
S.8A. (2) (b).r.
Admission of Securities to Listing. Chap. I. part 7.
The very severe sanctions are contained in the Schedule to the Act. applicable by virtue of S. 1 (3).
Schedule to the Act. § 2.
S. 1 (3) of the Borrowing (Control and Guarantees) Act. 1946.
Since the Exchange Control (Scheduled Territories) No 2 Order. 1972. residents are the inhabitants of the United Kingdom, the
Channel Islands, the Isle of Man. the Republic of Ireland and Gibraltar.
For a recent survey see The Investment Currency Market. Bank of England Quarterly Bulletin. 1976, p. 314 el seq. To
implement a resolution of the European Council of Ministers, the system described here was amended by. inter alia, abolishing
the 'surrender rule' by \irtue of which part of a premium had to be transferred to the Bank of England.
Apart from the Orders, attention should also be paid to the 'Notices EC' from the Bank of England as regards the actual
implementation: in this case Notices 8 and 10 (Securities). that only residents have subscribed. At the same time, under general orders the Bank
has granted exemption from authorization in the case of operations which take place in
what it considers to be satisfactory conditions of control.
If the securities are acquired by British residents, all that is necessary is to produce
evidence that they are in fact residents.17 This is done by means of a declaration given
by subscribers on the application form, counter-signed by the 'authorized depositary'.18
This declaration is not necessary if the securities and the documents appertaining to the
registration are kept by the 'authorized depositary'.19
In accordance with a general permit under foreign currency law, non-residents may
acquire sterling securities at the time of issue. Here it is necessary for registration to be
effected by an authorized depositary who will keep the securities for the account of the
non-resident investor. Payment may be made in foreign currency provided it is
converted at the official rate of exchange. Finally, the permit relates only to securities
quoted on the Stock Exchange.20
The same principles apply to the acquisition of securities on the secondary market.
There are no permit requirements for residents, but when they are entered in a register,
including the register of shareholders, an authorized depositary must attest that buyer
and seller are residents.21 The procedures are more flexible if, for example, the docu­
ments are in the custody of an authorized depositary.22 If non-residents engage in
securities transactions it is not necessary to apply for an individual permit if the
securities are listed 23 and if the authorized depositary, as the custodian of all docu­
ments, sees that the exchange legislation is complied with as regards monies and checks
whether, in the case of sale, the securities indeed come from non-residents.24 A further
condition is that transfer to a non-resident must not lead to changes in the control of
British companies, with the proviso that permission must be applied for if the purchase
relates to or can lead to a participation of 10% or more. It is made clear that the
purpose of this rule is to find out whether the operation should be treated in accordance
with the regulations governing direct investment rather than as a securities operation.25
The issue of bearer certificates is covered by special rules; the earlier ban was withdrawn
under a general permit. But at the same time a rule was introduced to the effect that
bearer documents must be deposited with a recognized depositary.26 In practice no
bearers are issued.
2.2. Securities in foreign currencies
The liberation of foreign payment transactions at the beginning of the 1960s was
associated with the introduction of fairly strict conditions for the export of capital by
residents. Direct investment by companies, purchases of securities or real estate abroad
must be paid for with 'investment currency', i.e. foreign currency in which trading is at a
special and higher rate of exchange than the Bank of England applies and supports for
" S.8 (1) Exchange Control Act. and implementation: Notice EC Securities No 10 (3rd issue), d. 6.
IH See Palmer's Company Law, 26-26, p. 266.
" Notice EC Securities. No 10 (3rd issue), ss. 8 and 17.
20e EC, No 10 (3rd, ss. 8 and 9, 10(b).
21 More correctly, the depositary is required to attest that neither buyer nor seller is a non-resident. Notice EC Securities, No 8
(2nd issue), s. 26(a) and 27: see also Notice EC Securities. No 10 (3rd issue), s. 16(c).
22 Notice EC Securities No 10 (3rd issue), s. 17 (c) (i).
23e ECs No 8 (2nd, s. 32 (c).
24 Ibid.
25 Notice EC Securities No 8 (2nd issue), s. 29 (d) and Supplement No 24.
!6 Exchange Control Act 1947. s. 10: Notice EC Securities No 10 (3rd issue), s. II el seq.

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