The European Commission has adopted a proposal for a new directive on investment services and regulated markets. The proposal aims to meet two key prerequisites for the completion of the Internal Market in financial services, namely (i) to give investment firms an effective 'single passport', and (ii) to ensure investors enjoy a high level of protection when using investment firms.

The proposal seeks to introduce a comprehensive regulatory framework governing the organized execution of investor transactions by exchanges, other trading systems and investment firms. It also updates and harmonizes the regulatory conditions with which investment firms must comply, at the time of initial authorization and thereafter. It will impose:

  • clearer and more precise rules on the conduct of business;
  • reinforcement of 'best execution' obligations;
  • new rules for handling clients' orders;
  • an obligation for large dealers and broker-dealers to make public firm bid and offer prices for a specified transaction size in liquid shares (known as the 'quote disclosure' rule); and
  • requirements for managing conflicts of interest which may arise when investment firms execute client orders against their own trading book. When they sell securities to, or buy them from their own clients, they will be subject to additional disclosure duties.

The proposal will replace the existing Investment Services Directive 1993/22 (ISD). The ISD relies heavily on mutual recognition and has not proved sufficient in practice to ensure investment firms can operate EU-wide on the basis of authorization in their home state. Principal changes introduced by the proposal are:

  • the establishment of a regulatory framework to promote an efficient, transparent and integrated financial trading infrastructure;
  • the strengthening of the provisions governing investment services, with a view to protecting investors and fostering market integrity;
  • the extension of the scope of the ISD, in terms of both financial services and financial instruments covered; and
  • the reinforcement of cooperation between competent authorities.

The proposal will be forwarded to the European Parliament and the EU Council for adoption under the co-decision procedure.

For further information on this topic please contact Philip Woolfson at Oppenheimer Wolff & Donnelly by telephone (+32 2 626 0500) or by fax (+32 2 626 0510) or by email ([email protected]).