Traditionally, the view of the US, whether in business or academia, has been that it was a place for weak private enforcement and stronger public enforcement. However, when compared with the level of public enforcement in the European Member States, even in the UK and in France, the US Securities and Exchange Commission has a stronger track record.

This picture is going to change dramatically, thanks to the proposed revisions in October 2011 of the European Union’s  2003 Market Abuse Directive (MAD), which deals with insider trading, market manipulation, and ad hoc disclosure.

The two proposals introduced were the Market Abuse Regulation (MAR) and the new Market Abuse Directive (MAD II).  The difference in the European Union between a regulation and a directive is that the former is self-executing, while the latter is an instruction given to the European Member States to adopt a law.  The MAR, like the MAD, deals with administrative sanctions. Now MAD II also requires European Member States to introduce criminal sanctions.

The proposals of MAR and MAD II are currently undergoing a three-way negotiation among the European Commission, the European Parliament, and the European Council, which represents the 27 Member States. The proposals should be adopted by the end of the semester or in the second semester of 2013 at the latest. They aim to significantly increase enforcement against market abuse in Europe by raising sanctions, expanding the investigative powers of national securities regulators, strengthening cooperation among them, and, in the case of the MAR, forcing a harmonized approach through the adoption of a regulation rather than a directive. In this process, the European Parliament is moving to strengthen the sanctions included in the MAR.

With respect to investigations, the MAR requires Member States to grant to their securities regulators search and seizure powers, subject to ex ante judicial authorization, and clarifies their right to request existing telephone and data traffic records. The European Parliament would even like to give securities regulators the right to wiretap, again subject to ex ante judicial authorization. It also requires that a specific regime be implemented to protect whistle-blowers. Cross-border cooperation, although already working well, will be significantly enhanced by eliminating the ability of the securities regulators of each Member State to refuse to act on a request for information or an investigation by another securities regulator. The MAR also allows the requested authority to allow the requesting authority to conduct its own inspection or investigation within that territory.

But, the most spectacular advance in the protection against market abuse concerns the sanctions themselves: the MAR raises them to the levels found in European competition law. It provides that fines must exceed any profit gained or loss avoided, and can be up to a maximum of twice such amount. This is similar to the US Securities and Exchange Act of 1934 that allows the SEC to seek a civil penalty of up to three times the amount of profit or loss resulting from an insider trade, which penalty was introduced by the Insider Trading Sanctions Act of 1984.

In the case of individuals, the MAR provides for administrative pecuniary sanctions of up to €5m. The level of administrative pecuniary sanctions must be established by Member States at a maximum of 10% of annual turnover for legal persons, although the European Parliament wants to increase those sanctions to an unlimited amount for individuals and 20% of the annual turnover for legal persons. In addition, the Member States will be able to increase such levels which will act only as a minimum. Finally, the Regulation requires the automatic publication of administrative sanctions except in very specific situations. Therefore, naming and shaming will be compulsory instead of optional for securities regulators. This is a major cultural change in Europe even if legislation and practices had moved in this direction since the financial crisis in many Member States.

MAD II, on the other hand, requires Member States to introduce criminal sanctions for insider trading and market manipulation. Almost all Member States already have such sanctions, MAD II also covers inciting, aiding and abetting, and the attempt to undertake a prohibited act. Finally, it also requires that legal persons be held liable for such criminal offences.

Thus, the political message is very clear: insider trading and other market abuses should be aggressively prosecuted. This is a very positive change but how did it come about?

This major political change results from a shift in the European landscape, which now views white collar crime much more harshly since the financial crisis made people aware that they ultimately pay the cost of defective supervision. Although insider trading does not create systemic risk, it puts taxpayer money at risk, such that it is included in the regulatory overhaul. Another reason for this strengthened approach is that, since 2008, the UK Financial Services Authority (FSA) has become much tougher with respect to enforcing the law, dropping its former “light touch” approach. That change created a different regulatory climate all across Europe.

The MAR is still subject to debate between the European Council and the European Parliament, especially as to the level of sanctions, double jeopardy, whistle-blowing, and naming and shaming. However, these differences are not great enough to prevent an agreement being reached during the pending negotiations.

As a result of these proposals, European securities legislation is going to look much more similar to US regulations than it used to, both as to its content and level of harmonization.

However, it is not possible to say if the revised legislation will lead to greater enforcement, since it merely provides for increased sanctions.  It does not force national securities regulators to adopt a more aggressive stance on enforcement. Therefore, it could remain merely law on the books. On the one hand, there will likely be increased enforcement in many Member States as a consequence of the political message sent by the new set of rules. In addition, the new European Securities and Markets Authority (ESMA), through mapping exercises such as the one published in April 2012 (Actual use of sanctioning powers under MAD, ESMA/2012/270), will put pressure on weak national enforcement. Yet, national traditions are strong, and financial markets are also very different in size and nature in Europe, meaning that national approaches and preferences to enforcement will remain.

Nevertheless, this new regulatory environment is going to improve, in the medium- to long-term, the chances of some form of mutual recognition, or substituted compliance, between European and US securities law and intermediaries. The launch of negotiations for a Transatlantic Trade and Investment Partnership this February could, and should, include financial services: mutual recognition could be another positive effect of the transatlantic convergence of securities law on insider trading and market abuse.