French toast

On Monday 24 November 2003, the French Minister of the Economy, Finance and Industry Francis Mer introduced the Paris financial markets to the new securities regulator, the Autorité des Marchés Financiers (AMF), its chairman Michel Prada, the members of its board and its disciplinary commission.

Created by law 2003-706 on financial security of 1 August 2003, this new institution arose from the merging of the Commission des Opérations de Bourse (COB – stock exchange authority), the Conseil
des Marchés Financiers (CMF – financial markets council) and the Conseil de Discipline de la Gestion Financière (CDGF – financial management disciplinary council). It combines a patchwork of legislative measures (reform of rules concerning financial direct marketing, reform of rules on the statutory auditing of accounts with the creation of the Haut Conseil du Commissariat aux Comptes (High Council for Statutory Auditors) and numerous provisions concerning company law) seeking to restore investor confidence, which has been severely shaken by events and affairs affecting the markets of first-world countries since the internet bubble burst.

Even though the reform introduced by the financial security law repeals many existing provisions relating to the CMF and amends those relating to the COB, there is no doubt that the status of the AMF clearly embodies the legacy of both the COB and the CMF.

The creation of the AMF has one essential aim: to increase the competitiveness of the Paris financial marketplace by reinforcing the clarity of its institutional organisation and the simplification of its regulatory environment. Henceforth, professionals and investors alike will have one single port of call. The initiator of a takeover bid will thus have just one filing to make with the AMF instead of the two that were necessary before: one to the COB for the draft information memorandum and the other to the CMF for the acceptability of the offered price.

Finally, the legislator sought to put an authority into place which could constitute an international reference in regulatory matters in order to allow a more effective contribution to mechanisms for European and international cooperation, particularly within the Committee of European Securities Regulators (CESR), the International Organization of Securities Commissions (IOSCO) and the Financial Stability Forum. This concern is shown in the new Article L621-1 of the Monetary and Financial Code, providing that the AMF will contribute to the regulation of securities markets at the European and international levels.

The status of the AMF
Arising from a merger of an administrative authority and a professional authority, the AMF is defined as an independent public authority, having a separate legal personality.

In conceptual terms, the merger of the COB and the CMF brings an end to the legal distinction, which had become artificial over the years, between an administrative and a professional form of regulation. Indeed, professionals on the Paris financial market sat on the board of the COB, which would proceed with broad professional consultations before proposing rules for homologation by Mer.

Although French law professors are far from finished writing about the notion of “independent public authority” with a separate legal personality – a new and sui generis concept – this has a certain number of clear practical consequences.

First of all in terms of its assets, liabilities and budget. This new status gives it financial independence with the power to raise taxes directly. It will have an annual budget of approximately €40m (£27.3m) brought in through fixed duties associated with its monitoring of information released by companies or issued at the time of financial operations. It will have operational flexibility due to its autonomy for the direct allocation of its revenues.

Next in its relations with the law. Having a separate legal personality (which the CMF had, but not the COB), the AMF will be able to go to court through the intermediary of its chairman, particularly in order to file as a civil plaintiff in criminal proceedings concerning securities market offences. However, in return, its legal personality means that the AMF will be responsible for its decisions, so that an injured third party will be able to act directly against it, and not against the state, before the courts. Finally, it will be able to recruit professionals from the world of economics and finance, using contracts that will be subject to private law.

Nevertheless, the AMF is still a public authority insofar as it exercises administrative ‘policing’ powers delegated to it by the state. This public nature is shown in the manner in which its 28 members are chosen, all appointed by public authorities, and in the existence of a government commissioner, who sits in all of the AMF’s internal bodies but has no voting power.

The organisation of the AMF
Management of the AMF is split between its chairman and the general secretary. The chairman is appointed for a non-renewable five-year term of office, by decree of the French President. This is a full-time position, as opposed to the other members of the board. The chairman has standing to act in the name of the AMF before all courts of law, now including the criminal law courts. In the event of a split vote within the board, the chairman has the casting vote.

The general secretary is the executive in charge of the AMF’s various departments. He or she is appointed by the chairman, after receiving the opinion of the board, and subject to the approval of the Minister of the Economy, Finance and Industry, expressed in the form of a ‘letter of non-objection’. The general secretary decides on the opening of investigations and can petition the presiding judge of the Tribunal de Grande Instance (regional civil court) for searches and seizures.

The organisation of the AMF is original in that it comprises two collegiate bodies: the board, comprising 16 members, and the disciplinary commission, comprising 12 members. The financial security law provides for the existence of a plenary board, the true decision-making body, and a disciplinary commission, which is exclusively responsible for deciding on administrative and disciplinary sanctions falling within the scope of the AMF’s authority.

This organisation was made necessary due to the European Commission directive on ‘market abuse’ on the one hand, and the provisions of Article 6 of the European Convention on Human Rights and Fundamental Freedoms on the other.

The tasks and powers of the AMF
The tasks of the AMF, set out in the financial security law, are defined in extremely broad terms. It must ensure “the protection of savings invested in financial instruments, the provision of information to investors and the proper working of the markets.”

In addition to its traditional tasks of regulation and supervision of financial operations, since the law of August 2003 the AMF has also been given the task of supervising rating agencies. In this respect, it is to produce a report each year on the role of rating agencies: their rules of conduct, the transparency of their methods and the impact of their activities on issuers and on the financial markets.

Finally, the financial security law extended the AMF’s powers to regulate all financial analysts, including independent analysts. The law also imposes a duty on investment service providers to conserve their analysts’ files for three years so as to be available for inspection by the AMF.

For the performance of these tasks, the AMF will adopt a single set of general regulations. While awaiting these regulations, the separate regulations of the COB and the CMF remain in force.

Moreover, the AMF has broad powers. It can proceed with inspections and investigations and issue injunctions in the event of breaches of laws and regulations that infringe the rights of investors or distort the working of the market.

The creation of the AMF has caused a sea change in the French financial landscape. This change is also the result of other various provisions of the financial security law with respect to the status of credit establishments and investment firms and also with respect to financial instruments. (It creates a new category of subordinated securities and adds greater flexibility to the use of negotiable debt instruments, in particular for French collective investment funds (OPCVMs) and French securitisation vehicles (FCCs).)

However, the actual impact of the creation of the AMF, and more generally of the reform, will depend mainly upon implementation by the market itself and by the legislator who is to enact subsequent legislation.

Bertrand Pebrier and Etienne Rocher are partners at Granrut Avocats in Paris (in alliance with Pinsents)