Monday, September 16, 2013

Advocate General for E.U. Court of Justice Rules Invalid ESMA Authority under Short Selling Regulation

In a proceeding instituted by the United Kingdom, the Advocate General for the European Court of Justice found invalid Article 28 of the E.U. Short Selling Regulation for vesting in the European Securities and Markets Authority (ESMA) the power to make legally binding decisions and adopt measures directed at individual entities that must prevail over any previous measure taken by a competent national authority, which power does not contribute to internal market harmonization. The Advocate General therefore proposed that the Court should annul Article 28 of the Short Selling Regulation. United Kingdom of Great Britain and Northern Ireland v. Council of the European Union and European Parliament, No. 270/12, September 12, 2013, Opinion of Advocate General Nillo Jääskinen.

The powers vested in ESMA under Article 28 go beyond internal market harmonization because the effect of Article 28 is to elevate to the EU level, and more precisely to ESMA, an intervention competence that operates in circumstances that are equivalent to those that trigger the intervention powers of the competent authorities of the Member States. By definition, ESMA will be forming a judgment on a matter on which the relevant competent authority has formed a different judgment. Further, under Article 28(4), the only entity ESMA is bound to consult before imposing these measures is the European Systemic Risk Board.

The AG pointed out that the objections raised by the United Kingdom do not constitute an all-out assault on the legal basis for the establishment of ESMA. It concerns instead the powers with which ESMA has been endowed by Article 28 of the Regulation. The U.K. formulated its challenge under Article 114 TFEU on the basis that this Treaty provision cannot authorize individual measures directed at particular natural or legal persons so that, to the extent to which Article 28 purports to allow such measures it is ultra vires.

The opinion described ESMA as a regulatory agency which assists with the task of regulation at the E.U. level related to the expansion of the internal market. As such, ESMA mainly provides common rules and services and operates under a management or supervisory board composed of Member States’ representatives and some representatives of the Commission.

Short Selling Regulation. In 2012, in order to harmonize its response to short selling in light of the financial crisis, the E.U. adopted the Short Selling Regulation. Short selling is a practice whereby assets and securities, which are not owned by the seller at the moment of sale, are sold with the intention of profiting from a decline in the price of the assets before the transaction is settled. The Regulation was adopted on the basis of Article 114 TFUE, which allows for the adoption of harmonizing measures where necessary for the achievement and functioning of the internal market.

While in principle there can be no objection to using Article 114 TFUE as a legal basis for E.U. agencies which adopt legally binding decisions, noted the Advocate General, the determining factor is whether the decisions of the agency in question either contributes to or amounts to internal market harmonization. The AG determined that the powers vested in ESMA under Article 28 of the Regulation go beyond these limits.

The Advocate General emphasized that ESMA is uniquely empowered to make legally binding decisions in substitution for those of a competent national authority, which may well disagree with the decision of ESMA, which decision will prevail over any previous measure taken by the national authority. In the Advocate General’s view, the effect of this is to create an E.U. level emergency decision-making mechanism that becomes operable when the national authorities do not agree on a course of action. It follows that this outcome is not harmonization but the replacement of national decision-making with EU level decision-making, which goes beyond the limits of Article 114.

If the Court should decide, contrary to his proposal, that Article 114 TFUE is an appropriate legal basis for Article 28 of the Regulation, the Advocate General urged the rejection of the other arguments advanced by the United Kingdom. In his view, the powers vested in ESMA are in line with the relevant E.U. constitutional rules in relation to the delegation of powers to an agency and do not leave too wide a margin of discretion to EMSA. He points out that Article 28 imposes specific procedural safeguards as to the measures that ESMA is empowered to take, including express definitions of the content of measures, the procedure for their adoption, and their temporal effect. Article 28 stems from a basic policy choice by the EU legislature in that the essential value judgments have been made by the latter and have not been left to ESMA.

The Advocate General’s opinion is not binding on the Court of Justice. It is the role of the Advocates General to propose to the Court, in complete independence, a legal solution to the cases for which they are responsible. The judges of the Court are now beginning their deliberations in this case. Judgment will be given at a later date.

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