Last verified on Tuesday 15th November 2016
The primary securities or related enforcement authority at the European Union (EU) level is the European Securities and Markets Authority (ESMA).
ESMA is an independent EU body with legal personality, whose seat is in Paris, France. In each EU Member State, it enjoys the most extensive legal capacity accorded to legal persons under national law. It may, in particular, acquire or dispose of moveable and immoveable property and be a party to legal proceedings.
Together with other EU authorities and agencies including the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), the European Insurance and Occupational Pension Authority (EIOPEA) and the national competent authorities of the EU member states (NCAs), ESMA forms part of the European System of Financial Supervision (ESFS). The main tasks of the ESFS are to ensure that the rules applicable to the financial sector are adequately implemented, to preserve financial stability and to ensure confidence in the financial system as a whole and sufficient protection for the customers of financial services, notably by supervising market participants in accordance with EU directives and regulations applicable to them.
Within the ESFS, ESMA’s specific responsibilities relate to the application of EU directives in the field of transparency, market abuse, investment funds, investment services, derivatives and market infrastructures. Within its scope of competence, ESMA must contribute to: improving the functioning of the internal market, including in particular a sound, effective and consistent level of regulation and supervision; ensuring the integrity, transparency, efficiency and orderly functioning of financial markets; strengthening international supervisory coordination; preventing regulatory arbitrage and promoting equal conditions of competition; ensuring the taking of investment and other risks are appropriately regulated and supervised; and enhancing customer protection.
To achieve this goal, ESMA’s tasks include (i) drawing up regulatory and technical standards based on EU financial legislation, (ii) issuing guidelines and recommendations on the application of European law, (iii) promoting transparency, simplicity and fairness in the markets to protect consumers of financial products, (iv) monitoring financial activities and analysing consumer trends, (v) coordinating actions of NCAs, particularly in emergency situations and (vi) resolving disagreements between NCAs on cross-border matters. Under certain strict conditions, it can temporarily prohibit or restrict financial activities that threaten the stability of the markets.
In addition, ESMA is responsible for the direct supervision of two main types of market participants: credit rating agencies (CRAs) and trade repositories (TRs) registered in the EU. ESMA also has the power to recognise or certify certain non-EU market participants such as non-EU CRAs, non-EU TRs and non-EU central counterparties, which are then permitted to operate in the EU but remain subject to supervision by the competent authority of their home country, subject to cooperation and exchange of information between such competent authority and ESMA.
ESMA does not have investigatory or sanction powers with respect to violation of securities laws such as disclosure violations, insider trading or market manipulation, whose powers belong to the national competent authorities (NCAs) of the EU member states or the public prosecutors of the EU member states. However, if an NCA fails to ensure that a financial market participant complies with EU law, ESMA is empowered to investigate the breach of EU law by the NCA and can issue a recommendation requiring the NCA to take the necessary action to comply with EU law, following which the European Commission may issue a formal opinion. If the NCA fails to take the necessary action, ESMA may, subject to certain strict conditions, address a decision directly to a market participant.
This chapter focuses on the investigation and sanction powers of ESMA over CRAs and TRs registered in the EU.
ESMA has the power to investigate and sanction violations by CRAs and TRs of the rules applicable to them under Regulation 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, as amended (CRAR) and Regulation 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended (EMIR) respectively.
Cooperation with NCAs
ESMA carries out its investigatory tasks in cooperation with NCAs.
Cooperation with NCAs and other ESFS authorities
ESMA and the other competent authorities of the ESFS (including EBA and EIOPA) are under a general obligation to cooperate and exchange information as required for the purposes of carrying out their duties under applicable EU regulations. In particular, ESMA must inform the relevant NCA of the member state where an investigation of a CRA or TR is to be carried out of the existence of an investigation. Officials of the NCA concerned must, upon the request of ESMA, assist ESMA representatives in carrying out their duties. Officials of the NCA concerned may also attend the investigations.
Delegation of powers to NCAs
Where it is necessary for the proper performance of a supervisory task, ESMA may delegate specific supervisory tasks to an NCA. Such specific supervisory tasks may, in particular, include the power to request information and to conduct investigations and onsite inspections. Prior to the delegation of a task, ESMA must consult the relevant NCA with respect to the scope of the task to be delegated; the timetable for the performance of the task to be delegated; and the transmission of necessary information by and to ESMA. A delegation of tasks does not affect the responsibility of ESMA and does not limit ESMA's ability to conduct and oversee the delegated activity. Supervisory responsibilities, including registration decisions, final assessments and follow-up decisions concerning infringements, may not be delegated.
Notifications of violations by NCAs
Where an NCA finds that a CRA has breached EU law on the territory of a member state, it must notify ESMA thereof and, where it considers it appropriate for investigatory purposes, it may also suggest to ESMA that it assess the need to use its investigatory powers in relation to the CRA concerned. ESMA must take appropriate action and keep the NCA informed. Where the NCA considers that a registered CRA, whose credit ratings are used within the territory of that member state, breaches its obligations and the infringements are sufficiently serious and persistent to have a significant impact on the protection of investors or on the stability of the financial system in that member state, the NCA may request that ESMA suspend the use, for regulatory purposes, of credit ratings of such CRA.
Prior authorisation of national judicial authorities
Prior to exercising certain investigation powers, with respect to CRAs or TRs such as onsite inspections, or requests for records of telephone or data traffic, ESMA is required to obtain authorisation from the judicial authority of the relevant EU member state in accordance with national rules. Such authorisation may also be applied for as a precautionary measure. In such case, the national judicial authority controls that the decision of ESMA is authentic, and that the coercive measures envisaged are neither arbitrary nor excessive having regard to the subject matter of the investigations. In its control of the proportionality of the coercive measures, the national judicial authority may ask ESMA for detailed explanations, in particular, relating to the grounds ESMA has for suspecting that an infringement has taken place and the seriousness of the suspected infringement and the nature of the involvement of the person subject to the coercive measures. However, the national judicial authority may not review the necessity for the investigation or demand that it be provided with the information on ESMA's file. The lawfulness of ESMA's decision is subject to review only by the Court of Justice of the European Union.
Coordination with national enforcement bodies
Enforcement of fines imposed by ESMA is governed by the rules of civil procedure in force in the EU member state in the territory of which it is carried out. An order for enforcement can be executed without any other formality except verification of the authenticity of ESMA’s decision by the competent body of the relevant EU member state. Enforcement may be suspended only by a decision of the Court of Justice of the European Union. However, the courts of the relevant EU member state concerned have jurisdiction over complaints that enforcement is being carried out in an irregular manner.
Criminal prosecution is within the exclusive remit of the member states. However, ESMA must refer matters for criminal prosecution to the relevant national authorities where, in carrying out its duties, it finds that there are serious indications of the possible existence of facts liable to constitute criminal offences. In addition, ESMA must refrain from imposing fines or periodic penalty payments where a prior acquittal or conviction arising from identical facts, or from facts that are substantially the same, has acquired the force of res judicata as the result of criminal proceedings under national law.
ESMA has the following investigatory powers with respect to CRAs and TRs.
Simple information requests
ESMA may request persons subject to investigation to provide all information that is necessary in order to carry out its duties. The person from whom the information is requested is not obliged to provide the information, but in case of a voluntary reply to the request, the information provided must not be incorrect or misleading. Providing an incorrect or misleading answer may result in the imposition of a fine.
Information requests by decision
ESMA may request persons subject to investigation to provide all information that is necessary in order to carry out its duties by way of a decision. The person from whom the information is requested is obliged to provide the information and the information provided must not be incorrect or misleading. Failing to respond or providing an incomplete response may result in the imposition of periodic penalty payments for each day of delay. Providing an incorrect or misleading answer may result in the imposition of a fine.
General investigation powers
ESMA is empowered to: (i) examine any records, data, procedures and any other material relevant to the execution of its tasks irrespective of the medium on which they are stored; (ii) take or obtain certified copies of or extracts from such records, data, procedures and other material; (iii) summon and ask any person under investigation or their representatives or staff for oral or written explanations on facts or documents related to the subject matter and purpose of the inspection and to record the answers; (iv) interview any other natural or legal person who consents to being interviewed for the purpose of collecting information relating to the subject matter of an investigation; (e) request records of telephone and data traffic.
Onsite inspection powers
ESMA may conduct all necessary onsite inspections at the business premises of the persons subject to investigation. Where the proper conduct and efficiency of the inspection so require, ESMA may carry out the onsite inspection without prior announcement. The officials of and other persons authorised by ESMA to conduct an onsite inspection may enter any business premises and land of the legal persons and are entitled to exercise the general investigation powers described above. They also have the power to seal any business premises and books or records for the period of, and to the extent necessary for, the inspection.
The persons subject to investigation must submit to the exercise of the general and onsite investigation powers. Failure to submit to an investigation and in particular to produce complete records, data, procedures or any other material required and to complete and correct other information provided in an investigation or to submit to an onsite inspection may result in the imposition of periodic penalty payments for each day of delay. Providing incorrect or misleading answers to questions asked in the context of the exercise of general investigation powers or onsite inspection powers may result in the imposition of a fine.
Upon completion of the investigation, ESMA may bring administrative proceedings resulting in the imposition of fines or take supervisory measures with respect to CRAs and TRs. It may not bring civil or criminal proceedings against CRAs or TRs.
The opening of an investigation against a specific CRA or TR is not required to be made public by ESMA.
The target of ESMA’s investigation is the legal entity (ie, the relevant CRA or TR subject to supervision by ESMA). ESMA may not impose fines or supervisory measures on individuals.
However, as part of its investigation into the activities of a CRA or TR, ESMA may exercise investigation powers with respect to third parties related to such CRA or TR, such as third parties to whom the CRA or TR has outsourced operational functions or activities. ESMA may also summon and ask any individual who is a representative or staff member of the CRA or TR or such related third parties for oral or written explanations on facts or documents relating to the subject matter and purpose of the investigation. Failure of such persons, whether individuals or legal entities, to submit to the exercise of the relevant investigation powers may result in the imposition of periodic penalty payments for each day of delay (the amount of the periodic penalty payments being 3 per cent of the average daily turnover in the preceding business year, or, in the case of natural persons, 2 per cent of the average daily income in the preceding calendar year).
An investigation typically begins when, in the course of carrying out its duty to supervise CRAs and TRs on an ongoing basis, ESMA finds that there are serious indications of the possible existence of facts liable to constitute one or more of the specific infringements listed in CRAR and EMIR, respectively, if that is the case, ESMA must appoint an independent investigating officer within ESMA to investigate the matter (IIO).
ESMA must determine that there are serious indications of the possible existence of facts liable to constitute one or more of the specific infringements listed in CRAR and EMIR.
Yes. Where the proper conduct and efficiency of the inspection so require, ESMA may carry out the onsite inspections described in question 4 without prior announcement.
There is no specific requirement for the findings of an internal review to be reported to ESMA. However, as part of its investigation powers, ESMA has the right to request the production of any document or information relevant to its investigation, which may include such findings.
ESMA provides on its website an e-mail address that whistleblowers can use to file complaints with respect to, or report wrongdoings on the part of, CRAs and TRs. ESMA is a relatively new authority, and the manner in which complaints and reports are taken into account in investigations has not been made public by ESMA at this stage.
A typical investigation by ESMA into the activities of CRAs or TRs would generally have three (3) phases.
The first phase (investigation phase) is carried out by the IIO, while the two following phases (review phase and decision phase) are carried out by ESMA’s Board of Supervisors, which is ESMA’s principal decision-making body. The Board of Supervisors may establish internal committees or panels for specific tasks attributed to it, and may provide for the delegation of certain clearly defined tasks and decisions to internal committees or panels, to ESMA’s Management Board or to its Chairperson.
The investigation phase
Where ESMA finds that there are serious indications of the possible existence of facts liable to constitute one or more of the infringements, ESMA must appoint an IIO to investigate the matter. The IIO must not be involved or have been involved in the direct or indirect supervision or registration process of the CRA or TR concerned and must perform his functions independently from the Board of Supervisors.
The IIO investigates the alleged infringements, taking into account any comments submitted by the persons subject to investigation, and must submit a complete file with his findings to the Board of Supervisors. In order to carry out his tasks, the IIO may exercise all investigatory powers described under question 4. Where carrying out his tasks, the IIO has access to all documents and information gathered by ESMA in its supervisory activities.
Upon completion of his investigation and before submitting the file with his findings to the Board of Supervisors, the IIO must give the persons subject to investigation the opportunity to be heard on the matters being investigated. To that effect, the IIO must notify to the person subject to investigation a written statement of findings and provide that person with the opportunity to make written submissions thereon.
The statement of findings sets out the facts liable to constitute one or more infringements, including any aggravating or mitigating factors of those infringements, as well as a reasonable time limit within which the person subject to investigation may make its written submissions. The IIO is not obliged to take into account written submissions received after that time limit has expired.
In its written submissions, the person subject to investigation may set out all the facts known to it which are relevant to its defence. It may attach any relevant documents as proof of the facts set out. It may propose that the IIO hear other persons who may corroborate the facts set out in the submissions of the person subject to investigation.
The IIO may also invite a person subject to investigation to which a statement of findings has been addressed to attend an oral hearing. The persons subject to investigation may be assisted by their lawyers or other qualified persons admitted by the IIO. Oral hearings must not be held in public.
The IIO must base his findings only on facts on which the persons subject to investigation have had the opportunity to comment. The rights of defence of the persons concerned must be fully respected during investigations.
When its investigation is completed, the IIO submits the file with its findings to the Board of Supervisors and must notify such submission to the persons subject to investigation.
The review phase
The complete file to be submitted by the IIO to the Board of Supervisors must include at least the following documents: (i) a copy of the statement of findings addressed to the person subject to the investigation; (ii) a copy of the written submissions by the person subject to the investigation; and (iii) the minutes of any oral hearing. Where the Board of Supervisors considers that the file submitted by the IIO is not complete, it sends back the file to the IIO with reasoned request for additional documents.
Where the Board of Supervisors considers, on the basis of a complete file, that the facts described in the statement of findings appear not to constitute an infringement, it decides to close the case, and it notifies that decision to the persons subject to investigation.
Where the Board of Supervisors does not agree with the findings of the IIO, it must submit a new statement of findings to the persons subject to investigation. Where the Board of Supervisors agrees with all or some of the findings of the IIO, it must inform the persons subject to investigation accordingly.
In either case, the Board of Supervisors sets a reasonable time limit within which the person subject to investigation may make written submissions. The persons subject to investigation may be invited to attend an oral hearing, at which they may be assisted by their lawyers or other qualified persons admitted by ESMA. Oral hearings must not be held in public.
The decision phase
On the basis of the statement of findings and, if so requested, after having heard the persons subject to investigation, the Board of Supervisors decides if one or more infringements have been committed, and if so, takes a supervisory measure and imposes a fine on the relevant CRA or TR.
The Board of Supervisors must base its decisions only on findings on which the persons subject to the proceedings have had an opportunity to comment. The rights of the defence must be fully respected in the proceedings. The IIO must not participate in the deliberations of the Board of Supervisors or in any other way intervene in the decision-making process of the Board of Supervisors.
If, with respect to CRAs, urgent action is needed in order to prevent significant and imminent damage to the financial system, the Board of Supervisors may adopt an interim decision and must give the persons concerned the opportunity to be heard as soon as possible after taking its decision.
With respect to CRAs, supervisory measures include: (i) withdrawal of registration; (ii) temporary prohibition from issuing credit ratings with effect throughout the Union, until the infringement has been brought to an end; (iii) suspension of the use, for regulatory purposes, of the credit ratings issued by the credit rating agency with effect throughout the Union, until the infringement has been brought to an end; (iv) requirement to bring the infringement to an end; and (v) issuance of public notices. Fines are calculated on the basis of a scale ranging from €10,000 to €750,000 depending on the nature of the infringement.
With respect to TRs, supervisory measures include: (i) requirement to bring the infringement to an end; (ii) imposition of fines; (iii) issuance of public notices; (iv) withdrawal of registration (as a last resort). Fines are calculated on the basis of a scale ranging from €5,000 to €20,000 depending on the nature of the infringement.
When determining the amount of a fine, ESMA must determine the basic amount of the fine within the scale applicable to the relevant offence, having regard to the annual turnover in the preceding business year of the CRA or TR concerned. The basic amount of the fine is then adjusted, if need be, by taking into account aggravating or mitigating factors in accordance with certain predefined coefficients and subject to certain caps. See question 37.
ESMA is required to disclose to the public every fine (and periodic penalty payment, if any) that has been imposed on a CRA or TR, unless such disclosure to the public would seriously jeopardise the financial markets or cause disproportionate damage to the parties involved. ESMA must also make public any decision regarding the adoption of a supervisory measure with respect to a CRA or TR on its website within 10 working days from the date when it was adopted. When making public such decisions, ESMA must also make public the right for the CRA concerned to appeal the decision, the fact, where relevant, that such an appeal has been lodged, specifying that such an appeal does not have suspensive effect and the fact that it is possible for the Board of Appeal to suspend the application of the contested decision.
With respect to cooperation and coordination with NCAs, national judicial authorities, national enforcement bodies and public prosecutors (see question 3).
With respect to cooperation and coordination with authorities of third countries (ie, countries other than EU member states): ESMA may develop contacts and enter into administrative arrangements with supervisory authorities, international organisations and the administrations of third countries, without prejudice to the respective competences of the EU member states and EU institutions. Those arrangements do not create legal obligations in respect of the EU and the EU member states nor do they prevent EU member states and their competent authorities from concluding bilateral or multilateral arrangements with those third countries.
With respect to CRAs, ESMA may conclude cooperation agreements on exchange of information with the supervisory authorities of third countries for the performance of the tasks of ESMA or those supervisory authorities, provided that information disclosed is subject to guarantees of professional secrecy equivalent to those applicable in the EU.
With respect to TRs, relevant authorities of third countries that do not have any trade repository established in their jurisdiction may contact ESMA with a view to establishing cooperation arrangements to access information on derivatives contracts held in Union TRs. ESMA may establish cooperation arrangements with those relevant authorities regarding access to information on derivatives contracts held in Union TRs that these authorities need to fulfil their respective responsibilities, provided that guarantees of professional secrecy exist, including the protection of business secrets shared by the authorities with third parties.
Yes. ESMA may, and in certain instances must, take into account the findings of NCAs in the course of its investigation. See question 3.
ESMA is empowered to: examine any records, data, procedures and any other material relevant to the execution of its tasks irrespective of the medium on which they are stored; take or obtain certified copies of or extracts from such records, data, procedures and other material; and request records of telephone and data traffic.
Criminal prosecution is within the exclusive remit of the EU member states, and the powers of criminal prosecutors vary across EU member states.
No. The powers conferred on ESMA are not to be used to require the disclosure of information or documents that are subject to legal privilege.
ESMA is bound by an obligation of professional secrecy. In particular, members of the Board of Supervisors and the Management Board, the Executive Director and members of the staff of ESMA including officials seconded by EU member states on a temporary basis and all other persons carrying out tasks for ESMA on a contractual basis are subject to the requirements of professional secrecy applicable under EU law, even after their duties have ceased. As a general matter, any confidential information received by such persons whilst performing their duties may not be divulged to any person or authority whatsoever (other than for the purpose of exchanges of information between competent authorities and as required for purposes of legal proceedings including enforcement of decisions), except in summary or aggregate form, such that individual financial market participants cannot be identified.
In addition, when processing any personal data, ESMA is required to comply with the EU rules on data protection provided in Regulation (EC) No 45/2001 of the European Parliament and of the Council of 18 December 2000 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data as amended (Regulation 45/2001). In particular, disclosures by ESMA of decisions regarding CRAs or TRs may not contain personal data, and communication of personal data to authorities and persons outside the EU is restricted.
ESMA is required to grant persons subject to investigation access to their file, subject, however, to the legitimate interest of other persons in the protection of their business secrets. The right of access to the file does not extend to confidential information affecting third parties.
With respect to access to the file by third parties, see question 51.
Persons subject to investigation cannot exercise a right not to produce documents requested by ESMA in the context of information requests by decision or the exercise of general investigation powers or onsite inspection powers. Failure to produce requested documents may result in the imposition of fines and/or periodic penalty payments. See question 4.
Data privacy and bank secrecy laws would generally not prevent the communication to ESMA of documents and materials by persons subject to investigation.
Communications of documents and information by persons subject to investigation to authorities outside the EU, whether on a voluntary basis or not, may in certain cases be restricted, depending on and in accordance with the laws applicable in the relevant EU member states.
ESMA is required to comply with the EU rules on data protection provided in Regulation 45/2001, which restricts processing (including storage) of personal data outside the EU in certain circumstances, particularly if the recipient country does not afford an adequate level of protection for such data.
The access to and use by ESMA of documents from outside the EU will generally be regulated under agreements for cooperation and exchange of information entered into between ESMA and the competent authorities of the relevant non-EU country, but may be restricted by the laws of such relevant non-EU country.
ESMA may summon and ask any person subject to investigation including related third parties (such as, for instance, third parties to whom the CRA or TR has outsourced operational functions or activities) or their representatives or staff for oral or written explanations on facts or documents related to the subject matter and purpose of the investigation and record the answers.
ESMA can also interview any other natural or legal person for the purpose of collecting information relating to the subject matter of an investigation, provided such person consents to be interviewed.
Records of interviews would normally not be made public, but may be accessed by third parties under certain conditions. See question 51.
Persons subject to investigation, including related third parties (such as, for instance, third parties to whom the CRA or TR has outsourced operational functions or activities) or their representatives or staff, may not refuse to respond to requests for explanations on facts or documents related to the subject matter and purpose of the investigation. Failing to respond or providing an incomplete response may result in the imposition of periodic penalty payments for each day of delay. Providing an incorrect or misleading answer may result in the imposition of a fine.
Other third parties may refuse to be interviewed and are not subject to fine or penalty payments for failing to submit to interviews.
Persons subject to investigation, including related third parties (such as third parties to whom the CRA or TR has outsourced operational functions or activities) or their representatives or staff or other third parties, may be assisted by their own counsel.
Any decision of ESMA taken as part of the investigation process may be appealed to the Board of Appeal and reviewed by the Court of Justice of the European Union. See questions 45–46.
Upon completion of his investigation and before submitting the file with its findings to ESMA, the IIO must give the persons subject to the investigations the opportunity to be heard on the matters being investigated. The IIO and the Board of Supervisors must base their findings only on facts on which the persons concerned have had the opportunity to comment.
The advocacy typically takes the form of written submissions. The IIO and the Board of Supervisors may also invite the person subject to investigation to attend an oral hearing.
Statements made by the person subject to investigation are on the record. Such records would normally not be made public, but may be accessed by third parties on certain conditions. See question 51.
The limitation period for the imposition of fines or penalty payments is five years.
The limitation period begins to run on the day following that on which the infringement is committed. However, in the case of continuing or repeated infringements, the limitation period begins to run on the day on which the infringement ceases.
The limitation period is suspended for as long as the decision of ESMA is the subject of proceedings pending before the Board of Appeal or before the Court of Justice of the European Union.
Any action taken by ESMA for the purpose of the investigation or proceedings in respect of an infringement of CRAR or EMIR interrupts the limitation period with effect from the date on which the action is notified to the relevant person under investigation. Each interruption shall cause the limitation period to start running afresh. However, the limitation period shall expire, at the latest, on the day on which a period of 10 years has elapsed without ESMA having imposed a fine or a periodic penalty payment, such period being extended by the duration of any suspension.
ESMA is a relatively new authority. As a result, it is difficult to assess with precision the length of a typical investigation at this stage.
If the investigation does not reveal an infringement, ESMA must issue a closing notice and notify it in writing to the person subject to investigation. See question 12.
The IIO submits a statement of findings together with the complete file to the Board of Supervisors. See question 12.
An independent officer within ESMA (the IIO) issues a statement of findings, which is reviewed, and may be amended by, the Board of Supervisors. See question 12.
When deciding to take a supervisory measure, ESMA must have regard to the following criteria: (i) the duration and frequency of the infringement; (ii) whether the infringement has revealed serious or systemic weaknesses in the undertaking’s procedures or in its management systems or internal controls; (iii) whether financial crime has been occasioned, facilitated or otherwise attributable to the infringement; (iv) whether the infringement has been committed intentionally or negligently.
When determining the amount of a fine, ESMA must determine the basic amount of the fine within the scale applicable to the relevant offence, having regard to the annual turnover in the preceding business year of the CRA or TR concerned. The basic amount of the fine is then adjusted, if need be, by taking into account aggravating or mitigating factors in accordance with certain predefined coefficients.
Aggravating factors include: repetition; commission of the infringement for more than six months; systemic weaknesses in the organisation, in particular in its procedures, management systems or internal controls; negative impact on the quality of the ratings (in the case of CRAs) or the data maintained (in the case of TRs); intent; lack of remedial action since the identification of the breach; lack of cooperation of senior management with ESMA in its investigations.
Mitigating factors include: minor breaches committed over less than 10 days; demonstration by senior management that all the necessary measures to prevent the infringement were taken; bringing quickly, effectively and completely the infringement to ESMA’s attention; voluntarily taken measures to ensure that similar infringement cannot be committed in the future.
The fine must not exceed 20 per cent of the annual turnover of the CRA or TR concerned in the preceding business year and, where the CRA or TR has directly or indirectly benefitted financially from the infringement, the fine shall be at least equal to that financial benefit.
ESMA can impose supervisory measures or fines, or both. See questions 12 and 37.
Illegal profits do not have to be disgorged. However, they are taken into account in the determination of the amount of the fine. Where the CRA or TR has directly or indirectly benefitted financially from the infringement, the fine shall be at least equal to that financial benefit.
Criminal charges may not be brought at EU level and are within the exclusive remit of the EU Member States. See Question 3.
Cooperation in the investigation and the remediation of the relevant infringement must be taken into account by ESMA in determining the amount of the fine. Failure of senior management to cooperate in the investigation is an aggravating factor. Voluntary and effective remediation such as (i) having taken all necessary measures to prevent the infringement, (ii) having brought the infringement to ESMA’s attention or (iii) taking measures such that a similar infringement cannot be committed in the future, are mitigating factors. Aggravating and mitigating factors are taken into account in the form of coefficients applied to the basic amount of the fine. See Question 37.
No. Deferred prosecution agreements or non-prosecution agreements with ESMA are not contemplated under EU rules.
Yes. Decisions of ESMA to impose fines or supervisory measures can be appealed to the Board of Appeal (administrative appeal) and reviewed by the Court of Justice of the European Union (judicial review).
Board of Appeal
The Board of Appeal is an independent joint body of ESMA, EBA and EIOPA. Any natural or legal person may appeal any decision taken by ESMA under applicable rules which is addressed to that person, or against a decision which, although in the form of a decision addressed to another person, is of direct and individual concern to that person. The appeal, together with a statement of grounds, must be filed with ESMA within two months of the date of notification of the decision to the person concerned, or, in the absence of a notification, of the day on which ESMA published its decision. The Board of Appeal must decide upon the appeal within two months after the appeal has been lodged. An appeal lodged does not have suspensive effect. However, the Board of Appeal may, if it considers that circumstances so require, suspend the application of the contested decision.
Court of Justice of the European Union
Proceedings may be brought before the Court of Justice of the European Union challenging a decision taken by the Board of Appeal or, in cases where there is no right of appeal before the Board of Appeal, by ESMA.
The Court of Justice of the European Union has unlimited jurisdiction to review decisions whereby ESMA has imposed a fine or periodic penalty payment. It may annul, reduce or increase the fine or periodic penalty payment imposed.
Board of Appeal
The Board of Appeal may confirm the decision taken by the competent body of ESMA, or remit the case to the competent body of ESMA. That body is bound by the decision of the Board of Appeal and must adopt an amended decision on the relevant matter.
Court of Justice of the European Union
ESMA is required to take the necessary measures to comply with the judgment of the Court of Justice of the European Union.
ESMA is required to disclose to the public fines, periodic penalty payments and supervisory measures that have been imposed on CRAs or TRs, subject to certain conditions. See Question 12.
With respect to CRAs, if a supervisory measure has been imposed consisting of the withdrawal of registration or the suspension of the use of credit ratings, credit ratings may continue to be used for regulatory purposes during a period not exceeding (i) 10 working days from the date ESMA's decision is made public if there are credit ratings of the same financial instrument or entity issued by other registered CRAs registered or (ii) three months from the date ESMA's decision is made public if there are no credit ratings of the same financial instrument or entity issued by other registered CRAs.
This effect would be determined under national law applicable to the relevant private proceedings.
Access to documents held by EU bodies such as ESMA is regulated under Regulation (EC) 1049/2001 of the European and of the Council of 30 May 2001.
Plaintiffs can request access to documents collected during the investigation, but ESMA is entitled to refuse production where it would undermine the public interest, privacy rights of individuals, commercial interests of individuals or legal entities, court proceedings or legal advice or the purpose of investigations, inspections and audits, unless there is an overriding public interest in disclosure.
Access to a document, drawn up by ESMA for internal use or received by ESMA, which relates to a matter where the decision has not been taken by ESMA, can be refused if disclosure of the document would seriously undermine ESMA's decision-making process, unless there is an overriding public interest in disclosure. Access to a document containing opinions for internal use as part of deliberations and preliminary consultations within the institution concerned can be refused even after the decision has been taken if disclosure of the document would seriously undermine the institution's decision-making process, unless there is an overriding public interest in disclosure.
As regards third-party documents, ESMA must consult the third party with a view to assessing whether an exception to disclosure is applicable, unless it is clear that the document shall or shall not be disclosed. If only parts of the requested document are covered by any of the exceptions, the remaining parts of the document must be released.
Private securities or related legal claims against CRAs or TRs may be brought under national Member State law (as determined in accordance with the principles of international private law) in parallel to investigations by ESMA.
In addition, a specific provision applies under EU law with respect to the liability of CRAs. Where a CRA has committed, intentionally or with gross negligence, an infringement having an impact on a credit rating, an investor or issuer may claim damages from that CRA for damage caused to it due to that infringement. An investor may claim damages where it establishes that it has reasonably relied on a credit rating for a decision to invest into, hold onto or divest from a financial instrument covered by that credit rating. An issuer may claim damages where it establishes that it or its financial instruments are covered by that credit rating and the infringement was not caused by misleading and inaccurate information provided by the issuer to the credit rating agency, directly or through information publicly available. The investor or issuer must present accurate and detailed information indicating that the CRA has committed an infringement, and that that infringement had an impact on the credit rating issued. Limitations on the civil liability of a CRA are permissible only where such limitations are (a) reasonable and proportionate; and (b) allowed by the applicable national law. This provision is without prejudice to further civil liability claims that may be brought in accordance with national law.
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