6. Private Enforcement

Cherednychenko gives an interesting overview of the ways Member States resist the penetration of EU investor protection law into their domestic private legal regimes. The most striking examples are Luxemburg and Scotland, where the courts have declined to recognize any private law effect to MiFID I rules. Olha O. Cherednychenko, “Financial Consumer Protection in the Eu: Towards a Self-Sufficient European Contract Law for Consumer Financial Services?,” European Review of Contract Law 10, no. 4 (2014). At 487.

In the words of the European Court of Justice: “It is for the internal legal order of each Member State to determine the contractual consequences where an investment firm offering an investment service fails to comply with the assessment requirements laid down in Article 19(4) and (5) of Directive 2004/39.” Genil 48 Sl and Comercial Hostelera De Grandes Vinos Sl V Bankinter Sa and Banco Bilbao Vizcaya Argentaria Sa, EU:C:2013:344 (2013). On this case and regulatory standards as duties in contract law, see the seminal article of Professor Grundmann Stefan Grundmann, “The Bankinter Case on Mifid Regulation and Contract Law,” European Review of Contract Law 9, no. 3 (2013). At 275–279.

“Commission Recommendation 2013/396/Eu—C (2013)3539 [11.06.2013],” (2013).

Ibid.

European Commission, “Press Release—Commission Recommends Member States to Have Collective Redress Mechanisms in Place to Ensure Effective Access to Justice,” (2013).

“A legal mechanism that ensures a possibility to claim cessation of illegal behaviour collectively by two or more natural or legal persons or by an entity entitled to bring a representative action (injunctive collective redress).” Point 3(a) of the Recommendation.

“A legal mechanism that ensures a possibility to claim compensation collectively by two or more natural or legal persons claiming to have been harmed in a mass harm situation or by an entity entitled to bring a representative action (compensatory collective redress).” Point 3(a) of the Recommendation.

“The claimant party should be formed on the basis of express consent of the natural or legal persons claiming to have been harmed.” Point 21 of the Recommendation.

European Commission, “Call for Evidence on the Operation of Collective Redress Arrangements in the Member States of the European Union,” http://​ec.​europa.​eu/​newsroom/​just/​item-detail.​cfm?​item_​id=​59539.

Ibid. At 224.

Ibid. At 224.

Ibid. At 224.

Ibid. At 225.

Ibid. At 246.

Rules of Civil Procedure for the United States District Courts—Rule 23.

Ibid.

Ibid.

Ibid.

Stella. At 252–253.

Stella. At 254.

Ibid. At 260–292.

“Title V. Disclosures And Discovery”

Rules of Civil Procedure for the United States District Courts—Rule 26, U.S.C. § 1332(d).

Stella. At 273.

Ibid. At 277.

Ibid. At 277–294.

As clearly explained by Stella: ibid. At 296.

Ibid. At 296.

A “material fact required to be stated therein or necessary to make the statements therein not misleading”. Section 11(a), ibid.

Section 11(a), ibid.

Rewording of the text: Section 11 (e), ibid.

Section 11(g), ibid.

Stella. At 296.

SEC Rule 12b-2, (Definitions).

Stella. At 298.

Stella. At 298.

Stella. At 298.

Ibid. At 298.

Ibid. At 294.

Ibid. At 914.

Stella. At 294; Perino. At 914.

Relevant studies are: Perino.—also reported by Stella. (At 357); Marilyn F. Johnson, Karen K. Nelson, and AC Pritchard, “Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act,” ed. Stanford Law and Economics Olin Working Paper No. 249 (Stanford, CA 2002)—also reported by Stella. (At 358); Marilyn F. Johnson, Karen K. Nelson, and AC Pritchard, “Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act,” The Journal of Law, Economics, & Organization 23, no. 3 (2007); Stephen J. Choi, “Do the Merits Matter Less after the Private Securities Litigation Reform Act?,” ed. NYU Law School—Law and Economics Research Paper Series—Research Paper No. 03-04 (New York, NY 2005); Stephen J. Choi, Karen K. Nelson, and Adam C. Pritchard, “The Screening Effect of the Private Securities Litigation Reform Act,” ed. University of Michigan Law and Economics Olin Working Paper No. 07-008 (Ann Arbor, MI 2007); Stephen J. Choi and Adam C. Pritchard, Lead Plaintiffs and Their Lawyers: Mission Accomplished, or More to Be Done?—Research Handbook on Shareholder Litigation (Elgar Publishing, Forthcoming, 2017).

Stella. At 299–306.

European Commission, “Out-of-Court Settlement of Consumer Disputes,” http://​europa.​eu/​legislation_​summaries/​consumers/​protection_​of_​consumers/​l32031_​en.​htm.

Ibid.

Ibid.

Ibid.

Ibid.

Ibid.

Ibid.

Ibid.

European Commission, “Study on the Use of Alternative Dispute Resolution in the European Union, Civic Consulting of the Consumer Policy Evaluation Consortium (Cpec),” (Bruxelles 2009).

“Consumer Redress in the European Union: Consumers’ Experiences, Perceptions and Opinions,” (2009).

“Cross-Border Adr in the European Union,” (2011).

Ibid. At 2.

Ibid. At 5.

Ibid. At 5.

Ibid. At 5.

Ibid. At 5.

Article 2.2(c,h,i) ibid.

Article 2.2(d,g) and Recital 16, ibid.

Cristian Silviu Busoi, “Draft Opinion of the Committee on Legal Affairs on the Proposal for a Directive of the European Parliament and of the Council on Alternative Dispute Resolution for Consumer Disputes (Com(2011)0793—C7-0454/2011—2011/0373(Cod)),” (Brussels 2012). At 3.

The official ODR website: European Commission, “Online Dispute Resolution,” https://​ec.​europa.​eu/​consumers/​odr/​main/​index.​cfm?​event=​main.​home.​show&​lng=​EN.

“Green Paper on Retail Financial Services: Better Products, More Choice, and Greater Opportunities for Consumers and Businesses, Brussels, 10.12.2015, Com(2015) 630 Final,” (2015).

European Commission, “Financial Dispute Resolution Network,” http://​ec.​europa.​eu/​internal_​market/​fin-net/​index_​en.​htm.

“Financial Services: Commission Launches out-of-Court Complaints Network to Improve Consumer Confidence,” (Bruxelles 2001).

European Banking Authority—EBA, “Personal Finance at the Eu Level—Fin-Net,” http://​www.​eba.​europa.​eu/​consumer-corner/​personal-finance-at-the-eu-level.

As summarized in: European Commission, “Fin-Net Activity Report 2015,” (2015). At 2.

European Commission, “About Fin-Net,” https://​ec.​europa.​eu/​info/​business-economy-euro/​banking-and-finance/​consumer-finance-and-payments/​consumer-financial-services/​financial-dispute-resolution-network-fin-net/​fin-net-network/​about-fin-net_​en.

“Memorandum of Understanding on a Cross-Border out-of-Court Complaints Network for Financial Services in the European Economic Area,” (Bruxelles 2001).

The European Economic Area (EEA) was established in 1994 by the then European Communities and the European Free Trade Association (EFTA) with the aim of allowing Iceland, Liechtenstein, and Norway to take part to the European Internal Market without being full members of the European Union. See: “Proposal for a Regulation of the European Parliament and of the Council Establishing a European Securities and Markets Authority,” (September 23, 2009).

Commission, “Fin-Net Activity Report 2015.” At 5.

Ibid. At 5. Note that in 2015 the largest category was “other” with 1612 cases.

“[…] an agreement in writing to submit to arbitration an existing controversy […] shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract”. Ibid.

Ibid.

Ibid. At 1294.

Uniform Law Commission, “Arbitration Act (2000),” http://​www.​uniformlaws.​org/​Act.​aspx?​title=​Arbitration%20​Act%20​ (2000).

Ibid.

Ibid.

See: Financial Industry Regulatory Authority—FINRA, “Sec Approves New Nasd Code of Arbitration Procedure,” http://​www.​finra.​org/​newsroom/​2007/​sec-approves-new-nasd-code-arbitration-procedure.

“Code of Arbitration Procedure for Customer Disputes,” http://​finra.​complinet.​com/​en/​display/​display_​viewall.​html?​rbid=​2403&​element_​id=​4096&​record_​id=​5174&​filtered_​tag.

“Guidance on Disputes between Investors and Investment Advisers That Are Not Finra Members,” https://​www.​finra.​org/​arbitration-and-mediation/​investment_​advisers.

As it is proved by attempted reforms such as the new Arbitration Fairness Act introduced in March 2017, which, if approved, would make a pre-dispute arbitration clause invalid or unenforceable in case it requires the arbitration of a dispute concerning employment, consumer, antitrust, or civil rights. Available at: H.R.1374—Arbitration Fairness Act of 2017.

On this point: John I. Sanders and Paul J. Foley, “Broker-Dealers and Investments Advisers Exempted from Cfpb’s Arbitration Agreement Rule,” https://​www.​lexology.​com/​library/​detail.​aspx?​g=​59c3fe0e-0ebd-449a-b1d5-58d8f762a3c1.

Niamh Moloney, “Effective Policy Design for the Retail Investment Services Market: Challenges and Choices Post Fsap “in Investor Protection in Europe: Corporate Law Making, the Mifid and Beyond, ed. Guido Ferrarini and Eddy Wymeersch (Oxford: Oxford University Press, 2006). At 425. As also mentioned by Olha O. Cherednychenko, “Public and Private Enforcement of European Private Law in the Financial Services Sector,” European Review of Private Law 24, no. 4 (2015). At 633–634.

“Public and Private Enforcement of European Private Law in the Financial Services Sector.” At 640. Important literature too confirms how public and private enforcement complement each other: Charles D. Kolstad, Thomas S. Ulen, and Gary V. Johnson, “Ex Post Liability for Harm Vs. Ex Ante Safety Regulation: Substitutes or Complements?,” American Economic Review 80, no. 4 (1990); Steven Shavell, “A Model of the Optimal Use of Liability and Safety Regulation,” Rand Journal of Economics 15, no. 2 (1984); also mentioned by Cherednychenko, “Public and Private Enforcement of European Private Law in the Financial Services Sector.” At 640.

“Public and Private Enforcement of European Private Law in the Financial Services Sector.” At 641.

Ibid. At 641.

Professor Cherednychenko too puts forward examples of hybrid forms of enforcement: “[A] hybrid form of enforcement can emerge whereby deterrence and compensation can be pursued by the same authority. Thus, for example, an administrative agency can be entrusted with providing compensation to the aggrieved consumers who have suffered losses as a result of the violation of contract-related supervision standards by financial service providers.” Ibid. At 641.

In the words of Professor Coffee: “In the United States, public enforcement of law is supplemented by a vigorous, arguably even hyperactive, system of private enforcement.” John C. Coffee Jr., “Law and the Market: The Impact of Enforcement,” ed. Columbia Law and Economics Working Paper No. 304 (2007). At 17. Professor MacNeil points out how “Private enforcement in the context of the federal securities laws was first recognized in the US in J. I Case Co. v Borak, in which the Supreme Court justified its availability as a necessary supplement to SEC enforcement.” Iain MacNeil, “Enforcement and Sanctioning,” in The Oxford Handbook of Financial Regulation, ed. Niamh Moloney, Eilís Ferran, and Jennifer Payne (Oxford: Oxford University Press, 2015). At 293. Very interestingly, professor Langevoort points out that “in the U.S., a robust system of private securities litigation is a mixed blessing: some, perhaps substantial, level of speculative litigation results, which costs investors and others a considerable amount while benefiting lawyers on both sides considerably. The right balance of incentives is hard to achieve. However, there is a distinct possibility that without the supplement of easily-invoked private actions, public securities enforcement in the U.S. would require much greater resources to be anything near effective.” Donald C. Langevoort, “Structuring Securities Regulation in the European Union: Lessons from the U.S. Experience,” in Investor Protection in Europe: Corporate Law Making, the Mifid and Beyond ed. Guido Ferrarini and Eddy Wymeersch (New York: Oxford University Press, 2006). At 506.

Stella. At 237.

Professors Correia and Klausner cast doubts on such complementarity: “To supplement SEC enforcement effectively, class actions must target violations and impose costs on violators consistent with SEC practice and policy. We have analyzed both targeting and penalties associated with class actions in comparison to the targeting and penalties associated with SEC enforcement actions. We find evidence that the targeting of class actions diverges from SEC practice. […] The supplementation rationale for class actions thus gets tepid support from this analysis.” Maria Correia and Michael Klausner, “Are Securities Class Actions “Supplemental” to Sec Enforcement? An Empirical Analysis,” in The Tel Aviv International Conference in Accounting—The Leon Recanati Graduate School of Business Administration (Tel Aviv 2012). At 44–45.

In the words of Professors Wiens and Haydock: “Aided by numerous federal and state judicial decisions and statutes favoring the enforcement of arbitration agreements, more parties are discovering that binding arbitration is an efficient, costeffective, and flexible alternative to litigation.” Wiens and Haydock. At 1293–1294.

Alongside public and private enforcement mechanisms, also criminal enforcement tools are employed in the US system so that “the prospect of criminal enforcement radically distinguishes securities regulation in the United States from the rest of the world. […] the [overall] interplay [is, thus, between] SEC enforcement, Department of Justice criminal prosecution, and private class actions”. Coffee Jr. At 44.

In the words of Professors Correia and Klausner: “the Supreme Court, Congress, and the SEC have justified securities class actions as “supplemental” to SEC enforcement and necessary because of constraints on the SEC’s resources.” Correia and Klausner. At 2.

An attorney’s fees are calculated by the court through two different methods: the so-called POF, substantially based on a percentage of the total amount to be paid by the defendant; and the so-called lodestar, substantially based on the number of hours spent working on the case. Stella. At 353.

Ibid. At 239.

Ibid. At 239.

In the words of Professor MacNeil: “The availability of class actions in the US provides an incentive for private enforcement […]. For private enforcement to work, the expected recovery must exceed the costs and for that reason the class action in the US, which draws investors who have suffered loss into litigation unless they opt out, is closely linked with the prevalence of private enforcement in that country and has been instrumental in boosting private monetary sanctions to a level that over some time frames exceeds public enforcement sanctions.” MacNeil. At 293.

Correia and Klausner. At 10.

Ibid. At 10.

Ibid. At 10.

Ibid. At 44.

Ibid. At 10.

Ibid. At 10.

Ibid. At 10.

In the words of Professor Moloney: “Private enforcement is not, however, significantly enhanced under the MiFID II reforms. The EU faces, of course, severe difficulties with respect to the harmonization of private enforcement mechanisms.” Niamh Moloney, “Liability of Asset Managers: A Comment,” Capital Markets Law Journal 7, no. 4 (2012). At 421; Also Federico DellaNegra, “The Private Enforcement of the Mifid Conduct of Business Rules. An Overview of the Italian and Spanish Experiences,” European Review of Contract Law 10, no. 4 (2014). At 574.

ADR Directive, Chap. 5.

Furthermore, “civil courts have acknowledged the civil effects of financial regulatory law: the infringement of the regulatory standards gives rise to contractual remedies. […] it seems that the private enforcement driven by civil courts remains the most important vehicle to protect investors. In both countries courts do recognize the civil effects of the regulatory law by interpreting national contract law in order to afford an effective contractual protection to the investors. […] national contract law, which remains on the shadow of EU securities regulation, is filling the gap left by the legislative and supervisory apathy.” DellaNegra, “The Private Enforcement of the Mifid Conduct of Business Rules. An Overview of the Italian and Spanish Experiences.” At 579, 592, 594–595.

“Private Law and Private Enforcement in the Post-Crisis Eu Retail Financial Regulation.”

In the words of Della Negra: “EU financial regulatory law is driven by a public-oriented approach and does not provide private law remedies for investors vis-à-vis the investment firms. At EU level, the breach of the conduct of business rules gives rise only to public-administrative sanctions. Whereas supervision and public enforcement are vertically-centralised, private enforcement is horizontally decentralised.” “The Private Enforcement of the Mifid Conduct of Business Rules. An Overview of the Italian and Spanish Experiences.” At 571.

ESMA Securities and Markets Stakeholder Group, “Advice to Esma—Investor Protection Aspects of the Consultation Paper on Mifid Ii and Mifir—Esma/2014/Smsg/035,” (2014). At 4. The report also states that: “[…I]n its 2010 Public Consultation, the Commission considered whether to introduce a principle of civil liability of investment services providers. However, this point was not followed up on by the Commission in its proposal. Therefore, the SMSG thinks that it would be helpful to know which role private enforcement (esp. of the suitability doctrine) plays in the Member States.” At 4.

All fifty US states have adopted statutes concerning arbitration procedures, as shown by the Table of Confirmation Procedures in Wiens and Haydock. At 1319–1328.

FINRA, “Guidance on Disputes between Investors and Investment Advisers That Are Not Finra Members”.

The general confusion generated by the fact that broker-dealers and investment advisers are subject to different regulatory regimes is a key concern raised by the SEC: Securities and Exchange Commission—SEC, “Study on Investment Advisers and Broker-Dealers” (Washington, DC 2011). At 2.

Micklitz. At 508.

A brilliant research on collective redresses, regulatory redress techniques, and ADRs in some EU Member States has been carried out by Professor Hodges: Christopher Hodges, “Mass Collective Redress: Consumer Adr and Regulatory Techniques,” ibid. 23, no. 5. Ibid.

Recital 49, ADR Directive. This is also criticized by Professors Fejős and Willett who rightly claim that: “It is appropriate that the Directive at least does not insist that outcomes are binding on consumers. However, if the aim is consumer access to justice, and if this is understood in a way that is sensitive to consumer needs and vulnerabilities, then it is strongly arguable that outcomes should be binding on businesses. There should be a final and enforceable outcome, without an option for the business to challenge the decision routinely, based on the substantive outcome. Rather, the business should only be able to challenge the outcome on the very limited grounds of a ‘judicial review’ type action. […O]utcomes that are binding on the business have the potential to ameliorate the inherent inequalities between consumers and businesses, giving consumers fast and cost-effective ways to enforce their private law rights.” Andrea Fejős and Chris Willett, “Consumer Access to Justice: The Role of the ADR Directive and the Member States,” ibid. 24, no. 1 (2016). Ibid. At 45–47.

Busoi.