eLaw Journal: Murdoch University Electronic Journal of Law, Vol 16, No 2 (2009)

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Re-Examining Investor Protection in Europe and the US

John JA Burke


The year 2009 is a propitious time to evaluate systems of investor protection in financial markets as global bank losses exceed the 1 trillion mark and market losses equally exceed the 1 trillion mark.[1]  Prior to the Global Financial Crisis, the European Union enacted sweeping legislation to reform its system of investor protection. The Markets in Financial Instruments Directive [MiFID] is the regulatory equivalent of the deregulatory 1987 “Big Bang” that shaped the current European financial markets. [2] It also applies to one of the world’s largest trading regions.[3] This article examines select investor protection provisions of MiFID and their analogues in US securities legislation. Part I sets forth the macroeconomic function of financial markets as an essential prerequisite by which to measure the likely effectiveness of investor protection provisions. Part II sets forth two models of investor behaviour. Part III describes paradigmatic theories of investor protection. Part IV critically assesses the paradigmatic theories of investor protection. Part V undertakes a comparative analysis of the principal investor protection provisions of MiFID and their US analogues. Part VI briefly comments on proposed US and EU legislation responding to the global financial crisis. Part VII summarises the conclusions reached by the foregoing analysis. MiFID reinvents and improves its predecessor, the Investment Services Directive, and tracks commercial developments in the marketplace. Its vaunted investor protection scheme cannot protect the investor against the most significant factor driving prices of financial instruments: the dark pool of unknown and unknowable contingencies.  

[1] Quinn J. and Dunkley J., Global Bank Losses Hit 1 Trillion Mark, 17 December 2008, found at http://www.telegraph.co.uk/finance/newsbysector/banks and finance/3814730/Global-bank-losses-hit-1-trillion-mark.html, viewed 18 December 2008. See also, “The 2008 Global Market Losses”,  http://blogs.wsj.com/marketbeat/2008/01/22/the-2008-global-market-losses/ viewed 21 March 2009.

[2] The European Union currently has 493 million inhabitants, trailing only India and China in terms of population size. There also are plans to expand the EU to include Croatia, Albania, and several other countries.

[3] Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, Recital 3.

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