Tag Archives: Investment company

Plan to harmonise national rules on UCITS depositaries

Plan to harmonise national rules on UCITS depositaries

Outline of the Community (European Union) legislation about Plan to harmonise national rules on UCITS depositaries

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Plan to harmonise national rules on UCITS depositaries

The European Commission would like to reduce the divergences that exist between the national rules governing depositaries entrusted with the safe keeping of assets on behalf on investors in undertakings for collective investment in transferable securities (UCITS) * such as unit trusts, common funds and SICAVs. By following a step-by-step approach, the Commission, in cooperation with the national regulators, intends to facilitate the cross-border activity of such UCITS. There are four main areas of action: prevention of conflicts of interest, clarification of the depositary’s liability, convergence of national prudential rules, and moves to enhance invstor transparency and information. UCITS are established in all Member States and their assets total some four thousand billion euros.

Document or Iniciative

Commission Communication to the Council and the European Parliament of 30 March 2004 on “Regulation of UCITS depositaries in the Member States: review and possible developments” [COM(2004) 207 final – Not published in the Official Journal].

Summary

In response to the conclusions of the Economic and Financial Affairs Council in June 2001 calling on it to prepare a report on the regulation of UCITS * depositaries and on the need to amend such regulation, the Commission is examining the existing legal framework. It notes that there are significant differences between Member States as regards, for example, minimum capital requirements, statutory and regulatory obligations, and the liability regimes for depositaries.

If cross-border activity is to expand, these rules must be harmonised. Fund managers and supervisory authorities will want to know exactly the resources and liabilities of depositaries established in other Member States before they are authorised to do business. In addition, investors will need to be better informed.

Favouring a step-by-step approach, the Commission is planning to entrust to regulatory experts in the European Union (EU) four areas of work for the period 2004-06: to promote better prevention of conflicts of interest; to clarify the extent of the depositary’s liability; to promote convergence of prudential requirements, notably those relating to capital and to the taking-up and exercise of the function of depositary; to tighten the standards on investor transparency and information.

The Commission states that a chapter on depositaries will initially be attached to its overall UCITS report under Directive 2001/108/EC in 2005. This chapter will specify to what extent EU legislation on the relationship between fund manager and depositary will have to be strengthened and what degree of harmonisation is needed as regards the typology of eligible depositary institutions and, consequently, their missions and resource requirements. A subsequent report reviewing progress is to be adopted in 2006. It will also evaluate whether is a need to legislate at Community level in order to create a fully-fledged European passport for expanding the cross-border activity of depositaries.

Better prevention of conflicts of interest

Conflicts of interest arise when the interests of investors are not the prime concern of the depositary or fund manager. The Commission is proposing measures to strengthen convergence of the relevant national rules. Such convergence will relate notably to the list of the functions that the fund manager can delegate to the depositary and, conversely, the list of the functions that the depositary may delegate.

Clarification of the extent of the depositary’s liability

The differences in the level and extent of the depositary’s liability are a major obstacle if there is to be a high level of investor protection throughout the EU and if the scope for depositaries to engage in cross-border activities is to be expanded. The Commission thus regards it as essential that there should be a common reading of the main task of the depositary, namely asset safe keeping, and of the specific control duties assigned to the depositary.

Convergence of prudential requirements

The prudential rules governing the taking-up and pursuit of the activity of depositary differ significantly between Member States as there is no common European definition of eligible institutions. The Commission is proposing to align these rules more closely, particularly those relating to capital requirements, by identifying a specific group of institutions subject to prudential supervision.

Enhancement of transparency and investor information

The Commission identifies the areas where public information standards should be strengthened: organisation of the depositary’s tasks, measures to prevent conflicts of interest, the depositary’s liability and all the costs connected to his services.

Background

This communication is in response to the remit assigned to the Commission in June 2001 by he Economic and Financial Affairs Council. The approach it advocates is based on an extensive survey and on an Internet consultation in the autumn of 2002 concerning the different national rules impeding the development of the internal market in the case of UCITS depositaries. The survey identified major disparities between national rules that help to explain the current fragmentation of the market (in virtually 95% of cases UCITS depositaries are national institutions). The internet consultation revealed significant differences in connection, for example, with minimum capital requirements, statutory obligations and the extent of the depositary’s liability. For there to be a genuine internal market in depositaries’ services, these rules need to be brought into line.

Alongside the fund and its manager, the UCITS depositary is the third pillar of the European UCITS system set up by Directive 85/611/EEC.
In 2001 the EU adopted two other UCITS Directives amending Directive 85/611/EEC (one focuses on the instruments in which funds may invest and the other on management companies, thereby setting in place a “European passport” scheme).

Key terms used in the act
  • UCITS: Depending on the jurisdiction, UCITS can be constituted either under the law of contract (as common funds) or trust law (as trusts) and also under statute, i.e. in corporate form (as investment companies). The Directive may refer to both non-corporate forms under one designation, e.g. as common funds or unit trusts. Importantly, some Member States’ legal frameworks are limited to common funds, i.e. all their UCITS are without legal personality and depend on a designated external fund manager (a management company).
  • UCITS depositary: Directive 85/611/EEC (as amended) defines it simply as an entity entrusted with specific prudential missions and subject to a number of other general provisions. The UK regulatory designation is twofold, according to whether these missions have to be achieved with regard to unit trusts (by a “trustee”) or with regard to an investment company (by a “depositary”). However, for the reader’s convenience, only the term “depositary” has been used in this communication.
    It should also be noted that the specific regulatory meaning of the designation “UCITS depositary” is precisely based on the peculiar nature of these missions and obligations and, more generally, of the provisions drawn up under UCITS national regulation from Community law. The scope of the concept of “safekeeping” of assets, to which it is particularly related, has thus to be considered in this specific context.
  • UCITS fund manager: This may be either a “management company” or a “self-managed investment company”. Unlike common funds or unit trusts, corporate UCITS, i.e. investment companies, may bring together a vehicle (the fund) and a fund management capacity into the same entity. Directive 2001/107/EC defines them as “investment companies which have not designated a management company” in their instruments of incorporation, i.e. self-managed investment companies. In this Communication, most of the remarks concerning the “fund manager” or “management company” should also be deemed to apply to self-managed investment companies, except that these may not receive any task under a delegation mandate, e.g. from the depositary.

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

Outline of the Community (European Union) legislation about Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities

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These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Fund mergers and master-feeder structures relating to undertakings for collective investment in transferable securities (UCITS)

Document or Iniciative

Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure (Text with EEA relevance).

Summary

This Directive lays down provisions relating to the mergers of undertakings for collective investment in transferable securities (UCITS) and master-feeder structures within the framework of the Directive on the rules applying to UCITS. It forms part of the implementing measures of the latter instrument, which include Directive 2010/43/EU, Regulation (EU) No 583/2010 and Regulation (EU) No 584/2010.

UCITS mergers

In the case of a merger of a UCITS, the unit-holders * must be informed of the conditions of the merger and of its potential influence on the receiving UCITS. The unit-holders shall receive other information including in particular:

  • their rights before and after the proposed merger takes effect;
  • a comparison of charges, fees and expenses for both UCITS;
  • whether the management or investment company of the merging UCITS intends to undertake any rebalancing of the portfolio * before the merger takes effect;
  • details concerning any accrued income in the respective UCITS.

The merging and receiving UCITS shall provide unit-holders with information on the approval procedure for the proposed merger and the date at which the merger is to take effect.

Key investor information of the receiving UCITS shall be provided to the unit-holders of the merging and receiving UCITS.

Master-feeder structures

Agreements and internal conduct of business rules between feeder UCITS and master UCITS

The master UCITS shall provide the feeder UCITS with:

  • a copy of its fund rules or instruments of incorporation and key investor information;
  • information on the delegation of investment management and risk management functions to third parties;
  • internal operational documents.

In addition, the master UCITS shall provide certain information with regard to the basis of investment and divestment:

  • a statement of which share classes of the master UCITS are available for investment by the feeder UCITS;
  • the amount of charges and expenses to be borne by the feeder UCITS;
  • the terms on which any initial or subsequent transfer of assets in kind may be made from the feeder UCITS to the master UCITS.

Procedures in the case of liquidation of the master UCITS

Where the feeder UCITS intends to invest at least 85% of its assets in units of another master UCITS, it shall provide:

  • its application for approval of that investment;
  • its application for approval of the proposed amendments to its fund rules;
  • the amendments made to its key investor information.

Where a feeder UCITS intends to convert into a non-feeder UCITS, it shall provide:

  • its application for approval of the proposed amendments to its fund rules;
  • the proposed amendments to its key investor information.

Where a feeder UCITS wishes to be liquidated, it shall provide notification of this intention.

The competent authorities shall be responsible for informing the feeder UCITS if it intends to invest at least 85% of its assets in units of another master UCITS or if it intends to convert into a non-feeder UCITS. This should take place 15 days after receipt of the documents. Once the feeder UCITS has obtained approval from the competent authorities, it shall inform the master UCITS.

Procedures in the case of merger or division of the master UCITS

The feeder UCITS shall provide the competent authorities with its application for approval in the following cases:

  • where it intends to continue to be a feeder UCITS of the same master UCITS;
  • where it intends to become a feeder UCITS of another master UCITS;
  • where it intends to convert into a non-feeder UCITS;
  • where it intends to be liquidated.

As with the liquidation procedure, the competent authorities shall inform the feeder UCITS 15 days after the documents have been received. Once the feeder UCITS has obtained approval from the competent authorities, it shall inform the master UCITS.

The law of the Member State applying in the case of liquidation, merger or division shall also apply to information sharing between the two depositaries.

Key terms of the Act
  • Unit-holder: any natural or legal person holding one or several shares in a UCITS.
  • Rebalancing of the portfolio: a significant modification of the composition of the portfolio of a UCITS.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2010/44/EU

30.7.2010

30.6.2011

OJ L 176 of 10.7.2010

UCITS: organisational requirements and rules of conduct

UCITS: organisational requirements and rules of conduct

Outline of the Community (European Union) legislation about UCITS: organisational requirements and rules of conduct

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

UCITS: organisational requirements and rules of conduct

Document or Iniciative

Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (Text with EEA relevance).

Summary

This Directive is an implementing measure of the Directive on the rules applying to UCITS. It specifies the organisational requirements with which management companies managing UCITS must comply, as well as rules of conduct and rules on handling conflicts of interest. Furthermore, the Directive establishes requirements concerning the risk management process for UCITS.

Entities concerned by the Directive

This Directive applies to:

  • management companies which manage UCITS;
  • depositaries;
  • investment companies that have not designated a management company.

Administrative procedures and control mechanism

Management companies have a duty to:

  • implement decision-making procedures, and an organisational structure;
  • ensure that information is transmitted to the relevant persons * in the proper way;
  • implement appropriate internal control mechanisms;
  • maintain records of their business and internal organisation.

Management companies must safeguard the security, integrity and confidentiality of information.

They must put in place operational accounting procedures in such a way that all assets and liabilities of the UCITS can be directly identified at all times. The accounting procedures must be in accordance with the accounting rules of the UCITS’ home Member States.

As regards internal control mechanisms, the senior management of management companies are responsible for general investment policy. They oversee the approval of investment strategies for each UCITS.

Management companies must ensure permanent compliance. This consists of evaluating the adequacy and effectiveness of the measures taken to address any failures of the management company in complying with its obligations. Compliance also consists of advising and assisting the persons responsible for carrying out the services and activities of the management company. This work is to be carried out by a person designated for this purpose.

Management companies shall be responsible for maintaining a risk management function at all times, independently of operational units, in particular responsible for:

  • implementing the risk management policy and procedures;
  • ensuring compliance with the UCITS risk limit system;
  • providing advice to the board of directors as regards the identification of the risk profile of each managed UCITS;
  • reviewing and supporting the arrangements and procedures for the valuation of over-the-counter (OTC) derivatives.

Management companies shall put in place a procedure to prevent certain relevant persons * from:

  • performing a personal financial transaction or advising another person to perform such a transaction;
  • divulging information that might influence the behaviour of other persons as regards the choice of their transactions.

Portfolio transactions must be recorded in order facilitate future reconstructions of the details of the order, as must be subscription and redemption orders. These records are then to be retained for at least five years.

Conflict of interests

The following situations may lead to conflicts of interest, where:

  • the management company is likely to make a financial gain, or avoid a financial loss, at the expense of the UCITS;
  • the management company has an interest in the outcome of a service provided to the UCITS or another client which does not share the interests of the UCITS;
  • the management company has an incentive to favour the interest of another client;
  • the management company carries out the same activities for the UCITS as for another client;
  • the management company receives money, goods or services illegally.

Management companies are therefore obliged to define in writing an effective policy as regards conflict of interest, which preserves the independence of the relevant persons.

Rules of conduct

Management companies must treat UCITS unit-holders * fairly. Where they have carried out a subscription or redemption order for a unit-holder, they must send the unit-holder notice containing in particular the following information:

  • the management company identification;
  • the name of the unit-holder;
  • the date and time of receipt of the order and method of payment;
  • the date of execution;
  • the UCITS identification;
  • the number of units involved.

Management companies are not permitted to carry out a UCITS order in aggregate with an order of another UCITS or another client or with an order on their own account.

Risk management

Management companies must implement an operational risk management policy. They are to calculate the global exposure of the UCITS once a day.

Key terms of the Act
  • Relevant person: in relation to a management company shall mean a director, partner or equivalent, or manager of the management company, an employee of the management company, as well as any other natural person whose services are placed at the disposal and under the control of the management company and who is involved in the provision by the management company of collective portfolio management, or a natural person who is directly involved in the provision of services to the management company under a delegation arrangements to third parties for the purpose of the provision by the management company of collective portfolio management.
  • Unit-holder: any natural or legal person holding one or more units in a UCITS.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2010/43/EU

30.7.2010

30.6.2011

OJ L 176 of 10.7.2010

Alternative Investment Fund Managers

Alternative Investment Fund Managers

Outline of the Community (European Union) legislation about Alternative Investment Fund Managers

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Alternative Investment Fund Managers

Document or Iniciative

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (Text with EEA relevance).

Summary

This Directive aims at framing the activities of managers * of Alternative Investment Funds (AIFs) *. The goal is to create an internal market for these managers whilst putting in place a harmonised regulatory framework.

The Directive does not apply to:

  • holding companies;
  • institutions for occupational retirement provision;
  • supranational institutions;
  • national central banks;
  • national, regional and local governments;
  • employee participation systems or employee savings schemes;
  • securitisation special purpose entities.

Conditions for the authorisation of AIFMs

Alternative Investment Fund Managers (AIFMs) are entrusted with the portfolio management and risk management of AIFs. They may additionally perform duties of administration and marketing.

In order to carry out their activities, AIFMs must apply to the competent authorities of their home Member State for authorisation, and provide information concerning:

  • the persons conducting the business of the AIFM;
  • the identities of the AIFM’s shareholders and direct or indirect members;
  • a programme of activity;
  • remuneration policies and practices;
  • arrangements made for the delegation to third parties of AIFM functions.

They must also submit information on the AIFs they intend to manage, namely:

  • investment strategies;
  • where the AIF is established if the AIF is a feeder AIF*;
  • the rules or instruments of incorporation;
  • arrangements made for the appointment of the depositary.

Where the AIFM is an internally managed AIF, it must have an initial capital of at least EUR 300 000, whereas an external manager of AIFs must provide capital of at least EUR 125 000.

Operating conditions for AIFM activities

AIFMs entrusted with portfolio management are not permitted to invest all or part of the client’s portfolio in units or shares of the AIFs they manage. They must comply with the Directive on investor-compensation schemes. They may delegate their duties provided that they notify the competent authorities of their home Member State.

Remuneration policies practised by AIFMs must not encourage excessive risk taking. The European Securities and Markets Authority (ESMA), in cooperation with the European Banking Authority (EBA), ensures that remuneration practices comply with the principles laid down in:

  • Annex II to this Directive;
  • the Recommendation on remuneration policies in the financial services sector.

AIFMs must separate in functional and hierarchical terms risk management tasks from operational units, and from portfolio management. At least once a year, they must scrutinise the risk management systems put in place.

AIFMs must adopt procedures which enable them to monitor the AIF’s liquidity risk and guarantee the compliance of the liquidity profile of the investments of the AIF. AIFMs are to conduct stress tests regularly.

AIFMs are to put in place appropriate and coherent valuation procedures. AIFMs must comply with the law of the country in which the AIF is established, with respect to asset valuation and the calculation of the net asset value per unit or share of the AIF.

For each AIF that they manage, AIFMs shall appoint a single depositary, the main task of which is to monitor the AIF’s cash flow. The depositary may be:

  • a credit institution established in the EU pursuant to the Directive relating to the taking up and pursuit of the business of credit institutions;
  • an investment firm established in the EU and subject to the requirements of the Directive on capital adequacy;
  • another type of entity subject to prudential regulation and permanent supervision. Additional criteria may be laid down by the competent authorities in Member States.

Transparency requirements

AIFMs are to publish an annual report for each financial year for each of the AIFs they manage and for each of the AIFs they market, no later than 6 months following the end of the financial year. The annual financial report shall be published pursuant to the Directive on the transparency of information.

Vis-à-vis investors, AIFMs must make the following information available to them, namely:

  • a description of the AIF’s investment strategy and objectives;
  • a description of all fees, charges and expenses;
  • a description of the main legal implications of the contractual relationship;
  • the identity of the AIFM, the AIF’s depositary and auditor;
  • the identity of the prime broker.

In addition, AIFMs must periodically disclose to investors:

  • the percentage of the AIF’s assets subject to special arrangements;
  • any new arrangements for managing the liquidity of the AIF;
  • the current risk profile of the AIF.

The competent authorities of the AIFM’s home Member State must also be kept abreast of the principal markets and instruments where they trade on behalf of the AIFs they manage.

AIFMs managing specific types of AIF

This Directive distinguishes two types of AIFMs:

  • AIFMs managing leveraged AIFs (leverage is the effect on financial yield of different extents of the use of debt): the competent authorities of the AIFM’s home Member State must use the information that the AIFM provides in order to determine whether leverage contributes to increasing systemic risk in the financial system. In return, the AIFMs must demonstrate that the leverage limits set for each AIF they manage are reasonable.
  • AIFMs managing AIFs which acquire control of non-listed companies and issuers (control shall mean more than 50 % of the voting rights of the companies): AIFMs must notify the following of the acquisition of control:

    1. the non-listed company;
    2. the shareholders of the non-listed company;
    3. the competent authorities of the home Member State of the AIFM.

Rights of EU AIFMs to market and manage AIFs

AIFMs may market units or shares of any AIF that they manage. In that case, they must notify the competent authorities of their home Member State in respect of each AIF that they intend to market. The documentation to be provided is set out in Annex IV.

Specific risks in relation to third countries

AIFMs are permitted to manage third country AIFs which are not marketed in the EU provided that certain rules are complied with and that cooperation arrangements are in place between the competent authorities of the home Member State of the AIFM and the supervisory authorities of the third country where the AIF is established.

Key terms of the Act
  • AIFMs: legal persons whose regular business is managing one or more AIFs.
  • Alternative investment funds (AIFs): collective investment undertakings, including investment compartments thereof, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and are not subject to the Directive on undertakings for collective investment in transferable securities.
  • Feeder AIF: an AIF which:
    1. invests at least 85 % of its assets in units or shares of another AIF (the “master AIF”);
    2. invests at least 85 % of its assets in more than one master AIF where those master AIFs have identical investment strategies;
    3. has otherwise an exposure of at least 85 % of its assets to such a master AIF.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2011/61/EU

21.7.2011

22.7.2013

OJ L 174 of 1.7.2011

Insurance undertakings: supervision

Insurance undertakings: supervision

Outline of the Community (European Union) legislation about Insurance undertakings: supervision

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Single market for services > Financial services: insurance

Insurance undertakings: supervision

Document or Iniciative

Directive 98/78/EC of the European Parliament and of the Council of 27 October 1998 on the supplementary supervision of insurance undertakings in an insurance group [See amending acts].

Summary

The Directive applies to insurance undertakings * with their registered office in the European Union (EU).

The Directive requires Member States to extend supervision (“supplementary supervision”) to all other entities that could have a bearing on the financial and operating position of a supervised insurance undertaking, including undertakings related to * or participating in * the insurance undertaking. Its scope extends to the following enterprises with which an insurer may have a parent/subsidiary relationship, or in which a participation * exists:

  • reinsurance undertakings *;
  • holding companies * (a distinction is made between financial holding companies with subsidiaries operating principally or exclusively in the insurance sector and mixed-activity holding companies with a broader range of activity);
  • non-member-country insurance and reinsurance undertakings *.

The Member States or the competent authorities * responsible for exercising supplementary supervision may waive supervision if it is deemed inappropriate or if the undertaking is of negligible interest.

Adequate internal mechanisms must exist for the production of relevant information in each insurance undertaking subject to supplementary supervision.

The competent authorities may carry out within their territory, themselves or through the intermediary of persons whom they appoint for that purpose, on-the-spot verification of information received by them.

Should the competent authorities of a Member State wish to verify information concerning an insurance undertaking situated in another Member State, they must ask the competent authorities of that other Member State to have that verification carried out.

Intra-group transactions must not jeopardise the solvency of the insurance undertaking. This applies to transactions between an insurance undertaking and its parent or subsidiaries as well as to transactions with an enterprise in which an insurance undertaking holds a participation.

The competent authorities are informed of intra-group transactions by way of an annual reporting requirement. Only significant transactions (loans, investments, etc) must be notified. The competent authorities must take appropriate measures at the level of the insurance undertaking when its solvency cannot be adequately guaranteed.

The Member States must ensure that an adjusted solvency calculation is carried out in compliance with Annex I to the Directive.

Directive 2002/87/EC amends the Directive in order to establish common standards for the prudential supervision of financial conglomerates and to create a level playing field and legal certainty for the financial institutions concerned.

The aim of Directive 2005/1/EC is to ensure institutional and legal coherence with the approach taken in the financial services industry. As of its entry into force, the European Insurance and Occupational Pensions Committee, established by Decision 2004/9/EC, replaces the Insurance Committee as the advisory body responsible for supporting the Commission in this area.

This Directive is repealed by the Directive on the taking-up and pursuit of the business of insurance and reinsurance as of 1 November 2012.

Key terms used in the act
  • Insurance undertaking: an undertaking which has received official authorisation in accordance with Article 6 of Directive 73/239/EEC.
  • Related undertaking: an undertaking which is either a subsidiary or another undertaking in which a participation is held.
  • Participating undertaking: either a parent undertaking or another undertaking which holds a participation.
  • Participation: participation within the meaning of Article 17, first sentence, of Directive 78/660/EEC or the holding, directly or indirectly, of 20 % or more of the voting rights or capital of an undertaking.
  • Reinsurance undertaking: an undertaking, other than an insurance undertaking or a non-member-country insurance undertaking, the main business of which consists in accepting risks ceded by an insurance undertaking, a non-member-country insurance undertaking or other reinsurance undertakings.
  • Insurance Holding Company: a parent undertaking the main business of which is to acquire and hold participations in subsidiary undertakings, where those subsidiary undertakings are exclusively or mainly insurance undertakings, reinsurance undertakings or non-member-country insurance undertakings, one at least of such subsidiary undertakings being an insurance undertaking.
  • Non-member-country insurance undertaking: an undertaking which would require authorisation in accordance with Article 6 of Directive 73/239/EEC if it had its registered office in the Community.
  • Competent authorities: the national authorities which are empowered by law or regulation to supervise insurance undertakings.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 98/78/EC

5.12.1998

5.6.2000

OJ L 330 of 5.12.1998

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2002/87/EC

11.2.2003

10.8.2004

OJ L 35 of 11.2.2003

Directive 2005/1/EC

13.4.2005

13.5.2005

OJ L 79 of 24.3.2005

Directive 2005/68/EC

10.12.2005

10.12.2007

OJ L 323 of 9.12.2005

Successive amendments and corrections to Directive 98/78/EC have been incorporated in the basic text. This consolidated version  is for reference purpose only.

Related Acts

Council Directive 2005/68/EC of 16 November 2005 on reinsurance and amending Council Directives 73/239/EEC, 92/49/EEC as well as Directives 98/78/EC and 2002/83/EC [Official Journal L 323 of 9.12.2005].

This Directive specifically mentions Directive 98/78/EC in Article 59 and provides for specific amendments in the fields of “supplementary supervision of insurance and reinsurance undertakings” (application, scope and competent authorities). Specific rules are laid down for access to information, cooperation between competent authorities and intra-group transactions.

Packaged retail investment products

Packaged retail investment products

Outline of the Community (European Union) legislation about Packaged retail investment products

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Packaged retail investment products

Document or Iniciative

Communication from the Commission to the European Parliament and to the Council of 30 April 2009 – Packaged retail investment products [COM(2009) 204 final – Not published in the Official Journal].

Summary

This Communication presents the measures planned by the European Commission in the packaged retail investment products sector and more specifically in terms of mandatory information and commercial practices. The aim is bring the Community framework into line with market reality. In this regard, the Commission intends to introduce, at European level, a horizontal approach in the field of retail investment products.

Characteristics

Packaged retail investment products have the following points in common:

  • they offer exposure to underlying financial assets;
  • their primary function is capital accumulation;
  • they are designed with the mid- to long-term in mind;
  • they are marketed directly to retail investors.

These products include the following types:

  • investment (or mutual) funds;
  • investments packaged as life insurance policies;
  • retail structured securities;
  • structured term deposits.

Current weaknesses

Packaged retail investment products can be at the origin of risks where there is a sharp asymmetry in information and expertise between the manufacturers and distributors of products and retail investors.

Another main weakness of this type of product is related to the inconsistencies in the European regulatory framework in force. It is currently inadequate with regard to the retail investment market reality and is not able to offer investors a satisfactory level of protection.

The main failings of the Community framework for packaged retail investment products have their origin in the lack of key investor disclosures and in the regulation of commercial practices.

Proposals for a horizontal approach

Key investor disclosures

Information for retail investors should be harmonised and standardised as much as possible so that they are better able to compare products.

Key information made available to investors should comply with the following criteria:

  • be fair, clear and not misleading;
  • guide investors, enabling them to make informed investment decisions (performance, risks, charges, etc.);
  • be short and simple;
  • be provided at the right time.

Selling of packaged retail investment products by intermediaries and other distributors

The MiFID (Markets in Financial Instruments Directive) provisions are considered to be a benchmark on conduct of business and the management of conflicts of interest. The Commission suggests that the scope of MiFID be extended to all packaged retail investment products.

The horizontal approach governing the regulation of commercial practices would be based on the following principles:

  • investors should be fairly treated;
  • products sold should correspond to the profile and needs of the investor;
  • risks should be clearly communicated to the investor if they decide not to take advice;
  • conflicts of interest must not adversely affect investors;
  • investors should receive clear and effective disclosures of remuneration arrangements and all charges, commissions or fees paid;
  • those assessing the suitability of products should fully understand all their features.

It is still necessary however to establish a generic definition of the concept of “a packaged retail investment product”, and a clear designation of the products that fall within scope.

Context

This Communication is the result of work carried out following the request by the ECOFIN Council in May 2007, and has the aim of restoring confidence with regard to financial markets. It is part of the reforms launched by the European Union since the start of the financial crisis in October 2008. This demonstrated the importance of ensuring transparency in financial products and brought to light the disastrous consequences of irresponsible marketing.

Financial conglomerates

Financial conglomerates

Outline of the Community (European Union) legislation about Financial conglomerates

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: general framework

Financial conglomerates

Document or Iniciative

European Parliament and Council Directive 2002/87/EC of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC, 93/22/EEC, 98/78/EC and 2000/12/EC [See amending acts].

Summary

This Directive provides for supervision of the conglomerate and promotes closer coordination between the supervisory authorities for the individual sectors and the exchange of information between them.

Characteristic thresholds of a financial conglomerate

The Directive considers that the activities of a group occur mainly in the financial sector where the balance sheet total of the regulated and non-regulated financial sector entities in the group exceeds 40 % of the group’s balance sheet total.

The most important financial sector in a financial conglomerate is the sector with the highest average. The Directive regards the group as a conglomerate where it has significant activities in another financial sector.

Target entities for supplementary supervision at the level of a financial conglomerate

Supplementary supervision is to be applied to:

  • any regulated entity at the head of a financial conglomerate;
  • any regulated undertaking which has as its parent company a mixed financial holding company with its head office in the Union;
  • any regulated entity connected to another entity in the financial sector.

Solvency

Financial conglomerates must have adequate capital of their own. In particular, the multiple gearing of own funds must be abolished. The parent firm is no longer able to issue loans to finance its regulated subsidiaries («excessive leveraging»).

The proposal defines methods for calculating solvency ratios and capital adequacy at group level.

«Intra-group» transactions and risk concentration

Regulated entities and mixed financial holding companies are required to report:

  • any significant risk concentration at the level of the financial conglomerate;
  • any intra-group transaction.

An intra-group transaction is regarded as significant if it exceeds 5 % of the total amount of capital adequacy requirements of own funds at the level of a financial conglomerate.

Internal control mechanisms

Regulated entities at the level of a financial conglomerate are required to set internal control mechanisms which enable all the incurred risks to be measured.

Reporting procedures must also be implemented to identify, measure, monitor and control the intra-group transactions, as well as the risk concentration.

A mixed committee of European supervisory authorities is responsible for ensuring coherent cross-sector and cross-border supervision and compliance with EU legislation.

Supervision

The Directive provides for the appointment of a competent authority or coordinator responsible for the supplementary supervision of regulated entities of a financial conglomerate. It is responsible for:

  • coordinating and disseminating information;
  • ensuring supervisory overview and assessment of the financial situation;
  • assessing compliance with the rules on capital adequacy and of risk concentration and intra-group transactions;
  • assessing the financial conglomerate’s structure, organisation and internal control system;
  • planning and coordinating the supervisory activities.

The competent authorities responsible for supervising regulated entities belonging to a financial conglomerate and the coordinator for the financial conglomerate are required to cooperate closely with each other. In particular, they must cooperate in order to achieve harmonised supervisory practices.

Parent companies with their head office outside the European Union (EU)

Regulated entities whose head office is located outside the EU must be subject to supervision which is equivalent to that provided for by this Directive.

Role of the European Commission

The Commission is responsible for clarifying certain concepts, such as credit institutions, insurance undertakings and investment firms. It must also establish more precise methods for calculating capital adequacy in order to take account of developments on financial markets and prudential techniques.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2002/87/EC

11.2.2003

11.8.2004

OJ L 35, 11.2.2002

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2005/1/EC

13.4.2005

13.5.2005

OJ L 79, 24.3.2005

Directive 2008/25/EC

21.3.2008

OJ L 81, 20.3.2008

Directive 2010/78/EU

4.1.2011

OJ L 331, 15.12.2010

Successive amendments and corrections to Directive 2002/87/EC have been incorporated in the basic text. This consolidated version is for reference purpose only.


Another Normative about Financial conglomerates

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Internal market > Single market for services > Financial services: banking

Financial conglomerates

Document or Iniciative

European Parliament and Council Directive 2002/87/EC of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC, 93/22/EEC, 98/78/EC and 2000/12/EC [See amending acts].

Summary

This Directive provides for supervision of the conglomerate and promotes closer coordination between the supervisory authorities for the individual sectors and the exchange of information between them.

Characteristic thresholds of a financial conglomerate

The Directive considers that the activities of a group occur mainly in the financial sector where the balance sheet total of the regulated and non-regulated financial sector entities in the group exceeds 40 % of the group’s balance sheet total.

The most important financial sector in a financial conglomerate is the sector with the highest average. The Directive regards the group as a conglomerate where it has significant activities in another financial sector.

Target entities for supplementary supervision at the level of a financial conglomerate

Supplementary supervision is to be applied to:

  • any regulated entity at the head of a financial conglomerate;
  • any regulated undertaking which has as its parent company a mixed financial holding company with its head office in the Union;
  • any regulated entity connected to another entity in the financial sector.

Solvency

Financial conglomerates must have adequate capital of their own. In particular, the multiple gearing of own funds must be abolished. The parent firm is no longer able to issue loans to finance its regulated subsidiaries («excessive leveraging»).

The proposal defines methods for calculating solvency ratios and capital adequacy at group level.

«Intra-group» transactions and risk concentration

Regulated entities and mixed financial holding companies are required to report:

  • any significant risk concentration at the level of the financial conglomerate;
  • any intra-group transaction.

An intra-group transaction is regarded as significant if it exceeds 5 % of the total amount of capital adequacy requirements of own funds at the level of a financial conglomerate.

Internal control mechanisms

Regulated entities at the level of a financial conglomerate are required to set internal control mechanisms which enable all the incurred risks to be measured.

Reporting procedures must also be implemented to identify, measure, monitor and control the intra-group transactions, as well as the risk concentration.

A mixed committee of European supervisory authorities is responsible for ensuring coherent cross-sector and cross-border supervision and compliance with EU legislation.

Supervision

The Directive provides for the appointment of a competent authority or coordinator responsible for the supplementary supervision of regulated entities of a financial conglomerate. It is responsible for:

  • coordinating and disseminating information;
  • ensuring supervisory overview and assessment of the financial situation;
  • assessing compliance with the rules on capital adequacy and of risk concentration and intra-group transactions;
  • assessing the financial conglomerate’s structure, organisation and internal control system;
  • planning and coordinating the supervisory activities.

The competent authorities responsible for supervising regulated entities belonging to a financial conglomerate and the coordinator for the financial conglomerate are required to cooperate closely with each other. In particular, they must cooperate in order to achieve harmonised supervisory practices.

Parent companies with their head office outside the European Union (EU)

Regulated entities whose head office is located outside the EU must be subject to supervision which is equivalent to that provided for by this Directive.

Role of the European Commission

The Commission is responsible for clarifying certain concepts, such as credit institutions, insurance undertakings and investment firms. It must also establish more precise methods for calculating capital adequacy in order to take account of developments on financial markets and prudential techniques.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2002/87/EC

11.2.2003

11.8.2004

OJ L 35, 11.2.2002

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2005/1/EC

13.4.2005

13.5.2005

OJ L 79, 24.3.2005

Directive 2008/25/EC

21.3.2008

OJ L 81, 20.3.2008

Directive 2010/78/EU

4.1.2011

OJ L 331, 15.12.2010

Successive amendments and corrections to Directive 2002/87/EC have been incorporated in the basic text. This consolidated version is for reference purpose only.

Undertakings for collective investment in transferable securities : applicable rules

Undertakings for collective investment in transferable securities : applicable rules

Outline of the Community (European Union) legislation about Undertakings for collective investment in transferable securities : applicable rules

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Undertakings for collective investment in transferable securities (UCITS): applicable rules

Document or Iniciative

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (Text with EEA relevance) [See amending acts].

Summary

This Directive lays down rules applying to undertakings for collective investment in transferable securities (UCITS).

What sort of undertaking does the Directive apply to?

UCITS include undertakings:

  • with the sole object of collective investment in transferable securities or in other liquid financial assets, capital raised from the public and which operate on the principle of risk-spreading;
  • the units of which are repurchased or redeemed out of these undertakings’ assets.

These undertakings may be constituted under the following laws:

  • contractual law (as common funds managed by management companies *);
  • trust law (as unit trusts);
  • statute (as investment companies).

However, this Directive does not apply to:

  • collective investment undertakings of the closed-ended type;
  • collective investment undertakings which raise capital without promoting the sale of their units to the public in the European Union;
  • collective investment undertakings the units of which may be sold only to the public in third countries;
  • categories of collective investment undertakings prescribed by regulations.

What are the conditions for the authorisation of a UCITS?

A UCITS must be authorised by the competent authorities of its home Member State in order to be able to pursue activities. The competent authorities may not authorise a UCITS under the following circumstances:

  • if the investment company does not comply with the preconditions;
  • if the management company is not authorised for the management of UCITS in its home Member State.

The European Securities and Markets Authority (ESMA) can elaborate technical regulatory standards in order to specify the information to be provided to the competent authorities as part of a request for approval. ESMA publishes the list of approved management companies on its website.

The Commission has a delegation of power concerning the elaboration of draft technical standards.

Obligations regarding management companies

The activity of management of UCITS comprises portfolio management, marketing and administration including inter alia legal and fund management accounting services, valuation and pricing or issues and redemptions.

The competent authorities are to grant the authorisation of a management company under the following conditions:

  • it has a capital of EUR 125 000;
  • it complies with the organisational requirements laid down by this Directive;
  • the organisational structure of the management company is set out.

Relations with third countries are covered by the Markets in Financial Instruments Directive (MiFID). If difficulties are encountered in the marketing of units in a third country, Member States inform ESMA and the Commission.

Management companies may delegate to third parties one or more of their own functions.

Management company passport

A management company established in a Member State is authorised to pursue its activities in another Member State by establishing a branch or under the freedom to provide services.

In cases where a management company established in a third country refuses to provide information or infringes the provisions of the host Member State, the competent authorities of the host Member State have the option of taking certain measures, such as preventing the management company from carrying out any new operations on the territory.

Obligations regarding investment companies

Investment companies are undertakings:

  • with the sole object of collective investment in transferable securities or in other liquid financial assets, capital raised from the public and which operate on the principle of risk-spreading;
  • the units of which are repurchased or redeemed out of these undertakings’ assets.

Member States shall grant authorisation to establish an investment company that has not designated a management company if the investment company has an initial capital of at least EUR 300 000.

Investment firms which have not designated a management company must, however, enclose a programme of operations with the application for authorisation.

Investment companies shall manage only assets of their own portfolio and shall not manage assets on behalf of a third party.

Each investment company’s home Member State shall draw up prudential rules for investment companies that have not designated a management company.

Obligations regarding depositaries

The assets of a UCITS shall be entrusted to a depositary for safe-keeping. They must:

  • ensure that the sale, issue, repurchase, redemption and cancellation of units effected on behalf of a common fund or by a management company are carried out in accordance with the applicable national law and the fund rules;
  • ensure that the value of units is calculated in accordance with the applicable national law and the fund rules (common funds);
  • carry out the instructions of the management company, unless they conflict with the applicable national law or the fund rules (common funds);
  • ensure that in transactions involving a common fund’s assets any consideration is remitted to it within the usual time limits;
  • ensure that a common fund’s income is applied in accordance with the applicable national law and the fund rules.

The depositary must be established in the same Member State as the UCITS.

However, certain investment firms may decide not to have a depositary. In this case, the Member States shall inform ESMA and the Commission of the identity of those companies which benefit from this derogation.

Mergers of UCITS

Member States may allow UCITS to perform cross-border * and domestic * mergers. The techniques used must be provided for under the laws of the Member State.

When a merger takes place, the merging UCITS must communicate information concerning the proposed merger, the common draft terms of merger, and a statement by each of the depositaries of the UCITS concerned.

Member States shall require that the common draft terms of merger include the following particulars:

  • the background to and the rationale for the proposed merger;
  • the expected impact of the proposed merger;
  • the calculation method of the exchange ratio;
  • the planned date.

Obligations concerning the investment policies of UCITS

The investments of a UCITS shall mainly comprise:

  • transferable securities and money market instruments admitted to or dealt on a regulated market;
  • transferable securities and money market instruments admitted to or dealt on another market in a Member State;
  • recently issued transferable securities;
  • units of authorised UCITS or other collective investment undertakings;
  • deposits with credit institutions;
  • financial derivative instruments.

UCITS may not acquire precious metals.

The Directive also establishes requirements to be met by the initiator in order for a UCITS to be permitted to invest in securities and other financial instruments of this type, as well as the qualitative requirements to be met by the UCITS that invest in these securities or other financial instruments.

The UCITS Directive gives investment limits for each category of asset. ESMA can elaborate technical regulatory standards which aim, in particular, at clarifying the provisions relating to the categories of assets.

ESMA must have access to all the information in a consolidated format in order to ensure the surveillance of systematic risks at EU level.

Master-feeder structures

A feeder UCITS is a UCITS which is authorised to invest at least 85 % of its assets in units of another UCITS or an investment compartment thereof.

A feeder UCITS may hold up to 15 % of its assets in the following:

  • ancillary liquid assets;
  • financial derivative instruments;
  • movable or immovable property.

The competent authorities of the home Member State of a feeder UCITS must give their approval if it invests in a master UCITS.

Obligations concerning information to be provided to investors

Investment firms and management companies must publish a prospectus, a half-yearly report and an annual report for each of the common funds which they manage. Furthermore, Member States shall require that an investment company and, for each of the common funds it manages, a management company, draw up a short document containing key information for investors (“key investor information”).

UCITS which market their units in Member States other than those in which they are established

UCITS may market their units in another Member State subject to a notification procedure.

Member States shall appoint the competent authorities in order to carry out the functions provided for by this Directive. The competent authorities are required to cooperate with ESMA.

Key terms of the Act

  • Management company: a company, the regular business of which is the management of UCITS in the form of common funds or of investment companies (collective portfolio management of UCITS);
  • Cross-border merger: the merger of UCITS at least two of which are established in different Member States, or established in the same Member State into a newly constituted UCITS established in another Member State;
  • Domestic merger: a merger between UCITS established in the same Member State where at least one of the involved UCITS has been notified.

Reference

Act Entry into force Deadline for transposition in the Member States Official Journal

Directive 2009/65/EC

7.12.2009

30.6.2011

OJ L 302 of 17.11.2009

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Directive 2010/78/EU

4.1.2011

31.12.2011

OJ L 331 of 15.12.2010

Directive 2011/61/EU

21.7.2011

22.7.2013

OJ L 174 of 1.7.2011

Successive amendments and corrections to Directive 2009/65/EC have been incorporated in the basic text. This consolidated version is for reference purpose only.

Related Acts

Regulations

Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website [Official Journal L 176 of 10.7.2010].

This Regulation is aimed at harmonising key investor information.
It specifies the information to be provided concerning the investment policy objectives of UCITS and lays down detailed rules on the presentation of the risk and reward profile of the investment by requiring use of a synthetic indicator.
It also specifies the format for the presentation and explanation of charges incurred by investors.
It also applies to particular UCITS structures consisting of two or more investment compartments.

Commission Regulation (EU) No 584/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards the form and content of the standard notification letter and UCITS attestation, the use of electronic communication between competent authorities for the purpose of notification, and procedures for on-the-spot verifications and investigations and the exchange of information between competent authorities [Official Journal L 176 of 10.7.2010].

This Regulation aims at harmonising the procedure for notification of marketing of units of UCITS in another Member State.
It specifies on the one hand the form and content of the standard notification letter to be used by UCITS. It defines on the other hand the form and content of the attestation to be used by the competent authorities of Member States to confirm that the UCITS fulfils the conditions laid down by Directive 2009/65/EC. The Regulation also sets out a detailed procedure for the electronic transmission of the notification file between competent authorities.
It also lays down procedures for the supervision of fund managers’ frontier activities.

Directives

Commission Directive 2010/43/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company [Official Journal L 176 of 10.7.2010].

Commission Directive 2010/44/EU of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards certain provisions concerning fund mergers, master-feeder structures and notification procedure [Official Journal L 176 of 10.7.2010].

Investment research and financial analysts

Investment research and financial analysts

Outline of the Community (European Union) legislation about Investment research and financial analysts

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Investment research and financial analysts

Document or Iniciative

Communication from the Commission to the Council and the European Parliament of 12 December 2006 entitled “Investment research and financial analysts” [COM(2006) 789 final – not published in the Official Journal].

Summary

Investment research provides financial information to ensure appropriate pricing, help issuers to raise capital and ensure deep and liquid secondary markets for financial instruments.

Financial analysts carry out this type of research by synthesising raw information to make it accessible. This work helps investors make decisions and facilitates research, investment advice and marketing communication by intermediaries.

Analysts are of great assistance for the financial markets. They do, however, face a variety of conflicts of interest. The interests of a firm or of clients may, for example, conflict with the interests of those to whom the research is directed. The Commission is therefore considering measures to improve the value and integrity of investment research.

This communication echoes the work done by the Forum Group on Financial Analysts and the International Organisation of Securities’ Commissioners Technical Committee (OICV-IOSCO). Work of the Forum Group and the OICV-IOSCO

The focus of the Forum Group’s report is the prevention, management, monitoring and disclosure of conflicts of interest relating to investment research. It gives recommendations to analysts involved in securities offerings or other finance work. It also advises companies on best practice, dissemination of investment research to the retail market, remuneration of analysts and securities dealing by analysts.

The OICV-IOSCO is focused on analysts working in integrated investment banks or broker-dealers, although the effects of conflicts of interest also affect other individuals. The report seeks to implement consistent rules relating to:

  • identification, avoidance, management, disclosure and elimination of conflicts of interest;
  • the integrity of analysts and their research;
  • education of investors concerning the conflicts of interest faced by analysts.

Market Abuse Directive and Markets in Financial Instruments Directive (MiFID)

Successive Directives on market abuses require information which advises an investment strategy to be fair and disclose the existence of conflicts of interest. The Commission has set up a disclosure regime for conflicts of interest that could influence investment data.

As soon as a firm provides investment services, it must be authorised by the MiFID and comply with its requirements. The MiFID requires firms to:

  • take steps to identify conflicts of interest;
  • disclose their conflicts of interest policy;
  • define and implement measures designed to serve their clients’ interests;
  • indicate where the steps taken are not sufficient to ensure the client’s interests;
  • inform their clients of the nature and origin of conflicts of interest.

Conflicts of interest – investment research

A recommendation described as “investment research” or something similar, or presented as objective and independent, is deemed to qualify as investment research. Generally directed at the client, such a recommendation may not constitute advice, as it must correspond to the needs of a specific client or be based on the specific situation of the client. Investment firms must effectively separate activities that serve clients and those that serve business interests. Thus, a firm that gives recommendations not constituting research must indicate that these are not given in accordance with standards designed to promote objectivity.

To guarantee their objectivity, investment firms must prevent persons involved from having certain dealings, particularly if they have knowledge of the timing or content of research before the public.

Firms disseminating information produced by third parties are not bound by these measures, provided that they have not altered this information and that they have verified the application of MiFID requirements.

Four outstanding issues

Work done by the Forum Group and the OICV-IOSCO has left four issues outstanding. The first relates to the possibility of mandatory registration by analysts of their qualifications. However, problems of analyst subjectivity do not derive from their lack of competence, but rather from the failure of firms to manage conflicts of interest affecting their research.

The second issue relates to the research services of independent firms and investment banks. Although the former are financed by their clients and the latter more indirectly, there are not necessarily quality differences between the two. For the research they carry out to be treated fairly, the MiFID permits investment firms to accept inducements, as long as these improve the quality of services and are disclosed to the client. This authorisation is valid for ‘bundled’ or ‘softed’ services provided by brokerage houses to portfolio managers.

The third issue relates to implementation of a best practice code to cover issuer relations with analysts. The rules set out by the Market Abuse Directive and the MiFID prohibit issuers from having undue editorial influence over research. They also prohibit them from disclosing price-sensitive information to analysts ahead of its release to the rest of the marketplace. For the Commission, the development of a best practice code will make relations between issuers and analysts more professional.

The final point relates to investor education. The Commission considers that it is the Member States, trade associations and investment firms that must take action in this area. The Commission itself undertakes to inform and educate consumers, notably through a conference that aims to bring together best practice in consumer education and to find out how to improve their financial literacy.

Investment services

Investment services

Outline of the Community (European Union) legislation about Investment services

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Internal market > Financial services: transactions in securities

Investment services

The European Union is liberalising access to stock-exchange membership and financial markets in host Member States for investment firms authorised to provide the services concerned in their home Member State.

Document or Iniciative

Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field [See amending acts].

Summary

The Directive applies to all investment firms. However, some of its provisions are not applicable to credit institutions whose authorisation covers one or more of the investment services listed in the annex.

Criteria for granting and withdrawing authorisation of investment firms in the home Member State. The competent authorities in each Member State must ensure that:

  • the investment firm has sufficient initial financial resources for the proposed activities;
  • the persons directing the business have sufficient professional integrity and experience;
  • holders of qualifying participations are suitable persons.

Authorisation applications have to be accompanied by a programme of operations. Member States have to grant or refuse authorisation within six months of submission of a complete application.

Introduction of a procedure for reciprocity with third countries. Member States must inform the Commission of any authorisation of a direct or indirect subsidiary of one or more parent undertakings in third countries and of any holding acquired by a parent undertaking in a Community investment firm such that the latter would become its subsidiary.

Whenever it appears to the Commission that a third country is not granting Community investment firms effective market access comparable to that granted by the Community to investment firms from that country, it may initiate negotiations in order to secure comparable competitive opportunities for Community investment firms.

The competent authorities of the home Member State are responsible for the prudential supervision of an investment firm. However, responsibility for implementing the rules of conduct and for monitoring compliance with them remains within the competence of the host Member State, which, when applying the rules, has to respect the principle of the public interest.

Proposed changes in qualifying holdings in an investment firm must be notified to the supervisory authorities so as to enable them to assess the suitability of the new shareholders/members.

The investment firm is required to indicate to investors which compensation scheme applies. It is envisaged that the various compensation schemes will be harmonised as soon as possible.

An investment firm authorised in another Member State is permitted to advertise by all means of communication available in the host Member State.

Member States must permit investment firms from other Member States to carry out in their territory the activities authorised by the home country, either by establishing a branch or by providing services without a branch.

Host Member States may not make the establishment of a branch or the provision of services by an investment firm authorised by its home Member State subject to further authorisation or to a requirement to provide endowment capital or any other measure having equivalent effect.

In certain circumstances, a Member State may require that the transactions connected with investment services be carried out on an organised market. However, investment firms, irrespective of whether they are banks, may become members of such an organised market.

Rules for notification to be made and formalities to be completed when either a branch is opened or services are provided in a host Member State.

Procedures to be followed by the authorities of either the home or the host Member State where an investment firm having an established branch or providing services fails to comply with the legal provisions in force in the host Member State.

Annex defining the investment activities, other services and financial instruments coming within the scope of the Directive.

Directive 95/26/EC amends the Directive to coordinate all the provisions concerning communications between authorities for the entire financial sector.

Directive 97/9/EC amends the Directive to establish an investor compensation scheme.

Directive 2000/64/EC amends the Directive to extend the rules on the exchange of confidential information, pursuant to a cooperation agreement with a non-member country, with competent authorities or bodies which, by virtue of their duties, help to strengthen the stability of the financial system. The scope for exchanging confidential information only with the corresponding competent authorities of non-member countries proved to be too restrictive.

Directive 2002/87/EC introduces specific prudential legislation for financial conglomerates as back-up for the sectoral prudential legislation applicable to credit institutions, insurance companies and investment firms. It provides for minimum alignment of the prudential legislation for homogeneous groups active in a single sector (banking, insurance, investment) on that applicable to financial conglomerates, both with a view to protecting consumers, depositors and investors and with a view to strengthening the European financial market.

With effect from 1 November 2007, Directive 2004/39/EC will repeal Directive 93/22/EEC (see Directive 2006/31/EC). References to Directive 93/22/EEC will then be construed as references to Directive 2004/39/EC.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Directive 93/22/EEC [adoption: cooperation] 01.07.1995 31.12.1995 OJ L 141 of 11.06.1993
Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal
Directive 95/26/EC 18.07.1996 OJ L 168 of 18.07.1995
Directive 97/9/EC 26.03.1997 26.09.1998 OJ L 84 of 26.03.1997
Directive 2000/64/EC 17.11.2000 17.11.2002 OJ L 290 of 17.11.2000
Directive 2002/87/EC 11.02.2003 11.08.2004 OJ L 35 of 11.02.2003
Directive 2004/39/EC 30.04.2004 30.04.2006 OJ L 145 of 30.04.2004

Related Acts

Commission communication of 14 November 2000 on the application of conductofbusiness rules under Article 11 of Directive 93/22/EEC [COM(2000) 722 final Not published in the Official Journal].
This text is the response to one of the objectives set by the Financial Services Action Plan. One of the practical obstacles to the smooth operation of the securities markets stems from the uncertainty in the application of the rules of conduct laid down by Article 11, which governs the relationship between service providers and their customers. It is therefore the Commission’s view that it is necessary to facilitate cross-border provision of services and to apprise Parliament, national authorities, supervisory bodies and operators of the nature of future revisions of Directive 93/22/EEC.
The context in which Article 11 is applicable has changed as new types of investors are present on the market and firms are developing new technologies. Account must also be taken of the adoption of the e-commerce Directive, which establishes the “home country” principle in relation to the electronic supply of investment services to professionals.
As regards the implementation of Directive 93/22/EEC, the Commission notes that all the Member States have complied with the general obligation to differentiate between professional investors and retail investors, but the way in which the distinction is made varies considerably. The services supplied to professional investors should be covered by the rules of conduct of the country of the service provider (home country). Retail investors for their part could be required by the host-country authorities to comply with local rules of conduct. It would also be logical if it were the authority of the country in which the branch of the firm was located that was competent to supervise relations between the branch and its customers, whether professional or retail. The Commission also considers that it is necessary to introduce the common template for categorising professional investors adopted by the national securities supervisors meeting within FESCO (Forum for European Securities Commissions).
At present, the Member States use different criteria to determine “where the service is provided”, even though that is where the rules of conduct are verified. They apply their own standards to cross-frontier investment services, even though the home country of the service provider already provides an equivalent level of protection.

Commission communication of 15 November 2000 on upgrading the Investment Services Directive [COM(2000) 729 final Not published in the Official Journal].
The Commission considers that it is necessary to update the legislative framework because of the technical changes to exchanges and clearing systems and the arrival of the euro and new technologies. The communication launches extensive consultations with all the parties concerned on the best way of updating Directive 93/22/EEC. For example, the “single passport” for investment firms should be sufficient for inter-professional business and could be progressively extended to cover services to retail investors. As regards the organisation of exchanges and clearing systems, it would be useful to apply common principles to trading systems, including new electronic arrangements.
On 3 April 2001 Parliament transmitted a resolution on this communication [Official Journal C 21 of 24.01.2002].
On 22 April 2002 the Commission launched a second round of consultation on this initiative.