Hoppa yfir valmynd
Ministry of Industries and Innovation

Regulation No. 995/2007 on investor protection and the business conduct of financial undertakings

30 October 2007

REGULATION
on investor protection and the business conduct of financial undertakings

CHAPTER I

Scope and definitions

Article 1

Contents and scope

This Regulation applies to financial undertakings and contains rules on the application of the provisions of Chapter II of Act No. 108/2007 on securities transactions.

Article 2

Definitions

For the purposes of this Regulation the following terms shall have the meanings hereinafter assigned to them:

1)   Employee of a financial undertaking:

      a)   director, partner or equivalent, manager or tied agent of the financial undertaking;

      b)   director, partner or equivalent, or manager of any tied agent of the financial undertaking;

      c)   an employee of the financial undertaking or of a tied agent of the undertaking, or any person whose services are placed under the control of the financial undertaking or a tied agent of the undertaking and who is involved in the provision by the undertaking of services in the area of securities transactions;

      d)   a natural person who is directly involved in the provision of services to the financial undertaking or to its tied agent under an outsourcing arrangement for the purpose of the provision by the undertaking of services in the area of securities transactions;

2)   Person with whom an employee of a financial undertaking has a family relationship:

      a)   the spouse, registered partner or co-habiting partner of the employee of a financial undertaking;

      b)   a dependent child, adoptive child or stepchild of the employee of a financial undertaking;

      c)   any other relative of the employee of a financial undertaking who has shared the same household as that employee for at least one year on the date of the transaction concerned.

3)   Distribution channels: Channels through which information is, or is likely to become, publicly available, for instance if the information is distributed to a large number of persons.

4)   Personal transactions: A trade in a financial instrument effected by or on behalf of the employee of a financial undertaking, where at least on of the following criteria are met:

      a)   the transactions in question take place outside the scope of the activities that the employee of a financial undertaking carries out in that capacity;

      b)   the trade is carried out for the account of any of the following persons:

            i.     the employee of the financial undertaking;

            ii.    any person with whom the employee of the financial undertaking has a family relationship, or with whom he has close links;

            iii.   a person whose relationship with the employee of a financial undertaking is such that the latter has a direct or indirect material interest in the outcome of the trade, other than a fee or commission for the execution of the trade.

5)   Financial undertaking: A financial undertaking within the meaning of the Act on financial undertakings.

6)   Securities financing transaction: Stock lending or stock borrowing, the lending or borrowing of other financial instruments, a repurchase or reverse repurchase transaction, or a buy-sell back or sell-buy back transaction.

7)   Financial analyst: An employee of a financial undertaking who produces the substance of investment research.

8)   Market under Articles 44 and 46 means: A regulated market, multilateral trading facility, systematic internaliser, market maker, any other party who brings together the buyers and sellers of financial instruments, or a party playing an equivalent role to any of the aforesaid in a state outside the European Economic Area.

9)   Group: In relation to a financial undertaking, the group of which that undertaking forms a part, consisting of a parent undertaking, its subsidiaries and the entities in which the parent undertaking or its subsidiaries hold a participation, as well as undertakings linked to each other by a relationship within the meaning of paragraph 1 of Article 12 of Council Directive 83/349/EEC of 13 June 1983 on consolidated accounts.

10) Durable medium: Any instrument which enables a client to store information addressed personally to that client in a way accessible for future reference for a specific period of time and which allows the unchanged reproduction of the information stored.

11) Outsourcing:  An arrangement of any form between a financial undertaking and a service provider by which that service provider performs a service or an activity which would otherwise be undertaken by the financial undertaking itself.

12) Senior management: The directors, chief executive officer or managing directors of a financial undertaking.

Article 3

Conditions applying to the provision of information

Where, for the purposes of this Regulation, information is required to be provided in a durable medium, this means that the information in question shall be provided in writing on paper. However, financial undertakings may provide information in a durable medium other than paper if:

a)  the provision of information in that manner is appropriate to the context in which the business between the undertaking and the client is, or is to be, carried on; and

b)  the person to whom the information is to be provided, when offered the choice between information on paper or in that other durable medium, specifically chooses the provision of the information in that other medium.

Where, pursuant to Articles 29, 30, 31, 32, 33 or the second paragraph of Article 46 of this Regulation, a financial undertaking provides information to a client by means of a website and that information is not addressed personally to the client, the financial undertaking shall ensure that the following conditions are satisfied:

a)  the provision of that information in that medium is appropriate to the context in which the business between the undertaking and the client is, or is to be, carried on;

b)  the client has specifically consented to the provision of that information in that form;

c)  the client has been notified electronically of the address of the website, and the place on the website where the information may be accessed;

d)  the information on the website is regularly updated;

e)  the information is accessible continuously by means of that website for such period of time as the client may reasonably need to inspect it.

For the purposes of this Article, the provision of information by means of electronic communications shall be treated as appropriate to the context in which the business between the undertaking and the client is, or is to be, carried on if there is evidence that the client has regular access to the internet. The provision by the client of an e-mail address for the purpose of the carrying on of that business shall be treated as such evidence.

II CHAPTER II

Organisational requirements

SECTION 1

Organisation

Article 4

General organisational requirements

Financial undertakings shall comply with the following requirements:

a)  to establish and maintain decision-making procedures and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities;

b)  to ensure that their employees are aware of the rules and procedures which must be followed in the business activities of the undertaking;

c)  to maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the undertaking;

d)  to employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them;

e)  to establish and maintain effective internal reporting and communication of information at all relevant levels of the undertaking;

f)   to maintain adequate records of their business and internal organisation;

g)  to ensure that the performance of multiple functions by their employees does not prevent those employees from discharging any particular function soundly, honestly and professionally.

The measures taken by financial undertakings for the purposes of the above organisational requirements shall take into account the nature and scale of the undertaking's activities.

Financial undertakings shall establish and maintain systems and procedures that are adequate to safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question.

Financial undertakings shall establish a business continuity policy, aimed at ensuring, in the case of an interruption to their systems and procedures, the preservation of essential data and functions and the maintenance of regular activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of regular activities.

Financial undertakings shall establish accounting policies that enable them, at the request of the Financial Supervisory Authority of Iceland, to deliver in a timely manner financial reports which reflect a true and fair view of their financial position and which comply with all applicable accounting standards and rules.

Financial undertakings shall monitor and, on a regular basis, evaluate the adequacy and effectiveness of their systems, internal control mechanisms and arrangements established in accordance with paragraphs 1 to 4, and take appropriate measures to address any deficiencies.

Article 5

Responsibility of senior management

The senior management of a financial undertaking is responsible for ensuring that the undertaking complies with its obligations under laws and rules.

The senior management shall regularly assess and review the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations under laws and rules and take appropriate measures to address any deficiencies.

The senior management shall regularly, and at least annually, receive written reports on the matters covered by the provisions of Articles 6, 7 and 8, indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies.

Article 6

Compliance

Financial undertakings shall establish and maintain adequate policies and procedures designed to detect any risk of failure by the undertaking in question to comply with its obligations under the Act on securities transactions, and put in place procedures to minimise such risk and enable the Financial Supervisory Authority to exercise its powers effectively under this Regulation.

The measures taken by a financial undertaking for the purpose of satisfying the above requirements shall take into account the nature and scale of the undertaking's activities.

Financial undertakings shall establish and maintain effective compliance functions which operate independently of the other aspects of their activities and which have the following responsibilities:

a)  to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures taken in accordance with paragraph 1, and the actions taken to address any deficiencies in the undertaking's compliance with its obligations;

b)  to provide the employees of the financial undertaking responsible for carrying out the execution of securities transactions with the necessary education, advice and assistance to enable them to discharge the undertaking's obligations under the Act on securities transactions.

Financial undertakings shall ensure that the following conditions regarding compliance are satisfied:

a)  the parties responsible for compliance must have the necessary authority, resources, expertise and access to all relevant information;

b)  a compliance officer shall be appointed and must be responsible for the compliance function and for any reporting to the senior management required pursuant to paragraph 3 of Article 5;

c)  the employees involved in the compliance function must not be involved in the performance of services or activities they monitor;

d)  the method of determining the remuneration of the employees of a financial undertaking involved in the compliance function must not be likely to compromise their objectivity.

Notwithstanding the provisions of paragraph 2, a financial undertaking shall not be required to comply with subparagraphs (c) or (d) if it is able to demonstrate that in view of the nature and scale of the undertaking's activities, the requirement under that subparagraph is too onerous and that its compliance function continues to be effective in other respects.

Article 7

Risk Management

Financial undertakings shall take the following actions with respect to risk management:

a)  establish and maintain adequate risk management policies and procedures which identify the risks relating to the undertaking's activities, processes and systems, and where appropriate, set the level of risk tolerated by the undertaking;

b)  adopt effective arrangements, processes and mechanisms to manage the risk relating to the undertaking's activities, processes and systems, in light of that level of risk tolerance;

c)  monitor the following:

     i.       the adequacy and effectiveness of the financial undertaking's risk management policies and procedures;

     ii.      the level of compliance by the financial undertaking and its employees with the arrangements, processes and mechanisms adopted in accordance with subparagraph (b);

     iii.     the adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the employees of the financial undertaking to comply with such arrangements, processes and mechanisms or follow such policies and procedures.

Financial undertakings shall establish and maintain a risk management function that operates independently where appropriate in view of the nature and scale of their business. The risk management function shall address the following tasks:

a)  implementation of the policy and procedures referred to in paragraph 1;

b)  provision of information and advice to senior management in accordance with paragraph 3 of Article 5.

Where a financial undertaking is not required to establish a risk management function that functions independently, it must nevertheless be able to demonstrate that the policies and procedures which it has adopted in accordance with paragraph 1 satisfy the requirements of that paragraph and are consistently effective.

Article 8

Internal audit

Where appropriate and proportionate in view of the nature and scale of their business, financial undertakings shall establish and maintain an internal audit function which is separate and independent from other functions and activities of the undertaking in question and which has the following responsibilities:

a)  to establish and maintain an audit plan to examine and evaluate the adequacy and effectiveness of the undertaking's systems and internal control mechanisms;

b)  to issue recommendations based on the result of work carried out in accordance with subparagraph (a);

c)  to verify compliance with those recommendations;

d)  to report in relation to internal audit matters in accordance with paragraph 3 of Article 5.

Article 9

Complaints handling

Financial undertakings shall establish transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients.

Financial undertakings shall keep records of each complaint and the measures taken for their resolution.

Article 10

Personal transactions

Financial undertakings shall establish and maintain adequate arrangements aimed at preventing the following activities in the case of any employee who is involved in activities that may give rise to a conflict of interest, or who has access to inside information within the meaning of the Act on securities transactions or to other confidential information relating to clients or transactions with or for clients:

a)  entering into a personal transaction which meets at least one of the following criteria:

     i.     the relevant persons are prohibited from entering into it under the Act on securities transactions, for instance as a result of the rules on insider trading;

     ii.    it involves the misuse or improper disclosure of the said confidential information;

     iii.   it conflicts or is likely to conflict with financial undertakings' obligations under the Act on securities transactions;

b)  advising or procuring, other than in the proper course of his employment, any other person to enter into a transaction in financial instruments which, if a personal transaction of the employee, would be covered by subparagraph(a) of this provision, subparagraphs (a) or (b) of paragraph 2 of Article 23 or paragraph 3 of Article 47;

c)  without prejudice to point 2 of the first paragraph of Article 123 of Act No. 108/2007 on securities transactions, other than in the normal course of his employment or contract for services, providing any information or opinion to any other person if the employee knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take the following steps:

     i.     to enter into a transaction in financial instruments which, if a personal transaction of the employee, would be covered by subparagraph(a) of this provision, subparagraphs (a) or (b) of paragraph 2 of Article 23 or paragraph 3 of Article 47;

     ii.    to advise or help another person to enter into such a transaction.

The arrangements required under paragraph 1 must in particular be designed to ensure that:

a)  each employee of a financial undertaking covered by paragraph 1 is aware of the restrictions on personal transactions, and of the measures established by the financial undertaking in connections with personal transactions and disclosure of information, in accordance with paragraph 1.

b)  the financial undertaking is promptly informed of any personal transaction entered into by the employee in question, either by notification of that transaction or by other procedures enabling the undertaking to identify such transactions;

c)  a record is maintained of employees' personal transactions, including any authorisation or prohibition in connection with such transactions.

In the case of outsourcing arrangements, the financial undertaking must ensure that the undertaking to which the activity is outsourced maintains a record of personal transactions entered into by any employee of the financial undertaking and provides that information to the financial undertaking promptly on request.

The provisions of paragraphs 1 and 2 shall not apply to the following kinds of personal transactions entered into by employees of financial undertakings:

a)  personal transactions effected under a discretionary portfolio management service where there is no prior communication in connection with the transaction between the portfolio manager and the person in question;

b)  personal transactions in units in collective undertakings that comply with the conditions of Act No. 30/2003 on undertakings for collective investment in transferable securities (UCITS) and investment funds, provided that the individual in question is not involved in the management of that undertaking.

SECTION 2

Outsourcing

Article 11

Meaning of critical and important functions

For the purposes of Article 7 of Act No. 108/2007 on securities transactions, an operational function shall be regarded as critical if a defect or failure in its performance would materially impair the continuing compliance of a financial undertaking with the conditions and obligations of its authorisation or its other obligations under the Act on securities transactions, or its financial performance, or the soundness or continuity of its securities transactions.

Without prejudice to the status of any other function, the following functions shall not be considered as critical for the purposes of paragraph 1:

a)  the provision of advisory services and other services which do not form part of the undertaking's activities in the area of securities transactions, including the provision of legal advice, the training of personnel, billing services and security;

b)  the purchase of standardised services, including market information services and price information.

Article 12

Conditions for outsourcing securities transactions or critical operational functions

When a financial undertaking outsources securities transactions or critical operational functions, the undertaking remains fully responsible for discharging all of its obligations under the Act on securities transactions and the Act on financial undertakings. Financial undertakings shall ensure that the following conditions are complied with:

a)  the outsourcing must not result in the delegation by senior management of its legal responsibility;

b)  the relationship and obligations of the financial undertaking towards its clients under the provisions of the Act on securities transactions must not be altered by the outsourcing;

c)  the conditions with which the undertaking must comply in order to be authorised in accordance with the provisions of the Act on financial undertakings must not be undermined by the outsourcing;

d)  none of the other conditions subject to which the undertaking's authorisation was granted must be removed or modified by the outsourcing.

Financial undertakings shall exercise due care and diligence when entering into, managing or terminating any arrangement for the outsourcing of any critical operational functions or securities transactions.

Financial undertakings shall in particular take the necessary steps to ensure that the following conditions are satisfied:

a)  the service provider must have the ability, capacity, and any authorisation required by law to perform the outsourced functions or securities transactions reliably and professionally;

b)  the service provider must carry out the outsourced services effectively, and to this end the financial undertaking must establish methods for assessing the standard of performance of the service provider;

c)  the service provider must properly supervise the carrying out of the outsourced functions, and adequately manage the risks associated with the outsourcing;

d)  appropriate action must be taken if it appears that the service provider may not be carrying out the functions effectively and in compliance with applicable laws and regulatory requirements;

e)  the financial undertaking must retain the necessary expertise to supervise the outsourced functions effectively and manage the risks associated with the outsourcing;

f)   the service provider must disclose to the financial undertaking any development that may have a material impact on its ability to carry out the outsourced functions effectively and in compliance with applicable laws and regulatory requirements;

g)  the financial undertaking must be able to terminate the arrangement for outsourcing where necessary without detriment to the continuity and quality of its provision of services to clients;

h)  the service provider must cooperate with the Financial Supervisory Authority in connection with the outsourced activities of financial undertakings;

i)   the financial undertaking, its auditors and the Financial Supervisory Authority must have access to data related to the outsourced functions. In addition, financial undertakings, auditors and the Financial Supervisory Authority shall have access to the business premises of the service provider;

j)   the service provider must adequately protect any confidential information relating to the financial undertaking and its clients;

k)  the financial undertaking and the service provider must establish and maintain a contingency plan for the recovery of data and periodic testing of backup facilities, where that is necessary having regard to the function, service or activity that has been outsourced.

The respective rights and obligations of the financial undertaking and of the service provider must be clearly set out in a written outsourcing agreement.

Where the financial undertaking and the service provider are members of the same group, the financial undertaking may, for the purposes of complying with the provisions of this Article and Article 13, take into account the extent to which the undertaking controls the service provider or has the ability to influence its actions.

Financial undertakings shall make all information available to the Financial Supervisory Authority necessary to enable the Authority to supervise the compliance of the performance of the outsourced activities with the requirements of this Regulation.

Article 13

Service providers located outside the European Economic Area

Where a financial undertaking outsources the service of portfolio management provided to retail clients to a service provider located in a state outside the European Economic Area, the following conditions shall be satisfied:

a)  the service provider must be authorised or registered in its home country to provide that service and must be subject to supervision of a public supervisory authority;

b)  there must be a cooperation agreement in place between the Financial Supervisory Authority and the supervisory authority of the service provider.

Where both the conditions mentioned in paragraph 1 are not satisfied, a financial undertaking may outsource securities transactions to a service provider located in a state outside the European Economic Area only if the undertaking gives prior notification to the Financial Supervisory Authority about the outsourcing arrangement and the Financial Supervisory Authority does not object to the arrangement within a reasonable time following receipt of the notification.

Without prejudice to the provisions of paragraph 2, the Financial Supervisory Authority shall publish a statement of policy in relation to outsourcing covered by paragraph 2. The statement shall set out examples of cases where the Financial Supervisory Authority would not, or would be likely not to, object to an outsourcing under paragraph 2 where one or both of the conditions in subparagraphs (a) or (b) of paragraph 1 are not met. It shall include a clear explanation as to why the Financial Supervisory Authority considers that in such cases outsourcing would not impair the ability of financial undertakings to fulfil their obligations under Article 12.

The Financial Supervisory Authority shall publish a list of the supervisory authorities in states outside the European Economic Area with which they have cooperation agreements for the purposes of subparagraph (b) of paragraph 1.

The provision of this Article do not in any way limit the obligations of financial undertakings to comply with the requirements of Article 12.

SECTION 3

Safeguarding of client assets

Article 14

Safeguarding of client financial instruments and funds

For the purposes of safeguarding clients' rights in relation to financial instruments and funds belonging to them, financial undertakings shall comply with the following requirements:

a)  they must keep such records and accounts as are necessary to enable them at any time and without delay to distinguish assets held for one client from assets held for any other client, and from their own assets;

b)  they must maintain their records and accounts in a way that ensures their accuracy and correspondence to the financial instruments and funds held for clients;

c)  they must conduct, on a regular basis, reconciliations between their internal accounts and records and those of any third parties by whom those assets are held;

d)  they must take the necessary steps to ensure that any client financial instruments deposited with a third party, in accordance with Article 15, are identifiable separately from the financial instruments belonging to the financial undertaking and from financial instruments belonging to that third party, by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection;

e)  they must take the necessary steps to ensure that client funds deposited in a central bank, a credit institution or a bank authorised in a state outside the European Economic Area or a qualifying money market fund, in accordance with Article 16, are identified separately from any accounts used to hold funds belonging to the financial undertaking;

f)   they must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client assets, or rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration and management, inadequate record-keeping or negligence.

Article 15

Depositing client financial instruments

Financial undertakings are permitted to deposit financial instruments held by them on behalf of their clients into an account or accounts opened with a third party provided that the firms exercise due diligence in the selection and periodic review of the third party and of the arrangements for the safekeeping of those financial instruments.

Financial undertakings shall in particular take into account the expertise and market reputation of the third party as well as any legal requirements or market practices related to the holding of those financial instruments that could adversely affect clients' rights.

If the safekeeping of financial instruments for the account of another person is subject to specific regulation and supervision in a jurisdiction where a financial undertaking proposes to deposit client financial instruments with a third party, the financial undertaking shall ascertain that the third party in question is subject to such regulation and supervision before depositing those financial instruments.

Financial undertakings shall not deposit financial instruments held on behalf of clients with a third party in a state outside the European Economic Area that does not regulate the holding and safekeeping of financial instruments for the account of another person unless one of the following conditions is met:

a)  the nature of the financial instrument or of the securities transactions connected with those instruments requires them to be deposited with a third party in the state in question;

b)  where the financial instruments are held on behalf of a professional client, that client requests the undertaking in writing to deposit them with a third party in the state in question.

Article 16

Depositing client funds

On receiving any client funds, financial undertakings shall promptly place those funds into one or more accounts opened with any of the following:

a)  a central bank;

b)  a credit institution authorised in accordance with the Act on financial undertakings;

c)  a bank authorised in a state outside the European Economic Area;

d)  a qualifying money market fund.

This paragraph shall not apply to a credit institution authorised under the Act on financial undertakings, or to equivalent undertakings in the European Economic Area authorised under Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, in relation to deposits within the meaning of that Directive held by that institution.

For the purposes of subparagraph (d) of paragraph 1, and of subparagraph (e) of paragraph 1 of Article 14, a “qualifying money market fund” means a collective investment undertaking authorised under Directive 85/611/EEC of the European Parliament and of the Council of 20 December 1985 relating to collective investment in transferable securities (UCITS), or an undertaking for collective investment authorised under Act No. 30/2003 on undertakings for collective investment in transferable securities (UCITS) and investment funds, and which satisfies the following conditions:

a)  its primary investment objective must be to maintain the net asset value of the undertaking either constant at par (net of earnings), or at the value of the investors' initial capital plus earnings;

b)  it must, with a view to achieving that primary investment objective, invest exclusively in high quality money market instruments with a maturity or residual maturity of no more than 397 days, or regular yield adjustments consistent with such a maturity, and with a weighted average maturity of 60 days. It may also achieve this objective by investing on an ancillary basis in deposits with credit institutions;

c)  the undertaking must provide liquidity through same day or next day settlement.

For the purposes of subparagraph (b) of this paragraph, a money market instrument shall only be considered to be of high quality if it has been awarded the highest available credit rating by each competent rating agency which has rated that instrument. For the purposes of this provision, a rating agency shall be considered to be competent if it issues credit ratings in respect of money market funds regularly and on a professional basis and is an eligible External Credit Assessment Institution (ECAI) within the meaning of paragraph 1 of Article 81 of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.

Where financial undertakings do not deposit client funds with a central bank, they shall exercise all due diligence in the selection and periodic review of the credit institution, bank or money market fund where the funds are placed and the arrangements for the holding of the funds.

Financial undertakings shall take into account the expertise and market reputation of such institutions or money market funds with a view to ensuring the protection of clients' rights, as well as any legal requirements or market practices related to the holding of client funds that could adversely affect clients' rights.

Clients of financial undertakings have the right to oppose the placement of their funds in a qualifying money market fund.

Article 17

Use of client financial instruments

Financial undertakings are not permitted to enter into arrangements for securities financing transactions in respect of financial instruments held by them on behalf of a client, or otherwise use such financial instruments for their own account or the account of another client of the undertaking, unless the following conditions are met:

a)  the client must have given his prior express consent to the use of the financial instruments on clear terms;

b)  the use of that client's financial instruments must be restricted to the specified terms to which the client consents.

In the case of a retail client, consent in accordance with subparagraph (a) shall have been given in writing or equivalent alternative mechanism indicating the client's consent.

Financial undertakings are prohibited from entering into arrangements for securities financing transactions in respect of financial instruments which are held on behalf of a client in an omnibus account maintained by a third party, or otherwise use financial instruments held in such an account for their own account or for the account of another client of the undertaking, unless, in addition to the conditions set out in paragraph 1, at least one of the following conditions is met:

a)  each client whose financial instruments are held together in an omnibus account must have given prior express consent in accordance with subparagraphs (a) of the first sentence and second sentence of paragraph 1.

b)  the financial undertaking must have in place systems and controls which ensure that only financial instruments belonging to clients who have given prior express consent in accordance with subparagraph (a) of paragraph 1 are so used 

the records of a financial undertaking shall include precise details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of the financial instruments used belonging to each client who has given his consent, so as to enable the correct allocation of any loss.

Article 18

Reports by external auditors

Financial undertakings shall ensure that their external auditors report at least annually to the Financial Supervisory Authority on the adequacy of their arrangements under Article 11 of Act No. 108/2007 on securities transactions and this Section of the Regulation.

SECTION 4

Conflicts of interest

Article 19

Conflicts of interest potentially detrimental to a client

Financial undertakings shall take all available measures designed to prevent conflicts of interest from adversely affecting the interests of their clients. For the purposes of identifying the types of conflict of interest that may arise in the course of providing investment and/or ancillary services, the financial undertaking shall take into account the question of whether the undertaking, its employee or a person directly or indirectly linked by control to the undertaking:

a)  is likely to make a financial gain, or avoid a financial loss, at the expense of the client;

b)  has an interest in the outcome of a service provided to the client, which is distinct from the client's interest in the outcome;

c)  has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client in question;

d)  carries on the same business as the client;

e)  receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission or fee for that service.

Article 20

Conflicts of interest policy

Financial undertakings shall establish and maintain an effective conflicts of interest policy, set out in writing. The policy shall be appropriate to the size and organisation of the undertaking and the nature and scale of its business.

Where the undertaking is a member of a group, the policy must also take into account any circumstances, of which the undertaking should be aware, which may give rise to a conflict of interests arising as a result of the structure and business activities of other members of the group.

The conflicts of interest policy established in accordance with paragraph 1 shall include the following content:

a)  it must identify, with reference to the different aspects of the activities of the financial undertaking in question, the circumstances which constitute or may give rise to conflicts of interest entailing a material risk of damage to the interests of one or more clients;

b)  it must specify procedures to be followed and measures to be adopted in order to manage such conflicts.

The procedures and measures provided for in subparagraph (b) of paragraph 2 shall be designed to ensure that the employees of a financial undertaking who are engaged in business activities involving a conflict of interest of the kind specified in subparagraph (a) of paragraph 2 carry on those activities at a level of independence appropriate to the size and activities of the undertaking and of the group to which it belongs, and to the materiality of the risk of damage to the interests of the clients.

For the purposes of subparagraph (b) of paragraph 2, the procedures to be followed shall include such of the following as are necessary and appropriate for the undertaking to ensure the requisite degree of independence:

a)  effective procedures to prevent or control the exchange of information between employees engaged in activities involving a risk of conflicts of interest where the exchange of that information may harm the interests of one or more clients (china walls);

b)  the separate supervision of employees whose principal functions involve carrying out activities on behalf of, or providing service to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the undertaking in question;

c)  the removal of any direct link between the remuneration of employees of a financial undertaking who are principally engaged in one activity and the remuneration of employees principally engaged in another activity, where conflicts of interest may arise in relation to those activities;

d)  measures to prevent or limit any person from exercising inappropriate influence over the way in which an employee of a financial undertaking carries out securities transactions;

e)  measures to prevent or control the simultaneous or sequential involvement of employees of a financial undertaking in separate activities, for the purpose of preventing conflicts of interest.

Disclosure to clients pursuant to the third paragraph of Article 8 of Act No. 108/2007 on securities transactions shall be made in a durable medium and include sufficient detail, taking into account the nature of the business conducted by the client, to enable that client to take an informed decision with respect to the securities transactions in the context of which a conflict of interest may arise.

Article 21

Record of services or activities giving rise to detrimental conflicts of interest

A financial undertakings shall keep and regularly update a record of the activities carried out by or on behalf of the undertaking that fall under the heading of securities transactions in which a conflict of interest entailing a material risk of damage to the interests of one or more clients has arisen.

SECTION 5

Organisational requirements for financial undertakings which produce and disseminate investment research

Article 22

Investment research

For the purposes of Article 23, “investment research” means public investment advice within the meaning of point 12 of the first paragraph of Article 2 of Act No. 108/2007 on securities transactions, which also meets the following conditions:

a)  it is labelled or described as investment research, or is otherwise presented as an objective or independent explanation of the matters contained in the recommendation;

b)  if the recommendation in question were made by a financial undertaking to a client, it would not constitute the provision of investment advice for the purposes of point 4 of the first paragraph of Article 2 of Act No. 108/2007.

Public investment advice related to financial instruments as defined in the Act on securities transactions that does not meet the conditions set out in paragraph 1, shall be treated as a marketing communication, cf. Article 28. Financial undertakings that produce or disseminate such recommendations shall ensure that they are clearly identified as such.

Financial undertakings shall ensure that a recommendation of the type covered by paragraph 2 contains a clear and prominent statement that it has not been prepared in accordance with legal requirements and the requirements of this Regulation as regards investment research which are designed to promote the independence of such research. The statement shall also note that dealing in financial instruments to which the investment research relates ahead of the dissemination of such research is not subject to any prohibition. In the case of oral recommendations, they shall include an oral notice to this effect.

Article 23

Organisational requirements for financial undertakings which produce and disseminate investment research

Financial undertakings which produce investment research that is intended or likely to be subsequently disseminated to clients of the undertaking or to the public, under their own responsibility or that of a member of their group, shall ensure the implementation of all the measures set out in paragraph 3 of Article 20 in relation to the financial analysts involved in the production of the investment research and other employees of the undertaking whose responsibilities or business interests may conflict with the interests of the persons to whom the investment research is disseminated.

Financial undertakings covered by paragraph 1 shall ensure that the following conditions are satisfied:

a)  financial analysts and other employees of the undertaking must not undertake personal transactions or transactions on behalf of any other person (including a financial undertaking) in financial instruments to which investment research relates with knowledge of the likely timing or content of that investment research which is not publicly available or available to clients and cannot readily be inferred from information that is so available, until the recipients of the investment research have had an opportunity to act on it. However, this does not apply to the execution of unsolicited client orders or market makers acting in good faith in the ordinary course of market trading, cf. Article 116 of Act No. 108/2007 on securities transactions;

b)  financial analysts and any other employees involved in the production of investment research must not undertake personal transactions in financial instruments to which the investment research relates, or in any related financial instruments, contrary to current recommendations, except in exceptional circumstances and with the prior approval of the compliance officer;

c)  the financial undertakings themselves, financial analysts and other employees involved in the production of investment research must not accept inducements from those with a material interest in the subject-matter of the investment research;

d)  the financial undertakings themselves, financial analysts and other employees involved in the production of investment research must not promise issuers favourable research coverage;

e)  no persons other than financial analysts are permitted before the dissemination of investment research to review a draft of the investment research for the purpose of verifying the accuracy of factual statements made in that research, or for any other purpose other than verifying compliance with the undertaking's legal obligations, if the draft includes a recommendation or a target price.

For the purposes of this paragraph, “related financial instrument” means a financial instrument the price of which is closely affected by price movements in another financial instrument which is the subject of investment research, and includes a derivative on that other financial instrument.

Financial undertakings which disseminate investment research produced by a third party to the public or to clients are exempted from the provisions of paragraph 1 if the following criteria are met:

a)  the person that produces the investment research is not a member of the group to which the financial undertaking belongs;

b)  the financial undertaking does not substantially alter the recommendations within the investment research;

c)  the financial undertaking does not present the investment research as having been produced by it rather than a third party;

d)  the financial undertaking verifies that the producer of the research is subject to requirements equivalent to the requirements under this Regulation in relation to the production of that research.

CHAPTER III

Operating conditions for financial undertakings

SECTION 1

Inducements

Article 24

Inducements

Financial undertakings shall not be regarded as acting honestly, fairly and professionally in accordance with the best interests of a client if, in relation to the provision of an investments or ancillary service, they pay or are paid any fee or commission, or provide or are provided with any non-monetary benefit, other than the following:

a)  a fee, commission or non-monetary benefit paid or provided to or by the client or a person on behalf of the client;

b)  a fee, commission or non-monetary benefit paid or provided to or by a third party or person acting on behalf of a third party, where the following conditions are satisfied:

     i.     the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount, must be clearly disclosed to the client, in a manner that is comprehensive and understandable, prior to the provision of the relevant investment or ancillary service;

     ii.    the payment of the fee or commission, or the provision of the non-monetary benefit must be designed to enhance the quality of the relevant service to the client and not impair compliance with the financial undertaking's duty to act in the best interests of the client;

c)  proper fees which enable or are necessary for the execution of securities transactions, such as custody costs, settlement and exchange fees, regulatory levies or legal fees, and which, by their nature, cannot give rise to conflicts with the undertaking's duties to act honestly, fairly and professionally in accordance with the best interests of its clients.

For the purposes of subparagraph (b)(i) of this provision, a financial undertaking is permitted to disclose the essential terms of the arrangements relating the fee, commission or non-monetary benefit in summary form, provided that it undertakes to disclose further details at the request of the client.

SECTION 2

Client categorisation and written agreements

Article 25

Client categorisation

Financial undertakings shall notify new and existing clients of their categorisation, cf. Article 21 of Act No. 108/2007 on securities transactions.

Financial undertakings shall inform clients in a durable medium of their right to request a different categorisation and of any limitations to the level of client protection entailed by their categorisation.

Financial undertakings may, either on their own initiative or at the request of the client concerned:

a)  treat as a professional or retail client a client that might otherwise be classified as an eligible counterparty pursuant to point 10 of the first paragraph of Article 2 of Act No. 108/2007;

b)  treat as a retail client a client that is considered as a professional client pursuant to point 9 of the first paragraph of Article 2 of Act No. 108/2007.

Article 26

Eligible counterparties

The term “eligible counterparty” means an eligible counterparty pursuant to the Act on securities transactions.

On request, financial undertakings may also recognise as eligible counterparties parties that are classified as professional clients under the Act on securities transactions. In such cases, however, the party concerned shall be recognised as an eligible counterparty only in respect of the services or transactions for which it could be treated as a professional client.

Where an eligible counterparty requests increased protection, but does not expressly request treatment as a retail client, and the financial undertaking agrees to that request, that eligible counterparty shall be considered as a professional client.

Where an eligible counterparty expressly requests treatment as a retail client, that eligible counterparty shall be treated as such, provided that the conditions of Article 23 of Act No. 108/2007 on securities transactions are satisfied.

Article 27

Retail client agreement

A financial undertaking that provides an investment service other than investment advice to a new retail client for the first time after the date of application of this Regulation shall enter into a written agreement, on paper or in another durable medium, with the client setting out the essential rights and obligations of the undertaking and the client.

SECTION 3

Information to clients

Article 28

Marketing communications and other information to retail clients

Financial undertakings shall ensure that all information they address to, or disseminate in such a way that it is likely to be received by, retail clients or potential retail clients, including marketing communications, satisfies the conditions laid down in paragraphs 2 to 8 of this Article.

The information referred to in paragraph 1 shall:

a)  include the name of the financial undertaking;

b)  be accurate and shall not emphasise any potential benefits of a securities transaction or transaction in financial instruments without also giving a fair and prominent indication of any relevant risks;

c)  be suitable for, and presented in a clear and understandable way to, the average member of the group to whom it is directed, or by whom it is likely to be received;

d)  not misrepresent, diminish or obscure important items, statements or warnings.

Where the information compares investment or ancillary services, financial instruments, or persons providing such services, the following conditions shall be satisfied:

a)  the comparison must be meaningful and presented in a fair and balanced way;

b)  the sources of the information used for the comparison must be specified;

c)  the key facts and assumptions used to make the comparison must be included.

Where the information contains an indication of past performance of a financial instrument, a financial index or an investment service, the following conditions shall be satisfied:

a)  that indication must not be a prominent feature of the information;

b)  the information must include performance information, based on complete 12-month periods, which covers:

     i.     the immediately preceding 5 years;

     ii.    the whole period for which the financial instrument has been offered, the financial index has been established, or the investment service has been provided, if less than five years; or

     iii.   such longer period as the undertaking may decide;

c)  the reference period and the source of the information must be stated;

d)  the information must contain a prominent warning that the figures refer to the past and that past performance is not a reliable indicator of future results;

e)  where the indication relies on figures denominated in a currency other than that of the state in which the retail client or potential retail client is resident, the currency must be clearly stated, together with a warning that the return may increase or decrease as a result of currency fluctuations;

f)   where the indication is based on gross performance, the effect of commissions, fees and other charges must be disclosed.

Where the information includes or refers to simulated past performance, it must relate to a financial instrument or a financial index, and the following conditions shall be satisfied:

a)  the simulated past performance must be based on the actual past performance of one or more financial instruments or financial indices which are the same as, or underlie, the financial instrument concerned;

b)  the information must contain a prominent warning that the figures refer to simulated past performance and that past performance is not a reliable indicator of future results;

In respect of the actual past performance referred to in subparagraph (a), the conditions set out in subparagraphs (a) to (c) and (f) of paragraph 4 must be complied with.

Where the information contains information on future performance, the following conditions shall be satisfied:

a)  the information must not be based on or refer to simulated past performance;

b)  it must be based on reasonable assumptions supported by objective data;

c)  where the information is based on gross performance, the effect of commissions, fees and other charges must be disclosed;

d)  it must contain a prominent warning that such forecasts are not a reliable indicator of future performance.

Where the information refers to a particular tax treatment, it shall prominently state that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

The information shall not use the name of any competent authority in such a way that would indicate or suggest endorsement or approval by that authority of the products or services of the financial undertaking.

Article 29

General requirements for information to clients

Financial undertakings shall, in good time before a retail client or potential retail client is bound by any agreement for the provision of investment services or ancillary services or before the provision of those services, whichever is earlier, provide that client or potential client with the following information:

a)  the terms of any such agreement;

b)  the information required by Article 30 relating to that agreement or to those investment or ancillary services.

Financial undertakings shall, in good time before the provision of investment or ancillary services to retail clients or potential retail clients, provide the information required under Articles 30 to 33.

Financial undertakings shall provide professional clients with the information referred to in paragraphs 5 and 6 of Article 32 in good time before the provision of the service concerned.

The information referred to in paragraphs 1 to 3 shall be provided in a durable medium or by means of a website provided that the conditions specified in paragraph 2 of Article 3 are satisfied.

Notwithstanding paragraphs 1 and 2, financial undertakings shall be permitted to provide the information required under paragraph 1 to a retail client immediately after that client is bound by any agreement for the provision of investment services or ancillary services, and the information required under paragraph 2 immediately after starting to provide the service, in the following circumstances:

a)  the undertaking was unable to comply with the time limits specified in paragraphs 1 and 2 because, at the request of the client, the agreement was concluded using a means of distance communication which prevents the undertaking from providing the information in accordance with paragraph 1 or 2;

b)  in any case where Article 9 of Act No. 33/2005 on the distance marketing of financial services does not otherwise apply, the financial undertaking complies with the requirements of that Article in relation to the retail client or potential retail client, as if that client were a consumer and the financial undertaking were a supplier within the meaning of that provision.

Financial undertakings shall notify a client in good time about any material change to the information provided under Articles 30 to 33 which is relevant to a service that the undertaking is providing to that client. That notification shall be in a durable medium if the information to which it relates is given in a durable medium.

Financial undertakings shall ensure that information contained in a marketing communication is consistent with any information the undertaking provides to clients in the course of carrying on investment and ancillary services.

Financial undertakings shall ensure that where a marketing communication contains an offer or invitation of the kind referred to in subparagraphs (a) and (b) below, and specifies the manner of response or includes a form by which any response may be made, it includes such of the information referred to in Articles 30 to 33 as is relevant to that offer or invitation:

a)  an offer to enter into an agreement in relation to a financial instrument, investment service or ancillary service with any person who responds to the communication;

b)  an invitation to any person who responds to the communication to make an offer to enter into an agreement with the financial undertaking in relation to a financial instrument, investment service or ancillary service.

However, this shall not apply if, in order to respond to an offer or invitation contained in the marketing communication, the potential retail client must refer to another document or documents, which, alone or in combination, contain that information.

Article 30

Information about the financial undertaking and its services for retail clients and potential retail clients

Financial undertakings shall provide retail clients and potential retail clients with the following general information, where relevant:

a)  the name and address of the financial undertaking, and the contact details necessary to enable clients to communicate with the undertaking;

b)  the languages in which the client may communicate with the financial undertaking, and receive documents and other information from the undertaking;

c)  the methods of communication to be used between the financial undertaking and the client, including, where relevant, those for the sending and reception of orders;

d)  a statement of the fact that the undertaking is authorised and the name and contact address of the authority that authorised it;

e)  where the financial undertaking is acting through a tied agent, a statement of this fact specifying the state in which that agent is registered;

f)   the nature, frequency and timing of the reports on the performance of the service to be provided by the financial undertaking to the client in accordance with the third paragraph of Article 9 of Act No. 108/2007 on securities transactions;

g)  if the financial undertaking holds client financial instruments or client funds, a summary description of the steps which it takes to ensure their protection, including summary details of any relevant investor compensation or deposit guarantee scheme which applies to the undertaking by virtue of its activities;

h)  a description, which may be provided in summary form, of the conflicts of interest policy maintained by the undertaking in accordance with Article 20;

i)   at any time that the client requests it, further details of that conflicts of interest policy in a durable medium or by means of a website, provided that the conditions specified in paragraph 2 are satisfied.

When providing the service of portfolio management, financial undertakings shall establish an appropriate method of evaluation and comparison so as to enable the client for whom the service is provided to assess the undertaking's performance. The term “appropriate method” refers, e.g., to a benchmark which is based on the investment objectives of the client and the types of financial instruments included in the client portfolio.

Where financial undertakings propose to provide portfolio management services to a retail client or potential retail client, they shall provide the client, in addition to the information required under paragraph 1, with such of the following information as is applicable:

a)  information on the method and frequency of valuation of the financial instruments in the client portfolio;

b)  details of any delegation of the discretionary management of all or part of the financial instruments or funds in the client portfolio;

c)  a specification of any benchmark against which the performance of the client portfolio will be compared;

d)  the types of financial instrument that may be included in the client portfolio and types of transaction that may be carried out in such instruments, including any limits;

e)  the management objectives, the level of risk to be reflected in the manager's exercise of discretion, and any specific constraints on that discretion.

Article 31

Information about financial instruments

Financial undertakings shall provide clients or potential clients with a general description of the nature and risks of financial instruments, taking into account, in particular, the client's categorisation as either a retail client or a professional client. The description must explain the nature of the specific type of instrument concerned, as well as the risks particular to that specific type of instrument. The description shall be sufficiently detailed to enable the client to make investment decisions on an informed basis.

The description of risks shall include, where relevant to the specific type of instrument concerned and the status and level of knowledge of the client in question, the following elements:

a)  the risks associated with that type of financial instrument, including an explanation of leverage and its effects and the risk of losing the entire investment;

b)  the volatility of the price of such instruments and any limitations on the available market for such instruments;

c)  the fact that an investor might assume, as a result of transactions in such instruments, financial commitments and other additional obligations in addition to the cost of acquiring the instruments;

d)  any margin requirements or similar obligations, applicable to instruments of that type.

If a financial undertaking provides a retail client or potential retail client with information about financial instruments that are the subject of a current offer to the public and a prospectus has been published in connection with that offer in accordance with the Act on securities transactions, that undertaking shall inform the client where that prospectus is available.

Where the risks associated with a financial instrument composed of two or more different financial instruments or services are likely to be greater than the risks associated with any of the components, the financial undertaking shall provide an adequate description of the components of that instrument and the way in which their interaction increases the risks.

In the case of financial instruments that incorporate a guarantee by a third party, the information about the guarantee shall include sufficient detail about the guarantor and the guarantee to enable the retail client or potential retail client to make a fair assessment of the guarantee.

Article 32

Information concerning safeguarding of client financial instruments and client funds

Where financial undertakings hold financial instruments or funds belonging to retail clients, they shall provide those retail clients or potential retail clients with such of the information specified in paragraphs 2 to 7 as is relevant.

The financial undertaking shall inform the retail client or potential retail client where the financial instruments or funds of that client may be held by a third party on behalf of the financial undertaking and of the responsibility of the financial undertaking under the applicable laws for any acts or omissions of the third party and the consequences for the client of the insolvency of the third party.

Where financial instruments of the retail client or potential retail client may, if permitted by the conditions of this Regulation and Article 12 of Act No. 108/2007 on securities transactions, be held in an omnibus account by a third party, the financial undertaking shall inform the client of this fact and shall provide a prominent warning of the resulting risks.

The financial undertaking shall inform the retail client or potential retail client where it is not possible under current law for client financial instruments held with a third party to be separately identifiable from the proprietary financial instruments of that third party or of the financial undertaking and shall provide a prominent warning of the resulting risks.

The financial undertaking shall inform the client or potential client where accounts that contain financial instruments or funds belonging to that client or potential client are or will be subject to the law of a jurisdiction of a state outside the European Economic Area. The financial undertaking shall indicate that the rights of the client or potential client relating to those financial instruments or funds may differ accordingly.

The financial undertaking shall inform the client about the existence and the terms of any security interest or lien which the undertaking has or may have over the client's financial instruments or funds and the identity of such instruments or funds, as well as any right of set-off it holds in relation to those instruments or funds. Where applicable, it shall also inform the client of the fact that a depository may have a security interest or lien over, or right of set-off in relation to those instruments or funds.

A financial undertaking, before entering into securities financing transactions in relation to financial instruments held by it on behalf of a retail client, or before otherwise using such financial instruments for its own account or the account of another client, shall in good time before the use of those instruments provide the retail client, in a durable medium, with clear, full and accurate information on the obligations and responsibilities of the financial undertaking with the respect to the risks involved.

Article 33

Information about costs and associated charges

Financial undertakings shall provide their retail clients and potential retail clients with information on costs and associated charges that includes such of the following elements as are relevant:

a)         the total price to be paid by the client in connection with the financial instrument or the investment service or ancillary service, including all related fees, commissions, charges and expenses, and all taxes payable via the financial undertaking or, if an exact price cannot be indicated, the basis for the calculation of the total price so that the client can verify it.

 For the purposes of this provision, the commissions charged by the undertaking shall be itemised separately in every case;

b)         where any part of the total price referred to in subparagraph (a) is to be paid in or represents an amount of foreign currency, an indication of the currency involved and the applicable currency conversion rates and costs;

 

c)  notice of the possibility that other costs, including taxes, related to transactions in connection with the financial instrument or the investment service may arise for the client that are not paid via the financial undertaking or imposed by it;

d)  the arrangements for payment or other performance.

Article 34

Information on units in a collective investment undertaking

In respect of units in a collective investment undertaking covered by Act No. 30/2003 on undertakings for collective investment in transferable securities (UCITS) and investment funds, a prospectus complying with the provisions of Article 47 of that Act shall be regarded as:

a)  sufficient information for the purposes of the first paragraph of Article 14 of Act No. 108/2007 on securities transactions, with respect to information on the risk involved in such investments so clients are able to make an informed investment decision; and

b)  sufficient information with respect to the costs and associated charges related to the unit in a collective investment undertaking, including the exit and entry commissions.

SECTION 4

Assessment of the suitability of clients and appropriateness of financial services

Article 35

Provisions common to the assessment of suitability and appropriateness

When assessing the suitability of a client, or potential client, in the area of securities transactions, and whether a particular product or service is appropriate for a specific client, financial undertakings shall obtain the following information regarding the client's knowledge and experience to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved:

a)  the types of service, transaction and financial instrument with which the client is familiar;

b)  the nature, volume and frequency of the client's transactions in financial instruments and the period over which they have been carried out;

c)  the level of education, and profession or relevant former profession of the client or potential client.

A financial undertaking shall not encourage a client or potential client not to provide information required under paragraph 1.

A financial undertaking is prohibited from relying on the information provided by its clients or potential clients if it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete.

 

Article 36

Assessment of suitability in the provision of investment advice or portfolio management services

Financial undertakings shall obtain from clients or potential clients such information as is necessary for the undertaking to understand the client's circumstances and to be able to assess on an informed basis, giving due consideration to the nature and extent of the service provided, whether the specific transaction to be recommended in the course of providing a portfolio management service, satisfies the following criteria:

a)         it meets the investment objectives of the client in question;

b)         it is such that the client is able financially to bear any related investment risks consistent with his investment objectives;

c)         it is such that the client has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.

Where a financial undertaking provides an investment service to a professional client it shall be entitled to assume that, in relation to the products, transactions and services for which it is so classified, the client has the necessary level of experience and knowledge for the purposes of subparagraph (c) of paragraph 1.

Where that investment service consists in the provision of investment advice to a professional client, the financial undertaking shall be entitled to assume for the purposes of subparagraph (b) of paragraph 1 that the client is able financially to bear any related investment risks consistent with the investment objectives of that client.

The information regarding the financial situation of the client or potential client shall include:

a)  his income and its sources;

b)  his assets, including liquid assets, investments and real property;

c)  financial commitments.

The information regarding the investment objectives of the client or potential client shall include, where relevant, information on the length of time for which the client wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.

Where, when providing portfolio management services or investment advice, a financial undertaking does not obtain the information required under Act No. 108/2007 on securities transactions, the undertaking shall not recommend investment services or financial instruments to the client or potential client.

Article 37

Assessment of appropriateness in respect of other securities transactions

When assessing whether an investment service as referred to in Article 16 of Act No. 108/2007 on securities transactions is appropriate for a client, the financial undertaking shall determine whether that client has the experience and knowledge necessary to understand the risks involved in relation to the product or securities transaction offered or requested.

For those purposes, the financial undertaking shall be entitled to assume that a professional client has the experience and knowledge necessary to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.

Article 38

Provision of services in non-complex instruments

A financial instrument which is not specified in subparagraph (a) of the fourth paragraph of Article 16 of Act No. 108/2007 on securities transactions shall be considered as non-complex if it satisfies the following criteria:

 a)  it does not fall within subparagraph (a)(iii), or subparagraphs (e), (f), (g) or (h) of point 2 of the first paragraph of Article 2 of Act No. 108/2007;

b)         there are frequent opportunities to dispose of, redeem, or otherwise realise that instrument at prices that are publicly available to market participants and that are either market prices or prices made available, or validated, by valuation systems independent of the issuer;

 c)  it does not involve any actual or potential liability for the client that exceeds the cost of acquiring the instrument;

d)        adequately comprehensive information on its characteristics is publicly available and is likely to be readily understood so as to enable any retail client to make an informed judgment as to whether to enter into a transaction in that instrument.

 

SECTION 5

Investment advice

Article 39

Investment advice

For the purposes of the definition of the term “investment advice” in point 4 of the first paragraph of Article 2 of Act No. 108/2007 on securities transactions, a personal recommendation is a recommendation that is made to a person in his capacity as a client or potential client, or his agent.

A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public.

Investment advice must be presented as suitable for the client in question, or must be based on a consideration of the circumstances of that client, and must constitute a recommendation to either:

a)         to buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument; or

b)         to exercise or not to exercise any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument.

 

SECTION 6

Reporting to clients

Article 40

Reporting obligations in respect of execution of orders other than for portfolio management

Where financial undertakings have carried out an order, other than for portfolio management, on behalf of a client, they shall take the following action in respect of that order:

a)  the financial undertaking must promptly provide the client, in a durable medium, with the essential information concerning the execution of that order;

b)         in the case of a retail client, the financial undertaking must send the client a notice in a durable medium confirming execution of the order as soon as possible and no later than the first business day following execution or, if the confirmation is received by the financial undertaking from a third party, no later than the first business day following receipt of the confirmation from the third party.

Subparagraph (b) shall not apply where the confirmation would contain the same information as a confirmation that is to be promptly dispatched to the retail client by another person.

The provisions of subparagraphs (a) and (b) shall not apply where orders executed on behalf of clients relate to bonds funding mortgage loan agreements with the said clients, in which case the report on the transaction shall be made at the same time as the terms of the mortgage loan are communicated, but no later than one month after the execution of the order.

In addition to the requirements under paragraph 1, financial undertakings shall supply the client, on request, with information about the status of his order.

In the case of orders for a retail client relating to units or shares in a collective investment undertaking which are executed periodically, financial undertakings shall either take the action specified in subparagraph (b) of paragraph 1 or provide the retail client, at least once every six months, with the information listed in paragraph 4 in respect of those transactions.

The notice referred to in subparagraph (b) of paragraph 1 shall include such of the following information as is applicable and, where relevant, in accordance with Table 1 of Annex I to Regulation (EC) No 1287/2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive, cf. Regulation No. 994/2007 regarding its implementation:

a)   the reporting undertaking identification;

b)   the name or other designation of the client;

c)   the trading day;

d)   the trading time;

e)   the type of the order;

f)    the venue identification;

g)   the instrument identification;

h)   the buy/sell indicator;

i)    the nature of the order if other than buy/sell;

j)    the quantity;

k)   the unit price;

l)    the total consideration;

m)  a total sum of the commissions and expenses charged and, where the retail client so requests, an itemised breakdown;

n)         the client's responsibilities in relation to the settlement of the transaction, including the time limit for payment or delivery as well as the appropriate account details where these details and responsibilities have not previously been notified to the client;

o)   if the client's counterparty was the financial undertaking itself, any person in the financial undertaking's group or another client of the financial undertaking, unless the order was executed through a trading system that enables anonymous trading.

For the purposes of subparagraph (k), where the order is executed in tranches, the financial undertaking shall supply the client with information about the price of each tranche or the average price.

 Where the average price is provided, the financial undertaking shall supply the retail client with information about the price of each tranche upon request.

The financial undertaking may provide the client with the information referred to in paragraph 4 using standard codes if it also provides an explanation of how the codes are used.

Article 41

Reporting obligations in respect of portfolio management

Financial undertakings which provide the service of portfolio management to clients shall provide each such client with a periodic statement in a durable medium of the portfolio management activities carried out on behalf of that client unless such a statement is provided by another person.

In the case of retail clients, the periodic statement required under paragraph 1 shall include, where relevant, the following information:

a)  the name of the financial undertaking;

b)  the name or other designation of the retail client's account;

c)  a statement of the contents and the valuation of the portfolio, including details of each financial instrument held, its market value, or fair value if market value is unavailable and the cash balance at the beginning and at the end of the reporting period, and the performance of the portfolio during the reporting period;

d)  the total amount of fees and charges incurred during the reporting period, itemising at least total management fees and total costs associated with execution, and including, where relevant, a statement that a more detailed breakdown will be provided on request;

e)  a comparison of performance during the period covered by the statement with the investment performance benchmark (if any) agreed between the financial undertaking and the client;

f)   the total amount of dividends, interest and other payments received during the reporting period in relation to the client' portfolio;

g)  information about other corporate actions giving rights in relation to financial instruments held in the portfolio;

h)  for each transaction executed during the period, the information referred to in subparagraph (c) to (l) of paragraph 4 of Article 40, where relevant, unless the client elects to receive information about executed transactions on a transaction-by-transaction basis, in which case paragraph 4 of this Article shall apply.

In the case of retail clients, the periodic statement referred to in paragraph 1 shall be provided once every six months, except in the following cases:

a)  where the client so requests, the periodic statement must be provided every three months;

b)  in cases where paragraph 4 applies, the periodic statement must be provided at least once every 12 months;

c)  where the agreement between a financial undertaking and a retail client for a portfolio management service authorises a leveraged portfolio, the periodic statement must be provided at least once a month.

Financial undertakings shall inform retail clients that they have the right to make requests for the purposes of subparagraph (a).

However, the exception provided for in subparagraph (b) shall not apply in the case of transactions in financial instruments covered by subparagraph (a)(iii), or subparagraphs (e), (f), (g) or (h) of point 2 of the first paragraph of Article 2 of Act No. 108/2007 on securities transactions.

In cases where the client elects to receive information about executed transactions on a transaction-by-transaction basis, financial undertakings shall promptly provide to the client, on the execution of a transaction, the essential information concerning that transaction in a durable medium.

Where the client concerned is a retail client, the financial undertaking must send him a notice confirming the transaction and containing the information referred to in paragraph 4 of Article 40 no later than the first business day following that execution or, if the confirmation is received by the financial undertaking from a third party, no later than the first business day following receipt of the confirmation from the third party. However, this shall not apply where the confirmation would contain the same information as a confirmation that is to be promptly dispatched to the retail client by another person.

Article 42

Additional reporting obligations for portfolio management or contingent liability transactions

Where financial undertakings provide portfolio management transactions for retail clients or operate retail client accounts that include an uncovered open position in a contingent liability transaction, they shall also report to the retail client any losses exceeding any predetermined threshold, agreed between the undertaking and the client, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.

Article 43

Statements of client financial instruments or client funds

Financial undertakings that hold client financial instruments or client funds shall, at least once a year, send to each client for whom they hold financial instruments or funds a statement in a durable medium of those financial instruments or funds, unless such a statement has been provided in any other periodic statement.

The provisions of this paragraph shall not apply to credit institutions authorised under the Act on financial undertakings, in respect of deposits held by such institutions.

The statement of client assets referred to in paragraph 1 shall include the following information:

a)  details of all the financial instruments or funds held by the financial undertaking for the client at the end of the period covered by the statement;

b)  the extent to which any client financial instruments or client funds have been the subject of securities financing transactions;

c)  the extent of any benefit that has accrued to the client by virtue of participation in any securities financing transactions, and the basis on which that benefit has accrued. In cases where the portfolio of a client includes the proceeds of one or more unsettled transactions, the information referred to in subparagraph (a) may be based either on the trade date or the settlement date, provided that the same basis is applied consistently to all such information in the statement.

Financial undertakings which hold financial instruments or funds and which carry out the service of portfolio management for a client may include the statement of client assets referred to in paragraph 1 in the periodic statement it provides to that client pursuant to paragraph 1 of Article 41.

SECTION 7

Best execution

Article 44

Best execution criteria

When executing client orders, financial undertakings shall take into account the following criteria for determining the relative importance of the factors referred to the first paragraph of Article 18 of Act No. 108/2007 on securities transactions:

a)  the characteristics of the client, including the categorisation of the client as retail or professional;

b)  the characteristics of the client order;

c)  the characteristics of the financial instruments that are the subject of that order;

d)  the characteristics of the execution venues to which that order can be directed.

A financial undertaking satisfies its obligation under the first paragraph of Article 18 of Act No. 108/2007 to make every attempt to obtain the best possible result for its clients to the extent that it executes an order or a specific aspect of an order following specific instructions from the client in question.

Where a financial undertaking executes an order on behalf of a retail client, the best possible result shall be determined in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which shall include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.

For the purposes of delivering best execution where there is more than one competing venue to execute an order for a financial instrument, in order to assess and compare the results for the client that would be achieved by executing the order on each of the execution venues listed in the undertaking's order execution policy that is capable of executing that order, the undertaking's own commissions and costs for executing the order on each of the eligible execution venues shall be taken into account in that assessment.

Article 45

Duty of financial undertakings carrying out portfolio management and reception and transmission of orders to act in the best interests of the client

When providing the service of portfolio management, financial undertakings shall comply with the conditions of Chapter II of Act No. 108/2007 on securities transactions, regarding the best execution of the transmission of client orders, when placing orders for transactions in financial instruments with other entities as part of the portfolio management.

When providing the service of reception and transmission of orders, financial undertakings shall comply with the conditions of Chapter II of Act No. 108/2007 regarding the best execution of the transmission of orders to other entities.

In order to comply with the provisions of paragraphs 1 and 2, financial undertakings shall take the actions mentioned in paragraphs 4 to 6 of this Article.

Financial undertakings shall take all reasonable steps to obtain the best possible result for their clients taking into account the factors referred to in the first paragraph of Article 18 of Act No. 108/2007. The relative importance of these factors shall be determined by reference to the criteria set out in paragraph 1 of Article 44 and, for retail clients, to the requirement under paragraph 3 of Article 44.

A financial undertaking satisfies its obligations under paragraph 1 and 2, and is not required to take the steps mentioned in this paragraph, to the extent that it follows specific instructions from its client when transmitting an order to another entity.

Financial undertakings shall establish a policy to enable them to comply with the obligations of paragraph 4. The policy shall identify, in respect of each class of instruments, the entities with which the orders are placed or to which the financial undertaking transmits orders for execution. The entities identified must have execution arrangements that enable the financial undertaking to comply with its obligations under this Article when it places or transmits orders to that entity for execution.

Financial undertakings shall provide appropriate information to their clients on the policy established in accordance with this paragraph.

Financial undertakings shall monitor on a regular basis the effectiveness of the policy established in accordance with paragraph 5 and, in particular, the execution quality of the entities identified in that policy and, where appropriate, correct any deficiencies.

In addition, financial undertakings shall review the policy annually. Such a review shall be carried out whenever a material change occurs that affects the undertaking's ability to continue to obtain the best possible result for their clients.

The provisions of paragraphs 1 to 6 shall not apply when the financial undertaking that provides the service of portfolio management and/or reception and transmission of orders also executes the orders received or the decisions to deal on behalf of its client's portfolio.

Article 46

Execution policy

Financial undertakings shall annually review the order execution policy established pursuant to the second paragraph of Article 18 of Act No. 108/2007 on securities transactions, as well as the order execution arrangements.

Such a review shall also be carried out whenever a material change occurs that affects the undertaking's ability to continue to obtain the best possible result for the execution of its client orders on a consistent basis using the venues included in its execution policy.

Financial undertakings shall provide retail clients with the following details on their execution policy in good time prior to the provision of the service:

a)  an account of the relative importance that the financial undertaking assigns, in accordance with the criteria specified in paragraph 1 of Article 44, to the factors referred to in the first paragraph of Article 18 of Act No. 108/2007, or the process by which the undertaking determines the relative importance of those factors;

b)  a list of the execution venues on which the undertaking places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders;

c)  a clear and prominent warning that any specific instructions from a client may prevent the undertaking from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions. That information shall be provided in a durable medium or by means of a website, provided that the conditions specified in paragraph 2 of Article 3 are satisfied.

SECTION 8

Client order handling

Article 47

General principles

Financial undertakings shall take the following actions when carrying out client orders

a)  they must ensure that orders executed on behalf of clients are promptly and accurately recorded and allocated;

b)  they must carry out otherwise comparable client orders sequentially and promptly unless the characteristics of the order or prevailing market conditions make this impracticable, or the interests of the client require otherwise;

c)  they must inform a retail client about any material difficulty relevant to the prompt carrying out of orders immediately upon becoming aware of the difficulty.

Where a financial undertaking is responsible for overseeing or arranging the settlement of an executed order, it shall take all reasonable steps to ensure that any client financial instruments or client funds received in settlement of that executed order are promptly and correctly delivered to the account of the appropriate client.

A financial undertaking shall not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its employees.

Article 48

Aggregation and allocation of orders

Financial undertakings are prohibited from carrying out a client order or a transaction for own account in aggregation with another client order unless the following conditions are met:

a)  it must be regarded as unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client;

b)  it must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to his disadvantage in relation to a particular order;

c)  an order allocation policy must be established and effectively implemented, providing in sufficiently precise terms for the fair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.

Where a financial undertaking aggregates an order with one or more other client orders and the aggregated order is partially executed, it shall allocate the related trades in accordance with its order allocation policy.

 

Article 49

Aggregation and allocation of transactions for own account

Financial undertakings which have aggregated transactions for own account with one or more client orders shall not allocate the transactions in a way that is detrimental to the clients involved.

Where a financial undertaking aggregates a client order with a transaction for own account and the aggregated order is partially executed, it shall allocate the related transactions to the client in priority to the undertaking. However, if the undertaking is able to demonstrate on reasonable grounds that without the combination it would not have been able to carry out the order on such advantageous terms, or at all, it may allocate the transaction for own account proportionally, in accordance with its order allocation policy referred to in subparagraph (c) of paragraph 1 of Article 48.

Financial undertakings shall, as part of the order allocation policy referred to in subparagraph (c) of paragraph 1 of Article 48, put in place procedures designed to prevent the reallocation, in a way that is detrimental to the client, of transactions for own account which are executed in combination with client orders.

SECTION 9

Record-keeping

Article 50

Retention of records

Financial undertakings shall retain all the records required under the Act on securities transactions and the relevant regulations for a period of at least five years.

Additionally, records which set out the respective rights and obligations of the financial undertaking and the client under an agreement to provide services, or the terms on which the undertaking provides services to the client, shall be retained for at least the duration of the relationship with the client.

However, the Financial Supervisory Authority may, in exceptional circumstances, require financial undertakings to retain any or all of those records for such longer period as is justified by the nature of the instrument or transaction, if that is necessary to enable the Authority to exercise its supervisory functions under the Act on securities transactions.

Following the expiry of the licence of a financial undertaking, the Financial Supervisory Authority may require the undertaking to retain records for the remaining term of the five year period required under the first subparagraph.

The records shall be retained in a medium that allows the storage of information in a way accessible for future reference by the Financial Supervisory Authority, and in such a form and manner that the following conditions are met:

a)         the Financial Supervisory Authority must be able to access them readily and to reconstitute each key stage of the processing of each transaction;

b)         it must be possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained;

c)         it must not be possible for the records otherwise to be manipulated or altered.

The Financial Supervisory Authority shall draw up and maintain a list of the minimum records that financial undertakings are required to keep under Act No. 108/2007 on securities transactions, and this Regulation.

 

CHAPTER IV

Final Provisions.

Article 51

Transposition

This Regulation is established in accordance with Article 26 of Act No. 108/2007 on securities transactions, for the adoption of Commission Directive 2006/73/EC implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, to which reference is made in Annex IX to the EEA Agreement, as amended by a Decision of the EEA Joint Committee No. 21/2007 of 27 April 2007.

Article 52

Entry into force

This Regulation shall enter into force on 1 November 2007.

The Ministry of Business Affairs, 30 October 2007.

Björgvin G. Sigurðsson.

Jónína S. Lárusdóttir.

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Disclaimer: This section of the site details available translations on legislation relating to the Government Offices in Iceland. In case of any discrepancies between the translations and the original text in Icelandic, the original text as published in the Icelandic Legal Gazette prevails.

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