sou · GUB350d2 · 2007-01-01 00:00:00 — 1.Member States shall require investment firms, when allocating functions internally, to ensure that senior management, and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under Directive 2004/39/EC. In particular, senior management and, where appropriate, the supervisory function shall be required to assess and periodically to review the effectiveness of the policies, arrangements and procedures put in place to comply with the obligations under Directive 2004/39/EC and to take appropriate measures to address any deficiencies. 2.Member States shall require investment firms to ensure that their senior management receive on a frequent basis, and at least annually, written reports on the matters covered by Articles 6, 7 and 8 indicating in particular whether the appropriate remedial measures have been taken in the event of any deficiencies. 3.Member States shall require investment firms to ensure that the supervisory function, if any, receives on a regular basis written reports on the same matters. 4.For the purposes of this Article, supervisory function means the function within an investment firm responsible for the supervision of its senior management. (Article 13(2) of Directive 2004/39/EC) Member States shall require investment firms to maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients, and to keep a record of each complaint and the measures taken for its resolution. (Article 13(2) of Directive 2004/39/EC) Meaning of personal transaction For the purposes of Article 12 and Article 25, personal transaction means a trade in a financial instrument effected by or on behalf of a relevant person, where at least one of the following criteria are met: (a)that relevant person is acting outside the scope of the activities he out in that capacity; (b)the trade is carried out for the account of any of the following persons: (i)the relevant person; (ii)any person with whom he has a family relationship, or with whom he has close links; (iii)a person whose relationship with the relevant person is such that the relevant person 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. (Article 13(2) of Directive 2004/39/EC) 1.Member States shall require investment firms to establish adequate arrangements aimed at preventing the following activities in the case of any relevant person 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 Article 1(1) of Directive 2003/6/EC or to other confidential information relating to clients or transactions with or for clients by virtue of an activity carried out by him on behalf of the firm: (a)entering into a personal transaction which meets either of the following criteria: (i)that person is prohibited from entering into it under Directive 2003/6/EC; (ii)it involves the misuse or improper disclosure of that confidential information; (iii)it conflicts or is likely to conflict with an obligation of the investment firm under Directive 2004/39/EC; (b)advising or procuring, other than in the proper course of his employment or contract for services, any other person to enter into a transaction in financial instruments which, if a personal transaction of the relevant person, would be covered by point (a) or Article 25(2)(a) or (b) or Article 47(3); (c)without prejudice to Article 3(a) of Directive 2003/6/EC, disclosing, other than in the normal course of his employment or contract for services, any information or opinion to any other person if the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps: (i)to enter into a transaction in financial instruments which, if a personal transaction of the relevant person, would be covered by point (a) or Article 2425(2)(a) or (b) or Article 47(3); (ii)to advise or procure another person to enter into such a transaction. 2.The arrangements required under paragraph 1 must in particular be designed to ensure that: (a)each relevant person covered by paragraph 1 is aware of the restrictions on personal transactions, and of the measures established by the investment firm in connection with personal transactions and disclosure, in accordance with paragraph 1; (b)the firm is informed promptly of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions; (c)a record is made of the personal transaction notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction. 3.Paragraphs 1 and 2 shall not apply to the following kinds of personal transaction: (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 relevant person or other person for whose account the transaction is executed; (b)personal transactions in units in collective undertakings that comply with the conditions necessary to enjoy the rights conferred by Directive 85/611/EEC [UCITS] or are subject to supervision under the law of a which requires an equivalent level of risk spreading in their assets, where the relevant person and any other person for whose account the transactions are effected are not involved in the management of that undertaking. (Article 13(2) and first subparagraph of Article 13(5) of Directive 2004/39/EC) Meaning of critical and important operational functions 1.For the purposes of the first subparagraph of Article 13(5) of Directive 2004/39/EC, an operational function shall be regarded as critical or important if a defect or failure in its performance would materially impair the continuing compliance of an investment firm with the conditions and obligations of its authorisation or its other obligations under Directive 2004/39/EC, or its financial performance, or the soundness or the continuity of its investment services and activities. 2.Without prejudice to the status of any other function, the following functions shall not be considered as critical or important for the purposes of paragraph 1: (a)the provision to the firm of advisory services, and other services which do not form part of the investment business of the firm, including the provision of legal advice to the firm, the training of personnel of the firm, services and the security of the firms premises and personnel; (b)the purchase of standardised services, including market information services and the provision of price feeds. [] [Paragraph 3 moved to Article 14, new paragraph 1.] (Article 13(2) and first subparagraph of Article 13(5) of Directive 2004/39/EC) Conditions for outsourcing critical or important operational functions or investment services or activities Member States shall ensure that, when investment firms outsource critical or important operational functions or any other investment services or activities, the firms remain fully responsible for discharging all of their obligations under Directive 2004/39/EC and comply, in particular, with the following conditions: (a) the outsourcing must not result in the delegation by senior management of its (b) the relationship and obligations of the investment firm towards its clients under the terms of Directive 2004/39/EC must not be altered; (c) the conditions with which the investment firm must comply in order to be authorised in accordance with Article 5 of Directive 2004/39/EC, and to remain so, must not be undermined; (d) none of the other conditions subject to which the firms authorisation was granted must be removed or modified. (first subparagraph of Article 13(5) of Directive 2004/39/EC) Conditions for outsourcing critical or important operational functions or investment services or activities Member States shall require investment firms to exercise due skill and care and diligence when entering into, managing or terminating any arrangement for the outsourcing to a service provider of critical or important operational functions or of any investment services or activities. Investment firms shall in particular take the necessary steps to ensure that the following conditions are satisfied: the service provider must have the ability, capacity, and any authorisation required by law to perform the outsourced functions, services or activities reliably and professionally; the service provider must carry out the outsourced services effectively, and to this end the firm must establish methods for assessing the standard of performance of the service provider; the service provider must properly supervise the carrying out of the outsourced functions, and adequately manage the risks associated with the outsourcing; 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; the investment firm must retain the necessary expertise to supervise the outsourced functions effectively and manage the risks associated with the outsourcing and must supervise those functions and manage those risks; the service provider must disclose to the investment firm any development that a material impact on its ability to carry out the outsourced functions effectively and in compliance with applicable laws and regulatory the investment firm 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; the service provider must cooperate with the competent authorities of the investment firm in connection with the outsourced activities; the investment firm, its auditors and the relevant competent authorities must have effective access to data related to the outsourced activities, as well as to the business premises of the service provider; and the competent authorities must be able to exercise those rights of access; the service provider must protect any confidential information belonging to the investment firm or relating to its clients; where applicable, the investment firm and the service provider must establish, implement and maintain a contingency plan for disaster recovery and periodic testing of backup facilities. Member States shall require the respective rights and obligations of the investment firms and of the service provider to be clearly allocated and set out in a written Member States shall provide that, where the investment firm and the service provider are members of the same group, the investment firm may, for the purposes of complying with this Article and Article 15, take into account the extent to which they the firm controls the service provider or has the ability to influence its actions, and the extent to which the service provider is included in the consolidated supervision of the group. Member States shall require investment firms to make available on request to the competent authority all information necessary to enable the authority to supervise the compliance of the performance of the outsourced activities with the requirements of (Article 13(2) and first subparagraph of Article 13(5) of Directive 2004/39/EC) Service providers located in third countries In addition to the requirements set out in Article 14(1), Member States shall require that, where an investment firm outsources the investment service of portfolio management provided to retail clients to a service provider located in a third country, that investment firm ensures that the following conditions are satisfied: (a)the service provider must be authorised or registered in its home country to provide that service and must be subject to supervision; (b)there must be an appropriate cooperation agreement between the competent authority of the investment firm and the supervisory authority of the service provider. Where those conditions are not satisfied, an investment firm may outsource investment services to a service provider located in a third country only if the firm gives prior notification to its competent authority about the outsourcing arrangement and the competent authority does not object to that arrangement within a reasonable time following receipt of that notification. Competent authorities shall publish a list of the supervisory authorities in third countries with which they have cooperation agreements that are appropriate for the purposes of point (b) of the first paragraph. SAFEGUARDING OF CLIENT ASSETS (Article 13(7) and (8) of Directive 2004/39/EC) Safeguarding of client financial instruments and funds 1.Member States shall require that, for the purposes of safeguarding clients rights in relation to financial instruments and funds belonging to them, investment firms 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 in particular their 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 17, are identifiable separately from the financial instruments belonging to the investment firm 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 accordance with Article 18, in a central bank, a credit institution or a bank authorised in a third country or a qualifying money market fund are held in an account or accounts identified separately from any accounts used to hold funds belonging to the investment firm; (f)they must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client assets, or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence. 2.If, for reasons of the applicable law, including in particular the law relating to property or insolvency, the arrangements made by investment firms in compliance with paragraph 1 to safeguard clients rights are not sufficient to satisfy the requirements of Article 13(7) and (8) of Directive 2004/39/EC, Member States shall prescribe the measures that investment firms must take in order to comply with those obligations. 3.If the applicable law of the jurisdiction in which the client funds or financial instruments are held prevents investment firms from complying with points (d) or (e) of paragraph 1, Member States shall prescribe requirements which have an equivalent effect in terms of safeguarding clients rights. (Article 13(7) of Directive 2004/39/EC) Depositing client financial instruments 1.Member States shall permit investment firms 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 all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements for the holding and safekeeping of those financial instruments. In particular, Member States shall require investment firms to 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. 2.Member States shall ensure that, if the safekeeping of financial instruments for the account of another person is subject to specific regulation and supervision in a jurisdiction where an investment firm proposes to deposit client financial instruments with a third party, the investment firm does not deposit those financial instruments in that jurisdiction with a third party which is not subject to such regulation and supervision. 3.Member States shall ensure that investment firms do not deposit financial instruments held on behalf of clients with a third party in a third country 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 instruments or of the investment services connected with those instruments requires them to be deposited with a third party in that third country; (b)where the financial instruments are held on behalf of a professional client, that client requests the firm in writing to deposit them with a third party in that third country. (Article 13(8) of Directive 2004/39/EC) 1.Member States shall require investment firms, on receiving any client funds, promptly to depositplace 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 Directive 2000/12/EC; (c)a bank authorised in a third country; (d)a qualifying money market fund. The first subparagraph shall not apply to a credit institution authorised under Directive 2000/12/EC in relation to deposits within the meaning of that Directive held by that institution. 2.For the purposes of point (d) of paragraph 1, and of Article 16(1(d), a qualifying money market fund means a collective investment undertaking authorised under Directive 85/611/EEC [UCITS], or which is subject to supervision and, if applicable, authorised by an authority under the national law of a , and which satisfies the following conditions: (a)its primary investment objective must be to maintain the net asset value of the undertaking either 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 either high quality money market instruments with a maturity or residual maturity of the following, whether alone or in combination with the other: (i)cash; (ii)high quality money market instruments with a maturity or residual maturity that is no greatermore than one year, or with 397 days, or regular yield adjustments which are made regularlyconsistent with such a maturity, and at least annuallywith 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)it must provide liquidity through same day or next day settlement. For the purposes of point (b), a money market instrument shall be considered to be of high quality if it has been awarded the highest or second highest available credit rating by each competent rating agency which has rated that instrument. An instrument that is not rated by any competent rating agency shall not be considered to be of high quality. For the purposes of the second subparagraph, 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 ECAI within the meaning of Article 81(1) of Directive XXXX/XX/EC of Parliament and of the Council recasting Directive 2000/12/EEC of Parliament and of 2000 relating to the taking up and pursuit of the business of credit institutions8. 3.Member States shall require that, where investment firms do not deposit client funds with a central bank, they exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institution, bank or money market fund where the funds are depositedplaced and the arrangements for the holding of those funds. Member States shall ensure, in particular, that investment firms 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 or regulatory requirements or market practices related to the holding of client funds that could adversely affect clients rights. (Article 13(7) of Directive 2004/39/EC) Use of client financial instruments 1.Member States shall not allow investment firms 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 firm, unless the following conditions are met: (a)the client must have given his prior express consent to the use of the instruments on specified terms, as evidenced, in the case of a retail client, by his signature; (b)the use of that client's financial instruments must be restricted to the specified terms to which the client consents. 2.Member States may not allow investment firms to enter 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 [OJ XXX] of another client 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 point (a) of paragraph 1; (b)the investment firm 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 point (a) of paragraph 1 are so used. The records of the investment firm shall include details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of financial instruments used belonging to each client who has given his consent, so as to enable the correct allocation of any loss. (Article 13(7) and (8) of Directive 2004/39/EC) Reports by external auditors Member States shall require investment firms to ensure that their external auditors report at least annually to the competent authority of the home of the firm on the adequacy of the firm's arrangements under Articles 13(7) and (8) of Directive 2004/39/EC and this ChapterSection. (Articles 13(3) and 18(1) of Directive 2004/39/EC) Conflicts of interest potentially detrimental to a client Member States shall ensure that, for the purposes of identifying the types of conflict of interest that arise in the course of providingcarrying out investment and ancillary services or activities or a combination thereof and whose existence may damage the interests of a client, investment firms take into account, by way of minimum criteria, the question of whether the investment firm or a relevant person, or a person directly or indirectly linked by control to the firm is in any of the following situations: (a)the firm or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the client; (b)the firm or that person has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the clients interest in that outcome;