Commission Directive 2006/73/EC of 10 August 2006 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   (Text with EEA relevance)
Date: 2006-08-10
Institutions: European Commission
Subjects: financial instrument, financial legislation, financial market, financial transaction, investment company, provision of services

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Official Journal of the European Union

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COMMISSION DIRECTIVE 2006/73/EC

of 10 August 2006

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

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Commu-
nity,

Having regard to Directive 2004/39/EC of
the European
Parliament and of the Council of 21 April 2004 on markets in
financial instruments amending Council Directives 85/611/EEC
and 93/6/EEC and Directive 2000/12/EC of
the European
Parliament and of the Council and repealing Council Directive
93/22/EEC (1), and in particular Article 4(2), Article 13(10),
Article 18(3), Article 19(10), Article 21(6), Article 22(3) and
Article 24(5) thereof,

Whereas:

(1) Directive 2004/39/EC establishes the framework for a
regulatory regime for financial markets in the Community,
governing, among other matters, operating conditions
relating to the performance by investment
firms of
services and, where appropriate, ancillary
investment
services and investment activities; organisational require-
ments for investment firms performing such services and
activities, and for regulated markets; reporting requirements
in respect of transactions in financial
instruments; and
transparency requirements in respect of transactions in
shares admitted to trading on a regulated market.

(2)

(3)

The rules for the implementation of the regime governing
organisational requirements for investment firms perform-
ing investment services and, where appropriate, ancillary
services and investment activities on a professional basis,
and for regulated markets, should be consistent with the
aim of Directive 2004/39/EC. They should be designed to
ensure a high level of integrity, competence and soundness
among investment firms and entities that operate regulated
markets or MTFs, and to be applied in a uniform manner.

It is necessary to specify concrete organisational require-
ments and procedures for investment firms performing
such services or activities. In particular, rigorous procedures
should be provided for with regard to matters such as
compliance, risk management, complaints handling, perso-
nal
identification,
management and disclosure of conflicts of interest.

transactions, outsourcing and the

(4)

The organisational
for
requirements
authorisation for investment firms should be set out in
the form of a set of rules that ensures the uniform

and conditions

(1) OJ L 145, 30.4.2004, p. 1. Directive as amended by Directive 2006/

31/EC (OJ L 114, 27.4.2006, p. 60).

application of the relevant provisions of Directive 2004/39/
EC. This is necessary in order to ensure that investment
firms have equal access on equivalent terms to all markets
in the Community and to eliminate obstacles,
linked to
authorisation procedures, to cross-border activities in the
field of investment services.

(5)

(6)

(7)

The rules for the implementation of the regime governing
operating conditions for the performance of investment
and ancillary services and investment activities should
reflect the aim underlying that regime. That is to say, they
investor
should be designed to ensure a high level of
protection to be applied in a uniform manner through the
introduction of clear standards and requirements governing
the relationship between an investment firm and its client.
On the other hand, as regards investor protection, and in
particular the provision of investors with information or
the seeking of information from investors, the retail or
professional nature of
the client or potential client
concerned should be taken into account.

The form of a Directive is necessary in order to enable the
implementing provisions to be adjusted to the specificities
of the particular market and legal system in each Member
State.

it

In order to ensure the uniform application of the various
provisions of Directive 2004/39/EC,
is necessary to
establish a harmonised set of organisational requirements
and operating conditions for investment
firms. Conse-
quently, Member States and competent authorities should
not add supplementary binding rules when transposing and
applying the rules specified in this Directive, save where this
Directive makes express provision to this effect.

(8) However,

it

in exceptional circumstances,

should be
possible for Member States to impose requirements on
investment firms additional to those laid down in the
implementing rules. However, such intervention should be
restricted to those cases where specific risks to investor
protection or to market integrity including those related to
the stability of
system have not been
adequately addressed by the Community legislation, and
it should be strictly proportionate.

the financial

(9) Any additional

imposed by
Member States in conformity with this Directive must not

requirements

retained or

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restrict or otherwise affect the rights of investment firms
under Articles 31 and 32 of Directive 2004/39/EC.

multiple investment firms or other regulated entities are
concentrated within a limited number of service providers.

(10) The specific risks addressed by any additional requirements
retained by Member States at the date of application of this
Directive should be of particular importance to the market
structure of the State in question, including the behaviour
of firms and consumers in that market. The assessment of
those specific risks should be made in the context of the
regulatory regime put in place by Directive 2004/39/EC
and its detailed implementing rules. Any decision to retain
additional requirements should be made with proper regard
to the objectives of that Directive to remove barriers to the
cross-border provision of investment service by harmonis-
ing the initial authorisation and operating requirements for
investment firms.

(11)

Investment firms vary widely in their size, their structure
and the nature of
their business. A regulatory regime
should be adapted to that diversity while imposing certain
fundamental regulatory requirements which are appropriate
for all firms. Regulated entities should comply with their
high level obligations and design and adopt measures that
are best suited to their particular nature and circumstances.

(12) However, a regulatory regime which entails too much
uncertainty for investment firms may reduce efficiency.
Competent authorities are expected to issue interpretative
guidance on provisions on this Directive, with a view in
particular to clarifying the practical application of
the
requirements of this Directive to particular kinds of firms
this kind
and circumstances. Non-binding guidance of
might, among other things, clarify how the provisions of
this Directive and Directive 2004/39/EC apply in the light
of market developments. To ensure a uniform application
of this Directive and Directive 2004/39/EC, the Commis-
sion may issue guidance by way of interpretative commu-
nications or other means. Furthermore, the Committee of
European Securities Regulators may issue guidance in order
to secure convergent application of
this Directive and
Directive 2004/39/EC by competent authorities.

(13) The organisational requirements established under Directive
2004/39/EC are without prejudice to systems established
by national law for the registration of individuals working
within investment firms.

(14) For

the purposes of

the provisions of

this Directive
requiring an investment firm to establish, implement and
maintain an adequate risk management policy, the risks
relating to the firm's activities, processes and systems
should include the risks associated with the outsourcing of
critical or important functions or of investment services or
activities. Such risks should include those associated with
the firm's relationship with the service provider, and the
potential risks posed where the outsourced activities of

(15) The fact that risk management and compliance functions
are performed by the same person does not necessarily
jeopardise the independent functioning of each function.
The conditions that persons involved in the compliance
function should not also be involved in the performance of
the functions that they monitor, and that the method of
determining the remuneration of such persons should not
be likely to compromise their objectivity, may not be
proportionate in the case of small
firms.
However, they would only be disproportionate for larger
firms in exceptional circumstances.

investment

(16) A number of

the provisions of Directive 2004/39/EC
require investment firms to collect and maintain informa-
tion relating to clients and services provided to clients.
Where those requirements involve the collection and
processing of personal data, firms should ensure that they
comply with national measures implementing Directive 95/
46/EC of the European Parliament and of the Council of
24 October 1995 (1) on the protection of individuals with
regard to the processing of personal data and on the free
movement of such data.

instructions

those obligations

(17) Where successive personal transactions are carried out on
behalf of a person in accordance with prior instructions
given by that person, the obligations under the provisions
of this Directive relating to personal transactions should
not apply separately to each such successive transaction if
and unchanged.
those
remain in force
Similarly,
should not apply to the
termination or withdrawal of such instructions, provided
that any financial instruments which had previously been
acquired pursuant to the instructions are not disposed of at
the same time as
terminate or are
the instructions
withdrawn. However, those obligations should apply in
relation to a personal transaction, or the commencement of
successive personal transactions, carried out on behalf of
the same person if those instructions are changed or if new
instructions are issued.

(18) Competent authorities should not make the authorisation
to provide investment services or activities subject to a
general prohibition on the outsourcing of one or more
critical or important functions or investment services or
activities. Investment firms should be allowed to outsource
such activities if the outsourcing arrangements established
by the firm comply with certain conditions.

for outsourcing critical or

(19) For the purposes of the provisions of this Directive setting
out conditions
important
operational functions or investment services or activities,
an outsourcing that would involve the delegation of
functions to the extent that the firm becomes a letter box
entity should be considered to undermine the conditions

(1) OJ L 281, 23.11.1995, p. 31. Directive as amended by Regulation

(EC) No 1882/2003 (OJ L 284, 31.10.2003, p. 1).

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with which the investment firm must comply in order to be
and remain authorised in accordance with Article 5 of
Directive 2004/39/EC.

(20) The outsourcing of

investment services or activities or
critical and important functions is capable of constituting a
material change of the conditions for the authorisation of
the investment firm, as referred to in Article 16(2) of
Directive 2004/39/EC. If such outsourcing arrangements
are to be put in place after the investment firm has obtained
an authorisation according to the provisions included in
those
I of Title II of Directive 2004/39/EC,
Chapter
arrangements
competent
should be notified to the
authority where required by Article 16(2) of Directive
2004/39/EC.

(21)

Investment firms are required by this Directive to give the
responsible competent authority prior notification of any
arrangement for the outsourcing of the management of
retail client portfolios that it proposes to enter into with a
service provider located in a third country, where certain
specified conditions are not met. However, competent
authorities are not expected to authorise or otherwise
approve any such arrangement or its terms. The purpose of
the notification, rather,
is to ensure that the competent
authority has the opportunity to intervene in appropriate
cases. It is the responsibility of the investment firm to
negotiate the terms of any outsourcing arrangement, and to
ensure that those terms are consistent with the obligations
of the firm under this Directive and Directive 2004/39/EC,
without the formal intervention of the competent authority.

(22) For the purposes of regulatory transparency, and in order to
ensure an appropriate level of certainty for investment
firms, this Directive requires each competent authority to
its policy in relation to the
publish a statement of
outsourcing of retail portfolio management
to service
providers located in third countries. That statement must
set out examples of cases where the competent authority is
unlikely to object to such outsourcing, and must include an
explanation of why outsourcing in such cases is unlikely to
impair the ability of the firm to comply with the general
In
conditions
providing that explanation, a competent authority should
always indicate the reasons why outsourcing in the cases in
question would not impede the effectiveness of its access to
all the information relating to the outsourced service that is
necessary for the authority to carry out its regulatory
functions in respect of the investment firm.

for outsourcing under

this Directive.

(23) Where an investment firm deposits funds it holds on behalf
of a client with a qualifying money market fund, the units
in that money market fund should be held in accordance
instruments
with the requirements for holding financial
belonging to clients.

(24) The circumstances which should be treated as giving rise to
a conflict of interest should cover cases where there is a
conflict between the interests of the firm or certain persons
connected to the firm or the firm's group and the duty the
firm owes to a client; or between the differing interests of
two or more of its clients, to whom the firm owes in each
case a duty. It is not enough that the firm may gain a benefit
if there is not also a possible disadvantage to a client, or
that one client to whom the firm owes a duty may make a
gain or avoid a loss without there being a concomitant
possible loss to another such client.

(25) Conflicts of interest should be regulated only where an
investment service or ancillary service is provided by an
investment firm. The status of the client to whom the
service is provided — as either retail, professional or eligible
counterparty — is irrelevant for this purpose.

(26)

(27)

In complying with its obligation to draw up a conflict of
interest policy under Directive 2004/39/EC which identifies
circumstances which constitute or may give rise to a
conflict of interest, the investment firm should pay special
attention to the activities of investment research and advice,
proprietary trading, portfolio management and corporate
finance business, including underwriting or selling in an
offering of
securities and advising on mergers and
acquisitions. In particular, such special attention is appro-
priate where the firm or a person directly or indirectly
linked by control to the firm performs a combination of
two or more of those activities.

lines

activities under

and their group's

Investment firms should aim to identify and manage the
conflicts of interest arising in relation to their various
business
a
comprehensive conflicts of interest policy. In particular,
the disclosure of conflicts of interest by an investment firm
should not exempt it from the obligation to maintain and
operate the effective organisational and administrative
arrangements required under Article 13(3) of Directive
2004/39/EC. While disclosure of specific conflicts of
interest is required by Article 18(2) of Directive 2004/39/
EC, an over-reliance on disclosure without adequate
consideration as to how conflicts may appropriately be
managed is not permitted.

(28)

Investment research should be a sub-category of the type of
information defined as a recommendation in Commission
Directive 2003/125/EC of 22 December 2003 implement-
ing Directive 2003/6/EC of the European Parliament and of
the Council as regards the fair presentation of investment
recommendations and the disclosure of conflicts of
interest (1), but it applies to financial instruments as defined
in Directive 2004/39/EC. Recommendations, of the type so
defined, which do not constitute investment research as
defined in this Directive are nevertheless subject to the

(1) OJ L 339, 24.12.2003, p. 73.

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provisions of Directive 2003/125/EC as
presentation of
investment
disclosure of conflicts of interest.

to the fair
recommendations and the

(29) The measures and arrangements adopted by an investment
firm to manage the conflicts of interests that might arise
from the production and dissemination of material that is
presented as investment research should be appropriate to
protect
financial
the objectivity and independence of
the investment research they produce.
analysts and of
Those measures and arrangements should ensure that
financial analysts enjoy an adequate degree of independence
from the interests of persons whose responsibilities or
business interests may reasonably be considered to conflict
with the interests of the persons to whom the investment
research is disseminated.

(30) Persons whose responsibilities or business interests may
reasonably be considered to conflict with the interests of
the persons to whom investment research is disseminated
should include corporate finance personnel and persons
involved in sales and trading on behalf of clients or the
firm.

(31) Exceptional circumstances in which financial analysts and
other persons connected with the investment firm who are
involved in the production of investment research may,
with prior written approval, undertake personal transac-
tions in instruments to which the research relates should
include those circumstances where, for personal reasons
relating to financial hardship, the financial analyst or other
person is required to liquidate a position.

business and underwriting, participating in ‘pitches’ for new
business or
financial
instruments; or being otherwise involved in the preparation
of issuer marketing.

for new issues of

‘road shows’

(37) Without prejudice to the provisions of

this Directive
relating to the production or dissemination of investment
research, it is recommended that producers of investment
research that are not investment firms should consider
adopting internal policies and procedures designed to
ensure that they also comply with the principles set out in
this Directive as to the protection of the independence and
objectivity of that research.

(38) Requirements imposed by this Directive, including those
relating to personal transactions, to dealing with knowledge
of investment research and to the production or dissemina-
tion of investment research, apply without prejudice to
other requirements of Directive 2004/39/EC and Directive
2003/6/EC of the European parliament and of the Council
of 28 January 2003 on insider dealing and market
abuse) (1)
manipulation (market
respective
implementing measures.

and their

(39) For

the purposes of

the provisions of

this Directive
concerning inducements, the receipt by an investment firm
of a commission in connection with investment advice or
general
in circumstances where the
advice or recommendations are not biased as a result of
the receipt of commission,
should be considered as
designed to enhance the quality of the investment advice
to the client.

recommendations,

(32) Small gifts or minor hospitality below a level specified in
the firm's conflicts of interest policy and mentioned in the
summary description of that policy that is made available
to clients should not be considered as inducements for the
purposes of the provisions relating to investment research.

(40) This Directive permits investment firms to give or receive
certain inducements only subject to specific conditions, and
provided they are disclosed to the client, or are given to or
by the client or a person on behalf of the client.

(33) The concept of dissemination of investment research to
clients or the public should not include dissemination
exclusively to persons within the group of the investment
firm.

(34) Current recommendations should be considered to be those
recommendations contained in investment research which
have not been withdrawn and which have not lapsed.

(35) The same requirements should apply to the substantial
alteration of investment research produced by a third party
as apply to the production of research.

(41) This Directive requires investment

firms that provide
investment services other than investment advice to new
retail clients to enter into a written basic agreement with
the client, setting out the essential rights and obligations of
it imposes no other
the firm and the client. However,
obligations as to the form, content and performance of
contracts for the provisions of
investment or ancillary
services.

(42) This Directive sets out requirements for marketing com-
munications only with respect
to the obligation in
Article 19(2) of Directive 2004/39/EC that information
addressed to clients, including marketing communications,
should be fair, clear and not misleading.

(36) Financial analysts should not become involved in activities
other than the preparation of investment research where
such involvement is inconsistent with the maintenance of
that person's objectivity. The following involvements
should ordinarily be considered as inconsistent with the
maintenance of that person's objectivity: participating in
investment banking activities such as corporate finance

(43) Nothing in this Directive requires competent authorities to
approve the content and form of marketing communica-
tions. However, neither does it prevent them from doing so,
insofar as any such pre-approval
is based only on
compliance with the obligation in Directive 2004/39/EC

(1) OJ L 96, 12.4.2003, p. 16.

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that information to clients, including marketing commu-
nications, should be fair, clear and not misleading.

(44) Appropriate and proportionate information requirements
should be established which take account of the status of a
client as either retail or professional. An objective of
Directive 2004/39/EC is to ensure a proportionate balance
between investor protection and the disclosure obligations
which apply to investment
is
appropriate that less stringent specific information require-
ments be included in this Directive with respect
to
professional clients than apply to retail clients. Professional
clients should, subject to limited exceptions, be able to
identify for themselves the information that is necessary for
them to make an informed decision, and to ask the
investment firm to provide that information. Where such
information requests are reasonable and proportionate
investment firms should provide additional information.

firms. To this end,

it

(45)

Investment firms should provide clients or potential clients
with adequate information on the nature of
financial
instruments and the risks associated with investing in them
so that their clients can take each investment decision on a
properly informed basis. The level of detail of
this
information may vary according to the client's categorisa-
tion as either a retail client or a professional client and the
nature and risk profile of the financial instruments that are
being offered, but should never be so general as to omit any
essential elements. It is possible that for some financial
instruments only the information referring to the type of an
instrument will be sufficient whereas for some others the
information will need to be product-specific.

(46) The conditions with which information addressed by
investment
firms to clients and potential clients must
comply in order to be fair, clear and not misleading should
apply to communications intended for retail clients in a
way that is appropriate and proportionate, taking into
account, for example, the means of communication, and
the information that the communication is intended to
convey to the clients or potential clients. In particular, it
would not be appropriate to apply such conditions to
marketing communications which consist only of one or
more of the following: the name of the firm, a logo or other
image associated with the firm, a contact point, a reference
to the types of investment services provided by the firm, or
to its fees or commissions.

(47) For the purposes of Directive 2004/39/EC and of this
Directive, information should be considered to be mislead-
ing if it has a tendency to mislead the person or persons to
whom it is addressed or by whom it is likely to be received,
whether or not the person who provides the information
considers or intends it to be misleading.

an investment firm should take into account, having regard
to the urgency of the situation and the time necessary for
the client to absorb and react to the specific information
provided, the client's need for sufficient time to read and
understand it before taking an investment decision. A client
is likely to require less time to review information about a
simple or standardised product or service, or a product or
service of a kind he has purchased previously, than he
would require for a more complex or unfamiliar product or
service.

(49) Nothing in this Directive obliges investment

firms to
provide all required information about the investment firm,
financial
instruments, costs and associated charges, or
concerning the safeguarding of client financial instruments
or client funds immediately and at the same time, provided
that they comply with the general obligation to provide the
relevant information in good time before the time specified
in this Directive. Provided that
information is
communicated to the client
in good time before the
provision of the service, nothing in this Directive obliges
firms to provide it either separately, as part of a marketing
communication, or by incorporating the information in a
client agreement.

the

(50)

In cases where an investment firm is required to provide
information to a client before the provision of a service,
each transaction in respect of the same type of financial
instrument should not be considered as the provision of a
new or different service.

(51)

In cases where an investment firm providing portfolio
management services is required to provide to retail clients
or potential retail clients information on the types of
financial instruments that may be included in the client
portfolio and the types of transactions that may be carried
out in such instruments, such information should state
separately whether the investment firm will be mandated to
invest in financial instruments not admitted to trading on a
regulated market,
in derivatives, or in illiquid or highly
volatile instruments; or to undertake short sales, purchases
with borrowed funds, securities financing transactions, or
any transactions involving margin payments, deposit of
collateral or foreign exchange risk.

(52) The provision by an investment firm to a client of a copy of
a prospectus that has been drawn up and published in
accordance with Directive 2003/71/EC of the European
Parliament and of the Council of 4 November 2003 on the
prospectus to be published when securities are offered to
the public or admitted to trading (1) should not be treated
as the provision by the firm of information to a client for
the purposes of the operating conditions under Directive
2004/39/EC which relate to the quality and contents of
such information, if the firm is not responsible under that
directive for the information given in the prospectus.

(48)

In determining what constitutes the provision of informa-
tion in good time before a time specified in this Directive,

(1) OJ L 345, 31.12.2003, p. 64.

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(53) The information which an investment firm is required to
give to a retail client concerning costs and associated
charges includes information about the arrangements for
payment or performance of the agreement for the provision
of investment services and any other agreement relating to
this
a financial
purpose, arrangements for payment will generally be
relevant where a financial instrument contract is terminated
by cash settlement. Arrangements for performance will
generally be relevant where, upon termination, a financial
instrument requires the delivery of shares, bonds, a warrant,
bullion or another instrument or commodity.

is being offered. For

instrument

that

laws,

(54) As regards collective investment undertakings covered by
Council Directive 85/611/EEC of 20 December 1985 on the
coordination of
regulations and administrative
provisions relating to undertakings for collective invest-
ment in transferable securities (UCITS) (1),
it is not the
purpose of this Directive to regulate the content of the
simplified prospectus as defined by Article 28 of Directive
85/611/EEC. No information should be added to the
simplified prospectus as a result of the implementation of
this Directive.

(55) The simplified prospectus provides, notably,

sufficient
information in relation to the costs and associated charges
in respect to the UCITS itself. However, investment firms
distributing units in UCITS should additionally inform their
clients about all the other costs and associated charges
related to their provision of investment services in relation
to units in UCITS.

(56)

the suitability test

is necessary to make different provision for

the
It
in Article 19(4) of
application of
Directive 2004/39/EC and the appropriateness test
in
Article 19(5) of that Directive. These tests have different
scope with regards to the investment services to which they
relate, and have different functions and characteristics.

the frequency of

(57) For the purposes of Article 19(4) of Directive 2004/39/EC,
a transaction may be unsuitable for the client or potential
client because of the risks of the financial
instruments
involved, the type of transaction, the characteristics of the
the trading. A series of
order or
transactions that are each suitable when viewed in isolation
may be unsuitable if the recommendation or the decisions
to trade are made with a frequency that is not in the best
interests of the client. In the case of portfolio management,
a transaction might also be unsuitable if it would result in
an unsuitable portfolio.

(58)

In accordance with Article 19(4) of Directive 2004/39/EC, a
investment
firm is required to assess the suitability of
services and financial instruments to a client only when it is
providing investment advice or portfolio management to
that client. In the case of other investment services, the firm
is required by Article 19(5) of that Directive to assess the
appropriateness of an investment service or product for a
client, and then only if the product is not offered on an

(1) OJ L 375, 31.12.1985, p. 3. Directive as last amended by Directive
2005/1/EC of the European Parliament and of the Council (OJ L 79,
24.3.2005, p. 9).

execution-only basis under Article 19(6) of that Directive
(which applies to non-complex products).

(59) For

the purposes of

the provisions of

this Directive
requiring investment firms to assess the appropriateness
of investment services or products offered or demanded, a
client who has engaged in a course of dealings involving a
specific type of product or service beginning before the date
of application of Directive 2004/39/EC should be pre-
sumed to have the necessary experience and knowledge in
order to understand the risks involved in relation to that
product or investment service. Where a client engages in a
course of dealings of that kind through the services of an
investment firm, beginning after the date of application of
that Directive, the firm is not required to make a new
assessment on the occasion of each separate transaction. It
complies with its duty under Article 19(5) of that Directive
the necessary assessment of
provided that
appropriateness before beginning that service.

it makes

(60) A recommendation or request made, or advice given, by a
portfolio manager to a client to the effect that the client
should give or alter a mandate to the portfolio manager
that defines the limits of the portfolio manager's discretion
should be considered a recommendation within the
meaning of Article 19(4) of Directive 2004/39/EC.

(61) For the purposes of determining whether a unit

in a
collective investment undertaking which does not comply
with the requirements of Directive 85/611/EC, that has
been authorised for marketing to the public, should be
considered as non-complex, the circumstances in which
valuation systems will be independent of the issuer should
include where they are overseen by a depositary that is
regulated as a provider of depositary services in a Member
State.

(62) Nothing in this Directive requires competent authorities to
approve the content of the basic agreement between an
investment firm and its retail clients. However, neither does
it prevent them from doing so, insofar as any such approval
is based only on the firm's compliance with its obligations
under Directive 2004/39/EC to act honestly, fairly and
professionally in accordance with the best interests of its
clients, and to establish a record that sets out the rights and
obligations of investment firms and their clients, and the
other terms on which firms will provide services to their
clients.

(63) The records an investment firm is required to keep should
be adapted to the type of business and the range of
investment services and activities performed, provided that
the record-keeping obligations set out in Directive 2004/
39/EC and this Directive are fulfilled. For the purposes of
the reporting obligations in respect of portfolio manage-
ment, a contingent liability transaction is one that involves
any actual or potential liability for the client that exceeds
the cost of acquiring the instrument.

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(64) For the purposes of the provisions on reporting to clients, a
reference to the type of the order should be understood as
referring to its status as a limit order, market order, or other
specific type of order.

reasonably to know that an instruction to that effect is
likely to prevent it from obtaining the best possible result
for that client. However, this should not prevent a firm
inviting a client
to choose between two or more
specified trading venues, provided that those venues are
consistent with the execution policy of the firm.

(65) For the purposes of the provisions on reporting to clients, a
reference to the nature of the order should be understood
as referring to orders to subscribe for securities, or to
exercise an option, or similar client order.

(66) When establishing its execution policy in accordance with
Article 21(2) of Directive 2004/39/EC, an investment firm
should determine the relative importance of the factors
mentioned in Article 21(1) of that Directive, or at least
establish the process by which it determines the relative
importance of these factors, so that it can deliver the best
possible result to its clients. In order to give effect to that
policy, an investment firm should select the execution
venues that enable it to obtain on a consistent basis the best
possible result
for the execution of client orders. An
investment firm should apply its execution policy to each
client order that it executes with a view to obtaining the
best possible result for the client in accordance with that
policy. The obligation under Directive 2004/39/EC to take
all reasonable steps to obtain the best possible result for the
client should not be treated as requiring an investment firm
to include in its execution policy all available execution
venues.

for

(67) For the purposes of ensuring that an investment firm
obtains the best possible result
the client when
executing a retail client order in the absence of specific
client instructions, the firm should take into consideration
all factors that will allow it to deliver the best possible result
in terms of the total consideration, representing the price of
the financial instrument and the costs related to execution.
Speed, likelihood of execution and settlement, the size and
nature of the order, market impact and any other implicit
the
transaction costs may be given precedence over
immediate price and cost consideration only insofar as
they are instrumental in delivering the best possible result
in terms of the total consideration to the retail client.

(68) When an investment firm executes an order following
specific instructions from the client, it should be treated as
having satisfied its best execution obligations only in
respect of the part or aspect of the order to which the client
instructions relate. The fact that the client has given specific
instructions which cover one part or aspect of the order
should not be treated as releasing the investment firm from
its best execution obligations in respect of any other parts
or aspects of the client order that are not covered by such
instructions. An investment firm should not induce a client
to instruct it to execute an order in a particular way, by
expressly indicating or implicitly suggesting the content of
the instruction to the client, when the firm ought

(69) Dealing on own account with clients by an investment firm
should be considered as the execution of client orders, and
therefore subject to the requirements under Directive 2004/
39/EC and this Directive and, in particular, those obliga-
tions
if an
in relation to best execution. However,
investment firm provides a quote to a client and that quote
would meet
firm's obligations under
Article 21(1) of Directive 2004/39/EC if the firm executed
that quote at the time the quote was provided, then the firm
will meet those same obligations if it executes its quote after
the client accepts it, provided that, taking into account the
changing market conditions and the time elapsed between
the offer and acceptance of the quote, the quote is not
manifestly out of date.

the investment

(70) The obligation to deliver the best possible result when
executing client orders applies in relation to all types of
instruments. However, given the differences in
financial
market structures or the structure of financial instruments,
it may be difficult to identify and apply a uniform standard
of and procedure for best execution that would be valid and
effective for all classes of
instrument. Best execution
obligations should therefore be applied in a manner that
takes into account the different circumstances associated
with the execution of orders related to particular types of
financial instruments. For example, transactions involving a
customised OTC financial instrument that involve a unique
contractual relationship tailored to the circumstances of the
client and the investment firm may not be comparable for
best execution purposes with transactions involving shares
traded on centralised execution venues.

(71) For the purposes of determining best execution when
executing retail client orders, the costs related to execution
should include an investment firm's own commissions or
fees charged to the client for limited purposes, in cases
where more than one venue listed in the firm's execution
policy is capable of executing a particular order. In such
cases, the firm's own commissions and costs for executing
the order on each of the eligible execution venues should be
taken into account in order to assess and compare the
results for the client that would be achieved by executing
the order on each such venue. However, it is not intended to
require a firm to compare the results that would be
achieved for its client on the basis of its own execution
policy and its own commissions and fees, with results that
the same client by any other
might be achieved for
investment firm on the basis of a different execution policy

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or a different structure of commissions or fees. Nor is it
intended to require a firm to compare the differences in its
own commissions which are attributable to differences in
the nature of the services that the firm provides to clients.

if, as an effect of that reallocation, unfair precedence is
given to the investment firm or to any particular client.

(72) The provisions of this Directive that provide that costs of
execution should include an investment
firm's own
commissions or fees charged to the client for the provision
of an investment service should not apply for the purpose
of determining what execution venues must be included in
the firm's execution policy for the purposes of Article 21(3)
of Directive 2004/39/EC.

(73)

It should be considered that an investment firm structures
or charges its commissions in a way which discriminates
unfairly between execution venues if it charges a different
commission or spread to clients for execution on different
execution venues and that difference does not reflect actual
differences in the cost to the firm of executing on those
venues.

(74) The provisions of this Directive as to execution policy are
without prejudice to the general obligation of an invest-
ment firm under Article 21(4) of Directive 2004/39/EC to
monitor the effectiveness of its order execution arrange-
ments and policy and assess the venues in its execution
policy on a regular basis.

(75) This Directive is not intended to require a duplication of
effort as to best execution between an investment firm
which provides the service of reception and transmission of
order or portfolio management and any investment firm to
for
which that
execution.

firm transmits

investment

its orders

(76) The best execution obligation under Directive 2004/39/EC
requires investment firms to take all reasonable steps to
obtain the best possible result for their clients. The quality
of execution, which includes aspects such as the speed and
likelihood of execution (fill rate) and the availability and
incidence of price improvement, is an important factor in
the delivery of best execution. Availability, comparability
and consolidation of data related to execution quality
provided by the various execution venues is crucial
in
enabling investment firms and investors to identify those
execution venues
the highest quality of
execution for their clients. This Directive does not mandate
the publication by execution venues of their execution
quality data, as execution venues and data providers should
be permitted to develop solutions concerning the provision
of execution quality data. The Commission should submit a
report by 1 November 2008 on the market-led develop-
ments in this area with a view to assessing availability,
comparability and consolidation at a European level of
information concerning execution quality.

that deliver

(77) For

the purposes of

this Directive
the reallocation of
concerning client order handling,
transactions should be considered as detrimental to a client

the provisions of

for

them to be

(78) Without prejudice to Directive 2003/6/EC, for the purposes
of the provisions of this Directive concerning client order
handling, client orders should not be treated as otherwise
comparable if they are received by different media and it
treated
would not be practicable
sequentially. For the further purposes of those provisions,
any use by an investment firm of information relating to a
pending client order in order to deal on own account in the
financial instruments to which the client order relates, or in
should be considered a
related financial
misuse of that information. However, the mere fact that
market makers or bodies authorised to act as counterparties
confine themselves to pursuing their legitimate business of
buying and selling financial instruments, or that persons
authorised to execute orders on behalf of third parties
confine themselves to carrying out an order dutifully,
should not in itself be deemed to constitute a misuse of
information.

instruments,

(79) Advice about financial instruments given in a newspaper,
journal, magazine or any other publication addressed to the
general public (including by means of the internet), or in
any television or radio broadcast, should not be considered
as a personal recommendation for the purposes of the
definition of ‘investment advice’ in Directive 2004/39/EC.

(80) This Directive respects the fundamental rights and observes
the principles recognised in particular by the Charter of
Fundamental Rights of
the European Union and in
particular by Article 11 thereof and Article 10 of the
European Convention on Human Rights. In this regard, this
Directive does not in any way prevent Member States from
applying their constitutional rules relating to freedom of
the press and freedom of expression in the media.

(81) Generic advice about a type of financial instrument is not
investment advice for the purposes of Directive 2004/39/
EC, because this Directive specifies that, for the purposes of
Directive 2004/39/EC,
investment advice is restricted to
advice on particular financial instruments. However, if an
investment firm provides generic advice to a client about a
type of financial instrument which it presents as suitable
for, or based on a consideration of the circumstances of,
that client, and that advice is not in fact suitable for the
is not based on a consideration of his
client, or
circumstances, depending on the circumstances of
the
particular case, the firm is likely to be acting in contra-
vention of Article 19(1) or (2) of Directive 2004/39/EC. In
particular, a firm which gives a client such advice would be
likely to contravene the requirement of Article 19(1) to act
honestly, fairly and professionally in accordance with the
best interests of its clients. Similarly or alternatively, such
advice would be likely to contravene the requirement of
Article 19(2) that information addressed by a firm to a
client should be fair, clear and not misleading.

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(82) Acts carried out by an investment firm that are preparatory
to the provision of an investment service or carrying out an
investment activity should be considered as an integral part
of that service or activity. This would include, for example,
the provision of generic advice by an investment firm to
clients or potential clients prior to or in the course of the
provision of investment advice or any other investment
service or activity.

(83) The provision of a general recommendation (that is, one
which is intended for distribution channels or the public)
about a transaction in a financial instrument or a type of
financial
the provision of an
ancillary service within Section B(5) of Annex I of Directive
2004/39/EC, and consequently Directive 2004/39/EC and
its protections apply to the provision of that recommenda-
tion.

instrument constitutes

(84) The Committee of European Securities Regulators, estab-
lished by Commission Decision 2001/527/EC (1) has been
consulted for technical advice.

(85) The measures provided for

in this Directive are in
accordance with the opinion of the European Securities
Committee,

HAS ADOPTED THIS DIRECTIVE:

CHAPTER I

SCOPE AND DEFINITIONS

Article 1

Subject-matter and scope

1. This Directive lays down the detailed rules
the
implementation of Article 4(1)(4) and 4(2), Article 13(2) to (8),
Article 18, Article 19(1) to (6), Article 19(8), and Articles 21, 22
and 24 of Directive 2004/39/EC.

for

2. Chapter II and Sections 1 to 4, Article 45 and Sections 6 and
8 of Chapter III and, to the extent they relate to those provisions,
Chapter I and Section 9 of Chapter III and Chapter IV of this
Directive shall apply to management companies in accordance
with Article 5(4) of Directive 85/611/EEC.

Article 2

Definitions

For the purposes of this Directive, the following definitions shall
apply:

(1)

‘distribution channels’ means distribution channels within
the meaning of Article 1(7) of Commission Directive 2003/
125/EC;

(2)

‘durable medium’ means any instrument which enables a
client to store information addressed personally to that

client in a way accessible for future reference for a period of
time adequate for the purposes of the information and
which allows the unchanged reproduction of the informa-
tion stored;

(3)

‘relevant person’ in relation to an investment firm, means
any of the following:

(a)

(b)

(c)

(d)

a director, partner or equivalent, manager or tied
agent of the firm;

a director, partner or equivalent, or manager of any
tied agent of the firm;

an employee of the firm or of a tied agent of the firm,
as well as any other natural person whose services are
placed at the disposal and under the control of the
firm or a tied agent of the firm and who is involved in
the provision by the firm of investment services and
activities;

a natural person who is directly involved in the
provision of services to the investment firm or to its
tied agent under an outsourcing arrangement for the
purpose of the provision by the firm of investment
services and activities;

‘financial analyst’ means a relevant person who produces
the substance of investment research;

‘group’, in relation to an investment firm, means the group
of which that firm 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 Article 12(1) of Council
Directive 83/349/EEC on consolidated accounts (2);

‘outsourcing’ means an arrangement of any form between
an investment firm and a service provider by which that
service provider performs a process, a service or an activity
which would otherwise be undertaken by the investment
firm itself;

(4)

(5)

(6)

(7)

‘person with whom a relevant person has a family
relationship’ means any of the following:

(a)

the spouse of the relevant person or any partner of
that person considered by national law as equivalent
to a spouse;

(b)

a dependent child or stepchild of the relevant person;

(c)

any other relative of the relevant person who has
shared the same household as that person for at least
one year on the date of
the personal transaction
concerned;

(1) OJ L 191, 13.7.2001, p. 43.

(2) OJ No L 193, 18.7.1983, p. 1.

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(8)

‘securities financing transaction’ has the meaning given in
Commission Regulation (EC) No 1287/2006 (1);

is evidence that the client has regular access to the internet. The
provision by the client of an e-mail address for the purposes of
the carrying on of that business shall be treated as such evidence.

(9)

‘senior management’ means the person or persons who
effectively direct the business of the investment firm as
referred to in Article 9(1) of Directive 2004/39/EC.

Article 4

Article 3

Additional requirements on investment firms in certain
cases

Conditions applying to the provision of information

1. Where, for the purposes of this Directive, information is
required to be provided in a durable medium, Member States
shall permit investment firms to provide that information in a
durable medium other than on paper only if:

1. Member States may retain or impose requirements addi-
tional to those in this Directive only in those exceptional cases
where such requirements are objectively justified and propor-
tionate so as to address specific risks to investor protection or to
market
integrity that are not adequately addressed by this
Directive, and provided that one of the following conditions is
met:

(a)

(b)

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

that

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.

(a)

(b)

2. Where, pursuant to Article 29, 30, 31, 32, 33 or 46(2) of
this Directive, an investment firm provides information to a
client by means of a website and that
information is not
addressed personally to the client, Member States shall ensure
that the following conditions are satisfied:

the specific risks addressed by the requirements are of
particular importance in the circumstances of the market
structure of that Member State;

the requirement addresses risks or issues that emerge or
become evident after
this
Directive and that are not otherwise regulated by or under
Community measures.

the date of application of

2. Any requirements imposed under paragraph 1 shall not
restrict or otherwise affect the rights of investment firms under
Articles 31 and 32 of Directive 2004/39/EC.

(a)

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

that

3. Member States shall notify to the Commission:

(b)

the client must specifically consent to the provision of that
information in that form;

(c)

the client must be notified electronically of the address of
the website, and the place on the website where the
information may be accessed;

(a)

(b)

any requirement which it intends to retain in accordance
with paragraph 1 before the date of transposition of this
Directive; and

any requirement which it intends to impose in accordance
with paragraph 1 at least one month before the date
appointed for that requirement to come into force.

(d)

the information must be up to date;

(e)

the information must be 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

3.
the provision of
information by means of electronic communications shall be
treated as appropriate to the context in which the business
between the firm and the client is, or is to be, carried on if there

this Article,

(1) See page 1 of this Official Journal.

In each case, the notification shall include a justification for that
requirement.

The Commission shall communicate to Member States and make
public on its website the notifications it receives in accordance
with this paragraph.

4. By 31 December 2009 the Commission shall report to the
European Parliament and the Council on the application of this
Article.

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CHAPTER II

ORGANISATIONAL REQUIREMENTS

SECTION 1

Organisation

Article 5

(Article 13(2) to (8) of Directive 2004/39/EC)

General organisational requirements

1. Member States shall require investment firms to comply
with the following requirements:

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

to ensure that their relevant persons are aware of the
procedures which must be followed for
the proper
discharge of their responsibilities;

implement and maintain adequate internal
to establish,
control mechanisms designed to secure compliance with
decisions and procedures at all
levels of the investment
firm;

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

to establish,
implement and maintain effective internal
reporting and communication of information at all relevant
levels of the investment firm;

to maintain adequate and orderly records of their business
and internal organisation;

(a)

(b)

(c)

(d)

(e)

(f)

(g)

3. Member States shall require investment firms to establish,
implement and maintain an adequate 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 investment services and activities, or,
where that is not possible, the timely recovery of such data and
functions and the timely resumption of their investment services
and activities.

4. Member States shall require investment firms to establish,
implement and maintain accounting policies and procedures that
enable them, at the request of the competent authority, to deliver
in a timely manner to the competent authority financial reports
which reflect a true and fair view of their financial position and
which comply with all applicable accounting standards and rules.

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

Article 6

(Article 13(2) of Directive 2004/39/EC)

Compliance

1. Member States shall ensure that investment firms establish,
implement and maintain adequate policies and procedures
designed to detect any risk of failure by the firm to comply
with its obligations under Directive 2004/39/EC, as well as the
associated risks, and put
in place adequate measures and
procedures designed to minimise such risk and to enable the
competent authorities to exercise their powers effectively under
that Directive.

Member States shall ensure that, for those purposes, investment
firms take into account the nature, scale and complexity of the
business of the firm, and the nature and range of investment
services and activities undertaken in the course of that business.

to ensure that the performance of multiple functions by
their relevant persons does not and is not likely to prevent
those persons from discharging any particular function
soundly, honestly, and professionally.

2. Member States shall require investment firms to establish
and maintain a permanent and effective compliance function
which operates independently and which has the following
responsibilities:

Member States shall ensure that, for those purposes, investment
firms take into account the nature, scale and complexity of the
business of the firm, and the nature and range of investment
services and activities undertaken in the course of that business.

2. Member States shall require investment firms to establish,
implement and maintain systems and procedures that are
adequate to safeguard the security, integrity and confidentiality
of information, taking into account the nature of the informa-
tion in question.

(a)

to monitor and, on a regular basis, to assess the adequacy
and effectiveness of the measures and procedures put in
place in accordance with the first subparagraph of para-
graph 1, and the actions taken to address any deficiencies in
the firm's compliance with its obligations;

(b)

to advise and assist the relevant persons responsible for
carrying out investment services and activities to comply
with the firm's obligations under Directive 2004/39/EC.

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In order to enable the compliance function to discharge its
3.
responsibilities properly and independently, Member States shall
require investment firms to ensure that the following conditions
are satisfied:

(a)

(b)

(c)

(d)

the compliance function must have the necessary authority,
resources, expertise and access to all relevant information;

a compliance officer must be appointed and must be
the compliance function and for any
responsible for
reporting as to compliance required by Article 9(2);

the relevant persons involved in the compliance function
must not be involved in the performance of services or
activities they monitor;

the method of determining the remuneration of
the
relevant persons involved in the compliance function must
not compromise their objectivity and must not be likely to
do so.

However, an investment firm shall not be required to comply
with point (c) or point (d) if it is able to demonstrate that in view
of the nature, scale and complexity of its business, and the nature
and range of investment services and activities, the requirement
under that point is not proportionate and that its compliance
function continues to be effective.

Article 7

(second subparagraph of Article 13(5) of Directive 2004/39/EC)

Risk management

1. Member States shall require investment firms to take the
following actions:

(a)

(b)

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

to adopt effective arrangements, processes and mechanisms
relating to the firm's activities,
to manage the risks
processes and systems,
risk
that
tolerance;

in light of

level of

shall

require investment

firms, where
2. Member States
appropriate and proportionate in view of the nature, scale and
complexity of their business and the nature and range of the
investment services and activities undertaken in the course of
that business, to establish and maintain a risk management
the
function that operates
following tasks:

independently and carries out

(a)

(b)

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

provision of reports and advice to senior management in
accordance with Article 9(2).

Where an investment firm is not required under the first sub-
paragraph to establish and maintain a risk management function
that functions independently,
it must nevertheless be able to
demonstrate that the policies and procedures which it is has
adopted in accordance with paragraph 1 satisfy the requirements
of that paragraph and are consistently effective.

Article 8

(second subparagraph of Article 13(5) of Directive 2004/39/EC)

Internal audit

Member States shall require investment firms, where appropriate
and proportionate in view of the nature, scale and complexity of
their business and the nature and range of investment services
and activities undertaken in the course of that business, to
establish and maintain an internal audit
function which is
separate and independent from the other functions and activities
of the investment firm and which has the following responsi-
bilities:

(a)

to establish,
implement and maintain an audit plan to
examine and evaluate the adequacy and effectiveness of the
internal control mechanisms
investment firm's systems,
and arrangements;

(b)

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

(c)

to verify compliance with those recommendations;

(c)

to monitor the following:

(d)

to report in relation to internal audit matters in accordance
with Article 9(2).

(i)

(ii)

(iii)

the adequacy and effectiveness of
firm's risk management policies and procedures;

the investment

the level of compliance by the investment firm and its
relevant persons with the arrangements, processes and
mechanisms adopted in accordance with point (b);

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

Article 9

(Article 13(2) of Directive 2004/39/EC)

Responsibility of senior management

shall

1. Member States
firms, when
require
allocating functions internally, to ensure that senior manage-
ment, and, where appropriate, the supervisory function, are
the firm complies with its
responsible for ensuring that
obligations under Directive 2004/39/EC.

investment

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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.

For the purposes of

4.
‘supervisory function’
means the function within an investment firm responsible for
the supervision of its senior management.

this Article,

Article 10

(Article 13(2) of Directive 2004/39/EC)

Complaints handling

Member States shall require investment
firms to establish,
implement and 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 11

(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)

(b)

that relevant person is acting outside the scope of the
activities he carries out in that capacity;

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 12

(Article 13(2) of Directive 2004/39/EC)

Personal transactions

1. Member States shall require investment firms to establish,
implement and maintain 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 at least
one 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
(b) or
Article 47(3);

(a) or Article 25(2)(a) or

(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)

instruments
to enter into a transaction in financial
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);

(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

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personal transactions and disclosure, in accordance with
paragraph 1;

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:

(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;

In the case of outsourcing arrangements the investment
firm must ensure that the firm to which the activity is
outsourced maintains a record of personal transactions
entered into by any relevant person and provides that
information to the investment firm promptly on request.

(c)

a record is kept of the personal transaction notified to the
firm or identified by it,
including any authorisation or
prohibition in connection with such a transaction.

(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, billing services
and the security of the firm's premises and personnel;

(b)

the purchase of standardised services,
information services and the provision of price feeds.

including market

Article 14

(Article 13(2) and first subparagraph of Article 13(5)
of Directive 2004/39/EC)

Paragraphs 1 and 2 shall not apply to the following kinds of

3.
personal transaction:

Conditions for outsourcing critical or important
operational functions or investment services or activities

(a)

(b)

transactions

effected under

personal
a discretionary
portfolio management service where there is no prior
transaction
communication in connection with the
between the portfolio manager and the relevant person or
other person for whose account the transaction is executed;

personal transactions in units in collective undertakings
that comply with the conditions necessary to enjoy the
rights conferred by Directive 85/611/EEC or are subject to
supervision under the law of a Member State 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.

SECTION 2

Outsourcing

Article 13

(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
the continuing compliance of an
would materially impair
investment
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.

firm with the conditions and obligations of

1. Member States shall ensure that, when investment firms
outsource critical or important operational functions or any
the
investment
remain fully
activities,
services or
their obligations under
responsible for discharging all of
Directive 2004/39/EC and comply,
in particular, with the
following conditions:

firms

(a)

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

(b)

(c)

the relationship and obligations of the investment firm
towards its clients under the terms of Directive 2004/39/EC
must not be altered;

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 firm's
authorisation was granted must be removed or modified.

2. Member States shall require investment firms to exercise due
skill, 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:

(a)

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;

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(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

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 may have a material impact on its
ability to carry out the outsourced functions effectively and
in compliance with applicable laws and regulatory require-
ments;

firm must be able to terminate the
the investment
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;

(j)

the service provider must protect any confidential informa-
tion relating to the investment firm and its clients;

(k)

the investment firm and the service provider must establish,
implement and maintain a contingency plan for disaster
recovery and periodic testing of backup facilities, where that
is necessary having regard to the function, service or
activity that has been outsourced.

firm controls the service provider or has the ability to influence
its actions.

5. 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 require-
ments of this Directive.

Article 15

(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

1.
in Article 14,
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,
the following
that
conditions are satisfied:

firm ensures

investment

that

(a)

(b)

the service provider must be authorised or registered in its
home country to provide that service and must be subject
to prudential supervision;

there must be an appropriate cooperation agreement
between the competent authority of the investment firm
and the supervisory authority of the service provider.

2. Where one or both of
those conditions mentioned in
paragraph 1 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.

3. Without prejudice to paragraph 2, Member States shall
publish or require competent authorities to publish a statement
of policy in relation to outsourcing covered by paragraph 2. That
statement shall set out examples of cases where the competent
authority would not, or would be likely not to, object to an
the
outsourcing under paragraph 2 where one or both of
conditions in points (a) and (b) of paragraph 1 are not met. It
shall
include a clear explanation as to why the competent
authority considers that in such cases outsourcing would not
impair the ability of investment firms to fulfil their obligations
under Article 14.

3. 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 agreement.

4. Nothing in this article limits the obligations on investment
firms to comply with the requirements in Article 14.

4. 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 the

5. 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
paragraph 1.

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SECTION 3

Safeguarding of client assets

Article 16

(Article 13(7) and (8) of Directive 2004/39/EC)

Safeguarding of client financial instruments and funds

1. Member States shall require that,
the purposes of
safeguarding clients’ rights in relation to financial instruments
and funds belonging to them, investment firms comply with the
following requirements:

for

(a)

(b)

(c)

(d)

(e)

(f)

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;

they must maintain their records and accounts in a way that
ensures their accuracy, and in particular their correspon-
dence to the financial
instruments and funds held for
clients;

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;

instruments deposited with a third party,

they must take the necessary steps to ensure that any client
financial
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;

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;

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.

rights are not

to satisfy the
safeguard clients’
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.

sufficient

If the applicable law of the jurisdiction in which the client
3.
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 17

(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.

if

the safekeeping of
2. Member States shall ensure that,
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;

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

(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.

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Article 18

(Article 13(8) of Directive 2004/39/EC)

Depositing client funds

1. Member States shall require investment firms, on receiving
any client funds, promptly to 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 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 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
(recast) (1) 0 in relation to deposits within the meaning of that
Directive held by that institution.

For the purposes of point

2.
(d) of paragraph 1, and of
Article 16(1)(e), a ‘qualifying money market fund’ means a
collective investment undertaking authorised under Directive 85/
611/EEC, or which is subject to supervision and, if applicable,
authorised by an authority under the national law of a Member
State, and which satisfies the following conditions:

(a)

(b)

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;

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)

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 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

(1) OJ L 177, 30.6.2006, p. 1.

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 2006/48/EC.

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 placed 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.

Member States shall ensure that clients have the right to oppose
the placement of their funds in a qualifying money market fund.

Article 19

(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
instruments held by them on behalf of a client, or
financial
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 or equivalent
alternative mechanism;

(b)

that client's financial

the use of
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 of another client unless, in addition to
the
the conditions set out in paragraph 1, at least one of
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;

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(b)

firm must have in place systems and
the investment
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.

(e)

the firm or that person 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.

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 20

(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 Member State of the firm on the adequacy
the firm's arrangements under Articles 13(7) and (8) of
of
Directive 2004/39/EC and this Section.

SECTION 4

Conflicts of interest

Article 21

(Articles 13(3) and 18 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
providing investment and ancillary services 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
the following situations, whether as a result of
in any of
providing investment or ancillary services or
investment
activities or otherwise:

(a)

(b)

(c)

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

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 client's
interest in that outcome;

the firm or that person has a financial or other incentive to
favour the interest of another client or group of clients over
the interests of the client;

(d)

the firm or that person carries on the same business as the
client;

Article 22

(Articles 13(3) and 18(1) of Directive 2004/39/EC)

Conflicts of interest policy

1. Member States shall require investment firms to establish,
implement and maintain an effective conflicts of interest policy
set out in writing and appropriate to the size and organisation of
the firm and the nature, scale and complexity of its business.

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

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

(a)

it must identify, with reference to the specific investment
services and activities and ancillary services carried out by
or on behalf of the investment firm, the circumstances
which constitute or may give rise to a conflict 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
shall ensure that
3. Member States
measures provided for in paragraph 2(b) are designed to ensure
that relevant persons engaged in different business activities
involving a conflict of
the kind specified in
interest of
paragraph 2(a) carry on those activities at a level of independence
appropriate to the size and activities of the investment firm and
of the group to which it belongs, and to the materiality of the
risk of damage to the interests of clients.

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

(a)

effective procedures to prevent or control the exchange of
information between relevant persons engaged in activities
involving a risk of a conflict of interest where the exchange
of that information may harm the interests of one or more
clients;

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(b)

(c)

separate

supervision of

relevant persons whose
the
principal functions involve carrying out activities on behalf
of, or providing services to, clients whose interests may
conflict, or who otherwise represent different interests that
may conflict, including those of the firm;

the removal of any direct link between the remuneration of
relevant persons principally engaged in one activity and the
revenues generated by, different
remuneration of, or
relevant persons principally engaged in another activity,
where a conflict of interest may arise in relation to those
activities;

Article 24

(Article 19(2) of Directive 2004/39/EC)

Investment research

1.
For the purposes of Article 25, ‘investment research’ means
research or other information recommending or suggesting an
investment strategy, explicitly or implicitly, concerning one or
several
financial
instruments, including any opinion as to the present or future
value or price of such instruments,
intended for distribution
channels or for the public, and in relation to which the following
conditions are met:

instruments or

issuers of

financial

the

(d) measures to prevent or limit any person from exercising
inappropriate influence over the way in which a relevant
investment or ancillary services or
person carries out
activities;

the simultaneous or
to prevent or control
(e) measures
sequential
involvement of a relevant person in separate
investment or ancillary services or activities where such
involvement may impair
the proper management of
conflicts of interest.

If the adoption or the practice of one or more of those measures
and procedures does not ensure the requisite degree of
independence, Member States shall require investment firms to
adopt such alternative or additional measures and procedures as
are necessary and appropriate for those purposes.

4. Member States shall ensure that disclosure to clients,
pursuant to Article 18(2) of Directive 2004/39/EC, is made in
a durable medium and includes sufficient detail, taking into
account the nature of the client, to enable that client to take an
informed decision with respect to the investment or ancillary
service in the context of which the conflict of interest arises.

(a)

(b)

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

the recommendation in question were made by an
it would not constitute the
the purposes of

if
investment firm to a client,
provision of
Directive 2004/39/EC.

investment advice for

2. A recommendation of the type covered by Article 1(3) of
Directive 2003/125/EC but relating to financial instruments as
defined in Directive 2004/39/EC that does not meet
the
conditions set out in paragraph 1 shall be treated as a marketing
communication for the purposes of Directive 2004/39/EC and
Member States shall require any investment firm that produces
or disseminates the recommendation to ensure that it is clearly
identified as such.

Additionally, Member States shall require those firms to ensure
that any such recommendation contains a clear and prominent
statement that (or, in the case of an oral recommendation, to the
effect that) it has not been prepared in accordance with legal
requirements designed to promote the independence of invest-
ment research, and that it is not subject to any prohibition on
dealing ahead of the dissemination of investment research.

Article 23

Article 25

(Article 13(6) of Directive 2004/39/EC)

(Article 13(3) of Directive 2004/39/EC)

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

Additional organisational requirements where a firm
produces and disseminates investment research

firms to keep and
Member States shall require investment
regularly to update a record of the kinds of investment or
ancillary service or investment activity carried out by or on
behalf of the firm in which a conflict of interest entailing a
material risk of damage to the interests of one or more clients
has arisen or, in the case of an ongoing service or activity, may
arise.

shall

investment

the firm or

1. Member States
firms which
require
produce, or arrange for the production of, investment research
that is intended or likely to be subsequently disseminated to
clients of
their own
responsibility or that of a member of their group, to ensure
the implementation of all the measures set out in Article 22(3) in
relation to the financial analysts involved in the production of
the investment research and other relevant persons whose
responsibilities or business interests may conflict with the

to the public, under

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interests of the persons to whom the investment research is
disseminated.

2. Member States shall require investment firms covered by
paragraph 1 to have in place arrangements designed to ensure
that the following conditions are satisfied:

(a)

(b)

(c)

(d)

(e)

financial analysts and other relevant persons must not
undertake personal transactions or trade, other than as
market makers acting in good faith and in the ordinary
course of market making or
in the execution of an
unsolicited client order, on behalf of any other person,
including the investment firm, in financial instruments to
which investment
in any related
financial instruments, 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 a reasonable
opportunity to act on it;

research relates, or

investment

in circumstances not covered by point (a), financial analysts
and any other relevant persons involved in the production
research must not undertake personal
of
transactions in financial instruments to which the invest-
ment research relates, or in any related financial instru-
ments, contrary to current recommendations, except in
exceptional circumstances and with the prior approval of a
member of the firm's legal or compliance function;

the investment firms themselves, financial analysts, and
other relevant persons involved in the production of the
investment research must not accept inducements from
those with a material interest in the subject-matter of the
investment research;

the investment firms themselves, financial analysts, and
other relevant persons involved in the production of the
investment research must not promise issuers favourable
research coverage;

issuers, relevant persons other than financial analysts, and
any other persons must not before the dissemination of
investment research be permitted to review a draft of the
investment
the purpose of verifying the
accuracy of factual statements made in that research, or
for any other purpose other than verifiying compliance
with the firm's legal obligations,
if the draft includes a
recommendation or a target price.

research for

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

shall exempt

firms which
3. Member States
disseminate investment research produced by another person
to the public or to clients from complying with paragraph 1 if
the following criteria are met:

investment

(a)

(b)

(c)

(d)

the person that produces the investment research is not a
member of
firm
belongs;

the group to which the investment

the investment
firm does not
recommendations within the investment research;

substantially alter

the

the investment
research as having been produced by it;

firm does not present

the investment

firm verifies that

the investment
the
research is subject
to requirements equivalent
to the
this Directive in relation to the
requirements under
production of that research, or has established a policy
setting such requirements.

the producer of

CHAPTER III

OPERATING CONDITIONS FOR INVESTMENT FIRMS

SECTION 1

Inducements

Article 26

(Article 19(1) of Directive 2004/39/EC)

Inducements

investment

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

(a)

(b)

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

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

(i)

the

and amount of

existence, nature

fee,
the
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, accurate and understandable,
prior to the provision of the relevant investment or
ancillary service;

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(ii)

the
the fee or commission, or
the payment of
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
firm's duty to act in the best interests of the client;

(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.

(c)

proper fees which enable or are necessary for the provision
of investment services, 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 firm's
duties
fairly and professionally in
accordance with the best interests of its clients.

to act honestly,

Member States shall permit an investment firm, for the purposes
of point (b)(i), to disclose the essential terms of the arrangements
relating to the fee, commission or non-monetary benefit in
summary form, provided that it undertakes to disclose further
details at the request of the client and provided that it honours
that undertaking.

SECTION 2

Information to clients and potential clients

4. 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 the most prominent feature of
the communication;

(b)

the information must
include appropriate performance
information which covers the immediately preceding 5
the whole period for which the financial
years, or
instrument has been offered, the financial index has been
established, or the investment service has been provided if
less than five years, or such longer period as the firm may
decide, and in every case that performance information
must be based on complete 12-month periods;

Article 27

(c)

the reference period and the source of information must be
clearly stated;

(Article 19(2) of Directive 2004/39/EC)

Conditions with which information must comply in order
to be fair, clear and not misleading

1. Member States shall require investment firms to 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,
the
conditions laid down in paragraphs 2 to 8.

including marketing communications,

satisfies

(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 Member 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;

2. The information referred to in paragraph 1 shall include the
name of the investment firm.

(f) where the indication is based on gross performance, the
fees or other charges must be

effect of commissions,
disclosed.

It shall be accurate and in particular shall not emphasise any
potential benefits of an investment service or financial instru-
ment without also giving a fair and prominent indication of any
relevant risks.

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

it must relate to a financial

It shall be sufficient for, and presented in a way that is likely to be
understood by, the average member of the group to whom it is
directed, or by whom it is likely to be received.

It shall not disguise, diminish or obscure important
statements or warnings.

items,

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

(a)

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

(a)

(b)

(c)

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;

in respect of the actual past performance referred to in
point (a), the conditions set out in points (a) to (c), (e) and
(f) of paragraph 4 must be complied with;

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 perfor-
mance.

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

Article 29

(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
fees or other charges must be

effect of commissions,
disclosed;

(d)

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

7. 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.

(Article 19(3) of Directive 2004/39/EC)

General requirements for information to clients

1. Member States shall require investment firms, 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
the earlier, to 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.

2. Member States shall require investment firms, in good time
before the provision of investment services or ancillary services
to retail clients or potential
to provide the
retail clients,
information required under Articles 30 to 33.

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

3. Member States shall require investment firms to provide
professional clients with the information referred to in Article 32
(5) and (6) in good time before the provision of the service
concerned.

Article 28

(Article 19(3) of Directive 2004/39/EC)

4. The information referred to in paragraphs 1 to 3 shall be
provided in a durable medium or by means of a website (where
that does not constitute a durable medium) provided that the
conditions specified in Article 3(2) are satisfied.

Information concerning client categorisation

1. Member States shall ensure that investment firms notify new
clients, and existing clients that the investment firm has newly
categorised as required by Directive 2004/39/EC, of
their
categorisation as a retail client, a professional client or an
eligible counterparty in accordance with that Directive.

2. Member States shall ensure that investment firms inform
clients in a durable medium about any right that client has to
request a different categorisation and about any limitations to the
level of client protection that it would entail.

3. Member States shall permit investment firms, either on their
own initiative or at the request of the client concerned:

(a)

(b)

to treat as a professional or retail client a client that might
otherwise be classified as an eligible counterparty pursuant
to Article 24(2) of Directive 2004/39/EC;

to treat as a retail client a client that is considered as a
professional client pursuant to Section I of Annex II to
Directive 2004/39/EC.

5. By way of exception to paragraphs 1 and 2, Member States
shall permit investment firms, in the following circumstances, 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:

(a)

(b)

the firm 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 firm from
providing the information in accordance with paragraph 1
or 2;

in any case where Article 3(3) of Directive 2002/65/EC of
the European Parliament and of the Council of 23 Sep-
tember 2002 concerning the distance marketing of
consumer financial services and amending Council Direc-
tive 90/619/EEC and Directives 97/7/EC and 98/27/EC (1)
does not otherwise apply, the investment firm complies
with the requirements of that Article in relation to the retail
client or potential retail client, as if that client or potential
client were a ‘consumer’ and the investment firm were a
‘supplier’ within the meaning of that Directive.

(1) OJ L 271, 9.10.2002, p. 16.

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6. Member State shall ensure that investment firms 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 firm is providing to that client. That notification shall be
given in a durable medium if the information to which it relates
is given in a durable medium.

7. Member States shall require investment firms to ensure that
information contained in a marketing communication is
consistent with any information the firm provides to clients in
the course of carrying on investment and ancillary services.

8. Member States
shall ensure that, where a marketing
communication contains an offer or invitation of the following
nature 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)

(b)

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

an invitation to any person who responds
communication to make an offer
to enter
agreement
investment service or ancillary service.

in relation to a financial

to the
into an
instrument or

However, the first subparagraph 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

(e) where the investment firm is acting through a tied agent, a
statement of this fact specifying the Member State in which
that agent is registered;

(f)

(g)

(h)

(i)

the nature, frequency and timing of the reports on the
the service to be provided by the
performance of
investment
in accordance with
firm to the
Article 19(8) of Directive 2004/39/EC;

client

if the investment firm 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 firm by virtue of its activities
in a Member State;

a description, which may be provided in summary form, of
the conflicts of interest policy maintained by the firm in
accordance with Article 22;

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 (where that does not constitute a
durable medium) provided that the conditions specified in
Article 3(2) are satisfied.

2. Member States shall ensure that, when providing the service
of portfolio management, investment firms establish an appro-
priate method of evaluation and comparison such as a
meaningful benchmark, based on the investment objectives of
the client and the types of financial instruments included in the
client portfolio, so as to enable the client for whom the service is
provided to assess the firm's performance.

(first indent of Article 19(3) of Directive 2004/39/EC)

Information about the investment firm and its services for
retail clients and potential retail clients

3. Member States shall require that where investment firms
propose to provide portfolio management services to a retail
client or potential retail client, they provide the client, in addition
to the information required under paragraph 1, with such of the
following information as is applicable:

1. Member States shall require investment firms to provide
retail clients or potential retail clients with the following general
information, where relevant:

(a)

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

(a)

(b)

(c)

(d)

the name and address of the investment firm, and the
contact details necessary to enable clients to communicate
effectively with the firm;

(b)

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

the languages in which the client may communicate with
the investment firm, and receive documents and other
information from the firm;

(c)

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

the methods of communication to be used between the
investment firm and the client including, where relevant,
those for the sending and reception of orders;

a statement of
authorised and the name and contact address of
competent authority that has authorised it;

the investment

the fact

that

firm is
the

(d)

(e)

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;

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

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Article 31

Article 32

(second indent of Article 19(3) of Directive 2004/39/EC)

(first indent of Article 19(3) of Directive 2004/39/EC)

Information about financial instruments

1. Member States shall require investment firms to 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. That description must explain the nature of
the specific type of instrument concerned, as well as the risks
particular to that specific type of instrument in sufficient detail
to enable the client to take investment decisions on an informed
basis.

2. 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, the following elements:

(a)

(b)

(c)

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;

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

the fact that an investor might assume, as a result of
transactions in such instruments, financial commitments
and other additional obligations,
including contingent
liabilities, additional to the cost of acquiring the instru-
ments;

(d)

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

Member States may specify the precise terms, or the contents, of
the description of risks required under this paragraph.

3.
If an investment firm provides a retail client or potential
retail client with information about a financial instrument that is
the subject of a current offer to the public and a prospectus has
been published in connection with that offer in accordance with
Directive 2003/71/EC,
inform the client or
potential client where that prospectus is made available to the
public.

firm shall

that

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

the components,

financial

In the case of

instruments that

5.
incorporate a
guarantee by a third party, the information about the guarantee
shall
the guarantor and the
guarantee to enable the retail client or potential retail client to
make a fair assessment of the guarantee.

include sufficient detail about

Information requirements concerning safeguarding of client
financial instruments or client funds

1. Member States shall ensure that, where investment firms
hold financial instruments or funds belonging to retail clients,
they provide those retail clients or potential retail clients with
such of the information specified in paragraphs 2 to 7 as is
relevant.

firm shall

2. The investment
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
investment firm and of the responsibility of the investment firm
under the applicable national law for any acts or omissions of the
third party and the consequences for the client of the insolvency
of the third party.

3. Where financial instruments of the retail client or potential
retail client may, if permitted by national law, be held in an
omnibus account by a third party, the investment firm shall
inform the client of this fact and shall provide a prominent
warning of the resulting risks.

firm shall

4. The investment
inform the retail client or
potential retail client where it is not possible under national
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 investment firm and shall provide a
prominent warning of the resulting risks.

5. The investment firm 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 other than that of a Member State and
indicate that the rights of the client or potential client
shall
relating to those financial
instruments or funds may differ
accordingly.

firm shall

inform the client about

6. An investment
the
existence and the terms of any security interest or lien which the
firm has or may have over the client's financial instruments or
funds, or 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.

7. An investment firm, 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

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the retail client, in a durable medium, with clear, full and accurate
information on the obligations and responsibilities of
the
investment
those financial
instruments, including the terms for their restitution, and on the
risks involved.

firm with respect

to the use of

with respect to the costs and associated charges related to the
UCITS itself, including the exit and entry commissions.

SECTION 3

Article 33

Assessment of suitability and appropriateness

(fourth indent of Article 19(3) of Directive 2004/39/EC)

Information about costs and associated charges

Member States shall require investment firms to provide their
retail clients and potential retail clients with information on costs
and associated charges that
the following
elements as are relevant:

includes such of

(a)

instrument or

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

Article 35

(Article 19(4) of Directive 2004/39/EC)

Assessment of suitability

1. Member States shall ensure that investment firms obtain
from clients or potential clients such information as is necessary
for the firm to understand the essential facts about the client and
to have a reasonable basis for believing, giving due consideration
to the nature and extent of the service provided, that the specific
transaction to be recommended, or entered into 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) where any part of the total price referred to in point (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;

(b)

(c)

(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 investment firm or imposed
by it;

(d)

the arrangements for payment or other performance.

For the purposes of point (a), the commissions charged by the
firm shall be itemised separately in every case.

Article 34

(second and fourth indent of Article 19(3)
of Directive 2004/39/EC)

Information drawn up in accordance
with Directive 85/611/EEC

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

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.

2. Where an investment firm 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 paragraph 1(c).

investment service consists in the provision of
Where that
investment advice to a professional client covered by Section 1 of
Annex II to Directive 2004/39/EC, the investment firm shall be
entitled to assume for the purposes of paragraph 1(b) that the
client is able financially to bear any related investment risks
consistent with the investment objectives of that client.

3. The information regarding the financial situation of the
client or potential client shall include, where relevant, informa-
tion on the source and extent of his regular income, his assets,
including liquid assets, investments and real property, and his
regular financial commitments.

1. Member States shall ensure that in respect of units in a
collective investment undertaking covered by Directive 85/611/
EEC, a simplified prospectus complying with Article 28 of that
Directive is regarded as appropriate information for the purposes
of the second indent of Article 19(3) of Directive 2004/39/EC.

4. The information regarding the investment objectives of the
client or potential client shall include, where relevant, informa-
tion 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.

2. Member States shall ensure that in respect of units in a
collective investment undertaking covered by Directive 85/611/
EEC, a simplified prospectus complying with Article 28 of that
Directive is regarded as appropriate information for the purposes
of the fourth indent of Article 19(3) of Directive 2004/39/EC

5. Where, when providing the investment service of invest-
ment advice or portfolio management, an investment firm does
not obtain the information required under Article 19(4) of
Directive 2004/39/EC, the firm shall not recommend investment
services or financial instruments to the client or potential client.

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Article 36

(Article 19(5) of Directive 2004/39/EC)

Assessment of appropriateness

Member States shall require investment firms, when assessing
whether an investment service as referred to in Article 19(5) of
Directive 2004/39/EC is appropriate for a client, to determine
whether that client has the necessary experience and knowledge
in order to understand the risks involved in relation to the
product or investment service offered or demanded.

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

transaction or product,

Article 37

(Article 19(4) and (5) of Directive 2004/39/EC)

Provisions common to the assessment of suitability or
appropriateness

1. Member States shall ensure that the information regarding a
client's or potential client's knowledge and experience in the
investment field includes the following, 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:

firm shall be entitled to rely on the
3. An investment
information provided by its clients or potential clients unless it
is aware or ought to be aware that the information is manifestly
out of date, inaccurate or incomplete.

Article 38

(first indent of Article 19(6) of Directive 2004/39/EC)

Provision of services in non-complex instruments

A financial instrument which is not specified in the first indent of
Article 19(6) of Directive 2004/39/EC shall be considered as
non-complex if it satisfies the following criteria:

(a)

it does not fall within Article 4(1)(18)(c) of, or points (4) to
(10) of Section C of Annex I to, Directive 2004/39/EC;

(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 the average retail client to make an informed
judgment as to whether to enter into a transaction in that
instrument.

Article 39

(a)

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

(Article 19(1) and 19(7) of Directive 2004/39/EC)

(b)

the nature, volume, and frequency of the client's transac-
tions 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.

Retail client agreement

Member States shall require an investment firm 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
Directive to enter into a written basic agreement, in paper or
another durable medium, with the client setting out the essential
rights and obligations of the firm and the client.

2. An investment firm shall not encourage a client or potential
client not to provide information required for the purposes of
Article 19(4) and (5) of Directive 2004/39/EC.

The rights and duties of the parties to the agreement may be
incorporated by reference to other documents or legal texts.

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SECTION 4

(c)

the trading day;

Reporting to clients

(d)

the trading time;

Article 40

(e)

the type of the order;

(Article 19(8) of Directive 2004/39/EC)

(f)

the venue identification;

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

1. Member States shall ensure that where investment firms
have carried out an order, other than for portfolio management,
on behalf of a client, they take the following action in respect of
that order:

(a)

(b)

the investment firm must promptly provide the client, in a
durable medium, with the essential information concerning
the execution of that order;

in the case of a retail client, the investment firm 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 investment firm from a
third party, no later than the first business day following
receipt of the confirmation from the third party.

Point (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.

Points (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.

2.
In addition to the requirements under paragraph 1, Member
States shall require investment firms to supply the client, on
request, with information about the status of his order.

3. Member States shall ensure that, in the case of orders for a
retail clients relating to units or shares in a collective investment
undertaking which are executed periodically, investment firms
either take the action specified in point (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 transac-
tions.

4. The notice referred to in point (b) of paragraph 1 shall
include such of the following information as is applicable and,
in accordance with Table 1 of Annex I to
where relevant,
Regulation (EC) No 1287/2006:

(a)

the reporting firm identification;

(b)

the name or other designation of the client;

(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)

(o)

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;

if the client's counterparty was the investment firm itself or
any person in the investment firm's group or another client
of the investment firm, the fact that this was the case unless
the order was executed through a trading system that
facilitates anonymous trading.

the investment

For the purposes of point (k), where the order is executed in
tranches,
firm may supply the client with
information about the price of each tranche or the average price.
Where the average price is provided, the investment firm shall
supply the retail client with information about the price of each
tranche upon request.

5. The investment
firm may provide the client with the
information referred to in paragraph 4 using standard codes if it
also provides an explanation of the codes used.

Article 41

(Article 19(8) of Directive 2004/39/EC)

Reporting obligations in respect of portfolio management

firms which
1. Member States
require investments
shall
provide the service of portfolio management
to clients to
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.

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In the case of retail clients, the periodic statement required
2.
under paragraph 1 shall include, where relevant, the following
information:

Article 4(1)(18)(c) of, or any of points 4 to 10 of Section C in
Annex I to, Directive 2004/39/EC.

(a)

the name of the investment firm;

(b)

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

(c)

(d)

(e)

(f)

(g)

(h)

including details of each financial

the contents and the valuation of

the
a statement of
instrument
portfolio,
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;

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;

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

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

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

the
for each transaction executed during the period,
information referred to in Article 40(4)(c) to (l) 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.

3.
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;

4. Member States shall require investment firms, in cases where
the client elects to receive information about executed transac-
tions on a transaction-by-transaction basis, to provide promptly
to the client, on the execution of a transaction by the portfolio
manager, the essential information concerning that transaction
in a durable medium.

Where the client concerned is a retail client, the investment firm
must
send him a notice confirming the transaction and
containing the information referred to in Article 40(4) no later
than the first business day following that execution or, if the
confirmation is received by the investment firm from a third
party, no later than the first business day following receipt of the
confirmation from the third party.

The second subparagraph 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

(Article 19(8) of Directive 2004/39/EC)

Additional reporting obligations for portfolio management
or contingent liability transactions

Member States shall ensure that where investment firms provide
portfolio management transactions for retail clients or operate
retail client accounts that include an uncovered open position in
a contingent liability transaction, they also report to the retail
client any losses exceeding any predetermined threshold, agreed
between the firm 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

(Article 19(8) of Directive 2004/39/EC)

(b)

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

Statements of client financial instruments or client funds

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

Investment firms shall inform retail clients that they have the
right to make requests for the purposes of point (a).

1. Member States shall require investment firms that hold client
financial instruments or client funds to send at least once a year,
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.

However, the exception provided for in point (b) shall not apply
in the case of transactions in financial instruments covered by

The first subparagraph shall not apply to a credit institution
authorised under Directive 2000/12/EC in respect of deposits
within the meaning of that Directive held by that institution.

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

(a)

(b)

(c)

details of all the financial instruments or funds held by the
investment firm for the client at the end of the period
covered by the statement;

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

the extent of any benefit that has accrued to the client by
virtue of participation in any securities financing transac-
tions, 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 point (a) may be based either on the trade date or the
settlement date, provided that
is applied
consistently to all such information in the statement.

the same basis

3. Member States shall permit investment firms which hold
financial instruments or funds and which carry out the service of
portfolio management for a client to include the statement of
client assets referred to in paragraph 1 in the periodic statement
it provides to that client pursuant to Article 41(1).

SECTION 5

Best execution

Article 44

(Articles 21(1) and 19(1) of Directive 2004/39/EC)

Best execution criteria

1. Member States shall ensure that, when executing client
orders, investment firms take into account the following criteria
for determining the relative importance of the factors referred to
in Article 21(1) of Directive 2004/39/EC:

(a)

the characteristics of the client including the categorisation
of the client as retail or professional;

(b)

the characteristics of the client order;

(c)

(d)

the characteristics of financial
subject of that order;

instruments that are the

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

For the purposes of this Article and Article 46, ‘execution venue’
means a regulated market, an MTF, a systematic internaliser, or a
market maker or other liquidity provider or an entity that
performs a similar function in a third country to the functions
performed by any of the foregoing.

under
firm satisfies
2. An
Article 21(1) of Directive 2004/39/EC to take all reasonable

investment

obligation

its

steps to obtain the best possible result for a client to the extent
that it executes an order or a specific aspect of an order following
specific instructions from the client relating to the order or the
specific aspect of the order.

3. Where an investment firm 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 firm's order execution policy
that
the firm's own
commissions and costs for executing the order on each of the
eligible execution venues shall be taken into account in that
assessment.

is capable of executing that order,

4. Member States shall require that investment firms do not
structure or charge their commissions in such a way as to
discriminate unfairly between execution venues.

5. Before 1 November 2008 the Commission shall present a
report to the European Parliament and to the Council on the
availability, comparability and consolidation of
information
concerning the quality of execution of various execution venues.

Article 45

(Article 19(1) of Directive 2004/39/EC)

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

shall

investment

1. Member States
firms, when
require
providing the service of portfolio management, to comply with
the obligation under Article 19(1) of Directive 2004/39/EC to act
in accordance with the best interests of their clients when placing
orders with other entities for execution that result from decisions
by the investment firm to deal in financial instruments on behalf
of its client.

shall

investment

2. Member States
firms, when
require
providing the service of reception and transmission of orders,
to comply with the obligation under Article 19(1) of Directive
2004/39/EC to act in accordance with the best interests of their
clients when transmitting client orders to other entities for
execution.

3. Member States shall ensure that, in order to comply with
paragraphs 1 or 2, investment firms take the actions mentioned
in paragraphs 4 to 6.

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Investment firms shall take all reasonable steps to obtain the
4.
best possible result for their clients taking into account the
factors referred to in Article 21(1) of Directive 2004/39/EC. The
relative importance of
these factors shall be determined by
reference to the criteria set out in Article 44(1)and, for retail
clients, to the requirement under Article 44(3).

An investment firm satisfies its obligations under paragraph 1 or
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 placing an order with, or transmitting an order to,
another entity for execution.

5.
Investment firms shall establish and implement a policy to
enable them to comply with the obligation in 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
investment firm transmits orders for execution. The entities
identified must have execution arrangements that enable the
investment firm to comply with its obligations under this Article
when it places or transmits orders to that entity for execution.

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

firms shall monitor on a regular basis the
6.
Investment
the policy established in accordance with
effectiveness of
paragraph 5 and,
in particular, the execution quality of the
entities identified in that policy and, where appropriate, correct
any deficiencies.

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

7. This Article shall not apply when the investment firm 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. In those
cases Article 21 of Directive 2004/39/EC applies.

the best possible result for the execution of its client orders on a
consistent basis using the venues included in its execution policy.

Investment

2.
shall provide retail clients with the
following details on their execution policy in good time prior
to the provision of the service:

firms

(a)

(b)

(c)

an account of the relative importance the investment firm
in accordance with the criteria specified in
assigns,
Article 44(1), to the factors referred to in Article 21(1) of
Directive 2004/39/EC, or the process by which the firm
determines the relative importance of those factors;

a list of the execution venues on which the firm 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;

a clear and prominent warning that any specific instruc-
tions from a client may prevent the firm 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 (where that does not constitute a durable
medium) provided that the conditions specified in Article 3(2)
are satisfied.

SECTION 6

Client order handling

Article 47

(Articles 22(1) and 19(1) of Directive 2004/39/EC)

General principles

Article 46

1. Member States shall require investment firms to satisfy the
following conditions when carrying out client orders:

(Article 21(3) and (4) of Directive 2004/39/EC)

Execution policy

1. Member States shall ensure that investment firms review
to
annually
Article 21(2) of Directive 2004/39/EC, as well as their order
execution arrangements.

established pursuant

execution policy

the

(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 impractic-
able, or the interests of the client require otherwise;

Such a review shall also be carried out whenever a material
change occurs that affects the firm's ability to continue to obtain

(c)

they must inform a retail client about any material difficulty
relevant to the proper carrying out of orders promptly
upon becoming aware of the difficulty.

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2. Where an investment firm 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.

3. An investment firm 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 relevant
persons.

Article 48

(Articles 22(1) and 19(1) of Directive 2004/39/EC)

the aggregated order is partially executed, it allocates the related
trades to the client in priority to the firm.

if

However,
the firm 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
Article 48(1)(c).

3. Member States shall require investment firms, as part of the
order allocation policy referred to in Article 48(1)(c), to 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.

Aggregation and allocation of orders

SECTION 7

1. Member States shall not permit investment firms to carry
in
out a client order or a transaction for own account
aggregation with another client order unless the following
conditions are met:

(a)

(b)

(c)

it must be unlikely that the aggregation of orders and
transactions will work overall to the disadvantage of any
client whose order is to be aggregated;

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

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
treatment of partial
and the
executions.

allocations

2. Member States shall ensure that where an investment firm
aggregates an order with one or more other client orders and the
aggregated order is partially executed,
it allocates the related
trades in accordance with its order allocation policy.

Article 49

(Articles 22(1) and 19(1) of Directive 2004/39/EC)

Aggregation and allocation of transactions for own account

1. Member States shall ensure that investment firms which
have aggregated transactions for own account with one or more
client orders do not allocate the related trades in a way that is
detrimental to a client.

2. Member States shall require that, where an investment firm
aggregates a client order with a transaction for own account and

Eligible counterparties

Article 50

(Article 24(3) of Directive 2004/39/EC)

Eligible counterparties

1. Member States may recognise an undertaking as an eligible
counterparty if that undertaking falls within a category of clients
who are to be considered professional clients in accordance with
paragraphs 1, 2 and 3 of Section I of Annex II to Directive 2004/
39/EC, excluding any category which is explicitly mentioned in
Article 24(2) of that Directive.

On request, Member States may also recognise as eligible
counterparties undertakings which fall within a category of
clients who are to be considered professional clients
in
accordance with Section II of Annex II to Directive 2004/39/
EC. In such cases, however, the undertaking 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.

2. Where, pursuant to the second subparagraph of Article 24
(2) of Directive 2004/39/EC, an eligible counterparty requests
treatment as a client whose business with an investment firm is
subject to Articles 19, 21 and 22 of that Directive, but does not
expressly request treatment as a retail client, and the investment
firm agrees to that request, the firm shall treat that eligible
counterparty as a professional client.

However, where that eligible counterparty expressly requests
treatment as a retail client, the provisions in respect of requests of
non-professional treatment specified in the second, third and
fourth sub-paragraphs of Section I of Annex II to Directive
2004/39/EC shall apply.

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SECTION 8

Record-keeping

Article 51

(Article 13(6) of Directive 2004/39(EC)

Retention of records

1. Member States shall require investment firms to retain all the
records required under Directive 2004/39/EC and its implement-
ing measures for a period of at least five years.

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

However, competent authorities may,
in exceptional circum-
stances, require investment firms 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 Directive
2004/39/EC.

Following the termination of the authorisation of an investment
firm, Member States or competent authorities may require the
firm to retain records for the outstanding term of the five year
period required under the first subparagraph.

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

(a)

(b)

the competent authority must be able to access them
readily and to reconstitute each key stage of the processing
of each transaction;

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

(c)

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

3. The competent authority of each Member State shall draw
up and maintain a list of the minimum records investment firms
are required to keep under Directive 2004/39/EC and its
implementing measures.

relating to the recording of telephone conversations or electronic
communications involving client orders.

5. Before 31 December 2009 the Commission shall, in the light
of discussions with the Committee of European Securities
Regulators, report to the European Parliament and the Council
on the
the provisions of
paragraph 4.

continued appropriateness of

SECTION 9

Defined terms for the purposes of Directive 2004/39/EC

Article 52

(Article 4(1)(4) of Directive 2004/39/EC)

Investment advice

in
For the purposes of the definition of ‘investment advice’
Article 4(1)(4) of Directive 2004/39/EC, a personal recommen-
dation is a recommendation that is made to a person in his
capacity as an investor or potential investor, or in his capacity as
an agent for an investor or potential investor.

That recommendation must be presented as suitable for that
person, or must be based on a
the
circumstances of that person, and must constitute a recommen-
dation to take one of the following sets of steps:

consideration of

(a)

(b)

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

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.

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

CHAPTER IV

FINAL PROVISIONS

Article 53

Transposition

1. Member States shall adopt and publish, by 31 January 2007
at the latest, the laws, regulations and administrative provisions
necessary to comply with this Directive. They shall forthwith
communicate to the Commission the text of those provisions
and a correlation table between those provisions and this
Directive.

4. Record-keeping obligations under Directive 2004/39/EC
and in this Directive are without prejudice to the right of
firms
Member States to impose obligations on investment

2. Member
1 November 2007.

States

shall

apply

those provisions

from

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3. When Member States adopt those provisions, they shall
contain a reference to this Directive or be accompanied by such a
reference on the occasion of their official publication. Member
States shall determine how such reference is to be made.

4. Member States shall communicate to the Commission the
text of the main provisions of national law which they adopt in
the field covered by this Directive.

Article 54

Entry into force

This Directive shall enter into force on the 20th day following its
publication in the Official Journal of the European Union.

Article 55

Addressees

This Directive is addressed to the Member States.

Done at Brussels, 10 August 2006.

For the Commission

Charlie McCREEVY

Member of the Commission