BaFin

Topic Compliance Circular 4/2010 (WA) - Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency

Reference number WA 31-Wp-2002-2009/0010Date: 07.06.2010, updated on 14.06.2011

(Mindestanforderungen an die Compliance-Funktion und die weiteren Verhaltens-, Organisations- und Transparenzpflichten nach §§ 31 ff. WpHG für Wertpapierdienstleistungsunternehmen – MaComp)

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AT: General organisational requirements for investment services enterprises pursuant to section 33 (1) of the Securities Trading Act (Wertpapierhandelsgesetz - WpHG)

AT 1 Preliminary remarks

  1. This Circular clarifies in greater detail individual provisions contained in Part 6 of the WpHG and in the regulations issued on the basis of these provisions1) . It provides a flexible and practical framework for structuring the organisation of the investment services business of enterprises that fall within the rules. The Circular is also designed to give guidance, in particular for smaller enterprises. At various points, it contains illustrative lists of possible measures to help enterprises comply with the requirements of the provisions mentioned.
  2. The objective of the Circular is to promote investor confidence in the proper functioning of securities markets and to strengthen the protection of all investors and the functioning of the capital markets as a whole, as well as to protect investment services enterprises and their employees. The Circular also aims to introduce appropriate measures to mitigate the risk of regulatory measures, claims for damages brought against enterprises and reputational damage for enterprises due to violations of the provisions contained in Part 6 of the WpHG.
  3. This Circular serves as a compendium consolidating the administrative practice of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) relating to the provisions of the above-mentioned legislation. It provides enterprises with a compilation of all administrative practices in force relating to Part 6 of the WpHG that have been published by BaFin and that can be updated if necessary.
  4. As the Circular only explains individual provisions of the above-mentioned legislative instruments in detail, it does not claim to be a comprehensive guide. BaFin will maintain an ongoing dialogue with the industry to meet the need for further detailed information.
  5. The Circular has a modular structure so that any necessary adjustments to specific regulatory areas can be restricted to the immediate revision of individual modules. The General Part (AT module) sets out basic principles relating to the organisational requirements and rules of conduct laid down in Part 6 of the WpHG. Specific individual provisions and obligations are explained in detail in the Special Part (BT).
  6. The requirements contained in BT 1 of this Circular are aimed at the compliance function of investment services enterprises. The General Part as well as BT 2 to BT 5 of this Circular are aimed at investment services enterprises as such. Investment services enterprises determine the business unit responsible for these areas themselves.

AT 2 Sources

AT 2.1 International/European sources and guidance

The legal requirements defined in detail in this Circular are based on the following supranational legal sources and agreements:

  1. International Organisation of Securities Commissions (IOSCO): Objectives and Principles of Securities Regulation,
  2. Basel Committee on Banking Supervision: Compliance and the Compliance Function in Banks,
  3. European Directive 2004/39/EC , European Directive 2006/73/EC and European Regulation 1287/2006 2) ,
  4. Guidance published by the Committee of European Securities Regulators (CESR):

    CESR's Level 3 Recommendations on the List of Minimum Records under Article 51(3) of the MiFID Implementing Directive dated 9 February 2007,

    CESR’s Q & A on Best Execution dated 29 May 2007.

AT 2.2 National legal sources

This Circular is based on the following national legal sources:

  1. Securities Trading Act (Wertpapierhandelsgesetz – WpHG)3)
  2. Banking Act (Kreditwesengesetz – KWG)
  3. Regulation specifying Rules of Conduct and Organisational Requirements for Investment Services Enterprises (Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung – WpDVerOV)
  4. Regulation governing the Analysis of Financial Instruments (Finanzanalyseverordnung – FinAnV).

AT 3 Scope

AT 3.1 Affected institutions

The requirements of this Circular apply to all investment services enterprises within the meaning of section 2 (4) WpHG. These are all credit institutions and financial services institutions as defined in section 1 (1) and (1a) KWG and all enterprises operating under section 53 (1) sentence 1 KWG that, in accordance with section 2 (3) WpHG, provide investment services commercially or on a scale which requires a commercially organised business undertaking. The requirements do not apply to enterprises that meet the exemption criteria defined in section 2a WpHG.

Only AT 8 and BT 3 to BT 5 of this Circular apply to branches in accordance with section 53b KWG. The provisions of the AT as well as BT 1 and BT 2 of this Circular apply to branches of German investment services enterprises domiciled in the EEA.

Credit and financial services institutions that are not investment services enterprises within the meaning of section 2 (4) WpHG are subject to the general organisational requirements under section 25a (1) KWG, but not the requirements under sections 31 et seq. WpHG and under this Circular.

The requirements in this Circular only apply to asset management companies and investment stock corporations as defined by the Investment Act if this is stipulated by the Circular entitled Minimum Requirements for Risk Management in Asset Management Companies (Mindestanforderungen an das Risikomanagement für Investmentgesellschaften – InvMaRisk)4).

The requirements in this Circular apply to asset management companies and investment stock corporations to the extent that they provide services and ancillary services within the meaning of section 7 (2) nos. 1, 3 and 4 of the Investment Act (Investmentgesetz - InvG), subject to the proviso that

a) the requirements in the AT and in BT 1 shall not apply (see also section 1 (4) of the Circular on the Minimum Requirements for Risk Management at Investment Companies (Rundschreiben Mindestanforderungen an das Risikomanagement für Investmentgesellschaften – InvMaRisk) dated 30 June 2010),
b) the requirements in BT 2, BT 3, BT 4 and BT 6 shall apply to the extent that the corresponding provisions of sections 31 et seq. WpHG relating to section 5 (3) InvG apply.

The provisions relating to sections 34b und 34c WpHG and the Regulation governing the Analysis of Financial Instruments (Finanzanalyseverordnung – FinAnV) in BT 5 of this Circular shall also apply to persons other than investment services enterprises.

AT 3.2 Principle of proportionality

This Circular reflects the heterogeneous corporate structure and the variety of business activities of investment services enterprises. It contains numerous opening clauses that simplify implementation, depending in particular on the size of the enterprises, their business focuses and risk situation. In this respect, the Circular can also be implemented flexibly by smaller enterprises. The nature, scale, complexity and risk content of the relevant business, as well as the nature and range of the investment services offered, shall be taken into account when determining the appropriate arrangements.

AT 4 Overall responsibility of management

Management is responsible for complying with the requirements laid down in the WpHG. All managers within the meaning of section 1 (2) KWG are responsible for ensuring a proper business organisation and for the further development of this organisation, irrespective of the internal division of responsibilities within the enterprise or group. This responsibility also extends to outsourced activities and processes. It continues to apply even if duties are delegated.

AT 5 Cooperation between several investment services enterprises

If investment services are provided for a client by two or more investment services enterprises domiciled in the EEA, for example where an investment services enterprise transmits a client order from one investment services enterprise to another for execution, the enterprises involved are generally entitled to expect that the other enterprises involved will meet their regulatory obligations. This also applies to the regulatory obligations to the client, insofar as it is legally or contractually defined which enterprise must fulfil them. Section 31e WpHG contains such a statutory definition.

This shall not apply if one of the investment services enterprises has clear evidence that one of the other enterprises is not meeting its regulatory obligations.

AT 6 General requirements for investment services enterprises under section 33 (1) WpHG

  1. An investment services enterprise shall establish adequate policies, keep available resources and put in place procedures designed to ensure that the investment services enterprise itself and its employees comply with the requirements of the WpHG. In particular, this requires the establishment of a permanent and effective compliance function that supports processes and acts preventively, and that can discharge its responsibilities independently.
  2. The policies established and procedures put in place shall ensure effective performance of the necessary control activities. The operating units are responsible for complying with the provisions and performing controls (internal controls). In addition, the enterprise shall ensure – at least on a random sampling basis – that monitoring activities are performed by other areas, such as monitoring of trading by the back office and/or the compliance function.
  3. The compliance function monitors the arrangements instituted to comply with the provisions of the WpHG, in particular sections 31 et seq. WpHG. The specific requirements for the compliance function are presented under BT 1.1 and 1.2 of this Circular.


AT 6.1 Structural and operational arrangements of the investment services enterprise

The arrangements described under AT 6 item 1 shall be based on the extent to which investment services enterprises and their employees could be subject to conflicts of interest or whether they regularly have access to compliance-relevant information.

In particular, persons who have access to inside or other confidential information have access to compliance-relevant information. Inside information within the meaning of section 13 WpHG shall be regarded in particular as knowledge of the issues listed in chapter IV 2.2.4., pp. 56-57 of the Issuer Guideline (Emittentenleitfaden) if this knowledge is likely to have a significant effect on the stock exchange/market price of a financial instrument if it became publicly known: BaFin’s Issuer Guideline, version dated 28 April 2009 chapter IV 2.2.4., pp. 56-57 (only available in German).

Compliance-relevant information shall also be regarded as knowledge of client orders if this knowledge can be used to the detriment of the client through proprietary trading by the enterprise or personal account dealing of employees (front or parallel running or scalping).

AT 6.2 Resources and procedures of the investment services enterprise

  1. The required resources and procedures of an investment services enterprise include in particular

    1. effective arrangements ensuring all reasonable steps are taken to identify conflicts of interest between the investment services enterprise itself including its employees and any persons directly or indirectly linked to it by control as defined by section 1 (8) KWG, and its clients or between one client and another that arise in the course of providing any investment services or ancillary services, and to prevent such conflicts of interest from adversely affecting the interests of its clients,
    2. arrangements to minimise delays in order execution or order transmission in the event of systems failures and malfunctions,
    3. effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients,
    4. arrangements to ensure that the appropriateness and effectiveness of the organisational measures taken are regularly monitored and assessed, and that the steps necessary to remedy any deficiencies are taken.

  2. Investment services enterprises that do not usually have access to compliance-relevant information within the meaning of AT 6.1 of this Circular and whose employees are not usually subject to conflicts of interest shall develop general measures as part of their organisational requirements in the event that they receive such information in individual cases.
    Investment services enterprises that usually have access to such information shall make sufficient arrangements and take measures to record the information to which the enterprise has access and to monitor whether the information is being disclosed in accordance with compliance rules.
    The relevant requirements for the compliance function are explained in module BT 1 of this Circular.
  3. The following illustrative list of steps and instruments shall be regarded as suitable for recording and monitoring the disclosure of compliance-relevant information within the meaning of AT 6.1 of this Circular.

    1. Chinese walls
      The goal of Chinese walls is to ensure that information within the meaning of AT 6.1 of this Circular that is disclosed in a particular area of an investment services enterprise only leaves the area in which it originated in accordance with 3.b. The following organisational measures may be taken:
      • the functional or physical separation of confidential areas (e.g. between client trading and proprietary trading),
      • the creation of access restrictions,
      • the development of rules governing access rights to data.

      Chinese walls serve to minimise the effects of conflicts of interest between the investment services enterprise and its clients or between its various clients. They therefore aim to ensure the continuous and unrestricted ability of the individual areas of the investment services enterprise to act without conflicts of interest by confining compliance-relevant information to the area in which it originated. In consultation with the compliance function, the relevant area is therefore individually responsible for taking all precautions to ensure the confidentiality of compliance-relevant information. If such measures cannot be taken, other comparable organisational measures shall be implemented to minimise conflicts of interest.
    2. Flow of information across areas (wall crossing)
      The flow of information across areas is permitted if this is required to fulfil the tasks of the investment services enterprise. It may be necessary for an investment services enterprise that operates in many business areas but has a division of responsibilities to involve staff members from other areas or to disclose information across different areas, in particular in the case of complex transactions entailing a high degree of difficulty and/or risk, or to fully utilise the investment services enterprise’s product range.
      The disclosure of information across areas within the meaning of AT 6.1 of this Circular and the involvement of staff members from other areas is therefore permitted if the disclosure of information is restricted to the extent necessary (need-to-know principle).
    3. Monitoring instruments
      Transactions involving financial instruments may be monitored in particular using a watch list and/or a restricted list.

      • Watch list
      A watch list is a non-public list of financial instruments updated on an ongoing basis about which an investment services enterprise has compliance-relevant information within the meaning of AT 6.1 of this Circular. The watch list shall be maintained in strict confidence by the compliance function. The securities recorded in the watch list are not generally subject to any restrictions on trading and/or advice. The watch list is used by the compliance function to monitor proprietary trading or personal account dealing of employees involving the relevant securities. It also serves to monitor compliance with Chinese walls between the different compliance-relevant areas of the enterprise. The watch list shall include all financial instruments of an enterprise about which compliance-relevant information exists (reportable securities). Employees of the investment services enterprise who receive compliance-relevant information in the course of their duties (reporting parties) are obliged to report this to the watch list without delay.

      • Restricted list
      An investment services enterprise may also maintain one or more restricted lists as an additional compliance instrument to the watch list. The restricted list is also a list of reportable securities that is updated on an ongoing basis. In contrast to the watch list, however, it is not to be kept confidential within the enterprise and serves to inform the relevant employees and areas of the investment services enterprise of any restrictions on personal account dealing and proprietary trading as well as on client and advisory transactions – with the exception of client transactions that are entered into at the client’s initiative without prior advice. The reasons for including securities in the restricted list can only be indicated to the extent that the relevant information is already known to the public.

AT 7 Relationship between sections 31 et seq. WpHG and section 25a KWG

  1. The reference in section 33 (1) sentence 1 WpHG to section 25a KWG clarifies that the requirements under section 25a (1) and (4) KWG also apply to the provision of investment services. In addition to the requirements in section 25a (1) and (4) KWG, including the more detailed information provided by MaRisk, the requirements in section 33 (1) WpHG and section 12 WpDVerOV apply to the investment services segment.

  2. The compliance function is part of the internal control system defined in section 25a (1) sentence 3 no. 1 KWG. The required policies, resources and procedures listed in AT 6 of this Circular are therefore part of the investment services enterprise’s internal control system.

AT 8 Record-keeping obligations

Information on the minimum scope of documentation required by law is provided in particular by the List of minimum record-keeping obligations in accordance with section 34 (5) WpHG (Verzeichnis der Mindestaufzeichnungspflichten gemäß § 34 Abs. 5 WpHG ) issued by BaFin (only available in German).

AT 8.2 Record-keeping obligations pursuant to section 14 (2) no. 5 WpDVerOV

The record-keeping obligations pursuant to section 14 (2) no. 5 WpDVerOV are set out in greater detail in the following. Under section 14 (2) no. 5 WpDVerOV, investment services enterprises are obliged to record circumstances indicating that an inducement within the meaning of section 31d (1) sentence 1 no. 1 WpHG is designed to enhance the quality of services provided to clients.

AT 8.2.1 List of inducements

1. Any and all inducements accepted by investment services enterprises from third parties in relation to the provision of investment or ancillary services shall be recorded in an internal list of inducements. The description shall distinguish between monetary inducements from sales commissions, trail commissions, brokerage commissions, etc. and non-monetary inducements offering non-cash benefits (such as supplying financial analyses, providing services to the enterprise, providing hardware, software, etc.).
2. The list of inducements shall be prepared once a year without delay following the end of the financial year. If annual financial statements are required to be prepared, preparation of the list of inducements within the period specified for this is considered as being without delay. The list of inducements can be maintained in written or electronic form.
3. Monetary inducements received in the previous financial year shall be listed by amount.
4. Inducements that are forwarded to clients do not have to be listed.

AT 8.2.2 List of inducement applications

1. If investment services enterprises accept monetary inducements, they are also required to prepare a separate list of the applications of these inducements once a year without delay following the end of the financial year. They shall disclose and quantify in this list (as an amount or percentage) the group of possible measures to improve quality in the list set out in the following for which they used the inducements received during the financial year:
– Efficient and high-quality infrastructure
(e.g. site equipment, maintenance of a widespread branch network, use of IT systems (hardware/software), or provision of communication facilities)
– Human resources (e.g. hiring and remunerating qualified employees in the area of investment advice, customer support, as well as in quality-enhancing functions such as the legal department, compliance function, internal auditing – to the extent that, as far at this can be estimated, the tasks performed by the employees are designed to safeguard or enhance the quality of the services provided to the client within the meaning of section 31d WpHG; granting of special bonuses, insofar as these are linked solely to the achievement of qualitative goals)
– Employee qualifications and information
(e.g. qualifications by way of training, provision of continuing professional development materials, use of e-learning systems; information by the provision of financial analyses, product information events, access to third-party information and dissemination systems, other provision of information materials)
– Client information (e.g. preparation, updating and maintenance of product information documents; provision and maintenance of efficient Internet portals with current market data, charts, research material, an events calendar, currency converter, yield calculator, value-at-risk calculator, break-even calculator, commodity unit calculator, interest calculator; client information events on specific market and investment topics)
– Quality assurance and enhancement processes
(e.g. processes to approve and introduce new products and business activities; recording and evaluation of advisory discussions; assessments and notifications by the company relating to the database pursuant to section 34d WpHG)
2. This list of groups of inducement applications is not exhaustive. Enterprises can add to these groups as appropriate.
3. If quantification of the measures to improve quality as an exact amount is only possible with significant effort, the enterprise may also make estimates.
4. If inducements were not used for measures to improve quality in the financial year in which they were received by the enterprise, they shall reported as such in the list of applications.
5. If they were not used in the current financial year, inducements may also be used for measures to improve quality in the following year.
6. On request, the investment services enterprise must be able to explain to BaFin in detail the application of monetary inducements received for measures to improve quality.

AT 8.2.3 Quality improvement

Quality assurance also counts as enhancing the quality of services provided to clients (quality improvement), as quality assurance necessarily means safeguarding the existing standard of quality. The use of monetary inducements received for materials, human resources, or other infrastructure that the investment services enterprise is obliged to maintain in any case pursuant to section 25a (1) KWG or section 33 (1) WpHG, such as the compliance function or other control functions, may also be approved as a measure to improve quality.

AT 9 Requirements for outsourcing under section 33 (3) WpHG

  1. In addition to the requirements under section 25a (2) KWG, section 33 (2) WpHG and AT 9 of MaRisk, the provisions under section 33 (3) WpHG must be complied with, if relevant.
  2. Under section 33 (3) sentence 1 no. 1 WpHG, portfolio management for retail clients within the meaning of section 31a (3) WpHG may only be outsourced to an enterprise domiciled in a third country under the additional condition that the external service provider is authorised or registered in the country in question in respect of this service and is supervised by an authority that is included in the List of supervisory authorities domiciled in a third country with which BaFin maintains an appropriate cooperation agreement in accordance with section 33 (3) sentence 1 no. 1 WpHG (Liste der Aufsichtsbehörden mit Sitz in einem Drittstaat, mit denen die Bundesanstalt eine angemessene Kooperationsvereinbarung gemäß § 33 Abs. 3 Satz 1 Nr. 1 WpHG unterhält ) (only available in German).
  3. Under section 33 (3) sentence 1 no. 2 WpHG, portfolio management for retail clients may be outsourced to an enterprise domiciled in a third country without the conditions in item 1 being met if the investment services enterprise notifies BaFin of the outsourcing in advance and BaFin does not object to it within a reasonable period. BaFin will not usually object to the notified outsourcing if the criteria contained in the List of conditions that, if satisfied, mean that BaFin will not usually object to an agreement notified to it to outsource portfolio management to an enterprise domiciled in a third country in accordance with section 33 (3) sentence 1 no. 2 WpHG (Liste der Bedingungen, bei deren Vorliegen die Bundesanstalt eine ihr angezeigte Auslagerungsvereinbarung der Finanzportfolioverwaltung an ein Unternehmen mit Sitz in einem Drittstaat gemäß § 33 Abs. 3 Satz 1 Nr. 2 WpHG in der Regel nicht beanstandet ) (only available in German) are met.

    Three months shall generally be regarded as a reasonable period unless a longer period is required for BaFin to complete its examination in an individual case due to the specific nature and/or complexity of the matter.

BT: Special requirements under sections 31 et seq. WpHG

BT 1 Status and responsibilities of the compliance function

This module explains the requirements relating to the status and responsibilities of the compliance function under section 33 (1) WpHG and section 12 WpDVerOV.

BT 1.1 Status

  1. An investment services enterprise shall establish and equip a permanent and effective compliance function that can discharge its responsibilities independently. Management bears overall responsibility for the compliance function.
  2. The investment services enterprise shall appoint a Compliance Officer who is responsible for the compliance function and the reports provided to management and the supervisory body, without prejudice to management’s overall responsibility. Management is generally responsible for forwarding the reports to the supervisory body.
  3. The compliance function is a management instrument. It may also report to a specific member of management. Irrespective of this, the enterprise shall ensure that the chairperson of the supervisory body in consultation with management can obtain information directly from the Compliance Officer5).

BT 1.1.1 Independence

  1. In the course of fulfilling his professional responsibilities, the Compliance Officer is bound only by the instructions issued by management.
  2. To enable compliance responsibilities to be performed effectively, compliance function staff, including the Compliance Officer, may not be involved in the investment services that they monitor. Exemptions are only permitted if it would be disproportionate to entrust the compliance function to a separate person who is not involved in the investment services due to the size of the enterprise or the nature, scale, complexity, or risk content of the enterprise’s business, or the nature and range of the services offered. This is the case if the performance of the compliance function – including in combination with financial control functions – does not require a full-time position due to the nature, scale and complexity of the enterprise’s business or the nature and range of the investment services or ancillary services offered given the volume of these services. In this case, the position of Compliance Officer can be held by the manager, for example, even if the manager is involved in the enterprise’s operations. However, an enterprise must still appoint a Compliance Officer even if it utilises the exemption rule.
    If the exemption rule is utilised, the information on additional activities performed by compliance function staff shall be documented in an auditable form. The reasons why the criteria for utilising the exemption rule have been met shall also be documented in an auditable form.
    Outsourcing the compliance function to a third party may also be an appropriate solution in individual cases, provided that the criteria for outsourcing under section 25a (2) KWG and section 33 (2) WpHG are observed.
    If a manager is not involved in the enterprise’s operations, he can act as Compliance Officer without the exemption criteria within the meaning of this item being met.
  3. As a rule, an independent organisational unit shall be established if employees of the enterprise regularly have access to compliance-relevant information within the meaning of AT 6.1 of this Circular. Enterprises are individually responsible for determining whether the criteria in sentence 1 have been met and shall document this in an auditable form.
    Exceptionally, an enterprise shall not be required to establish an independent organisational unit even if its employees regularly have access to compliance-relevant information within the meaning of AT 6.1 of this Circular if it would be disproportionate to establish an independent organisational unit due to the size of the enterprise or the nature, scale, complexity, or risk content of the enterprise’s business, or the nature and range of the services offered. Conflicts of interest within the enterprise, the classification of the enterprise’s clients in accordance with section 31a WpHG and the financial instruments sold or traded must be taken into account here in particular.
    For example, appointing a separate Compliance Officer may be disproportionate for smaller enterprises that only employ auxiliary administrative staff in addition to the manager(s). However, if an enterprise employs at least two people, they are required to monitor each other to comply with the principle of effective monitoring activities defined in AT 6 of this Circular. In the case of sole proprietorships, an examination may be conducted exceptionally as part of the annual audit in accordance with section 36 (1) WpHG after agreement with BaFin. All monitoring activities and their results shall be documented even if the enterprise does not establish an independent organisational unit.
    If this exemption rule is utilised, the reasons for this shall be given and documented in an auditable form. For example, the exemption rule is utilised if the compliance function is performed exclusively by a single manager.
  4. The significance of the compliance function shall be reflected in its position within the enterprise’s organisational structure. At a minimum, if an investment services enterprise performs a not insubstantial volume of proprietary trading as defined in section 2 (3) no. 2 WpHG, underwriting business as defined in section 2 (3) no. 5, or ancillary investment services as defined in section 2 (3a) no. 3, no. 5, or no. 6 WpHG, the Compliance Officer shall report directly to the member of management responsible for the compliance function for organisational and disciplinary purposes.
    In these cases, no connections shall be established with other organisational or staff units. However, connections with other control units at the same level (also defined as compliance in the broader sense), such as money laundering prevention or risk control, are permitted, whereas connections with the internal audit function are generally prohibited. However, if connections are established with other organisational and staff units, such as the legal department, this must be documented in an auditable form, explaining the reasons for the connection with the other organisational unit.
  5. Significant assessments and recommendations by the Compliance Officer that are overruled by management shall be documented and included in the report defined in section 33 (1) sentence 2 no. 5 WpHG. For example, a recommendation by the Compliance Officer not to permit a particular financial instrument to be included in sales activities shall be regarded as a significant recommendation.
  6. To ensure independence, it is recommended that the Compliance Officer be appointed for at least 24 months. Additionally, a suitable measure to strengthen the Compliance Officer’s position is to agree a 12-month notice period for the employer.
  7. It is recommended that the position, competences and remuneration of the Compliance Officer be based on the position, competences and remuneration of the heads of internal audit, risk control and the legal department of the investment services enterprise. The differences relating to personnel and other responsibilities of the relevant position may be taken into account when determining remuneration.
  8. The remuneration of compliance function staff may not depend on the activities of the employees whom they monitor. However, performance-related remuneration may be permitted in individual cases if it does not give rise to conflicts of interest. In the case of performance-related remuneration that exceeds this in accordance with the exemption under section 12 (5) WpDVerOV, for example where the remuneration of the Compliance Officer who has sole responsibility for monitoring all business areas is based on the enterprise’s performance, effective precautions are required to counter the resulting conflicts of interest. This shall be documented in an auditable form.
    The requirements contained in Circular 22/2009 (BA) – Supervisory Requirements for Institutions’ Remuneration Systems dated 18 December 2009 also apply.

BT 1.1.2 Effectiveness

  1. Compliance function staff shall be involved in all relevant information flows that may be significant for the compliance function’s tasks. They shall be granted access to all information that is relevant for their activities. They shall be granted unrestricted rights to information and rights of inspection and access with regard to all premises and documents, records, tape recordings, IT systems and other information that is required to investigate the relevant issues. Employees may not refuse to hand over documents or provide compliance-relevant information. The rights to information and of inspection and access must be able to be exercised on the compliance staff’s own initiative.
  2. The persons entrusted with the compliance function shall have the necessary specialist knowledge for the tasks assigned to them. This requires – at the latest after an induction period – a qualification that gives them the knowledge they need in the following areas in accordance with their tasks:

    • relevant administrative provisions issued by BaFin and the legal provisions governing investment services enterprises that are relevant for regulatory purposes, at a minimum those relating to the relevant tasks assigned to the employee,
    • knowledge of the key elements of BaFin’s organisational structure and responsibilities,
    • knowledge of the requirements for and the structure of appropriate processes used by investment services enterprises to identify violations of regulatory provisions,
    • knowledge of the compliance function’s tasks and responsibilities,
    • knowledge of different types of sales structures and the structural and operational arrangements of investment services enterprises,
    • knowledge of the financial instruments traded or sold by the relevant investment services enterprise,
    • knowledge of the requirements for providing services with an international reach if this is required at the relevant investment services enterprise.
  3. As a rule, Compliance Officers at investment services enterprises whose staff regularly have access to compliance-relevant information within the meaning of AT 6.1 of this Circular shall additionally have the following knowledge and experience:
    • knowledge of all the enterprise’s business areas relating to investment services and ancillary services, as well as their inherent risks,
    • knowledge of trading surveillance,
    • professional experience in the provision of investment and ancillary services; this may include working in a legal department, internal auditing function, or back office.
  4. The compliance function shall have the necessary resources to fulfil its tasks. The equipment and staffing of the compliance function shall therefore be based on the enterprise’s business model and the resulting tasks assigned to the compliance function. The scope of the compliance function’s activities shall depend on the nature, scale, complexity and risk content of the business conducted by the investment services enterprise. An appropriate dedicated budget shall be allocated to the compliance function of an investment services enterprise that requires the establishment of an independent organisational unit in accordance with BT 1.1.1 item 3. The budget may be determined as a whole for investment services enterprises that are part of a group. The Compliance Officer shall be consulted before the budget is determined. Significant cuts in the budget shall be justified in writing. The supervisory body shall be informed of all significant cuts.
  5. The Compliance Officer shall be assigned a deputy who must be sufficiently qualified to perform the Compliance Officer’s duties in his absence.
  6. he tasks and competences of the compliance function shall be laid down in the working and organisational instructions of the investment services enterprise. The competences comprise responsibilities and powers. Relevant amendments to regulatory provisions shall be reflected promptly by adapting these tasks and competences.

BT 1.1.3 Permanence

The compliance function shall be established permanently. Monitoring activities shall not only be performed based on specific circumstances, but also regularly and on the basis of a monitoring schedule. The monitoring activities shall regularly cover all key areas of investment services and ancillary services, taking into account the risk content associated with the business areas.

BT 1.2 Tasks of the compliance function

  1. The compliance function advises the operating units and monitors and assesses the policies and procedures established by the enterprise as well as the steps taken to remedy any deficiencies. Additionally, it reports to management and the supervisory body.
  2. The compliance function shall assist with the preparation of internal organisational and working instructions for the investment services enterprise and with their continuous enhancement if they are relevant to compliance issues. Without prejudice to the operating units’ responsibility, the compliance function shall be involved in this as early as possible to ensure that the organisational and working instructions are suitable for preventing violations of the statutory provisions.
  3. he compliance function shall also be involved in the following tasks in particular:
    • defining the criteria for determining whether staff positions are compliance-relevant,
    • processes for designing and approving new products,
    • new business areas, services, markets, or trading venues for investment services and ancillary services,
    • determining the principles governing sales targets and bonus payments for employees involved in investment services and ancillary services; if the investment services enterprise is a subsidiary of an enterprise domiciled abroad and receives requirements from the parent company relating to these issues, the compliance function shall examine whether the parent company’s requirements are consistent with German supervisory requirements,
    • establishing the various Chinese walls,
    • designing processes to monitor the personal account dealing of employees within the enterprise,
    • determining the best execution policy and, if necessary, the policy for transmitting orders to be executed by a third-party enterprise,
    • communication with trading surveillance units at stock exchanges and supervisory authorities if such communication is compliance-relevant.
    The early involvement of the compliance function – for example through rights to intervene in product approval processes – shall enable it to perform its monitoring and assessment activities on the basis of a proper business organisation. This does not entail the transfer of responsibility from the operating units to the compliance function.
  4. The compliance function shall ensure that conflicts of interest are prevented or that unavoidable conflicts of interest are sufficiently taken into account. This applies in particular to the protection of client interests. The goal of the compliance function is also to ensure that organisational precautions are taken within the enterprise to prevent the unlawful disclosure of compliance-relevant information within the meaning of AT 6.1 of this Circular.
  5. The compliance function shall advise and support the enterprise’s business areas and staff with regard to compliance with statutory provisions and organisational and working instructions. This includes holding regular and needs-based training sessions, or helping the operating units hold such training sessions, in particular with regard to changes in the law, newly issued BaFin Circulars and guidelines, or other amendments to supervisory requirements and the resulting rules of conduct for employees, as well as changes in the enterprise’s organisational structure and in organisational and working instructions for all employees for whom the changes may be relevant.
  6. The compliance function shall perform regular risk-based monitoring activities to ensure that the policies and precautions established, and therefore the investment services enterprise’s organisational and working instructions, are being complied with. In particular, this includes verifying whether the control activities listed in the working and organisational instructions are being performed regularly and properly by the operating units.
    The monitoring activities may not be based exclusively on auditing results produced by the internal auditing function.
  7. The compliance function shall regularly monitor and assess the appropriateness and effectiveness of the organisational and working instructions issued by the enterprise. Suitable sources and instruments may be used for the required monitoring activities, such as aggregated risk measurements; additionally, on-site inspections or other reviews shall be conducted by the compliance function. The Compliance Officer shall use risk-based criteria to determine which on-site inspections his organisational unit will perform itself (core compliance area)6) . This shall be justified in an auditable form. The number of random samples shall be recorded.
    Monitoring activities are performed taking into account the controls by the business areas and the reviews by the risk management function and the internal auditing function. In contrast to the reviews by the internal auditing function, the compliance function monitors the policies and procedures established for investment services and ancillary services on a continuous basis, supporting processes if possible, or at least in a timely manner.
  8. f deficiencies in the policies and procedures are identified, the compliance function shall determine the steps necessary to remedy the deficiencies in existing organisational procedures and inform management of this, as well as monitor and regularly assess the implementation of measures. In order to enable such examination, corresponding monitoring activities are also required in this context.
  9. At least once a year, the Compliance Officer shall present management with a report on the appropriateness and effectiveness of the policies, resources and procedures defined in section 33 (1) sentence 2 no. 1 WpHG, which shall include in particular information on whether suitable measures were taken to remedy violations by the investment services enterprise or its employees of requirements under the WpHG or to eliminate risks of such violations. These reports shall also be submitted to the chairperson of the supervisory body. The Compliance Officer is not obliged to inform management prior to submitting the annual report to the supervisory body. Additional ad hoc reports may be required as needed in individual cases.
  10. In particular, the report shall include information on the procedures underlying the items stipulated in section 6 (1) sentence 1 nos. 2 –16 of the Investment Services Examination Regulation (Wertpapierdienstleistungs-Prüfungsverordnung – WpDPV), if this information is relevant according to the nature of the investment services or ancillary services provided, and if the compliance function has identified defects relating to the procedures or if the procedures are of material importance for the enterprise. The disclosures on the compliance function shall include information on the appropriateness of the compliance function’s staff and materials. In addition, the report shall include information on significant correspondence with the relevant supervisory authorities. It shall also describe necessary measures and strategies resulting from knowledge gained in the reporting period; this relates to measures taken during the reporting period and measures planned for the subsequent period.
  11. Amendments to the content of the report that were initiated by management shall be documented separately. The chairman of the supervisory body shall be informed of these amendments.

BT 1.3 Relationship with BaFin

To enable effective supervision by BaFin, the investment services enterprise is obliged to inform BaFin without delay of the appointment and removal of the Compliance Officer. The employee’s CV and informative documents proving that he is sufficiently qualified shall be enclosed with the notification of the appointment of the Compliance Officer. The removal of a Compliance Officer shall be justified to BaFin in writing.

BT 2 Monitoring of personal account dealing of employees in accordance with section 33b WpHG and section 25a KWG

Section 33b WpHG was the first statutory provision governing the monitoring of personal account dealing of employees and became effective in the WpHG as at 1 November 2007. At the same time, BaFin revoked the Announcement of the Federal Banking Supervisory Office (Bundesaufsichtsamt für das Kreditwesen) and the Federal Securities Supervisory Office (Bundesaufsichtsamt für den Wertpapierhandel) on standards for the rules of conduct for employees of credit institutions and financial services institutions concerning personal account dealing of 7 June 2000 (‘Guiding Principles for Personal Account Dealing’) (cf. BaFin’s letter of 23 October 2007 on the abolition of the Guideline on the Rules of Conduct, Compliance Guideline and the Guiding Principles for Personal Account Dealing).

This module further defines the provisions contained in section 33b WpHG. It also explains the requirements relating to the monitoring of personal account dealing of employees that are outside the scope of section 33b WpHG.

BT 2.1 Definition of an employee

  1. Section 33b (1) no. 3 covers persons who provide investment services directly themselves, as well as all persons who assist these employees by performing both support activities and subsequent control activities. Support functions are regularly performed in particular by research department, compliance department, back office, or IT support staff, assistants, or members of other support areas in an investment services enterprise. Staff members shall be regarded as employees and freelance workers as well as agency workers, temporary staff and interns/trainees at an enterprise.
  2. Section 33b (1) no. 4 WpHG also covers persons who perform these activities without being employees of an investment services enterprise if they work for an enterprise to which activities or processes have been outsourced in accordance with section 25a (2) KWG.
  3. Those employees whose activities may give rise to conflicts of interest or who have access to inside information or other confidential information and to whom the requirements under section 33b (3) WpHG apply (cf. 3.) shall be selected from the group of persons listed in section 33b (1) WpHG.

BT 2.2 Definition of personal account dealing of employees

  1. Section 33b (2) no. 3 WpHG covers all transactions that are outside the scope of activities of employees that they enter into for own account or for the account of others. Transactions for the account of a third party shall be regarded in particular as all transactions that employees enter into using a privately issued power of attorney. The provision of the WpHG therefore not only covers transactions for parties closely associated with employees.
    Own account transactions are all transactions in which employees may have a beneficial interest. Own account transactions are also regarded as transactions by a third party in the name of or for the account of the employee insofar as the employee has knowledge of this or has arranged the transaction.
  2. The majority of the personal account dealing of employees defined in section 33b WpHG fall under section 33b (2) no. 3 WpHG. Section 33b (2) nos. 1 and 2 WpHG broadens the scope to include transactions by employees within their scope of activities, and therefore transactions that employees enter into to perform their duties at the investment services enterprise. They comprise transactions by employees for own account and for the account of closely associated parties within the meaning of section 15a (3) WpHG. These are transactions that, if entered into, could expose employees to conflicts of interest, such as the risk of preferring a close relative when assigning an order or when managing a portfolio.
  3. Whether a transaction falls within the scope of activities of an employee or not shall be assessed on the basis of the employee’s function, for example according to the employee’s job description. It is irrelevant whether the employee could have entered into the specific transaction in accordance with the instructions issued to him.

BT 2.3 Organisational requirements defined in section 33b (3) WpHG

  1. Investment services enterprises shall use adequate resources and procedures that are suitable for preventing unlawful personal account dealing of employees. Enterprises are individually responsible for determining which of the employees covered by section 33b (1) WpHG perform activities that could give rise to conflicts of interest or which employees have access to compliance-relevant information within the meaning of AT 6.1 of this Circular by virtue of their activities. The requirements under section 33b (3) WpHG apply to these persons.
  2. Management shall name a unit or the units in the enterprise that is/are entrusted with identifying and regularly monitoring the employees covered by section 33b (3) WpHG. Enterprises are also obliged to maintain an organisational structure that ensures that this unit is regularly informed of the existence of conflicts of interest and of inside and other confidential information within the enterprise.
    Enterprises shall use risk criteria to assess which areas and persons to include; for example, the volume of information available to investment advisers or tied agents may determine whether they are included.
  3. Conflicts of interest within the meaning of section 33b (3) WpHG are only conflicts of interest that arise in personal account dealing of an employee. Such conflicts occur if an employee’s interests in entering into a personal account dealing within the meaning of section 33b (2) WpHG could conflict with the interests of a client or of the investment services enterprise. Other conflicts of interest are covered by section 33 (1) sentence 2 no. 3 WpHG.
  4. Adequate resources and procedures shall be used to prevent unlawful personal account dealing of employees. This may require different measures for different employees. It is therefore possible to prepare various lists of duties for different employees. Potential appropriate measures are in particular the measures specified in AT 6.2. item 3 of this Circular.

BT 2.4 Organisational requirements defined in section 33b (4) WpHG

  1. Under section 33b (4) no. 2 WpHG, investment services enterprises shall ensure that they can gain knowledge of any personal account dealing pursuant to section 33b (3) WpHG of an employee without delay. This can be assured using a variety of procedures, including the following:
    • A suitable and proven procedure is that the enterprise maintaining the account or securities account sends duplicate copies of employee transactions within the meaning of section 33b (3) WpHG to the investment services enterprise.
    • Another suitable procedure is the immediate notification of any personal account dealing by an enterprise’s employees on their own initiative in a regular letter of representation to management or to a unit specified by management.
    • Another possible procedure is to request information on a random sampling basis about transactions by employees within the meaning of section 33b (3) WpHG, for example by employees submitting a letter of representation if they are asked for information about their transactions. Information about powers of attorney held by employees for third-party accounts or securities accounts may also be requested at the same time. In order to verify the completeness of the employee’s declaration, the enterprise may also ask for a letter of representation from the institution through which the transactions were executed.
    • The introduction of approval requirements for employees before the execution of any personal account dealing shall also be regarded as a suitable measure.
    In each case, the activities shall be performed by a unit that is independent of the operations departments, front office and back office unless this is disproportionate due to the size of the enterprise.
  2. Under section 33b (4) no. 3 WpHG, personal account dealing by employees of an external service provider shall be documented by the external service provider if the employees’ activities may give rise to conflicts of interest or if the employees have access to inside information or other confidential information by virtue of their activities. In accordance with BaFin’s current administrative practice, it is not necessary to monitor the external service provider’s compliance with these documentation requirements if the external service provider is itself an investment services enterprise within the meaning of section 2 (4) WpHG. If the outsourcing enterprise and the external service provider are part of a group, all personal account dealing of employees in the group may be documented at one of these enterprises.
    In the case of outsourcing to a multi-client service provider, this provider may be monitored by one or more of the outsourcing enterprises on behalf of the outsourcing enterprises.
  3. The documentation of personal account dealing of employees as required under section 33b (4) no. 4 WpHG, of which the investment services enterprise gains knowledge in accordance with section 33b (4) nos. 2 and 3 WpHG, as well as the documentation of all authorisations and prohibitions that the enterprise grants or imposes in connection with this, must be performed in such a way that compliance with the statutory provisions can be verified in an examination as defined by section 36 WpHG.

BT 2.5 Organisational requirements defined in section 33b (5) and (6) WpHG

Lead brokers are to be considered equivalent to market makers as defined in section 33b (5) no. 1 WpHG.

BT 2.6 Exemptions

Under section 33b (7) WpHG, certain personal account dealings by employees are exempted from the requirements set out in section 33b (3) and (4) WpHG. In addition, investments in accordance with the Capital Accumulation Act (Vermögensbildungsgesetz) and other contractually agreed savings plans are exempted.

BT 2.7 Requirements under section 25a KWG

Employees of investment services enterprises who are not involved in the provision of investment services but could have access to inside information and other confidential information may not enter into any transactions that violate section 14 WpHG or a provision of Part 6 of the WpHG. Credit and financial services institutions that are not investment services enterprises within the meaning of section 2 (4) WpHG shall also comply with section 14 WpHG. Suitable procedures and measures for personal account dealing of employees shall be taken to comply with this statutory provision as part of the general organisational requirements under section 25a (1) KWG8) . The procedures taken must ensure that employees who could have access to inside information and other confidential information do not enter into any transactions that violate the above-mentioned provisions. For example, this could affect staff in M&A departments, legal departments, the credit business, or executive board assistants.

BT 3 Information including marketing by investment services enterprises pursuant to section 31 (2) WpHG and section 4 WpDVerOV

With the provisions of Article 27 of Directive 2006/73/EC of 10 August 2006 (transposed into German law by section 31 (2) WpHG) as well as section 4 WpDVerOV)), the European legislator created detailed and far-reaching rules on the marketing of investment services enterprises. Despite their relatively high degree of detail, uncertainties in interpretation on the part of market participants have been observed during the first months after entry into force of the new rules. In order to resolve these uncertainties and to create framework conditions amongst competitors that are as consistent as possible, I therefore explain section 31 (2) WpHG and section 4 WpDVerOV as follows:

BT 3.1 Scope of application

BT 3.1.1 Scope of application / Scope of obligations

  1. The provisions of section 31 (2) sentences 1, 3 and 4 WpHG as well as section 4 WpDVerOV apply as a rule without distinction to all information relating to financial instruments or (ancillary) investment services which investment services enterprises address to clients and/or retail clients, regardless of whether or not such information constitutes marketing material; by contrast, information addressed exclusively to eligible counterparties is exempted within the scope of application of section 31b WpHG. Moreover, section 31 (2) sentence 2 WpHG stipulates specifically for marketing information that the latter must be clearly recognisable as such. A marketing communication is information intended to induce the addressees to acquire a financial instrument or to commission an investment service (sales promoting aim). Information that is merely used in an advisory situation does not necessarily have a primarily sales promoting aim. Neutral product information made available in the fulfilment of obligations to provide advice appropriate to the client and the investment situation does not fall under the definition of marketing information. The Act provides for an obligation to expressly identify the information only when the marketing character of the information is not otherwise clearly recognisable. Such recognisability may result from the manner and form in which the information is presented or from the content of the information. On the whole, the assessment must be made on a case-by-case basis. Pure image marketing is not covered by the provisions.
  2. Possible examples of marketing information that might be required to be indicated as such are:
    • contributions in an investment services enterprise’s client magazines which appear to be objective but which primarily pursue a sales promoting aim;
    • letters to clients (especially when addressed to them personally) suggesting the purchase of certain securities provided that this does not constitute investment advice8) or financial analyses in accordance with section 31 (2) sentence 4 no. 1 WpHG.
    Such information is to be distinguished from the information that is required to be indicated as marketing communication pursuant to section 31 (2) sentence 4 no. 2 WpHG. This information must be indicated although it does not have any immediate marketing character but qualifies as financial analysis and is therefore precisely intended to be an objective and independent recommendation. This is a special form of financial analyses to which the provisions of section 34b WpHG as well as the Regulation governing the Analysis of Financial Instruments are applicable.9) These provisions are a self-contained framework which takes precedence over the provisions of section 31 (2) WpHG as well as section 4 WpDVerOV. That means that apart from fulfilling the requirements of the financial analysis rules, generally no further-reaching requirements under section 4 WpDVerOV are to be observed. That is because its material assessments are already covered by the requirements for financial analyses to be produced and presented in a fair manner pursuant to section 34b (1) sentence 2 WpHG. This concerns, in particular, the obligation to present data in a manner which is fair, clear and not misleading including a balanced analysis of the risks and rewards of a recommended financial instrument.
  3. Clients within the meaning of section 31 (2) WpHG and section 4 WpDVerOV are any natural or legal persons for whom investment services enterprises provide or bring about investment services or ancillary services (cf. section 31a (1) WpHG). The concept of client thus encompasses not only existing clients but also all persons with whom no client relationship as yet exists but to whom an investments services enterprises addresses information with a view to acquiring them as clients.
  4. Section 31 (2) WpHG applies to all information addressed to clients, i.e. information addressed to retail clients and professional clients alike and, to a limited extent (cf. 1.1), to eligible counterparties. The principles contained in section 31 (2) WpHG are specified in more detail in section 4 WpDVerOV for information addressed to retail clients. As a result, information for retail clients is primarily to be measured by section 4 WpDVerOV, information to professional clients or eligible counterparties solely by section 31 (2) WpHG.

BT 3.1.2 Relationship to section 124 of the Investment Act (Investmentgesetz – InvG) and section 15 of the Securities Prospectus Act (Wertpapierprospektgesetz – WpPG)

The provisions of section 124 InvG and section 15 WpPG apply parallel to the provisions of section 31 (2) WpHG and section 4 WpDVerOV.

BT 3.2 Making information available

  1. Pursuant to section 31 (2) sentence 1 WpHG and section 4 (1) WpDVerOV, all information made available by investment services enterprises to clients falls under the scope of application of the provisions. On account of the broad definition of client (which also includes potential clients; see above), any marketing information of an investment services enterprise is covered.
  2. Since the Act is based on the premise that the information is made available to the client by the investment services enterprise, it does not matter whether the information originally comes from the investment services enterprise. For this reason, information which is initially provided to the investment services enterprise by a third party and which is then made available to the clients by the investment services enterprise also falls under the scope of application of the provisions.

    Example: Marketing materials of an asset management company or an issuer

    If an investment services enterprise makes available to clients information from third-party sources (for example by handing out information in print form or by making available information from third-party sources on its own website and/or by links to the websites of other providers), such investment services enterprise as a rule is initially fully responsible itself for ensuring compliance with the provisions of section 31 (2) WpHG and section 4 WpDVerOV. If the third party itself is an investment services enterprise, the provisions of section 31 (2) WpHG and section 4 WpDVerOV also apply to the third-party enterprise regardless of whether it makes the information available to its clients directly or – for example as issuer – provides such information to other investment services enterprises for marketing purposes.

    Example: X bank issues a bond which is (also) to be distributed through Y bank. For this purpose, X bank provides Y bank with marketing materials. In this case, X bank must ensure that this information satisfies section 31 (2) WpHG and, where applicable, section 4 WpDVerOV. Apart from obvious cases, Y bank does not itself have any obligation to check the information for compliance.
  3. If the third-party source itself is an investment services enterprise from the EEA and the information is addressed to clients to whom identical requirements apply, the investment services enterprise that receives such information and then makes it available to clients may as a rule (except in the case of manifest violations) rely on the information supplied being in compliance with the law because the supplying investment services enterprise is itself under an obligation to comply with such requirements under section 31 (2) WpHG and section 4 WpDVerOV. However, this applies only to the extent the information is communicated without being changed and is clearly identifiable as information from the third-party investment services enterprise.
    Other particularities may arise in such third-party scenarios. If the third-party source is not itself an investment services enterprise, an evaluative assessment of the overall circumstances must be made in order to decide whether such information is deemed to have been made available to clients by the investment services enterprise. In such cases, attributability depends on whether the client considers the information to originally come from the investment services enterprise and/or whether the third party itself has a sales interest and may therefore have to be attributed to the investment services enterprise. This is normally assumed to be the case not only for marketing materials but also particularly for product-specific information of issuers.

    Example: X bank makes product information of Y asset management company (Y-AMC) available to its clients. Since in the context of product distribution Y-AMC in this case is attributed to X bank, X bank must ensure that the information made available by it to its clients satisfies the provisions of section 31 (2) WpHG as well as section 4 WpDVerOV.
    If, on the other hand, X bank makes available in its sales premises daily newspapers containing information on the performance of financial instruments, X bank is not responsible for ensuring that such information satisfies the requirements of section 4 WpDVerOV, because daily newspapers do not typically have any marketing interest in respect of the financial instruments to which the price information contained therein relates, and as such are therefore not attributable to X bank.
  4. Particularly in connection with information found on websites, investment services enterprises have an obligation to ensure that information exclusively intended for professional clients or eligible counterparties and therefore not satisfying all requirements of section 4 WpDVerOV is not additionally made available to retail investors. With regard to information provided over the Internet, it is also recommended to post on freely accessible web pages only information suitable for retail clients or such information which, whilst describing the information offering for professional clients or eligible counterparties, does not contain any information that does not satisfy the requirements of section 4 WpDVerOV. The latter may be made available to professional clients or eligible counterparties either in an access-protected section after such access has been duly granted (e.g. by a password) or separated from the other information by a clearly visible notice, to be confirmed by the website user, that the information was not posted for retail clients.
  5. By contrast, when making available sales prospectuses which are provided to the investment services enterprise by the issuer and whose content satisfies the statutory provisions, the provisions of section 31 (2) WpHG and section 4 WpDVerOV do not give rise to any additional disclosure obligations on the part of the investment services enterprise10) .

BT 3.3 Provisions relating to the presentation of information addressed to retail clients

For information addressed to retail clients, section 4 WpDVerOV contains various provisions relating to the manner in which such information is presented:

BT 3.3.1 Sufficient and comprehensible presentation

  1. Information that investment services enterprises make available to retail clients as a rule must be fair, clear and not misleading (cf. section 31 (2) sentence 1 WpHG). That means, among other things, that material statements must not be expressed in an ambiguous manner and that material information must not be omitted.
    Example: Product names such as "guarantee certificate" or similar, as well as references, for example, to "100% capital protection" or similar, do not make it sufficiently clear without further explanation who provides the guarantee (issuer, group affiliate or third party) or where the capital protection arises from. In the interest of ensuring clarity of the information, a clarifying reference to the person of the guarantor is therefore generally required (such as: "100% capital guarantee of X bank") or, for references to capital protection, an additional clarifying statement as to the origin of the capital protection.
    In this connection, further reference must be made, where applicable, to the risk of a capital or repayment guarantee lapsing as a result of extraordinary rights of termination being exercised, as well as to any conditions or (especially quantitative) restrictions existing in respect of a guarantee.
    Likewise, the product description must clearly set out whether a capital guarantee, for example, only applies on the maturity date or whether a deduction of charges for hedging transactions should be expected (e.g. in the case of early sale of products subject to capital guarantees).
  2. Moreover, information must be sufficient for, and presented in a way that is likely to be understood by, the group of clients to whom it is made available, or by whom it is likely to be received11) :
    The information must be sufficient so as to be understood by the average member of the group of clients to whom it is addressed12). The necessary scope and depth of product descriptions therefore must be geared to the average knowledge of the target group. The more complicated a product or service (including its risks) is, the more explanations the related product information as a rule must contain. If information is addressed expressly and in a clearly recognisable way to only one clearly defined group of clients who can be expected to possess an advanced level of expertise, this may be duly considered when determining the scope and depth of the product description.
  3. Furthermore, the information sufficient in scope for the average member of the client group addressed must be presented in a way that is comprehensible to such member. That means, among other things, that the way in which the information is worded must be all the more straightforward and generally comprehensible the less knowledgeable and experienced the addressed clients can assumed to be.

    Example: Whereas the reference to the "credit risk of X bank" in marketing material for a certificate is sufficiently comprehensible to a customer group with prior knowledge in financial matters, marketing material addressed to retail clients in general may call for a wording using less specialised terms (e.g.: "Risk of financial loss due to payment default or insolvency of X bank").
  4. In particular, it must be ensured that the way in which the information is presented does not disguise, diminish or obscure important items, statements or warnings13) .

    Negative example: Whereas the reader finds the rewards of a product expressly described in the information provided under the header "Benefits of the product", he/she has to deduce the product’s associated risks from the characteristics provided under the header "For whom is the product suitable?".
    In the first place, it is not clear from the heading "For whom is the product suitable?" that this section contains important information on the product’s risks that is of particular importance for the investor. Secondly, the risks must be clearly specified; it is not sufficient that the risks can be inferred or concluded from the product description.
  5. Where information relating to the interest paid on the capital invested is provided, the question of whether the promised interest is subject to conditions must be considered. Whereas normally no particular mention has to be made regarding issuer default risk (e.g. for a corporate or government bond; unlike certificates, see above) provided that the risk premium and/or the default risk of the issuer is not unusually high, it is definitely necessary to provide a clarifying reference when the promised interest is subject to further conditions.

    Example: A certificate pays the specified interest only if no payment default of the reference company occurs.

    In such cases, formulations such as "Chance of x% return p.a." or "Return of up to x% p.a." should be used instead of absolute statements such as "Return: x% p.a.".

BT 3.3.2 Up-to-datedness of presentation

  1. The requirements as to how up-to-date the information distributed must be are governed as a rule by the principle that the information must be fair and not misleading pursuant to section 31 (2) sentence 1 WpHG and by the general principle of proportionality. Whereas information distributed via online databases as a rule must be up-to-date and in some circumstances must be made available in real time, prospectus material made available for online downloading is subject to lower requirements as to how up to date the data are, and printed marketing materials intended to be made accessible at branches to still lower requirements. The decision always depends on the specific information as well as the product or service and their specific features. In individual cases, however, the aforementioned principles of presenting information in a way that is fair and not misleading may make it necessary, also in the case of materials for which the time elapsing between the editorial and publication date would normally be sufficient, either to refrain from distributing or to update such materials if significant changes occur shortly after the editorial deadline.

    Example: Whereas it may have been acceptable, until the 2008 financial crisis, to regard the risk of default of an issuer of certificates as being so negligible to justify foregoing a mention of such risk in the description of a product’s risks (see 3.3), the situation is now different. After such changes become known it may therefore be necessary to adjust the information materials accordingly or to withdraw them from circulation. The same applies, for example, with regard to performance data (see 3.4) after significant changes in value that have taken place within a short time.

    Giving regard to the requirement to present information in a way that is clear, fair and not misleading, it is advisable and sensible in any case to provide an easily recognisable reference to the date of the information.
  2. An exception to the general requirement for information made available online to be up-to-date is possible in cases where, for example, marketing materials relating to certificates are kept available on the website of the issuer or the disseminating investment services enterprise after expiry of the subscription period. This satisfies an interest in information on the part of the investors. At the same time it is not reasonable to continue requiring companies to keep such marketing materials up-to-date. However, particularly in this case it is indispensable to provide for a clear and recognisable reference to the date of the information.

BT 3.3.3 Presentation of benefits and risks

  1. Pursuant to section 4 (2) WpDVerOV, any benefits of an investment service or a financial instrument may only be emphasised if at the same time a clear reference is made to any related risks.
  2. Unlike in securities sales prospectuses, reference to risks need only be made if the information emphasises at least one benefit of the presented product. In that case, however, the principle of proportionality applies, i.e. the scope and accuracy in which the benefits and risks are described must be in balanced proportion. The more extensively benefits are highlighted, the more extensively any risks must be addressed. That does not mean that the number of benefits and risks always has to be the same. Where a product has more benefits than risks, these may outnumber the risks in the presentation and vice versa. Also, benefits and risks do not always have to correspond to each other in substance, i.e. like "the two sides of a coin". It is decisive that where all material benefits of a product are specified, reference is also made to all material risks, and that where only particularly important benefits are mentioned, reference is also made to the particularly important risks.
  3. A benefit may be given linguistic, typographical or any other prominence. It must not refer to a specific financial instrument (e.g. by means of a securities identification number). The rules governing the presentation of benefits and risks also apply if the information refers to a specific group of financial instruments having a similar structure.

    Example: In marketing material for a certain type of certificates (for example, leveraged certificates) emphasising their benefits (e.g. prospect of disproportionate gains versus the underlying), reference would also have to be made to their risks (e.g. disproportionate risks of losses being incurred versus the underlying; issuer risk).
    As already mentioned above, it is particularly important when presenting the risks and rewards to keep in mind that the way in which such information is presented may not disguise, diminish or obscure important items, statements or warnings14) . It therefore has to be ensured that information is presented in a clear and straightforward manner in which not merely the circumstances giving rise to a risk but also the risk itself are pointed out.

  4. Pursuant to section 4 (2) WpDVerOV, the risks must always be presented "concurrently" with the benefits. For information in printed form that means that the references to risks must be found in the same document as the benefits. It is not sufficient to make reference to other places (in particular a website or other information materials) or the possibility of having a client meeting. Although the presentation of the risks does not have to be provided in a place that is directly proximate to the presentation of the benefits, it does have to be made in a clear and prominent manner.
    Example: It is not possible to mention the risks only in the text of a footnote with the benefits being presented outside of the footnotes. Neither is it possible to describe in a letter to clients only the benefits whilst referring to other documents, e.g. a product information sheet, with regard to the risks. This also applies if the document presenting the risks is directly attached to or sent together with such letter.
  5. The above principles apply regardless of the type of information medium used.

    Examples of possible risks include:
    •issuer default risk in the case of certificates
    •guarantor default risk
    •exchange rate risk
    •market-induced price or rate fluctuations
    •possibility of tradability being restricted or absent
    •possible obligation to make additional contributions
    •extraordinary termination rights of issuer.

BT 3.3.4 Presentation of performance

Where information addressed to retail clients contains statements on the performance of a financial instrument, a financial index or an investment service, it must be clearly stated to what period the information refers and that past performances, simulations or forecasts are no reliable indicator for future performance (section 4 (7) WpDVerOV).

The rules relating to performance information provided to retail clients in some cases distinguish between historical (section 4 (4) and (5) WpDVerOV) and forward-looking (section 4 (6) WpDVerOV) information:

BT 3.3.4.1 Historical information

Historical data as a rule may not represent the most prominent aspect of the information (section 4 (4) sentence 1 WpDVerOV). That means that statements relating to past performance may not be given any special prominence, either typographically or in respect of the order they are placed in, the depth in which they are described or in any other way.

BT 3.3.4.1.1 Suitable information
  1. Pursuant to section 4 (4) no. 1 WpDVerOV, information on performance must be "suitable". Information that appears suitable is, as a rule, any absolute or relative percentage information such as:
    •"50% increase in value between 10 January 2008 and 10 January 2009" or
    •"Between 10 January 2008 and 10 January 2009, 50% greater increase in value compared with [comparison object]".
  2. Within the meaning of section 4 (4) no. 1 WpDVerOV, however, absolute or relative performance statements may also be suitable, such as:
    • "Price on 10 January 2008: €40.00 / price on 10 January 2009: €50.00" or
    • "€1000.00 increase between 10 January 2008 and 10 January 2009" or
    • "Between 10 January 2008 and 10 January 2009, increase in value €50.00 higher than [comparison object]".
  3. The performance data must always reflect actual performance over a twelve-month period. That means that cumulative performance data relating to the entire period under review (e.g. "500% in 10 years") are not suitable because such data do not allow for any conclusions to be made with regard to the volatility and risk of the investment. For the same reason, annualised average values for multi-year periods (e.g. "5% p.a. on average over the past 5 years") are also unsuitable. Annualised data may be suitable by way of exception if the actual performance was nearly constant over the entire period under review.
BT 3.3.4.1.2 Minimum period: as a rule, the immediately preceding five years
  1. In respect of the period to which the performance data refer, the WpDVerOV provides for detailed requirements:
    The performance data as a rule must refer to the immediately preceding five years (section 4 (4) no. 1 WpDVerOV), with "years" in this place being used to mean twelve-month periods and not calendar years.
  2. In this regard, the requirements with regard to the criterion of immediateness, i.e. the length of the period permitted between the most up-to-date performance information and the date the information is distributed, are determined according to the principle of proportionality and the principle of presenting information in a fair way pursuant to section 31 (2) sentence 1 WpHG. This means that the information made available must be as up-to-date as is possible using reasonable efforts.
  3. In individual cases, however, the requirement of presenting information in a way that is fair and the prohibition of providing misleading information (section 31 (2) sentence 1 WpHG) may make it necessary that materials which would normally be sufficiently up-to-date may either no longer be distributed or have to be updated if significant changes in value occur shortly after the editorial deadline (cf. also 3.2).
BT 3.3.4.1.3 Exception: data available only for a shorter period

If for the financial instrument, financial index or investment service in question the performance data are available only over a period of less than five years, information must be stated for the entire available period.

BT 3.3.4.1.4 Limit to exception: as a rule no information for periods of less than one year
  1. As a rule, no statement of performance data would be permitted pursuant to section 4 (4) no. 1 WpDVerOV in cases where performance could be presented only over a period of less than twelve months (because the financial instrument was introduced to trading only less than twelve months ago, for example).
  2. In this connection it must be pointed out that the prohibition relates only to the presentation of the performance of the financial instrument, the financial index or the investment service over a period of less than one year. By contrast, statements relating to the current value only are of course permitted.
BT 3.3.4.1.5 Exception to prohibition on statements for periods of less than one year

Given the purpose of the provision and the clients’ legitimate need for information, however, an exception appears to be permissible within narrow limits for non-marketing, unbiased information requested by clients (for example, information in automated Internet share price databases or in the case of information necessary as part of advice provided pursuant to the Securities Trading Act) (cf. also 3.4.1.8).

BT 3.3.4.1.6 Additional data

In addition to the statutory requirements, further performance data may be stated. However, such data may not be given greater importance than the legally required data in terms of content and form. In other words, at least equivalent emphasis must be given to the legally required data.

BT 3.3.4.1.7 Impact of commissions, fees and other charges
  1. Where the performance data are presented as gross values, it must be stated how such values are impacted by commissions, charges and other fees (cf. section 4 (4) no. 4 and (5) sentence 2 and (6) sentence 2 WpDVerOV).

    In this connection, commissions, fees and other charges are understood to mean all financial expenditures necessarily arising for the client from the purchase, holding, or sale of a financial instrument, or the use of an investment service, such as

    •sales charges in the case of fund units;
    •transaction costs such as order fees and brokerage fees;
    •any securities account fees and other custody fees.

  2. Section 4 (4) no. 4, (5) sentence 2 and (6) sentence 2 WpDVerOV require quantified data on the impact of commissions, fees and other charges. In this regard, it is generally not sufficient to provide an unquantified general notice that commissions, fees and other charges reduce performance, since this is already immediately clear from such terms by definition. However, it is very difficult to make an exact statement on adjusted performance giving due regard to the performance-reducing factors specified by law, because the parameters to be taken into account vary significantly depending on the individual case: the amount of the values to be applied is dependent either on the institution that performs the service in question (example: transaction and custody costs) or on the investor (example: the total amount invested, which in turn influences the transaction and custody costs). As a result, it is practically impossible, at least in the case of general information, to report values that apply to all clients. To nevertheless satisfy the statutory requirement of section 4 (4) no. 4, (5) sentence 2 and (6) sentence 2 WpDVerOV, the following approach is recommended:

    When calculating the adjusted performance, investment services enterprises present the performance as required by section 4 (4) no. 4, (5) sentence 2 and (6) sentence 2 WpDVerOV reflecting the impact of commissions, fees and other charges by applying the aforementioned charges in the amounts typically incurred, either in the amount of their own fee schedule or average customary market values. It is irrelevant whether the investment services enterprise determines such average values itself or uses data provided by associations or by other third parties. Precise market analyses employing empirical mathematical methodologies are not prescribed for the determination of “average customary market values”. Rather, the use of values that are assumed to be close to reality is sufficient, provided that these do not appear to be arbitrarily distorted. An amount of €1,000.00 or an average investment amount typically encountered in practice for the financial instrument in question is applied by the investment services enterprise as a standardised model value, and a period of five years or a shorter period typically encountered in practice as the investment period. The inclusion of securities account costs may be replaced by a reference to the fact that securities account costs that could additionally reduce performance may be incurred. In addition to this standardised model calculation, the investment services enterprise may give clients an opportunity to calculate individual adjusted performance using an online performance calculator available on the institution’s website. In this case, clients would have to enter the values applicable to them for the individual variable parameters, including the investment amount.

    If an institution offers investment services as part of online offerings, it may give its clients an opportunity to calculate individual adjusted performance for these offerings using an online performance calculator available on the institution’s website, instead of the standardised model calculation. In this case, clients would have to enter the values applicable to them for the individual variable parameters, including the investment amount.

    The investment services enterprise may also use the online performance calculator as an alternative to the standardised model calculation to calculate individual adjusted performance, for example if the investment advice is provided at a branch office. In this case, the investment adviser must determine the individual variable parameters, including the investment amount, individually for each client. A printout of the online performance calculator must be made available to the client. In both of the cases described above, the online performance calculator can replace the standardised model calculation.

BT 3.3.4.1.8 Statement of simulated performances
  1. Simulations of past performance or references to such simulation may relate only to a financial instrument, the underlying of a financial instrument or a financial index (cf. section 4 (5) sentence 1 WpDVerOV). This list of items that a simulation might contain is exhaustive. Consequently, client information may not contain, for example, simulations of the performance of a mere trading or investment strategy15) .
  2. Moreover, simulations of past performance must be based on the actual past performance of one or more financial instruments, underlyings or financial indices that correspond to the financial instrument in question or form the basis of the same, as well as satisfy all conditions stated under 3.4 above (cf. section 4 (5) sentence 2 WpDVerOV).

    Example: Simulation of the past performance of a basket certificate launched on 10 January 2009, which is based on the past performance of the individual basket components (which must be either financial instruments, or underlyings of such financial instruments or financial indices).
    The prerequisite for such simulation is that the financial instruments, underlyings or financial indices used as a basis must be identical to the current basket components and their past performance must cover the entire simulation period. It is therefore not permissible to replace in the simulation one or more basket components not possessing such actual past performance by similar or comparable financial instruments, underlyings or financial indices.

    Example: A newly launched basket certificate tracks the performances of shares A, B, C and D, with shares A, B and C having already been quoted for more than six years, but share D only for five years. A simulation of the performance of this basket certificate with reference to the past six years would not be permissible because no past performance for the sixth year exists for share D and it would not be permissible to use the performance of a share similar or comparable to share D for simulation purposes. However, it is possible to simulate the performance of the basket certificate with reference to the past five years because for that period historical price data exist for all four shares.
  3. Moreover, the financial instrument, the underlying or the financial index to be used in the simulation must have a clearly defined composition for a simulation to be possible at all. For this reason it is not permitted to simulate in client information the past performance of a financial instrument or a financial index whose respective composition depends on discretionary decisions.
    Example:For a newly launched fund, a certain investment strategy including certain weighting provisions is defined for the fund’s management. However, the actual choice of stocks and the decision on specific transactions is left to the discretion of the fund’s management. In this case it is not possible to determine what the fund’s exact composition would have been in the past because it is impossible to know what discretionary decisions the fund’s management would have taken in the past.
  4. For the same reason it is impermissible as a rule to simulate the past performance of such structured products in client information for which, beyond the pure costs of the individual components, margins of the issuer that vary over the entire term are used in pricing, unless it is clearly prominently stated that the margins of the issuer assumed in the calculation of performance are notional and variable and therefore do not provide any reliable indication of the future impact of issuer margins on the performance of the product.
    Example:The structure of a guarantee certificate is made up of several components (e.g. securities and futures transactions). The issue price is formed by adding the prices of the individual components as well as a profit margin of the issuer. However, the amount of such margin changes constantly over the term as a result of the issuer’s pricing. In this case it is not possible to know how high the issuer would have calculated its margin at individual points in time in the past. It is therefore likewise not possible to determine what the price of the certificate would have been at times before the issue.
  5. As a rule, it is permissible to present a combination of actual and simulated performance data. In this case, however, it must be clear and unambiguous from the presentation which data are of an actual nature and which ones are simulated.

    Example: A certificate launched six months ago tracks the performance of share A "1:1". Although it would not be permissible to present the performance data of the certificate only for the past six months given the prohibition of presenting performance information for periods of less than one year (see point 3.4.1.4), a reference to the actual performance of share A during the preceding four and a half years nevertheless makes it possible to present the performance of the certificate for the period of the past five years.
    Lastly, in the case of simulated performance data it must as a rule be stated – as for the statement of actual performance data – what impact commissions, fees and other charges have.

    Example: A newly launched fund continuously tracks a certain index "1:1" as stated in the fund’s terms and conditions. For want of sufficient actual historical price data, a simulation of its past performance is to be presented. In this case the simulation has to take account of any sales charge and/or redemption fees as well as transaction costs in the same way as for the presentation of actual performance.
BT 3.3.4.2 Forward-looking data

Data provided on future performance may not be based on simulated past performance or refer to such simulation. The statements must be based on reasonable assumptions supported by objective data and, if based on gross performance, clearly state the impact of commissions, fees and other charges (cf. section 4 (6) WpDVerOV).

BT 3.4 Tax information

Information referring to a particular tax treatment must contain a clear reference that tax treatment depends on the individual circumstances of each client and may be subject to changes in future (cf. section 4 (8) WpDVerOV).

BT 3.5 Consistency of marketing and product information

Information provided in marketing statements may not contradict information that the investment services enterprise makes available to the client when performing investment services and ancillary services (cf. section 4 (9) WpDVerOV). This means in particular that information provided in sales prospectuses or other information materials must be consistent with statements made as part of marketing.

BT 3.6 Statements with reference to the supervisory authority

The name of any competent authority within the meaning of the Securities Trading Act shall not be mentioned in such a way that would indicate or suggest endorsement or approval by that authority of the products or services of the investment services enterprise (section 4 (11) WpDVerOV).

Consequently, when advertising for a financial instrument it is not permitted, for example, to inform of BaFin’s approval of the prospectus published as part of the issue in such a way as to give clients the impression that BaFin has explicitly endorsed or approved the financial instrument as such. Neither is it permitted to make reference to the fact of existing supervision by BaFin in such a way as to give rise to the impression that the services or products offered by the investment services enterprise have been explicitly endorsed or approved by BaFin.

BT 3.7 Documentation of marketing communications

Apart from the requirement of keeping one copy of the marketing communication no further record-keeping obligations apply to marketing communications provided that it is clear from the marketing communication to which client group the communication is addressed (cf. section 14 (7) WpDVerOV). To the extent that the marketing communication is issued periodically by using a particular standard template, retention of one sample copy of such standardised information, marketing communication or financial analysis is sufficient if the creation of the individual documents can be reconstructed from the additional documentation.

Appendix

The following are some non-binding examples suggesting possible ways of presenting performance for the past 5 years:

A. Bar chart (return expressed as a percentage)

Grafik 1 BaFin

Jan. 04-Jan. 05: net = minus sales charge / order fee / brokerage fee / securities account fee for investment amount of [1/4 average securities account]

Jan. 05-Jan. 07: gross minus securities account fee for investment amount of [1/4 average account]

Jan. 08-Jan. 09: net = minus redemption fee / order fee / brokerage fee / securities account fee for investment amount of [1/4 average securities account]

Note: The specific return for the investment amount contemplated by you can be calculated using a return calculator available on our website (www.a-bank.de/renditerechner).

B.Line chart (return expressed as a percentage)

Grafik 2 BaFin


Jan. 04-Jan. 05: net = minus sales charge / order fee / brokerage fee / securities account fee for investment amount of [1/4 average securities account]

Jan. 05-Jan. 07: gross minus securities account fee for investment amount of [1/4 average account]

Jan. 08-Jan. 09: net = minus redemption fee / order fee / brokerage fee / securities account fee for investment amount of [1/4 average securities account]

Note: The specific return for the investment amount contemplated by you can be calculated using a return calculator available on our website (www.a-bank.de/renditerechner).

C. Curve chart (performance of 100 euro investment expressed in euros)

Grafik 3 BaFin

Jan. 04-Jan. 05: net = minus sales charge / order fee / brokerage fee / securities account fee for investment amount of [1/4 average account]

Jan. 05-Jan. 07: gross minus securities account fee for investment amount of [1/4 average account]

Jan. 08-Jan. 09: net = minus redemption fee / order fee / brokerage fee / securities account fee for investment amount of [1/4 average securities account]

Note: The specific return for the investment amount contemplated by you can be calculated using a return calculator available on our website (www.a-bank.de/renditerechner).

BT 4 Best execution of client orders in accordance with section 33a WpHG

BT 4.1. Exercise of discretion in selecting execution venues and in developing the execution policy

  1. The investment services enterprise selects execution venues at its discretion. The investment services enterprise is obliged to use the discretion granted to it and, when exercising this discretion, to consider all relevant execution venues and all factors that are significant for determining the best possible result. The different execution venues shall be compared and assessed using uniform and non-discriminatory criteria.
  2. In addition to the criteria listed in section 33a (2) and (3) WpHG, the selection process may take other factors into account in the exercise of discretion, provided that these factors do not conflict with the obligation to obtain the best possible result for the client. In view of this requirement, the investment services enterprise may also consider qualitative factors relating to the execution venues (such as the monitoring of trading by a trading surveillance unit, complaints management and processing, the trading hours of the individual execution venues, the reliability of performance promises, the binding nature of quotes and other price information, the selection of order specifications and execution types, the service and information offering for investors, the type of order book, counterparty risk, reliability of settlement, etc.).
  3. In the retail client business, best execution shall be based on the total consideration paid. The total consideration paid is an extremely important criterion when exercising discretion. Minor differences in the total consideration paid may be disregarded provided that this is clearly justified. The costs to be taken into account when calculating the total consideration paid also include implicit trading costs. Fees and remuneration charged by execution venues as well as clearing and settlement costs may only be included when calculating the total consideration paid if they are passed on to the client.

BT 4.2 Content of the execution policy

  1. The execution policy shall be based on the nature and extent of the investment services business, securities orders and client structure. This applies in particular to the degree of detail and the depth of regulation in the execution policy.
  2. The execution policy shall specify the key factors that determined the selection of the relevant execution venue and the key execution venues to which securities orders will be transmitted for execution.
  3. The adoption and use of a third party’s execution policy (model policy) is only permitted if it allows the investment services enterprise to comply with its obligation to ensure best execution of securities orders. Among other things, this requires that the criteria used as a basis for developing the model policy can be applied to the investment services enterprise’s business model. This applies in particular to the client structure, the securities traded, the average order size, the pricing model or the costs billed to the client for executing securities orders.

BT 4.3 Assessment procedure and review of the execution policy

  1. The requirements for the method used to determine the execution venues that provide the best possible results (assessment procedure) are defined according to the nature and extent of the investment services business conducted by the investment services enterprise.
  2. It is recommended that the assessment procedure be implemented using current and meaningful market data. The same applies to the annual review of the enterprise’s execution policy. It is recommended that the enterprise examine whether the execution of securities orders at another trading venue would have led to better execution using meaningful random samples (back testing). If the assessment procedure or the random sampling examination allows the use of non-binding price information in the review of the execution policy, the investment services enterprise shall also examine whether orders are regularly executed at the bid and offer prices prevailing at the time the orders were placed.
  3. If significant changes in the enterprise’s business model or in the market environment take place during the year, the investment services enterprise shall review its execution policy in a timely manner and adapt it if necessary.
  4. If the investment services enterprise uses a third party’s model policy, the execution policy may also be assessed and reviewed by the third party. In this case, the investment services enterprise shall verify that the third party properly performs the tasks assigned to it. The investment services enterprise may have this confirmed by an auditor.

BT 4.4 Transmission of securities orders for execution by another investment services enterprise

  1. The minimum requirements for investment services enterprises that transmit client orders to another investment services enterprise for execution or that provide portfolio management services without executing the orders or decisions themselves are contained in section 33a (8) WpHG. In its execution policy, the investment services enterprise shall determine and select the investment services enterprises that are commissioned to execute securities orders for each group of financial instruments (selection policy) in accordance with the criteria specified in section 33a (2) and (3) WpHG. The main investment services enterprises that are commissioned to execute securities orders shall be named in the selection policy.
  2. The investment services enterprise that is commissioned to execute securities orders shall be selected in particular on the basis of its execution policy. The commissioning enterprise shall examine whether the execution policy of the commissioned investment services enterprise ensures best execution of securities orders and adequately reflects client interests.
  3. As part of the regular monitoring of best order execution, the investment services enterprise shall examine whether the investment services enterprise commissioned to execute securities orders is executing the orders in accordance with the execution policy of the commissioned investment services enterprise, and whether execution via this investment services enterprise permanently ensures the best execution of securities orders. As part of the monitoring activities, the actual execution of securities orders shall be compared with the execution policy of the commissioned investment services enterprise on a random sampling basis.
  4. If the investment services enterprise concludes as a result of its review that the execution policy of the commissioned investment services enterprise no longer ensures best execution, the investment services enterprise shall either transmit the orders to another investment services enterprise for best execution or issue an instruction to the current investment services enterprise with regard to the execution venue.
  5. The investment services enterprise is not obliged to select another investment services enterprise to execute the securities orders if the selection was made by the client itself, for example if the client has selected the enterprise maintaining the securities account via which the securities transactions shall be executed as part of the investment services provided by an asset manager for the client. In this case, too, the investment services enterprise shall explicitly indicate to its clients that the obligation to ensure best execution does not apply (section 33a (6) no. 2 WpHG) and that best execution of the securities orders cannot be assured.
  6. The investment services enterprise is obliged to draw up its own execution policy in accordance with the requirements specified in BT 4.1 to BT 4.3 of this Circular if the commissioned investment services enterprise has no execution policy or only executes securities orders on the instructions of the transmitting investment services enterprise.

BT 5 Interpretation of certain terms used in section 31 (2) sentence 4 and section 34b WpHG in conjunction with the Financial Analysis Regulation (Finanzanalyseverordnung – FinAnV)

This letter serves as an explanation of the interpretation by BaFin of certain terms that are of particular significance for the application of section 34b WpHG in conjunction with the Financial Analysis Regulation. The contents of section 34b WpHG, the Financial Analysis Regulation and this letter represent minimum requirements. Under the conditions set out in section 34b (4) WpHG, the provisions set forth in section 34b (1), (2) and (5) WpHG and in this letter do not apply to journalists.
Previous interpretive letters of BaFin on section 34b WpHG dated 16 December 2003, 1 September 2005 and 8 February 2006 are replaced by this letter.

BT 5.1. Analysis of financial instruments

  1. The Securities Trading Act and the Financial Analysis Regulation contain two different concepts of ‘financial analysis’ which, for the purposes of this letter, are referred to below as ‘financial analyses in the narrower sense’ and ‘financial analyses in the broader sense’.
  2. The concept of ‘financial analysis in the narrower sense’ is defined in section 34b (1) sentence 1 WpHG. According to this definition, financial analysis in the narrower sense is constituted by
    • information concerning financial instruments within the meaning of section 34b (3) WpHG in conjunction with section 2 (2b) WpHG or their issuers
    • that contains a direct or indirect recommendation for a particular investment decision and
    • is intended to be made available to an unspecified group of individuals.

    It is of no importance how the analysis is presented (in written or electronic form, or in some other way, e.g. in the context of public presentations).
  3. The concept of ‘financial analysis’ is also used in a wider sense in section 34b (5) sentence 3 WpHG and in section 5a (1) sentence 1 FinAnV and includes
    • investment services enterprises' financial analyses of financial instruments within the meaning of section 2 (2b) WpHG (excluding the restriction defined in section 34b (3) WpHG) or their issuers
    • where such analyses are intended or likely to be distributed to clients or to the public.

    Consequently, the provisions relating to financial analyses in the broader sense only apply to investment services enterprises. These enterprises must check whether the analysis in question might be defined as financial analysis in the broader sense in cases where it is not financial analysis in the narrower sense, either because the analysis does not refer to a financial instrument within the meaning of section 34b (3) WpHG, or because the analysis is not intended to be made available to an unspecified group of individuals. An analysis is considered a financial analysis in the broader sense if it relates to a financial instrument within the meaning of section 2 (2b) WpHG and/or is intended to be distributed to the clients of an investment services enterprise.
    Because the production, distribution or communication of financial analyses constitutes an ancillary investment service within the meaning of section 2 (3a) no. 5 WpHG, financial analyses produced by investment services enterprises are subject to the general provisions outlined in Part 6 of the WpHG to the extent that these provisions can be applied to financial analyses. This does not affect the existing legal requirements placed on financial analyses in the narrower sense.


BT 5.2 Information concerning financial instruments or their issuers containing a direct or indirect recommendation for a particular investment decision

  1. A financial analysis must
    • comprise the preparation of information concerning one or more financial instruments or their issuer(s) and
    • contain an investment recommendation for a particular investment decision (e.g. “Buy”/ “Sell” or a price target).
  2. In order to be considered information concerning a financial instrument or its issuer containing a recommendation, it must, in addition to contain a recommendation and taking full account of all relevant circumstances, convey the impression that the financial instrument or issuer concerned has been the subject of detailed consideration. The financial instrument or its issuer must not necessarily have been the subject of examination. In particular, it is not mandatory to analyse and evaluate an enterprise's financial or trading data. It is generally sufficient that the impression of such consideration is delivered via facts, opinions and/or comments relating to the recommendation, or – in exceptional cases – via the presentation of or the context in which the recommendation is made.
  3. A mere recommendation that does not convey the impression that the financial instrument or the issuer has been the subject of detailed consideration, however, does not qualify as a financial analysis. This should be distinguished from a situation in which a mere recommendation is to be regarded as a summary of a financial analysis produced by a third party pursuant to section 34b (2) WpHG.
  4. In line with the prerequisites set out above, a technical analysis of a financial instrument deriving projections for future performance from past price movements, or a sector report covering several enterprises and containing a recommendation, may also be considered a financial analysis.
  5. A financial analysis is not, however, constituted by
    • the rendering of a pure price chart that does not project the future price performance;
    • the analysis of an index;
    • a report analysing the economic, political or market environment that does not contain recommendations for specific financial instruments;
    •a sample portfolio which does not offer additional information on the financial instruments included or their issuers that would convey the impression of detailed consideration;
    • a portfolio recommendation referring to regions or sectors that does not refer to individual financial instruments or their issuers;
    • a warrant calculator or a similar tool that is used to evaluate statistical data on the basis of generally accepted algorithms;
    • a pure product description;
    • a company description that does not include a direct or indirect recommendation for a particular investment decision;
    • pure marketing material (e.g. advertising or other informational material used in marketing), unless it gives the impression of unbiased information or constitutes marketing communication within the meaning of section 31 (2) sentence 4 no. 2 WpHG (see below);
    • the pure dissemination of company news without giving a direct or indirect recommendation for a particular investment decision;
    • information prepared to fulfil statutory obligations (e.g. ad hoc notifications pursuant to section 15 WpHG, stock exchange admission or sales prospectuses, information on domestic or foreign asset management companies pursuant to the Investment Act);
    • an investment recommendation which does not give the impression that a financial instrument or its issuer has been the subject of detailed consideration ("We recommend buying X stocks");
    • a simple summary of recommendations made by the enterprise itself (recommendation lists); section 34b (2) WpHG must, however, be observed in relation to lists containing summaries of third-party financial analyses.
  6. A financial analysis must always contain a recommendation for a financial instrument or its issuer (see (a) above). Such recommendation for a particular investment decision can be made directly, for instance in the form of a recommendation to buy, hold or sell particular financial instruments, or indirectly, e.g. by defining particular price targets.
  7. For an indirect recommendation for a particular investment decision, it is sufficient, but also necessary, that if the statement is considered as a whole, it clearly expresses how the current or future price or value of a financial instrument is assessed. An evaluation which presents or assesses past events, without offering an opinion on the current or future price or value of the financial instrument, is not an indirect investment recommendation (e.g. ranking lists based on a financial instrument’s past performance).
    Correspondingly, explanations referring to transactions completed in the context of individual asset or fund management would not generally be regarded as an indirect investment recommendation.
  8. In line with the prerequisites set out above, the following statements may constitute indirect recommendations:
    • "The stock is overvalued"
    • "The bond is undervalued"
    • "The investment fund/certificate has high recovery potential"
    • "Outperformer"
    • "Underperformer"
    • "Bullish stocks"
    • "Bearish stocks"
    • "Our best performers"
    • "Tip of the day"
    • "Trading idea"
    • "Top player"

BT 5.3 Intended to be made available to an unspecified group of individuals

  1. In order to qualify as financial analysis within the meaning of section 34b (1) sentence 1 WpHG, the financial analysis must be intended to be made available – possibly by a third party right from the outset – to an unspecified group of individuals. This is the case if the financial analysis is not designed to serve purely internal purposes, but is also intended for distribution channels or for the public as defined in Directives 2003/6/EC, 2003/125/EC and 2006/73/EC. A distribution channel is a channel which makes the financial analysis available to such a large number of people that it is tantamount to public distribution (e.g. copies displayed in offices, the internet, other media, but also correspondingly extensive postal or electronic mailing lists).
  2. A recommendation that was prepared as part of specific investment advice based on the individual requirements of a particular client does not constitute a financial analysis. A recommendation given when providing investment advice cannot be considered to have been tailored to the client's individual circumstances, taking into account for example the client’s personal, financial or tax situation, only because it was provided to selected clients, for example in conjunction with a personal letter. The decisive factor is that the recommendation was prepared on the basis of the individual situation of the particular client or group of clients from the outset, resulting in a personal recommendation.
  3. Informal short-term investment recommendations that stem from the sales or trading department of an investment services enterprise and are communicated to clients (e.g. sales and morning notes) do not constitute financial analyses in the narrower sense. This is only the case, however, if they are not released or intended to be made available to the public or to a large number of people, via distribution channels or the media for instance (see above). The title of such information is immaterial with regard to its classification. The question of whether informal short-term investment recommendations that stem from the trading or sales department of an investment services enterprise and are communicated to clients should be regarded as financial analyses in the broader sense needs to be clarified at European level in order to ensure a level playing field for all market participants. Until such clarification is forthcoming, the arrangements currently applied to financial analyses in the narrower sense will also be applied to financial analyses in the broader sense until further notice.

BT 5.4 Public distribution and communication

  1. A financial analysis is publicly distributed pursuant to section 34b (1) sentence 2 and (5) sentence 3 WpHG if it is made available to the public or to a large number of people (e.g. via postal delivery, via e-mail or by posting it on the internet). The existence of a disclaimer does not serve to prevent a financial analysis from being publicly distributed.
  2. In the context of public distribution it is immaterial whether the recipients had or could have had access to the financial analysis via other sources.
  3. Financial analysis is deemed to have been communicated if it is made available by someone other than the person responsible for producing the analysis. The number of recipients of the financial analysis does not determine whether or not it has been communicated.
  4. The party communicating a financial analysis can rely on the enterprise responsible for producing the analysis having fully complied with its obligations under section 34b WpHG and the Financial Analysis Regulation provided that the enterprise responsible for producing the analysis is a German enterprise supervised by BaFin. This can be assumed in the case of investment services enterprises and persons who have notified BaFin of their activities pursuant to section 34c WpHG. This also applies to journalists if they have either notified BaFin of their activities pursuant to section 34c WpHG or, pursuant to section 34b (4) WpHG, are subject to self-regulation comparable to the provisions set forth in section 34b (1), (2) and (5) and in section 34c WpHG. Such notification and/or self-regulation can be assumed to exist unless there is evidence to the contrary.
  5. The provisions described above do not apply to cases where the party producing the analysis has evidently not complied with the requirements placed on financial analyses because, for example, the analysis is explicitly only intended to be used for internal purposes within a corporate group or financial services network.
  6. The communication of financial analyses that have been produced in another member state of the European Economic Area (EEA) is subject to the provisions described above, provided that the enterprise responsible for producing the analysis is supervised in the member state concerned. The provisions described above apply mutatis mutandis to financial analyses that have been produced outside the EEA if, before being communicated or publicly distributed in Germany, the financial analysis has already been communicated or publicly distributed in another EEA member state and these activities are supervised in the member state concerned.
  7. These provisions do not apply in cases where the financial analysis has not been produced, communicated or previously publicly distributed in another EEA member state in accordance with the aforementioned principles. As in this case there is no way of ensuring that compliance with European provisions will be monitored by another competent authority, the party that communicates or publicly distributes the financial analysis in Germany is responsible for doing its utmost to perform its own checks to establish whether the financial analysis has been produced in compliance with the provisions of section 34b WpHG and the Financial Analysis Regulation. If this is not the case, the financial analysis is not allowed to be communicated or publicly distributed in Germany (section 34b (1) sentence 2 WpHG).

BT 5.5 Marketing communications

  1. Marketing communications within the meaning of section 31 (2) sentence 4 no. 2 WpHG are financial analyses in either the narrower or broader sense that are distributed by investment services enterprises and whose production is either wholly or partially non-compliant with the organisational provisions of section 33b (5) and (6) WpHG and of section 34b (5) WpHG in conjunction with section 5a FinAnV or with comparable foreign provisions. In return for their non-compliance with these organisational provisions, section 31 (2) sentence 4 no. 2 WpHG states that such financial analyses must be clearly identified as marketing communications and contain a statement that they do not meet all legal requirements designed to guarantee the impartiality of financial analyses and that they are not subject to any prohibition on dealing ahead of the publication of financial analyses (see section 33b (5) and (6) WpHG). With the exception of the aforementioned organisational provisions, however, all other provisions concerning the fair production and presentation of financial analyses and the disclosure of conflicts of interest apply to the extent that they are pertinent in each case.
  2. The aforementioned provisions do not apply to material that is intended purely for advertising purposes because this does not constitute financial analysis (see section 2. (a) above). This advertising material does not have to be clearly identified as such or contain a statement as described in section 31 (2) sentence 4 no. 2 WpHG.

BT 5.6 Interpretation of other legal terms

  1. The issue of how to interpret some other undefined legal terms used in section 34b WpHG and in the Financial Analysis Regulation is also still unresolved. The main problems that arise here are
    • the definition of the term ‘affiliated enterprise’;
    • the quantification of the ‘major shareholding’ mentioned in section 5 (3) no. 1 FinAnV;
    • the issue of what items should be disclosed as ‘other significant financial interests’ pursuant to section 5 (3) no. 2 (e) FinAnV; and
    • the question of what period constitutes a ‘timely’ collection of the information requiring disclosure pursuant to section 6 (1) sentence 3 FinAnV.
  2. Having carefully considered the various arguments to be taken into account, I have decided not to issue any more general guidance on how to interpret these undefined legal terms in the foreseeable future. Instead, it will be left to the enterprises concerned to find an appropriate solution for the way in which they disclose information based on their individual situation. Each enterprise will therefore be responsible for how it interprets and applies the relevant statutory requirements and for ensuring that it puts in place the necessary arrangements appropriate to its own situation so that it complies with the statutory provisions. This approach is intended to give more responsibility to the enterprises themselves and to make it easier to use analyses of financial instruments across Europe.
    BaFin will be keeping a close eye on these arrangements as part of its supervisory duties.

BT 5.7 Requirements pursuant to section 31d WpHG and payment by issuers of financial analysts' travel expenses and accommodation costs for analysts' meetings and related events

  1. Issuers should not bear the travel expenses or accommodation costs of financial analysts who work for investment services enterprises as this could give rise to potential conflicts of interest.
    Consequently, I presume that most market participants will already have adopted the practice of not allowing issuers to bear analysts' travel expenses and accommodation costs in much the same way as it is no longer acceptable for such issuers to give gifts to financial analysts.

  2. As far as investment services enterprises are concerned, compliance with this best practice is one way of meeting the requirements of section 31d (2) WpHG in conjunction with section 5a (2) no. 2 FinAnV. Bearing in mind Recital (37) of EU Commission Directive 2006/73/EC, it is recommended that all other persons adhere to these principles as well. I would also like to point out in this context that the Society of Investment Professionals in Germany (DVFA) and the German CFA Society (GCFAS) have likewise enshrined these principles in their codes of conduct.

BT 6: Requirements for investment advice minutes under section 34 (2a) WpHG

BT 6.1 Scope of section 34 (2a) WpHG

  1. Provision of the investment advice minutes

    The requirements for the preparation of investment advice minutes are set out in section 34 (2a) WpHG and section 14 (6) WpDVerOV. These provisions require minutes to be prepared whenever investment advice as defined in section 2 (3) sentence 1 no. 9 WpHG is provided to a retail client. Under section 34 (2a) sentence 2, 2nd half-sentence WpHG, the minutes shall be provided to the client, on paper or in another durable medium, without undue delay16 after the conclusion of the investment advice, and, in any case, prior to the conclusion of a transaction based on the investment advice. The preparation without undue delay and provision of the minutes after conclusion of the investment advice imposes a reasonable burden on the adviser and is provided for by the legislator because it is the only way in which the client can compare the content of the meeting with the client’s own recollection of the meeting.

    The qualification “and, in any case, prior to the conclusion of a transaction based on the investment advice” in section 34 (2a) sentence 2, 2nd half-sentence WpHG clarifies that any transaction following conclusion of the investment advice may only be entered into once the minutes have been provided to the client such that the client has had an opportunity to take note of it. An exception to this principle is permitted under the conditions set out in section 34 (2a) sentence 3 and sentence 4 WpHG, for example if telecommunication media are used to provide the investment advice. No other exceptions are permitted.

    The qualification “and, in any case, prior to the conclusion of a transaction based on the investment advice” in section 34 (2a) sentence 2, 2nd half-sentence WpHG does not restrict the obligation to provide the minutes to cases in which a transaction is entered into; on the contrary, the minutes must always be provided to the client after conclusion of the investment advice, irrespective of whether or not a transaction is entered into. This also applies to persons who are not yet clients of the investment services enterprise.

    If the investment advice is provided to an authorised representative, the minutes shall be provided to that authorised representative, i.e. to the person who participated in the meeting.

  2. Organisational requirements


    The general organisational requirements imposed on investment services enterprises in AT 6 item 1 and item 2 of the MaComp include the obligation to put in place appropriate and effective organisational arrangements so as to ensure compliance with the obligation to prepare and provide investment advice minutes provided to retail clients, and to monitor and regularly assess the appropriateness and effectiveness of these arrangements. The organisational arrangements must be designed in such a way as to ensure compliance with the obligation to prepare and provide investment advice minutes in all of the scenarios set out in section 34 (2a) WpHG, and thus also in cases where the provision of investment advice does not lead to a transaction being entered into. This requires investment services enterprises to put in place organisational arrangements in connection with the provision of investment advice that, as part of the general control activities, also enable effective control activities to be implemented in respect of compliance with the obligations set out in section 34 (2a) WpHG in the case of investment advice that is not followed by a transaction being entered into, and thus also in the case of persons who are not clients of the investment services enterprise. The organisational arrangements must be designed in such a way as to ensure that all individual meetings with potential new clients concerning investments in financial instruments that do not lead to a transaction being entered into must be documented in the enterprise, for example in appointments diaries or lists, so as to allow a comparison with the investment advice minutes that have been prepared (cf. in this regard BaFin’s letter on the provision of investment advice to interested persons dated 1. November 2010 (only available in German).

BT 6.2: Content of the investment advice minutes under section 14 (6) WpDVerOV

  1. Reason for the investment advice


    Information on the reasons for the investment advice must indicate the party at whose initiative the meeting was held. For this reason, the minutes must state specifically whether the initiative came from the investment services enterprise or from the client. Additionally, the information provided on the reasons for the meeting must indicate clearly whether the investment services enterprise instructed its employees to approach clients regarding certain financial instruments. This refers to sales and marketing measures that are designed to promote the sale of certain financial instruments or certain types of financial instruments. An appropriately pre-formulated reason for the meeting should be incorporated into the form for the minutes in order to document centralised sales and marketing measures. Information on the reasons for the investment advice must also indicate whether the client is seeking advice linked to a special personal situation (such as starting working life or a marriage/divorce) or because of information that the client has received from a third party, such as from the press or advertisements, and the client notifies this to the adviser.

  2. Background information for the investment advice


    The detailed information about the client’s personal situation that underlies the investment advice comprises firstly the information about the client’s financial situation and the client’s knowledge and experience with respect to transactions in specific types of financial instruments or investment services that is required to be obtained pursuant to section 31 (4) sentence 1 WpHG. Additional information provided by the client about their personal situation must also be recorded, where such information is relevant for the investment advice. To ensure that the information is recorded, the investment services enterprise must incorporate in the form for the minutes a corresponding free text field for recording such information. To allow the client to check that the information about their personal situation contained in the investment advice minutes is complete, the corresponding free text field must also be visible in the version provided to the client. The client must be able to establish from the heading of this free text field that additional information about their personal situation can be recorded in this free text field.

  3. Significant concerns of the client
    Information about the significant concerns voiced by the client in connection with the investment advice and the weighting of those concerns comprise firstly the information about the client’s investment objectives to be obtained pursuant to section 31 (4) sentence 1 WpHG. However, the investment services enterprise is also required to record supplementary additional individual information provided by the client about their significant concerns and the weighting of those concerns. If there is a conflict between the concerns voiced by the client (for example if “high return” and “high level of security” are both given as investment objectives), the investment advice minutes must document how the customer concerns are weighted. Records of the information provided by the client about their concerns and the weighting of those concerns must also indicate whether the client changed their concerns and the weighting of those concerns during the course of the investment advice. This will be the case, for example, if the client initially considered a certain investment or investments in a certain risk class, but then decided on another investment or an investment in another risk class, and this also represents a change in the client’s concerns. To ensure that the information is recorded, the investment services enterprise must incorporate in the form for the minutes a corresponding free text field for recording such information. To allow the client to check that the information about their significant concerns voiced in connection with the investment advice and the weighting of those concerns that is contained in the investment advice minutes is complete, the corresponding free text field must be visible to the client even in the case of a computer-generated report. The client must be able to establish from the heading of this free text field that additional information about their concerns and the weighting of those concerns can be recorded in this free text field.


    A single free text field with an appropriate heading can be used to document supplementary information provided by the client about their personal situation and their significant concerns, and the weighting of those concerns.

  4. Reference to other documents


    The investment services enterprise may make reference in the investment advice minutes to documents prepared at an earlier date, for example records of information about the client’s personal situation, including the information to be obtained pursuant to section 31 (4) sentence 1 WpHG, provided that the following conditions are met: based on the reference, a third party must also be in a position to identify the record prepared at an earlier date to which reference is being made; this requires the precise designation and the preparation date of the documents to be stated in the investment advice minutes. In addition, the documents referred to must have been made available to the client on a durable medium and the investment services enterprise must retain the earlier record referred to for the same period for which the investment advice minutes is required to be retained.
    However, including in cases where reference is made to documents prepared at an earlier date, the form for the minutes must allow for the documentation of supplementary information provided by the client about their personal situation and their significant concerns, as well as the weighting of those concerns.

  5. Information about financial instruments and investment services


    The presentation of various investment services shall also be recorded as part of the information on the financial instruments and investment services that are the subject of the investment advice. For example, if the adviser not only recommends the purchase, sale, or holding of specific financial instruments, but also presents financial portfolio management services in the course of the investment advice, this shall be recorded appropriately.

  6. Significant reasons and weighting


    The actual reasons cited by the adviser for the recommendations made must be recorded as information on the significant reasons for the recommendations made in the course of the client meeting. This relates to the principal arguments advanced by the adviser that are designed to convince the client of the adviser’s recommendation, such as a reference to past performance, particular expertise in fund management, special tax structuring, or the safety of the recommended investment.

    To ensure that the information is recorded appropriately, the investment services enterprise must incorporate in the form for the minutes a corresponding free text field for recording this information. To allow the client to check that the information about the reasons actually cited by the adviser for the recommendations given that is contained in the investment advice minutes is complete, the corresponding free text field must be visible to the client even in the case of computer-generated minutes. The client must be able to establish from the heading of this free text field that the reasons actually cited by the adviser for the recommendations given must be recorded in this free text field.

  7. Signature


    Under section 34 (2a) WpHG, the minutes shall be signed by the person providing the investment advice. This requires the minutes to contain either an original or a facsimile signature of the adviser preparing the minutes. The signature may only be provided in facsimile form if technical measures have been implemented to ensure that the signature can only be incorporated, i.e. added to the electronic document, once the minutes have been completed. Merely naming the adviser in the minutes is not sufficient.


    The date and time of completion of the minutes must also be evident in connection with signature of the minutes.

_____________________________________________________

1)References in this Circular to provisions contained in Part 6 of the WpHG are to be understood as references to these provisions including the regulations issued on the basis of these provisions.

2)This Regulation is an immediately effective legislative instrument that does not need to be transposed into German law.

3)Previously, the provisions of sections 31 et seq. WpHG were clarified from time to time in greater detail by the Guideline of the Federal Securities Supervisory Office (Bundesaufsichtsamt für den Wertpapierhandel) on the details concerning the organisational duties of investment services enterprises pursuant to section 33 (1) of the Securities Trading Act of 25 October 1999 (‘Compliance Guideline’), the Guideline pursuant to Section 35 (6) of the Securities Trading Act (WpHG) on the details concerning Sections 31 and 32 WpHG relating to the commission business, proprietary trading on behalf of a third party, and agency business of investment services institutions of 23 August 2001 (‘Guideline on the Rules of Conduct’) and the Announcement of the Federal Banking Supervisory Office (Bundesaufsichtsamt für das Kreditwesen) and the Federal Securities Supervisory Office (Bundesaufsichtsamt für den Wertpapierhandel) on standards for the rules of conduct for employees of credit institutions and financial services institutions concerning personal account dealing of 7 June 2000 (‘Guiding Principles for Personal Account Dealing’). These administrative regulations were abolished by letters in the period from 23 October 2007 to 1 November 2007.

4)The InvMaRisk was not completed at the time the MaComp was published.

5)If the investment services enterprise has established an audit committee, the enterprise shall alternatively ensure that the chairperson of the audit committee can obtain the information.
6)For example, churning control is typically performed directly by compliance function staff.

7)Under section 25a (1) sentence 1 KWG, this requirement applies to all institutions defined in section 1 (1b) KWG, but not to branches in accordance with section 53b (1) KWG.

8)This presupposes that the addressee’s individual financial situation is taken into consideration (cf. Joint information sheet issued by BaFin and the Deutsche Bundesbank on the new statutory definition of investment advice of 12 November 2007).

9)Cf. in this regard BaFin’s letter of 21 December 2007 on the interpretation of individual terms of section 31 (2) sentence 4, section 34b WpHG in conjunction with the Regulation governing the Analysis of Financial Instruments.

10)Cf. recitals 52, 55 and 56 of Directive 2006/73/EC of 10 August 2006.
11)Cf. Article 27 (2) Directive 2006/73/EC.
12)Cf. Article 27 (2) Directive 2006/73/EC.
13)Cf. Article 27 (2) Directive 2006/73/EC.
14)Cf. Article 27 (2) Directive 2006/73/EC.
15)Unlike section 4 (4) sentence 1 WpDVerOV, section 4 (5) sentence 1 WpDVerOV does not permit investment services as an item of presentation.

16)Note: “undue” is defined by section 121 (1) of the German Civil Code (Bürgerliches Gesetzbuch – BGB) as “without culpable delay” (see English translation of the BGB published by the German Federal Ministry of Justice (http://bundesrecht.juris.de/englisch_bgb/index.html).

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Please note:Ger­man ver­sion is bind­ing

This translation is furnished for information purposes only and may refer to an older version of the text. The original German text is binding in all respects.