BaFin

Topic Compliance Circular 4/2013 (WA) - Interpretation of statutory requirements for preparation of information sheets pursuant to sections 31(3a) WpHG, 5a WpDVerOV

Reference number WA 36 – Wp 2002 – 2012/0003Date: 11.11.2013

Circular 4/2013 (WA) - Interpretation of statutory requirements for preparation of information sheets pursuant to section 31 (3a) of the German Securities Trading Act (WertpapierhandelsgesetzWpHG) / section 5a of the German Investment Services Conduct of Business and Organisation Regulation (Wertpapierdienstleistungs-Verhaltens- und OrganisationsverordnungWpDVerOV)

On this page:

1. General

Pursuant to section 31 (3a) of the German Securities Trading Act (WertpapierhandelsgesetzWpHG), the client, when provided with investment advice, must be given an information sheet concerning every financial instrument to which a buy recommendation of the advisor relates in good time before a transaction in financial instruments is concluded. In the case of clients being provided with information outside an advisory situation, the general requirements of section 31 (2) and (3) of the WpHG apply.

Example:

If information on financial instruments for online banking is posted on the Internet by an investment services enterprise that does not provide investment advice, section 31 (3a) of the WpHG does not apply. For these publications, only the general requirements of section 31 (2) and (3) of the WpHG have to be met.

Section 31 (3a) of the WpHG codifies a public-law obligation for investment services enterprises. The obligation to provide information sheets is not subject to disposition. Only professional clients are exempt pursuant to section 31 (9) sentence 2 of the WpHG. Consequently, retail clients are recipients of the information sheets.

Section 5a of the Investment Services Conduct of Business and Organisation Regulation (Wertpapierdienstleistungs-Verhaltens- und Organisationsverordnung – WpDVerOV) clarifies requirements to be met by the information sheets in terms of their content pursuant to section 31 (3a) of the WpHG and prescribes the minimum data that an information sheet must contain.

Moreover, the content of information sheets must be consistent with section 31 (2) sentence 1 of the WpHG and section 4 of the WpDVerOV. Information sheets likewise form part of the information that investment services enterprises address to clients. This is of particular significance for information exceeding the minimum data pursuant to section 5a (1) nos. 1 to 5 of the WpDVerOV. If e.g. it is expedient to include data on past performance in the information sheets and to consequently represent such data there, this must be effected in accordance with the requirements of section 4 (4) and (5) of the WpDVerOV. Accordingly, the principles of MaComp BT 3 also apply to information sheets pursuant to section 31 (3a) of the WpHG, with the exception of BT 3.2. no. 3 (see below).

The investment services enterprise giving the client advice as a general rule must ensure under its own responsibility that an information sheet used by it complies with the legal requirements. For information sheets procured by third parties, the principles of MaComp BT 3.2. no. 3 do not apply. Preparation of information sheets by third parties first requires a regulation consistent with supervisory legislation that must contain statements on at least the following items:

The company preparing the information sheets warrants to the user of the information sheets that these are standard-compliant information sheets prepared pursuant to the requirements of the Supervisory Authority. It moreover grants the company using the information sheets, its auditor pursuant to section 36 (1) and (3) and section 35 (1) of the WpHG as well as the Supervisory Authority all information rights and rights of audit. Requested information shall be provided, as well as requested documents made available, without undue delay.

The company using the information sheets prepared by a third party must reasonably manage and monitor the risks associated with their preparation. As a general rule this would mean that the user of information sheets obtained from third parties would have to perform all required monitoring measures itself. In this regard, two exceptions are possible:

  • The institution using information sheets of a third party may, as a rule, waive performance of its own audit activities if the entity preparing information sheets has in place an internal auditing function in compliance with the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement – MaRisk) and promptly provides the user of the information sheets those portions of the auditing reports relating to the preparation of the information sheets.
  • By way of alternative, an audit certificate of an auditor/auditing firm for the auditing field “Preparation of information sheets pursuant to section 31 (3a) of the WpHG” may be sent. The certificate must satisfy the professional standards customary for the activity of auditors/auditing firms, e.g. IDW PS 951.

2. Timely provision

The information sheets pursuant to section 31 (3a) of the WpHG must be provided in good time before the transaction is concluded, i.e. in any case before the client places the buy order. The clients must be allowed a reasonable timeframe within which to apprise themselves of the information contained in the information sheet before making their investment decision. The scope of the timeframe will be determined by the circumstances of the individual case and must take various aspects into account, such as the complexity of the product. It is therefore not possible to lay down a defined time span as being generally binding.

The investment services enterprise may provide the client with the information sheets either in printed form or as an electronic document. If transmission by electronic means has been agreed, the information sheets e.g. may be sent by e-mail or posted to the client’s electronic mailbox kept with the investment services enterprise.

The information sheets can also be made available by providing an exact link by which they can be accessed on the Internet. In this case it must be ensured that the client retains unrestricted control over the information sheet serving as the basis for the advice. This means that the client must be able to print out and save the electronic document. This is ensured e.g. by means of a PDF document.

2.1. Investment advice provided to persons present

As a rule, the information sheet pursuant to section 31 (3a) of the WpHG is handed out in printed form in the case of investment advice being provided to persons present. This in any case satisfies the duty defined in section 31 (3a) of the WpHG.

2.2. Investment advice provided to persons absent

If the advice is not provided on site, it is not possible for the client to be provided with the information sheet simultaneously in physical form. That carries the risk that an order for the purchase of financial instruments can be executed only with a time delay, for example after the information sheet has been sent by post.

This can be avoided if clients

a) are provided with the information sheet beforehand by post or electronic means and apprise themselves of the contents thereof in advance, as long as the principles of proper investment and investor advice are still observed;

or

b) are provided with the information sheet during the informational meeting electronically and apprise themselves of its contents during such time.

3. Requirements to be met by information sheets

3.1. General requirements

The following general requirements must be observed when preparing information sheets:

3.1.1. Clear identification

The prohibition on providing misleading information requires a distinction to be made between the different types of information received by the client. Both financial services enterprises and clients have an interest in information sheets pursuant to section 31 (3a) of the WpHG being clearly and easily identifiable as such. Headers such as “Information sheet pursuant to section 31 (3a) of the German Securities Trading Act” or “Product information sheet pursuant to the German Securities Trading Act” clearly distinguish information sheets pursuant to section 31 (3a) of the WpHG from other types of information.

If an investment services enterprise entitles information addressed to a client as “Product information sheet pursuant to the German Securities Trading Act” or “Information sheet pursuant to section 31 (3a) of the German Securities Trading Act”, such information must satisfy all requirements set out in section 31 (3a) of the WpHG, since otherwise such title has to be qualified as misleading.

3.1.2. Recipient horizon and comprehensibility

Comprehensibility of the information sheet must be defined by the recipient horizon of a retail client. As a rule, no special prior linguistic and specialist knowledge on the part of the client may be assumed as a prerequisite for understanding financial instruments. What is decisive is the recipient horizon of reasonably well-informed investors.

Pursuant to section 31 (3a) of the WpHG, the information sheets must be “easily understandable”. Since these are addressed to the reasonably well-informed investor, it is normally necessary to explain uncommon abbreviations to such group of persons. Complex sentence structures are to be avoided. The mere reiteration of financial-mathematical formulas is no substitute for a generally comprehensible description of how a financial instrument works.

Examples of impermissible wording:

  • "Investors bear the risk of the issuer’s financial situation deteriorating and of the issuer being subjected to a reorganisation procedure or transfer order, or of insolvency proceedings being instituted on its assets – and of payments due under the certificates therefore not being made, or not being made fully or on time."
  • "The x certificate was designed as a recovery product for the holders of the y certificate."

Examples of abbreviations and unknown terms not permissible without explanations being provided:

  • "Settlement currency: NOK"
  • "Stock exchange listing: EURO MTF"
  • "Style of exercise: Bermudan"

The only exceptional case in which persons or entities other than reasonably well-informed investors may be addressed is when the information sheet is identified as being suitable for only certain groups of recipients. Such identification must be clearly emphasised in a conspicuous place in the information sheet.

Example:

"This Information Sheet is directed exclusively to investors possessing the requisite experience or knowledge relating to transactions with warrants."

As a result, the relevant financial instrument may not be recommended to investors other than the specified group of recipients.

3.1.3. No false or misleading information

Pursuant to section 31 (3a) sentence 2 of the WpHG, information provided in the information sheet may be neither false nor misleading. Any exclusions of correctness of or responsibility for the information sheet are impermissible because they may give the impression with clients that the correctness of the information provided to them is in doubt or that such information is not correct at all.

3.1.4. Consistency with the prospectus

Pursuant to section 31 (3a) sentence 2, second half-sentence of the WpHG, the information sheet must be “in accordance with the information given in the prospectus”. If a base prospectus/final terms exist, the information in the information sheet may not give the impression of trivialising the prospectus or the final terms, nor may they contradict the same.

If the prospectus defines certain addressed groups of persons and entities or requirements to be met in terms of the client’s objective factual knowledge and/or experience, this must be deemed to be essential information and included in the information sheet.

A complete reproduction of all information contained in the prospectus is not required since the information sheets are limited in their scope and may contain only “essential” information.

3.1.5. Up-to-datedness of the information

The information contained in the information sheets must be up to date so that investors are not misled when making their investment decisions. In keeping with the principle of presenting information in a way that is fair and not misleading, the information sheets pursuant to section 31 (3a) of the WpHG must therefore be up to date, which in turn entails a duty to update them. It is not possible to lay down set intervals for updating because this depends on the type of financial instrument as well as the specific capital market situation. In the event of significant changes, the information sheet must be updated without undue delay (example: the issuer of share XY has filed for insolvency).

The requirement to present information in a way that is clear, fair and not misleading as set out in section 31 (2) sentence 1 of the WpHG means that an easily recognisable reference to the date of the information needs to be provided, since it is only in this way that its up-to-dateness can be verified quickly and without significant additional work.

It is not permissible to limit or exclude the up-to-dateness of the information provided in the information sheet.

Example of an impermissible limitation:

"This Product Information Sheet reflects the status at the time the document was prepared. It may be outdated by reason of future developments without the document having been amended."

The securities investment enterprise’s duty to update the information sheet ends once provision of investment advice has been concluded. After conclusion of provision of investment advice, there is no requirement to point out to the client that the information sheet has been updated. This does not apply in cases where repeated investment advice on one and the same financial instrument is provided. The investment advisor is not automatically released from the duty to provide an information sheet, but instead must verify whether an updated information sheet has to be made available based on more recent information. For advice provided on a repeated basis, the obligation in any case does not apply where the client was already provided with an information sheet and such information sheet is still up to date. It is advisable to document such fact in the investment advice minutes.

3.1.6. Prohibition on promotional information and other information provided for purposes other than those of the legislation

Pursuant to section 5a (1) sentence 3, second half-sentence of the WpDVerOV, the information sheets may not contain any promotional or other information not serving the purposes of the legislation.

Ratings and the use of adjectives of a promotional character are therefore impermissible.

Example of permissible wording:

"Interest rate of x% p.a."

Example of impermissible wording:

"Attractive interest rate of x% p.a."

Information on ethical, social and environmental matters may not be used for promotional purposes and are only permissible if they present essential characteristics of the product and the criteria forming the basis of such statements are stated and explained.

Example:

In the case of a certificate for a sustainability index it must be stated how "sustainability" is defined by the issuer of the certificate.

Neither may the information sheet contain information on a client’s investment orientation.

Example of impermissible information:

"This product is suitable for risk-tolerant investors."

The terms “risk-tolerant”, “risk-averse”, etc. currently are not used uniformly throughout the industry. As a result, this might impair comparability of the information sheets for the investor. Until an industry-wide standard has been developed, information on a client’s investment orientation cannot be deemed expedient for the purposes of the legislation.

A reference to BaFin in the information sheet as the Supervisory Authority for investment services enterprises is not permissible. This might create the impression with investors that each information sheet has been verified by the Supervisory Authority beforehand.

3.2. Specific requirements in terms of content

Pursuant to section 5a (1) sentence 2 of the WpDVerOV, the information sheet must contain the essential information regarding the respective financial instrument in such clear and easily understandable terms so as to enable the client in particular to assess the type of financial instrument (3.2.1.), its functioning (3.2.2.), the risks associated with it (3.2.3.), the prospects of the principal being repaid and the prospects of income being generated under various market conditions (3.2.4.), and the costs involved in the investment (3.2.5.) so that the client can make the best possible comparison with the characteristics of other financial instruments.

3.2.1. Type of financial instrument (section 5a (1) sentence 2 no. 1 of the WpDVerOV)

At the beginning of the information sheet, it is first necessary to specify the product class (e.g. share, convertible bond, bonus certificate, etc.). To ensure accurate identification, the German Securities Identification Number (WKN) and the International Securities Identification Number (ISIN) must be stated in addition. In the case of financial instruments that are not issued with such information (such as contracts for difference, swap contracts), all information necessary to accurately identify the financial instrument must be stated. The issuer of the financial instrument must also be specified. To make it easier for readers to access additional information, a reference to the sector and website of the issuer of the financial instrument must be provided. Also to be stated is the market segment in which the financial instrument is traded, and in the case of shares their type and whether they are listed on a generally known market index (such as DAX or M-DAX). In this way investors are provided with indications for assessing the liquidity of the financial instrument.

Not included in the description of the type of a financial instrument is information for which separate sub-items are provided in section 5a (1) of the WpDVerOV, e.g. risks or costs.

3.2.2. Functioning of financial instrument (section 5a (1) sentence 2 no. 2 of the WpDVerOV)

After information has been provided on the type of the financial instrument, a general description is to be given on how it works. This must also include product specifications. The description may not confine itself merely to the level of the overall product class.

There are two ways in which to provide an adequate description:

a) either by providing a general description of the functioning followed by a separate enumeration of product-specific data; or

b) by linking the description of the financial instrument’s functioning to the product-specific data.

Examples of permissible wording:

  • Bond with a fixed interest rate
    Re. a)
    "The product is a bond with a fixed term and fixed interest rate. The investor is entitled to an annual fixed interest payment for the term on the nominal amount of the bond. On the maturity date, the investment principal is repaid at the nominal amount of 100%.
    Product data: Issuer: bank A, interest rate: x% p.a. with reference to the nominal value, term: until (date) [further information]."
  • Re. b)
    "XY bond is a bearer bond of bank A with a term running until (date). The annual interest rate is x% with reference to the nominal value. [further information]"

Examples of impermissible wording:

  • Share
    An information sheet on an ordinary share in the form of a bearer share contains statements on registered shares. If the information sheet describes a bearer share, details on registered shares are misplaced and thus not permissible.
  • Bearer bond
    "A bearer bond is a bond with a fixed or variable interest rate and a fixed or variable term."

In keeping with the aims of the information sheet, the key data must be stated, e.g. term, interest dates, denomination, possibility of exchanging the underlying or debtor, in some cases repayment of principal at fixed dates, issuer’s termination options, etc.

Stating the product-specific data may not be wholly or partly replaced by a reference to third-party publications.

Example of impermissible reference:

“Product data
Country of origin: USA
Primary trading currency: USD
Stock exchange admission: no
For precise details, please see the publications of the company.”

If the term of the financial instrument is uncertain due to termination options of the issuer, this must be taken into account in the information stated with regard to the term (also in chart representations of the term).

One difficulty presented relates to the representation of product-specific data if such data have not yet been finally defined at the time when the information sheet is made available (e.g. for certificates distributed in the subscription phase and for which certain thresholds materialise only at the end of the subscription phase). In such cases, at least the future event on which such data depend is to be described as specifically as possible.

Example:

"Threshold 2 = closing price of X share on the Frankfurt Stock Exchange on day Y."

In any case, information on relevant product details must not be left out completely merely because they are not yet defined when the investment advice is provided.

3.2.3. Risks associated with the financial instrument (section 5a (1) sentence 2 no. 3 of the WpDVerOV)

3.2.3.1. General remarks

The risks inherent in the recommended financial instrument must be specified and explained.

Examples:

  • A financial instrument is based on a basket of other financial instruments. In this case, the correlation risk must be specified and briefly described.
  • The issuer of a financial instrument based on one or more underlyings may exchange these. In this case the risks arising from this for the investor must be stated and explained.
  • The income of the financial instrument is paid in a foreign currency. In this case, particulars must be provided with regard to the foreign currency risk.
  • The foreign issuer is exposed to the risk of currency export restrictions. In this case the transfer risk must be stated.

The risks specified in the information sheet must be weighted by importance, i.e. the risk of greatest importance for the investor must be specified before risks that are relatively insignificant. A risk is deemed to be insignificant if its realisation for the investor neither results in a significant loss nor has a significant likelihood of occurring.

Example:

In the case of a knock-out certificate near the knock-out event, the risk of such event occurring (assuming issuer’s good credit rating) is the first risk to be specified.

In most cases, however, the issuer risk will probably have to be stated first.

The significance of those risks of importance to the investor may not be diluted by adding excessive amounts of non-essential information. The mere enumeration of risks of no relevance for the financial instrument described in an information sheet is impermissible.

Example of impermissible statement of risks in the case of a bond traded in euros:

“For financial instruments not quoted in euros, a risk of currency exchange-rate losses exists for regular income, sale, redemption or return in each case.”
3.2.3.2. Risk-limiting instruments

If membership in a protection scheme exists, reference may be made to this fact. The reference in this regard must be neutral and objective, and confined to its core statement.

Example of permissible wording:

Bank X is a member of the protection scheme Z. For further information, please visit www.Z.de.

However, the objectivity of such reference is impaired if made immediately after the statements on issuer risk, since that creates the impression with the investor that the issuer risk is diminished by the membership in the protection scheme. Such manner of presentation thus conveys a statement going beyond the objective content of the reference itself.

For this reason, this brief reference must be provided only at a neutral place in the information sheet, for example under the section “Miscellaneous”. Any statements going beyond such abstract reference that merely present the advantages of membership in a protection scheme are promotional in character and thus impermissible.

Example of impermissible wording:

"In addition, the bank, in the event of an economic crisis, will always be in a position in which it can fully meet its legal obligations at all times given the institution protection that has been put in place by the protection scheme."

If guarantee notices/letters of comfort of a third party exist (e.g. by the parent company in favour of a foreign subsidiary), these must be stated in the section “Miscellaneous” and explained in terms of their essential features. Also to be stated are material restrictions for the investor.

3.2.3.3. Issuer’s termination rights

If the issuer is able to terminate a financial instrument early or if repayment of the principal depends on the occurrence of future, unforeseeable events, the resulting risks must be stated and explained.

Example of permissible wording for a certificate with termination right of issuer:

“Since the issuer has a right of early termination, the investment is subject to the risk of the financial instrument being repaid in a capital market situation that is unfavourable for the investor. In that case reinvestment would be possible only on less favourable terms for the investor.”

3.2.4. Prospects of repayment of principal and income under various market conditions (section 5a (1) sentence 2 no. 4 of the WpDVerOV)

3.2.4.1. Market price-determining factors

Investors must first acquire a basic understanding of the impact that capital market developments may have on the investment decisions made by them. This is only possible if they are aware of the factors determining market prices. For that reason, the main price-determining factors must be stated and described in terms of their effects. The description may be provided in the form of a continuous text or in tabular form.

Example of permissible description:
Market interest rate during term Price of bond during term Explanations:
↗ Market interest rate rises ↘ Bond price falls If market interest rate rises, the price of a bond falls.
↘ Market interest rate falls ↗ Bond price rises If market interest rate falls, the price of a bond rises.
→ Market interest rate unchanged → Bond price unchanged In this case the price generally does not change.

Statements on the likelihood of the market price-determining conditions occurring are not required. It is not sufficient to provide a purely abstract listing of various influencing factors.

Examples of impermissible wording:

  • "Factors such as price fluctuations on the equity markets, the company’s business developments, price discount on dividend payment, changes in credit rating and rating adjustments as well as supply and demand may have an impact on the product. However, no statements can be made on the effects of the specific factors."
  • "In times of crisis, price losses on the equity market in general and for an individual stock in particular may occur."
3.2.4.2. Scenario descriptions

With reference to the financial instrument recommended in the investment advice provided, the prospects of the capital employed being repaid and of the expected returns being realised must be described under various market conditions. For this purpose, both sample calculations and chart representations may be used. In a sample calculation, an investment amount deviating from the specific investment amount of the investor may be worked with (with regard to costs, see 3.2.5.).

The description must be balanced. As a rule, three different situations are to be presented for this purpose: a positive, a neutral and a negative scenario. The assumptions on which each of these scenarios is based must be disclosed (such as particulars on the investment period). In addition, the assumptions must be plausible, realistic and suited to the respective financial instrument. As stated under 3.1.5, the example must be updated if its representativeness is significantly restricted or no longer exists (e.g. exchange of reference shares for a certificate; triggering of a bonus threshold event of a certificate if the bonus is thereby forfeited).

The descriptions must take account of the fact that a description in purely gross terms is not compliant with the legislation. This would give the client the incorrect impression that its capital employed is fully participating in a positive performance.

Example of impermissible description of scenarios for a share (particulars on investment term and the costs to be borne by the investor are not provided):

Price: + 20% Return: + 20%
Price: +/- 0% Return: +/- 0%
Price: - 20% Loss: - 20%

Since the costs to be borne by the client have an impact on the success of its investment, a purely gross presentation is misleading. Only net or combined gross-net presentations are representative for the client. For all cost types, the scenario descriptions must be based on realistic cost rates. The cost assumptions made in the scenario descriptions must be disclosed to the client in the information sheet.

In the description of the prospects for repayment of the principal and for returns, it is not permissible to repeat product features and to portray these as a special opportunity.

Example:

In said place of an information sheet on a bond, features such as "fixed interest rate", "high liquidity and flexibility", "investment independent of the equity market" are repeated in point form.

Given the prohibition of advertising in the information sheets, it must be ensured that opportunities are presented neutrally. In the example given above, the statement regarding the “high liquidity” qualifies as a promotional statement. This also holds true for the statement regarding the “fixed interest rate” if the interest rate, though not being dependent on the benchmark rate, may change as a result of other circumstances during the term, such as a relevant clause in the terms of the issue.

3.2.5. Costs associated with the investment (section 5a (1) sentence 2 no. 5 of the WpDVerOV)

The German legislators intended the cost disclosure duty to serve as a warning, since investors can make an investment decision only if they know the cost burdens entailed for them.
It is acceptable to state the costs in the information sheet as institution-specific maximum cost of acquisition as a percentage of the investment amount, supplemented by the specification of a minimum fee in euros if such fee is charged by the institution.

Example:

"On purchase of share A, acquisition costs of up to 1.0% of the price value are payable; the minimum costs normally amount to as much as €50.00".

Since acquisition costs also include sales charges, they must be stated as a percentage of the investment amount. Cost items may also be stated in specific euro amounts.

In the case of ancillary purchasing costs and consequential purchasing costs (e.g. stock exchange fees, custodian costs, selling costs), it is sufficient to provide in the presentation of costs an abstract reference to such costs to be borne by the investor, since at the time of the investment advice being provided these as a rule have not yet been established with the required certainty by reason of the best execution principle, or because custodian costs and selling costs can change over time.

It is impermissible to refrain from stating costs in an information sheet by instead making reference to the schedule of prices and services or to information provided by the investment advisor.

3.3. Other disclosures

The phrase “insbesondere” (“in particular”) in section 5a (1) sentence 2 WpDVerOV leaves room for additional information provided such information is sensible for the investor and expedient for the aim pursued by the legislation. However, the maximum scope of two or three pages may not be exceeded. In practice, particularly disclosures on the availability of the financial instrument as well as on its tax treatment have come to be provided under other disclosures. Particulars on availability are especially advisable during the subscription phase of financial instruments, e.g. regarding the term of the subscription phase, the possibility of early termination, etc.

In the case of a financial instrument with limited liquidity, potential problems in purchasing are to be pointed out. Additionally, potential problems that may be encountered if the financial instrument is later sold are to be specified under the “Risks” item.

4. Period for implementation

The above explanations must be implemented in full by 31 December 2013.

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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.