General principles of European and National regulation of markets in financial instruments

Transcription

1 General principles of European and National regulation of markets in financial instruments Avv. Salvatore Providenti Università di Bergamo

2 Financial services: general framework The integration of financial markets means that capital can be allocated more efficiently and makes for better long term economic performance. The European Union has established a legislative framework geared to strengthening the financial services sector, in particular in order to improve the performance of financial operators and boost liquidity, competition and financial stability. European policy on financial services shares some concerns with that on the free movement of capital when it comes to facilitating, and improving the security of, financial activity. Such issues stem in particular from the cross border character of this activity, but also from the massive growth in services based on new technologies. Financial services policy covers three main sectors: the banking system, insurance and securities. Apart from laying down rules for operators and investors (banks, insurance and securities), the Union also intends to give greater protection to consumers in specific areas such as retail financial services.

3 The four freedom of movement Art of the Treaty on the Functioning of the European Union The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.

4 Financial services: transactions in securities Listing on the Stock Exchange Admission of securities to official stock exchange g listing and information to be published on those securities Equity capital Rights of shareholders in listed companies Transparency of information about issuers of securities Prospectus to be published when securities are offered to the public or admitted to trading Market abuse Credit rating agencies Investment research and financial analysts Investment funds Undertakings for collective investment in transferable securities (UCITS): applicable rules UCITS: organisational requirements and rules of conduct Investment services Markets in financial instruments (MiFID) and investment services Capital adequacy of investment firms and credit institutions Investor compensation schemes

5 Prospectus to be published when securities are offered to the public or admitted to trading: Directive 2003/71/EC of 4 November 2003 (now Directive 2010/73 of 24 november 2010) Obligation to publish a prospectus The Member States do not authorise any offering of securities to the public on their territory unless a prospectus has been published previously, except where an offer of securities: is addressed solely to qualified investors; and/or is addressed to fewer than 150 natural or legal persons other than qualified investors; and/or is addressed to investors who acquire securities for a total consideration of at least EUR per investor, for each separate offer; and/or has a denomination of at least EUR ; and/or has a total value in the EU, over a period of 12 months, of less than EU This Directive therefore provides for derogations. The latter are regulated by technical standards prepared by the European Securities and Markets Authority (ESMA) and adopted by the European Commission. Approval of the prospectus No prospectus can be published until it has been approved by the competent authority of the home Member State. This competent authority must notify the ESMA at the same time as the issuer, the person offering the securities or the person seeking admission to trading on a regulated market, of its decision regarding the approval of the prospectus. This notification must be given within ten working days of the submission of the draft prospectus (twenty working days if the public offer involves securities issued by an issuer who does not have any securities admitted to trading on a regulated market and who has not previously offered securities to the public).

6 Transparency of information about issuers of securities: Directive 2004/109/EC of 15 December 2004 on the harmonisation of transparency requirements about issuers whose securities are admitted to trading on a regulated market (now Directive 2013/50/UE of 22 october 2013) The Directive lays down detailed disclosure requirements: for issuers whose securities are already admitted to trading on a regulated market; to shareholders with voting rights; to natural or legal persons holding voting rights or financial instruments that influence voting rights. Competent authority Each Member State will designate a competent authority responsible in particular for implementing the Directive. Each competent authority shall have all the powers necessary for the performance of its functions, specifically: monitoring of disclosure of timely information by the issuer and publication on its own initiative of information not disclosed within the time limits set; request for further information and documents; verification of compliance with the disclosure requirements, by way of on site inspections; suspension for a maximum of ten days of trading in securities or prohibition of trading on a regulated market if it finds that the disclosure requirements laid down in the Directive have not been met or if it has reasonable grounds for suspecting that those requirements have been infringed.

7 Markets in financial instruments (MiFID) and investment services: Directive2004/39/ of 21April 2004 on markets in financial instruments (now MIFID2 Directive n. 2014/65 of and MIFIR Regulation n. 600/2014 of , applicable as of ) OLD REGIME The Directive requires the Member States to harmonise the rules governing investment services and activities. To that end, the Member States must set up an authorisation system enabling investment firms to operate throughout the EU. These firms must be registered and the register must be accessible to the public. Each authorisation is notified to the European Securities and Markets Authority (ESMA). Investor protection The Directive will considerably enhance investor protection by setting business of conduct rules for providing investment services to clients and minimum standards for the mandate and powers that national competent authorities must have at their disposal. It also establishes effective mechanisms for real time cooperation in investigating and prosecuting breaches of the rules. Appointing competent authorities Member States must appoint their competent authorities and send the necessary information to the Commission, ESMA and the competent authorities of the other Member States. The competent authorities act as a point of contact in the Member States. ESMA keeps a list of these authorities up to date. These authorities are required to cooperate closely with ESMA

8 Market abuse: Before Directive 2003/6/EC of 28 January 2003 on insider dealing and market manipulation (MAD) Now (applicable as of 3 July) Market Abuse Regulation (MAR) n. 596 of 16 April 2014 and Market Abuse Directive (MAD2) n. 56 of 16 April 2014 on criminal sanctions for market abuse A revamped EU legal framework, applicable as of 3 July, will ensure even more efficient, transparent and trustworthy European financial markets European Commission press release) This new rulebook, will increase investor protection and confidence by allowing deeper and more integrated financial markets, and contribute to the creation of the Capital Markets Union. The new framework will strengthen the fight against market abuse across commodity and related derivative markets, explicitly ban the manipulation of benchmarks, such as LIBOR, and reinforce the investigative and sanctioning powers of regulators. The updated rulebook strengthens and replaces the existing EU rules on market integrity and investor protection, first adopted in It consists of the Market Abuse Regulation and the Directive on Criminal Sanctions for Market Abuse. The Market Abuse Regulation ensures that rules keep pace with market developments, such as new trading platforms, as well as new technologies, such as high frequency trading (HFT). The new Directive on Criminal Sanctions for Market Abuse (or Market Abuse Directive) complements the Market Abuse Regulation by requiring Member States to introduce common definitions of criminal offences of insider dealing and market manipulation, and to impose maximum criminal penalties for the most serious market abuse offences. Member States have to make sure that such behaviour, including the manipulation of benchmarks, is a criminal offence, punishable with effective sanctions everywhere in Europe. The essential delegated and implementing acts based on the Market Abuse Regulation have been adopted in time to ensure that market participants and supervisory authorities can implement the new rule book and apply it as of 3 July 2016.

9 ESMA ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union's financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both amongst securities regulators, and across financial sectors by working closely with the other European Supervisory Authorities competent in the field of banking (EBA), and insurance and occupational pensions (EIOPA). REGULATION (EU) No 1095/2010 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority)

10 Consob The Italian appointed Authority Born in 1974 Main Law: LEGISLATIVE DECREE No. 58 OF 24 FEBRUARY 1998 Consolidated Law on Finance pursuant to Articles 8 and 21 of Law no. 52 of 6 February 1996 The Commissione Nazionale per le Società e la Borsa (CONSOB) is the public authority responsible for regulating the Italian securities market. Its activity is aimed at the protection of the investing public. In this connection, the CONSOB is the competent authority for ensuring - transparency and correct behaviour by securities market participants; - disclosure of complete and accurate information to the investing public by listed Companies; - accuracy of the facts represented in the prospectuses related to offerings of transferable securities to the investing public; - compliance with regulations by auditors entered in the Special Register It conducts investigations with respect to potential infringements of insider dealing and market manipulation law.

11 Rules and Institutions in Italy Consolidated Law 58/1998 and executing regulations Minister of the Economy and Finance (Treasury) Consob Bank of Italy Borsa Italiana S.p.A. Consob and Bank of Italy Regulations Central Depositary of Financial Instruments (Montetitoli) Compensation systems Judicial system (criminal and civil) Relationships with other Authorities

12 Art. 5 Consolidated Law 58/1998 General purposes The objectives of supervisory activities indicated in this section shall be: a) the safeguarding of faith in the financial system; b) the protection of investors; c) the stability and correct operation of the financial system; d) competitiveness of the financial system; e) the observance of financial provisions

13 Art. 5 Consolidated Law 58/1998 Scope of supervision For the pursuance of objectives indicated in subsection 1, the Bank of Italy shall be responsible for risk containment, asset stability and the sound and prudent management of intermediaries For the pursuance of objectives indicated in subsection 1, Consob shall be responsible for the transparency and correctness of conduct

14 Other provisions on general purposes Art Consob shall supervise regulated markets with the aim of ensuring the transparency of the market, the orderly conduct of trading and the protection of investors Art Consob shall exercise the powers provided for in this Part (ISSUERS) having regard to the protection of investors and the efficiency and transparency of the market in corporate control and the capital market

15 Prospectus -The general obligations Persons who intend to make a public offering shall give advance notice thereof to Consob, attaching the prospectus to be published The prospectus for the public offering of EU financial instruments shall be drafted in compliance with models provided in EU regulations on this matter Offerors or issuers may request the issue of the authorisation in order to have the prospectus published in Italy recognized abroad

16 The content of the prospectus in Italy art. 94 The prospectus shall contain the information that, depending on the characteristics of the financial products and the issuer, is necessary for investors to make an informed assessment of the issuer's assets and liabilities, profits and losses, financial position and prospects and of the financial products and related rights. The prospectus also contains a securities note which briefly gives key information, in non-technical jargon, in the language in which the prospectus was originally drafted. The format and content of the securities note, together with the prospectus, give adequate information on the fundamental features of the financial products in order to aid the investors to decide whether or not to invest in such products (the underlined part is implementation of the last directive)

17 The approval of the prospectus art. 94 bis For approval purposes, Consob shall verify the accuracy of the prospectus, and according to the modalities and procedures including the consistency and comprehensibility of the information contained therein Consob shall approve the prospectus according in compliance with EU regulations. Failure to issue decision by Consob by the established deadlines shall not constitute approval of the prospectus Consob shall issue a regulation with provisions implementing this chapter

18 Responsibility (national solution) The issuer, offeror or any guarantor, as applicable, or the persons responsible for the information contained in the prospectus, shall be liable, each in relation to the extent of their own duties, for damages caused to the investor placing reasonable faith in the truth and accuracy of information contained in the prospectus, unless it is proved that all due diligence was adopted for the purpose of guaranteeing that the information in question complied with the facts and that no information was omitted that could have altered the sense thereof. The intermediary responsible for placement shall be liable for false information or omissions that could influence the reasoned decisions of an investor, unless said intermediary proves that all due diligence was adopted pursuant to the previous subsection.

19 Sanctions False with special purposes can lead to a criminal sanction Any person who, with a view to obtaining an undue profit for himself or for others, in prospectuses required for public offerings or for admission to trading on regulated markets, with the intention of deceiving the recipients of the prospectus, includes false information or conceals data or news in a way that is likely to mislead such recipients, shall be punished by imprisonment for between one and five years

20 Sanctions (2) The breach of the general obligation to publish prospectuses can lead to an administrative sanction up to 5 million Euros The breach of rules concerning the content and other rules issued by Consob can lead to an administrative sanction up to euros Sometimes the sanction can be applied to directors or officers working for the company issuing or offering securities (violations of personal duties with serious effects on firms, risks, investor protection or integrity and fairness of the market art. 190 bis Italian Consolidated Law)

21 Powers of Consob Consob can suspend or inhibit offers in course without prospect or breaching rules on fairness and disclosure during public offers

22 Transparency Powers of Consob By regulation, in compliance with EU Law establishes - tresholds and terms of declaration - publication terms of financial reporting (annual financial report; halfyearly) - cases of exemption from the requirement to publish the financial reports; - the content of information on significant related party transactions Where it is ascertained that documents comprising the financial statements do not comply with drafting regulations, Consob may request that the issuer publishes this fact and arrange publication of supplementary information as necessary in order to reinstate correct market information. Consob may challenge the resolution approving annual accounts on the grounds that the accounts fail to conform with the provisions governing the preparation thereof (IAS) or request the courts to verify the conformity of the consolidated accounts with the same provisions

23 Transparency tresholds UE (Directive 109/2004 Transparency) Reaching, exceeding or falling below 5 %, 10 %, 15%, 20 %, 25 %, 30 % (or 1/3), 50 % e 75 % (or 2/3) Minimum requirements Italy Exceeding or falling below 3% (2 % until D. Lgs. 25/2016) if not PMI; 5%PMI (in the law); Reaching, exceeding or falling below 5%, 10%, 15%, 20%, 25%, 30%, 50%, 66.6%, 90% and 95% (Consob Regulation)

24 Potential investments Those who directly or through nominees, trustees or subsidiary companies, hold potential investments, disclose the following to the investee and to Consob: a) reaching or exceeding the thresholds of 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%; b) the reduction of the potential investment to below the thresholds specified at letter a). 2. Those who directly or through nominees, trustees or subsidiary companies, hold an overall long position, disclose the following to the investee and to Consob: a) exceeding the thresholds of 10%, 20%, 30% and 50%; b) the reduction to below the thresholds specified at letter a).

25 Definitions: potential investments/physical delivery potential investments: shares comprising the underlying capital of derivative financial instruments listed under Article 1, paragraph 3 of the Consolidated Law and all other financial instrument or contract, which, by virtue of a legally binding agreement, attributes the holder, on its exclusive initiative, the unconditional right to purchase, by physical delivery, the underlying shares or the discretion to buy, by means of physical delivery, the underlying shares

26 Definitions: long position (cash delivery) other long positions: shares which constitute the underlying item of derivative financial instruments listed by article 1, paragraph 3 of the Consolidated Law and all other financial instrument or contract, other than those relevant for potential investments, able to determine the assumption of an financial interest, positively linked to the trend of the underlying item, including the case of the counterparty of the holder of a short position overall long position: the aggregate position held in shares, potential investments and other long positions

27 Enforcement of the transparency and prospectus obligations The Authority authorizes the publication of prospectuses and the fulfilment of the duty to publish integration and supplement The Authority can suspend or forbid the offer The Authority can punish with administrative sanctions Prospectuses: before 2015 from 1/4 to the double of the total value of the offer (or from to 2 millions euro)- now from to 5 million Euros Disqualification (directors of intermediaries, listed companies, other open companies; from 2 months to 3 years) Other violations: from to euros Shareholding s: from to 1,5 millions euros ; from to euros if there is a late of no more than 2 months

28 Enforcement by other authorities Criminal violation: false prospectus Possibility of informative manipulation Civil responsibility for prospectuses: issuer (directors, board of statutory auditors, important offers, e.g. CFO), intermediaries placing financial products, accounting firm, Authority

29 Special relationships with Statutory auditors Surveillance board Audit Committee Accounting firm

30 Going to market abuse: the general duty of information Without prejudice to the information requirements established by specific provisions of law, listed issuers shall make available to the public, without delay, the inside information referred now in Article 7 MAR that directly concerns such issuers and their subsidiaries Information shall mean information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments

31 Characteristics of information (MAR) Information shall be deemed to be of a precise nature if: a) it refers to a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to occur; and b) it is specific enough to enable a conclusion to be drawn as to the possible effect of the set of circumstances or event referred to in paragraph a) on the prices of financial instruments. Information which, if made public, would be likely to have a significant effect on the prices of financial instruments shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions

32 Insider dealing (art. 8 of MAR) Insider dealing arises where a person possesses inside information and uses that information by acquiring or disposing of, for its own account or for the account of a third party, directly or indirectly, financial instruments to which that information relates The use of inside information by cancelling or amending an order concerning a financial instrument to which the information relates where the order was placed before the person concerned possessed the inside information, shall also be considered to be insider dealing.

33 Unlawful recommendations (art. 8, par. 2 and 3) For the purposes of this Regulation, recommending that another person engage in insider dealing, or inducing another person to engage in insider dealing, arises where the person possesses inside information and: (a) recommends, on the basis of that information, that another person acquire or dispose of financial instruments to which that information relates, or induces that person to make such an acquisition or disposal, or (b) recommends, on the basis of that information, that another person cancel or amend an order concerning a financial instrument to which that information relates, or induces that person to make such a cancellation or amendment. The use of the recommendations or inducements referred to in paragraph 2 amounts to insider dealing within the meaning of this Article where the person using the recommendation or inducement knows or ought to know that it is based upon inside information.

34 Who are the insiders? This Article applies to any person who possesses inside information as a result of: (a) being a member of the administrative, management or supervisory bodies of the issuer or emission allowance market participant; (b) having a holding in the capital of the issuer or emission allowance market participant; (c) having access to the information through the exercise of an employment, profession or duties; (d) being involved in criminal activities. This Article also applies to any person who possesses inside information under circumstances other than those referred to in the first subparagraph where that person knows or ought to know that it is inside information. Where the person is a legal person, this Article shall also apply, in accordance with national law, to the natural persons who participate in the decision to carry out the acquisition, disposal, cancellation or amendment of an order for the account of the legal person concerned.

35 Unlawful disclosure of inside information For the purposes of this Regulation, unlawful disclosure of inside information arises where a person possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties.

36 Market manipulation (art. 12) Different activities and behaviours, realized entering trades or using media, which leads (or it is likely to lead) to false or misleading prices, markets, information on issuers or financial instruments There are accepted market prices

37 The European legal background on market abuse sanctions - MAD1 EU legislation (MAD1 Directive 2003/6; now MAR Regulation 596/2014) requires that Member States adopt "effective, proportionate and dissuasive" administrative sanctions, without prejudice to their faculty to decide whether to also impose criminal sanctions ( double track system ) (Article 14 of MAD1)

38 MAD1 and MAR administrative sanctions The directive 2003/6/EC set forth and took for granted the existence of a legal framework based on mandatory administrative sanctions, as the most efficient, timely and prompt system The new Regulation confirms the importance of administrative sanctions as an essential point of the regulatory framework

39 The new Market Abuse Regulation - Regulation n. 596/2014 of 16 april 2014 Recital 71 MAR A set of administrative sanctions and measures should be provided for to ensure a common approach in Member States and to enhance their deterrent effect. The possibility of a ban from exercising management functions within investment firms should be available to the competent authority. Sanctions imposed in specific cases should be determined taking into account where appropriate factors such as the disgorgement of any identified financial benefit, the gravity and duration of the infringement, any aggravating or mitigating factors, the need for fines to have a deterrent effect and, where appropriate, include a discount for cooperation with the competent authority

40 The new Market Abuse Regulation (2) Recital 72 MAR Even though nothing prevents Member States from laying down rules for administrative as well as criminal sanctions for the same infringements, they should not be required to lay down rules for administrative sanctions for infringements of this Regulation which are already subject to national criminal law by 3 July In accordance with national law, Member States are not obliged to impose both administrative and criminal sanctions for the same offence, but they can do so if their national law so permits. However, maintenance of criminal sanctions rather than administrative sanctions for infringements of this Regulation or of Directive 2014/57/EU should not reduce or otherwise affect the ability of competent authorities to cooperate and access and exchange information in a timely manner with competent authorities in other Member States for the purposes of this Regulation, including after any referral of the relevant infringements to the competent judicial authorities for criminal prosecution

41 The new Market Abuse Regulation (3) Article 30 Administrative sanctions and other administrative measures 1. Without prejudice to any criminal sanctions and without prejudice to the supervisory powers of competent authorities under Article 23, Member States shall, in accordance with national law, provide for competent authorities to have the power to take appropriate administrative sanctions and other administrative measures in relation to at least the following infringements: Member States may decide not to lay down rules for administrative sanctions as referred to in the first subparagraph where the infringements referred to in point (a) or point (b) of that subparagraph are already subject to criminal sanctions in their national law by 3 July Where they so decide, Member States shall notify, in detail, to the Commission and to ESMA, the relevant parts of their criminal law.

42 MAD2 and the principle of ne bis in Recital 23 idem The scope of this Directive is determined in such a way as to complement, and ensure the effective implementation of, Regulation (EU) No 596/2014. Whereas offences should be punishable under this Directive when committed intentionally and at least in serious cases, sanctions for breaches of Regulation (EU) No 596/2014 do not require that intent is proven or that they are qualified as serious. In the application of national law transposing this Directive, Member States should ensure that the imposition of criminal sanctions for offences in accordance with this Directive and of administrative sanctions in accordance with the Regulation (EU) No 596/2014 does not lead to a breach of the principle of ne bis in idem

43 Nature and purpose of administrative sanctions provided by European law The nature of the administrative measures: fines; confiscation of assets for a value corresponding to that "used" by the transgressor plus the profit obtained; disqualification for offices or to practice activities in the financial markets sector; The purpose of the measures seems to be mainly that of restoring confidence in the markets, affecting the factors (the economic resources and the professional employment or position held by the offender in financial market sector) which such offences normally make possible, thus stimulating honest investors to operate, guaranteeing public confidence in the markets and in the correct trading on those markets There is no question of recovering damages

44 Consob in the regulation of Intermediaries (also UCITS) BEFORE MIFIR AND MIFID2 IMPLEMENTATION Transparency (reporting obligations to customers; advertising and promotion; information on order execution) Correctness of conduct Fairness (knowledge of investors with aim of realize adequacy and appropriateness in transactions and services; best execution; interest of customer in portfolio management; respect of rules on management of collective schemes; incentives) Regulation after consulting with Bank of Italy Undertakings for Collective Investments in Transferable Securities

45 Bank of Italy INDEPENDENCE INSURED BY THE STATUS OF CENTRAL BANK Capital adequacy Limitation of risk Deposit of financial instruments and money of customers Investment of UCITS Regulations after consultation with Consob

46 Areas covered jointly by Consob and Bank of Italy in the supervision on intermediaries (Joint Regulation) Corporate Governance Organisation Internal Audit with different aim (respect of rules, payment of incentives) Management of conflict of interests Accounting and business continuity Compliance and complaint management Personal transactions

47 Supervisory powers and other powers The Authorities can convene the directors, members of the board of auditors and managers; order the convening of the governing bodies and set the agenda for the meeting; proceed directly to convene the governing bodies where the competent bodies have not complied with an order issued under paragraph b) In the public interest or in the interest of participants, the Bank of Italy and Consob, within the scope of their respective authority, may order the suspension or temporary limitation of the issue or redemption of units or shares of collective investment undertakings

48 Supervisory powers and other powers Relationship with Board of auditors and independent statutory auditors Communication of data and information and transmission of documents Inspections - Each authority shall notify the inspections it undertakes to the other, which may request it to carry out on the-spot verifications of matters within the scope of its authority Exhibition of documents Adoption of measures deemed necessary

49 GENERAL PRINCIPLES OF FAIRNESS Art. 21 TUF In providing investment and non-core services and activities, authorised intermediaries must: a) act diligently, fairly and transparently in the interests of customers and the integrity of the market. b) acquire the necessary information from customers and operate in such a way that they are always adequately informed; c) use publicity and promotional communications which are correct, clear and not misleading, d) have resources and procedures, including internal control mechanisms, suitable for ensuring the efficient provision of services and activities

50 Principles against conflict of interests In the provision of investment services and activities and accessory services, Italian investment companies, non-eu investment companies, asset management companies, harmonised asset management companies, financial intermediaries registered in the list pursuant to Article 107 of the Consolidated Law on Banking, Italian banks and non-eu banks: a) shall adopt all reasonable measures to identify and manage conflict of interest which may arise with the customer or between customers, also by the adoption of appropriate organisational measures, in order to avoid a negative impact on the interests of the customer; b) shall clearly inform customers, prior to acting on their behalf, of the general nature and/or sources of conflict of interest where measures taken pursuant to paragraph a) are not sufficient to ensure, with reasonable certainty, that the risk of damaging the interests of the customer is avoided; c) shall perform independent, sound and prudent management and take measures to safeguard the rights of customers with regard to their assets

51 ADEQUACY OR SUITABILITY Consob regulation on Intermediaries INVESTMENT CONSULTANCY AND PORTFOLIO MANAGEMENT The intermediaries must know from the customer a) awareness and experience of the investment sector relevant to the type of instrument or service; b) the financial position; c) the investment objectives Where intermediaries providing investment consultancy or portfolio management services are unable to obtain the information required under this article, they shall abstain from providing said services

52 Adequacy test Based on information obtained from the customer, and taking into account the nature and characteristics of the service provided, the intermediaries shall assess whether the specific transaction recommended or executed as part of the provision of portfolio management services satisfies the following criteria: a) correspondence with the customer s investment objectives; b) the nature of the transaction is such that the customer is financially able to face any risk related with the investment compatible with his investment objectives; c) the customer has the necessary experience and awareness of the nature of the transaction to understand the risks involved in such a transaction or management of the portfolio Where the services are provided to a professional customer, intermediaries may presume that, with regard to the instruments, transactions and services for which said customer is classified as a professional customer, he has the necessary level of experience and awareness

53 Appropriateness evaluation 1. In the provision of investment services other than investment consultancy and portfolio management intermediaries shall verify that the customer has the necessary level of experience and awareness to understand the risks deriving from the instrument or investment service offered or requested 2. Intermediaries may presume that a professional customer has the necessary level of experience and awareness to understand risks relating to the investment service or transactions or type of transaction or instruments according to which the customer was classified as professional. 3. Where for the purposes of subsection 1 the intermediary considers that the instrument or service is not appropriate to the customer or potential customer, the intermediary shall advise accordingly. Said advice may be provided in a standardised format 4. Where the customer or potential customer decides not to provide the information or where such information is insufficient, the intermediaries shall advise the customer or potential customer that such a decision inhibits any intermediary verification that the service or instrument is appropriate to the customer. Said advice may be provided in a standardised format

54 Simple execution or receipt of orders No adequacy and appropriateness but Conflict of interests rules apply Simple financial instruments shares admitted for trading on a regulated market, or equivalent market in another country, money market instruments, bonds or other debt securities (excluding bonds or debt securities with an underlying derivative), harmonised UCITS OTHER SIMPLE FINANCIAL INSTRUMENTS: no derivatives frequent opportunities to sell, redeem or otherwise obtain repayment such at prices openly available to market operators (not by the issuer) no liability for the customer which exceeds the cost; Information and characteristics allows the average retail customer to make an informed decision of investment

55 Professional investors By regulation and after consulting the Bank of Italy, Consob shall identify private professional customers, together with the criteria to identify private persons who on request may be treated as professional customers, and related request procedures Annex 3 of Consob Regulation on Intermediaries

56 Civil rules Art. 23 Consolidate Law on Finance WRITTEN CONTRACTS AND GIVEN COPY Except for investment consultancy (often connected to other services) The executing orders may not be written No refer to usage for fees or any payment by the customer Nullity due to the violation of these rules may be enforced only by customer In actions for damages in respect of injury caused to the customer in the performance of investment services or non-core services, the burden of proof of having acted with the due diligence required shall be on the authorised intermediaries

57 Nullity or reimbursement of damages Different decision by Italian Courts Supreme Court after different statements by local Courts: in case of violation of rules concerning the fairness of the behaviour REINBURSEMENT OF DAMAGES/CIVIL RESPONSIBILITY BUT NOT NULLITY OF THE CONTRACT (2007)

58 Relations between Consob enforcement and civil responsibility Consob can apply administrative sanctions to directors, managers, internal audit officers of intermediaries Sanctions go from to 10% of Turnover to the legal person Directors and other officers if conditions art. 190-bis (SEE BEFORE) are present All affected persons can oppose the sanctions in front of Courts of Appeal with a simplified procedure The customers can found on the breach of rule sanctioned by Consob (especially if confirmed by Courts) their civil action

59 EXAMPLES AND CASES

60 Cases of market abuse - Parmalat Market manipulation based on misleading information Parmalat, Antonveneta Parmalat: false accounts/continued actions CEO and other executive directors/ CFO and other key officers/ Accounting firm and its partners / Non executive directors (check duties) No administrative sanctions but interdicition to the accounting firm (which has been closed)

61 Antonveneta Antonveneta: manipulation based on market operations and on dissemination of misleading information Market operations: pre-arranged (by phone) contracts only formally closed by means of the market technological system / Price targeting /Continued actions False or misleading information: no disclosure on shareholder s agreements / Presentation of false alternative candidacy to the board of directors / Continued actions

62 Examples of insider trading Partner of an accounting firm systematically using information received on extraordinary operations (mergers, takeover bids) of listed companies he was working in to invest Communication by the CEO to political allied of an important acquisition

63 Civil responsibility Banks (intermediaries) obliged by civil Courts to refund damages to retail investors not adequate to Republic of Argentina, Cirio or Parmalat bonds / not completely showing their conflict of interest / not well organized about compliance with know your client and/or know your merchandise rules Hundreds of cases Civil responsibility in criminal cases

64 Responsibility of Authority The Authority acts in presence of indices of anomaly and complaints or reports on the existence of pathologic or abnormal situations (Italian Supreme Court) The plaintiff must give evidence of existence of signals Proximity principle

65 Esma Guidelines on Suitability rule 9 General Guidelines 1 - Investment firms should inform clients, clearly and simply, that the reason for assessing suitability is to enable the firm to act in the client s best interest. At no stage should investment firms create any ambiguity or confusion about their own responsibilities in the process.

66 Esma guidelines 2- Investment firms must have in place adequate policies and procedures to enable them to understand the essential facts about their clients and the characteristics of the financial instruments available for those clients (e.g. marital status, age, family, employment, need for liquidity in special moments)

67 Esma guidelines 3 - Investment firms are required to ensure that staff involved in material aspects of the suitability process have an adequate level of knowledge and expertise

68 Esma guidelines 4 - Investment firms should determine the extent of information to be collected from clients in light of all the features of the investment advice or portfolio management services to be provided to those clients Necessary information depending by the type of the financial instrument or transaction that the firm may recommend or enter into (including the complexity and level of risk); the nature and extent of the service that the firm may provide; the nature, needs and circumstances of the client.

69 Esma guidelines 5- Investment firms should take reasonable steps to ensure that the information collected about clients is reliable. In particular, firms should: (a) not rely unduly on clients self-assessment in relation to knowledge, experience and financial situation; (b) ensure that all tools employed in the suitability assessment process are appropriately designed (e.g. questions are not drafted in such a way that they lead the client to a specific type of investment); and (c) take steps to ensure the consistency of client information

70 Esma guidelines 6- Where an investment firm has an ongoing relationship with the client, it should establish appropriate procedures in order to maintain adequate and updated information about the client

71 Esma guidelines 8- In order to match clients with suitable investments, investment firms should establish policies and procedures to ensure that they consistently take into account: (a) all available information about the client that is likely to be relevant in assessing whether an investment is suitable, including the client s current portfolio of investments (and asset allocation within that portfolio); (b) all material characteristics of the investments considered in the suitability assessment, including all relevant risks and any direct or indirect costs to the client