COMMISSION de SURVEILLANCE du SECTEUR FINANCIER Luxembourg, le 31 juillet 2007 Aux établissements de crédit, entreprises d’investissement et sociétés de gestion de droit luxembourgeois au sens du chap

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(b) – disclosure, and, the obligation not to impair compliance with the duty act in the best interest of the client – must also, of course, be met, as must other obligations under MiFID. 9 21. Recital 39 is limited to an investment firm that is giving unbiased investment advice or general recommendations. However, it does not exclude that other cases may be treated in similar terms. An example is where an issuer or product provider pays an investment firm for distribution where no advice or general recommendation is provided. In such cases the investment firm will be providing an investment service to its end-clients; in the absence of payment by the product provider or issuer these investment services, most likely, would not be provided; therefore, in the distribution of financial instruments the payments could be seen as being designed to enhance the quality of the service to the client by allowing that investment service being performed over a wider range of financial instruments.

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1. b)– disclosure, and, the obligation not to impair compliance with the duty act in the best interest of the client – must also, of course, be met, as must other obligations under MiFID. BOX 5 Recommendation 5: Recital 39 to the Level 2 Directive CESR considers that: (
2. a)Recital 39 makes clear that where an investment firm provides investment advice or general recommendations which are not biased as a result of the receipt of commission then the advice or recommendations should be considered as having met the condition of being designed to enhance the quality of the service to the client.

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1. b)– disclosure, and, the obligation not to impair compliance with the duty to act in the best interests of the client – must be met; (
2. b)Recital 39 is relevant to cases in which an investment firm is giving unbiased investment advice or general recommendations. It is not exhaustive and does not prohibit other distribution arrangements under which an investment firm receives a commission (from, for example, a product provider or issuer) without giving investment advice or general recommendations. For these cases, payments can be seen as being designed to enhance the quality of the service to the client by allowing a given investment service to be performed over a wider range of financial instruments.

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1. b)– disclosure, and, the obligation not to impair compliance with the duty act in the best interests of the client – must be met. Article 26(
2. b)of the Level 2 Directive: Disclosure 22. Article 26 recognises in 26 (
3. b)clear, prior disclosure to the firm's client as one of the conditions for receipts or payments paid or provided to or by a third party to be permitted. 23. As far as the content of the disclosure is concerned, Article 26 (
4. b)(I) is clear in setting out the information that an investment firm should provide, that is: “the existence, nature and amount of the fee, commission or benefit, or, where the amount cannot be ascertained, the method of calculating that amount”. A generic disclosure which refers merely to the fact that the firm may or will receive inducements is not in CESR's view sufficient to enable the investor to make an informed decision and therefore will not be considered as meeting the requirements of Article 26. 24. The final paragraph of Article 26, however, allows the investment firm to provide a "summary disclosure" ("the essential terms of the arrangements relating to the fee, 10 commission or non-monetary benefit in summary form") rather than the full information. CESR considers that means it must contain enough information to enable the client to make an informed decision. 25. There has been some concern about distribution channels where between a product provider and the final client there is at least one further intermediary. Each investment firm that is providing an investment or ancillary service must comply with its obligation of disclosure to its clients in relation to the services that it provides. BOX 6 Recommendation 6: Disclosure under Article 26(
5. b)of the Level 2 Directive CESR considers that: (
6. a)in order to contain the "essential terms" a summary disclosure must provide adequate information to enable the investor to relate the disclosure to the particular investment or ancillary service that is provided to him, or, to the products to which it relates, to make an informed decision whether to proceed with the investment or ancillary service and, whether to ask for the full information; (
7. b)a generic disclosure which explains merely that the firm will or may receive or pay or provide items within Article 26(
8. b)is not sufficient to enable a client to make an informed decision and therefore will not be considered as providing the "essential terms of the arrangements" referred to in Article 26 of the Level 2 Directive; (
9. c)when a number of entities are involved in the distribution channel, each investment firm that is providing an investment or ancillary service must comply with its obligation of disclosure to its clients. 11 3. Illustrative examples to show the application of the Recommendations 26. In order to explain how Article 26 operates CESR provides below a number of examples. These illustrate some of the variety of circumstances in which Article 26 of the Level 2 Directive is relevant. 27. The examples deal only with the application of Article 26 of MiFID Level 2 Directive in relation to the circumstances they mention and are presented without prejudice to firms’ other obligations under MiFID. 28. The examples are for illustration purposes only; although they are intended to be helpful in assessing cases that arise in practice, each such case must be assessed on its own merits and in accordance with its own circumstances. It is not correct to extrapolate the conclusions reached in these examples without a thorough analysis of the context and specific circumstances of each case. I. A client of an investment firm agrees a fee of €100 an hour plus disbursements for the service of investment advice. The investment firm provides the advice and issues an invoice for 10 hours work €1000 and an additional €200 for disbursements. The client pays the invoice himself or instructs his accountant to pay the invoice. The payment is clearly paid by the client or by a person on behalf of the client and as such is within Article 26(
10. a)of the Level 2 Directive. No additional requirements under Article 26 apply to the arrangements. ***** II. A client of an investment firm that provides portfolio management services agrees a fee of 1% per annum of assets under management charged pro rata to be paid out of assets under management and that dealing costs such as dealing fees charged by brokers will also be paid out of the client's assets. The payments out of the client's funds for the service of portfolio management are clearly paid by the client or by a person on behalf of the client and as such are within Article 26(
11. a)of the Level 2 Directive. The payment of the dealing fees will amount to payments on behalf of the client within Article 26(a). No additional requirements under Article 26 apply to the arrangements. ***** III. A client has agreed with investment firm (A) the fee that he will pay to (A). The client could, if he wishes in connection with an investment or ancillary service provided by (A), also provide an explicit instruction to (C) to pay the amounts that the client owes to investment firm (A) out of the client's account with (C). The client is able to instruct (C) to cease to make such payments. Here it is clear that (C) is acting on behalf of its client and the arrangements are within Article 26 (a), and, that (C) is not a "third party" such as to require the tests of Article 26(
12. b)to be met. ***** 12 IV. A client of an investment firm that provides portfolio management services agrees a fee of 1% per annum of assets under management charged pro rata to be paid out of assets under management and that dealing costs such as dealing fees charged by brokers will also be paid out of the client's assets. The portfolio manager agrees with one broker that 20% of the dealing fees above a certain level each year will be repaid. These are paid to the portfolio manager. The payments to the investment firm out of the client's assets for the service of portfolio management are clearly paid by the client or by a person on behalf of the client and as such are within Article 26(
13. a)of MiFID Level 2. In this case the portfolio manager has also negotiated a further payment to itself. This receipt by the investment firm from a "third party" (the broker) falls within Article 26(
14. b)and in order for the portfolio manager to retain it and not pay it to the client the tests within Article 26(
15. b)would have to be met. Particularly relevant could be factors 4 (a), (
16. b)and 4(c). The arrangement entered into by the investment firm does not appear to provide any new benefit for the clients of the investment firm. The investment firm itself receives a benefit and therefore has an incentive to use only the broker offering the payments. Any enhancement of the service provided to the investment firm’s clients seems unlikely, but the incentive is likely to impair the firm's duty to act in the best interest of its clients (for example, to provide best execution). ***** V. An investment firm provides a portfolio management service to a client and charges a fee for that service. The investment firm purchases financial instruments for its client; the provider of those financial instruments pays a commission to the investment firm that is paid out of the product charges made to the client. CESR’s view is that such arrangements are not altogether prohibited. The receipt of commission in addition to the management fees received for the service of portfolio management is clearly of a nature that could impair the firm’s duty to act in the best interests of its client. One clear option for the investment firm is to repay to its client any commissions received. If the investment firm wishes not to do so then special attention has to be paid, since it would be difficult for portfolio managers to meet the other conditions within Article 26, especially the duty to act in the best interests of the client. ***** VI. A client (C) of an investment firm (F) wishes to deal in instruments that (F) does not offer. Therefore (F) introduces (C) to another investment firm (A). (C) becomes a client of investment firm (A). (A) provides investment services to (C) and charges transaction fees to (C). (A) then pays a share of those fees to the introducing investment firm (F). The arrangements need to be considered from the perspective of both the paying investment firm (A) and the receiving investment firm (F). CESR's view is that the payment by the investment firm (A) will fall within Article 26(b), and can be considered to be designed to enhance the quality of the service to the client. The payment to the introducing broker must be disclosed and not impair the investment firm's duty to act in the best interest of the client. CESR's view is that the receipt by the investment firm, where received in connection with an investment or ancillary service provided to (C), will fall within Article 26(b). (F) will need to consider carefully whether the arrangements are permitted under Article 26(
17. b)and for this purpose may find the factors set out in Recommendation 4 useful. Article 26(
18. b)also requires the receipt of the benefit to be disclosed. 13 ***** VII. An investment firm provides investment advice or general recommendations to its client, transmits orders to product providers on behalf of the client and it does not charge a fee to its clients but receives commission from the product providers when it arranges such sales. If the investment advice or general recommendation is not biased as a result of the receipt of commissions the receipt should be considered as designed to enhance the quality of the investment advice to the client.

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1. b)will also have to be met, and Recommendation 4 (
2. c)will be particularly relevant. ***** VIII. As Example VII above, except that the investment firm receives an additional one-off bonus (or "override") payment once sales of a particular product reach an agreed level. Factors 4(b), (
3. c)and (
4. e)are particularly relevant to such an arrangement, a