The Federal Ministry for Economic Affairs and Energy has now published the long-awaited draft law revising the German Placement Agent Regulation (“FinVermV”). FinVermV is relevant for all brokers and advisers whose work is subject to § 34f GewO (“Placement Agents”). The changes aim to conform FinVermV to the European regulation under the Directive 2014/65/EU (“MiFID II”), such that the requirements of MiFID II now apply to Placement Agents.
Avoiding, Addressing and Disclosing Conflicts of Interest
A new provision creates an obligation of a Placement Agent to put in place appropriate measures to identify and avoid conflicts of interest. The provision covers conflicts of interest between the Placement Agent, employees involved in brokerage and advice and investors. If a conflict of interest is unavoidable, the Placement Agent must use appropriate measures to address the conflict of interest in such a manner as to ensure that disadvantages for the investor are prevented.
It should be assumed that a Placement Agent should have, at a minimum, internal policies in place to cover existing conflicts of interest and procedures for addressing them (a Conflicts-of-Interest Policy).
The Placement Agent must disclose conflicts of interest to an investor when, in spite of the measures taken, a risk remains of a detriment to the investor’s interests. This applies in particular in the case of conflicts of interest arising from incentives received or from the compensation structure.
In general, it should be possible to meet this requirement by providing general information in advance regarding existing conflicts of interest.
In the future, it will no longer be permissible for employee compensation to be in tension with the obligation to act in the best interest of investors. “Sales targets” and special levels of variable compensation are especially problematic in this regard. FinVermV will thus mandate the introduction of compensation guidelines.
The FinVermV draft bill provides less strict regulation of incentives than it is the case for a securities services provider, which is subject to the requirements of the German Securities Trading Law (“WpHG”). Unlike under the WpHG, incentives do not need to be designed to improve the quality of service provided to the client. In the context of WpHG regulation, this requirement necessitates that the amount of an incentive must be justified by an improvement in quality or by advantages for a client.
By contrast, under the FinVermV draft bill it is suf-ficient to meet a lower standard: An incentive is permissible provided that it does not have a negative effect on the quality of brokerage and advice.
FinVermV as currently in force already imposes an obligation on the Placement Agent to provide general information on risks, costs and incidental expenses of a product. Going forward, a more detailed listing of costs pursuant to MiFID II requirements must be disclosed. The requirements include information on the effects of cumulative costs on investment return.
FinVermV will allow a Placement Agent to meet the cost disclosure requirements by using issuer’s or sponsor’s own cost disclosure materials. This will reduce the burden on Placement Agents, however, only with regard to product costs, which are difficult to estimate.
Requirements for Marketing Documents
The FinVermV draft bill now specifies that the requirements for marketing documents will apply in the professional client context as well. This was previously unclear.
In particular, this affects presentations and other marketing materials to the extent such materials contain information that go beyond the legally required information. Difficulties may especially be posed by performance in-formation relating to a product or to predecessor products.
Target Market Requirements
The draft bill relaxes the requirements relating to target market determination. In contrast to a securities services provider, a Placement Agent is not required to carry out a target market determination of its own. It is sufficient for a Placement Agent to obtain target market information from the issuer or sponsor and to carry out distribution on the basis of this target market.
Recording of Conversations
An important change is the requirement to record telephone conversations and electronic communication as long as investment brokerage or investment advice is involved. This is intended to facilitate the preservation of evidence.
The duty to make recordings does not include date arrangements and preliminary conversations. One way to not be subject to the duty to make recordings is to refrain from brokerage and investment advice by telephone entirely.
A documentation duty applies to personal, face-to-face conversations as well. In this regard, the Placement Agent must prepare summaries or notes on the content of the conversations.
Declaration of Suitability
The duty to prepare minutes of the consultation has been eliminated for Placement Agents. Taking its place is the declaration of suitability, as already familiar from the implementation of MiFID II for securities services provider.
Entry into Force / Transitional Provisions
We assume that the revised FinVermV will enter into force on the day after its adoption into law on 1 January 2019. Transitional provisions have not been included. If this is not changed, Placement Agents will need to implement and apply the new requirements, in particular regarding recording conversations, on very short notice.