Netherlands Regulation

Transcription

1 Netherlands Regulation FUNDS AND FUND MANAGEMENT Supervision of investment undertakings: Financial Supervision Act (Wft) and other relevant legislation and regulations 2.1 General Origin of the Wft The Financial Supervision Act (Wet financieel toezicht Wft) took effect on 1 January The Wft contains the bulk of regulations for financial undertakings and financial markets, and their supervision and regulation. Prior to 1 January 2007, supervisory rules covering financial undertakings and financial markets were fragmented and spread across different sector-based laws, such as: the 1995 Securities Transactions Supervision Act (Wet toezicht effectenverkeer 1995); the 1993 Insurance Operations Supervision Act (Wet toezicht verzekeringsbedrijf 1993); the Investment Institutions Supervision Act (Wet toezicht beleggingsinstellingen); the Financial Services Act (Wet financiële dienstverlening); the Disclosure of Influence and Capital Interest in Securities Issuing Institutions (Wet melding zeggenschap en kapitaalbelang in effecten uitgevende instellingen); and the 1992 Credit Supervision Act (Wet toezicht kredietwezen 1992). Many European regulations in the field of financial markets have been incorporated in the Wft.

2 2 Netherlands Regulation Functional supervision Before 2002, financial supervision used to be organized by sector, that is, the Dutch central bank (De Nederlandsche Bank N.V. DNB) supervised the credit institutions, the Pensions and Insurance Foundation (Stichting Pensioen- and Verzekeringskamer PVK) supervised insurance companies and pension funds, and the Netherlands Authority for Financial Markets (Stichting Autoriteit Financiële Markten AFM) supervised the securities sector. In 2002, sector supervision was replaced by functional supervision within the sector legal framework that still existed at the time. The Wft created a new legal framework that is entirely honed on the functional supervisory model. The functional supervisory model distinguishes between: prudential supervision; and conduct of business supervision. With separate supervisor appointed for each type of supervision, being the DNB (the PVK was legally merged with DNB) and the Authority for the Financial Markets (AFM) respectively. Prudential supervision focuses on the solidity of financial undertakings and on contributing to the stability of the financial markets (Section 1:24 Wft). The prudential rules consist primarily of business economic standards, including the solvency and liquidity requirements aimed at ensuring that a financial undertaking can at all times meet its payment obligations. DNB is charged with the prudential supervision of all the financial undertakings subject to such supervision. Conduct of business supervision focuses on orderly and transparent financial market processes, integrity between market parties, and proper and careful treatment of clients (Section 1:25 Wft). Conduct of business supervision distinguishes between standards focused on financial undertakings (conduct of business aspects of the management of these undertakings; Part 4 of the Wft) and standards not only focused on financial undertakings, but also on securities issuing institutions, organizers of financial instruments markets, and sometimes on all of them (for example, standards to prevent abuse of the market; Part 5 of the Wft). The AFM is charged with conduct of business supervision. DNB grants authorization to financial undertakings subject primarily to prudential supervision (insurance companies and credit institutions). The AFM grants authorization to financial undertakings subject primarily to conduct of business supervision (investment managers of investment institutions, financial service providers, asset managers and other investment undertakings. A brief summary is given below of the relevant provisions in the WFT for investment undertakings and secondary legislation and regulations.

3 3 Netherlands Regulation Structure of the Wft The Wft comprises of the following seven parts: General provisions, including definitions, provisions regarding the scope of the act, provisions aimed mainly at the supervisors, and domestic and international cooperation between supervisors, supervision and enforcement, duty of confidentiality, and publication options by and procedural rules for supervisors. Market access of financial undertakings, which includes all provisions in relation to authorizations for financial undertakings wishing to operate in the markets (duty to and requirements for obtaining authorization through references to permanent supervision requirements, as well as the umbrella provisions for possible exemption). Prudential supervision of financial undertakings, containing primarily supervisory provisions for insurance companies, credit institutions and clearing institutions (including solvency, liquidity, technical provisions, expertise, trustworthiness and integrity, and structure and organization), and other mainly prudential rules. Conduct of business supervision of financial undertakings, containing the supervisory provisions for advisors, intermediaries, investment institutions, and financial services providers (including investment institutions and their investment managers). Financial markets conduct supervision, mainly concerned with offering securities and authorizing trade in securities on a regulated market, holding a market in financial instruments, notifying voting rights, share capital, control and share capital interests in issuing institutions, preventing market abuse, and, soon, also rules on public offers. Supervision of financial markets infrastructure (settlement firms). This part has not yet been implemented, but will concern clearing systems and securities settlement systems (clearing and settlement). Final provisions. Each part of the Wft consists of chapters, and each chapter consists of departments***. The Wft is a framework act, which means it contains its own rules, in addition to forming an umbrella for secondary legislation and regulations. Four layers can be distinguished: The first layer is the Wft itself, the second layer contains the Orders in Council (the Decrees), the third layer comprises the statutory rules of the Ministry of Finance (MoF) (for example, the Wft exemption provisions and the Wft implementation decree), DNB and the AFM, and one could say that the fourth layer contains the policy rules of the MoF, DNB, and the AFM. These are not

4 4 Netherlands Regulation generally binding provisions, but rules in the meaning of Section 1:3(4) of the General Administrative Law Act (Algemene wet bestuursrecht) Investment undertaking, investment manager, and custodian For the scope of regulating the offering of securities in an investment undertaking, it is important to be clear about the meaning of the concepts investment undertaking, undertaking for collective investment in transferable securities (UCITS), and investment manager. Pursuant to Section 1:1 Wft, an investment undertaking is defined either as an investment institution or an investment company (legal entity) or an investment fund (non-legal entity). Both types of investment undertakings request or acquire funds or other goods for collective investment for participants to share in the return on the investments. An investment company is defined as a legal entity that requests or acquires funds or other goods for collective investment for the participants to share in the return on the investments. An investment fund is defined as equity not placed with an investment company containing funds or other goods requested or acquired for collective investment for the participants to share in the return on the investments. An investment fund or an investment company can also be an undertaking for collective investment in transferable securities (UCITS). The UCITS rules have a European origin in Directive (85/611/EEC, OJ L 375) (the UCITS Directive); the rules for non-ucits do not have a European origin. The Wft defines a UCITS as an undertaking for collective investments in transferable securities in accordance with Section 1(2) of the UCITS Directive. The Directive stipulates that a UCITS: collectively invests capital raised from the public in transferable securities and/or other liquid assets; and purchases or redeems shares at the request of the participants out of that undertaking s assets (it is a so-called open-ended investment firm, in contrast to closed-ended investment firms with no ongoing issuing or repurchasing of shares occurring). Section 1:1 Wft defines an investment manager as a legal entity that manages one or more investment firms. An investment fund always has an investment manager. An investment company only requires an investment manager in the case of a UCITS with shareholders equity below EU 300,000 (Section 4:58 Wft). In the case of an investment fund subject to supervision, the investment manager is a separate entity from the custodian with full legal powers. Pursuant to the Wft, the investment manager of an investment fund should place the assets of the investment fund with an independent custodian. This

5 5 Netherlands Regulation ensures that the equity that is the economic property of the participants in the investment fund is held separately from the equity of the investment manager. In the event of the investment manager s bankruptcy, the creditors will therefore not have a claim against the fund assets. The custodian is charged with keeping the assets of the investment firm in custody. The separate custodial function was created in order to enable separation of the assets between the investment firm and the investment manager. The firm s investment manager depends on the cooperation of the custodian to access the assets of the investment fund. Only a legal entity whose main business it is to keep in custody and administer investment objects on behalf of third parties is eligible to act as custodian. The task of the custodian is to monitor and ensure on behalf of the participants that the actions of the investment manager comply with the conditions set by the investment fund. A UCITS in principle always has to appoint a custodian. Furthermore, if an investment company (a legal entity investment undertaking) appoints a custodian voluntarily, the custodian in question has to satisfy all the conditions set by the Wft. General consensus agrees that the concept of independent custodian precludes, among other things, the managers of the investment firm and the custodian from being appointed to the other. It also precludes the investment manager and the custodian from acquiring shares directly or indirectly in the equity of the other. This counters the mixing of duties and cross-relationships between the investment manager and the custodian. The Wft does not preclude the investment manager and the custodian from being subsidiaries of the same company, provided mutual independence is properly guaranteed and there are no obstacles to supervision. NB Investment manager in this brochure is deemed to mean the investment manager of an investment fund, the investment manager of an investment company with a separate investment manager*** and an investment company without a separate investment manager***, unless stated otherwise Closed-end and open-end investment undertakings, securities, and financial instruments A major distinction concerning investment undertakings is between so-called open-end and closed-end investment undertakings. An open-end investment undertaking is an investment undertaking where, pursuant to the articles of association or other rules and regulations, shares are directly or indirectly purchased or redeemed at the request of participants against the assets of the undertaking. The AFM has published in October 2008 a further guidance with regard to open-end and closed-end in the current market situation. The AFM

6 6 Netherlands Regulation guidance indicates that in the current market turmoil there may be situations which may result in the inability of the open-end investment undertaking to purchase shares and that the open-end investment undertaking may include additional conditions with regard to the purchase of shares of the participants. The AFM stipulates that these conditions may not result in an actual obstruction of the purchase of shares, because that would result in a blockage of continuous purchase (one of the preconditions of an open-end investment undertaking). The AFM indicates that an investment undertaking is no longer an open-end investment undertaking if the investment undertaking has: extensive room for judgment in the decision to deny or grant the redemption of shares of participants; and limited the number of purchases to a percentage or number of shares which are in no proportion to the number of outstanding shares and/or the required held liquidity. In a closed-end investment undertaking, shares are not purchased or redeemed. Furthermore, a range of different hybrid forms are distinguished, being semi-open-end funds, with the purchase or redemption of shares being subject to certain conditions and limits applying. Generally, semi-open-end funds are classified as open-end funds. Semi-open-end and semi-closed-end are legal terms no longer used in the Wft legislation. The offering of transferable securities in closed-end investment undertakings in the Netherlands is in principle not only forbidden (without the relevant authorization) by Part 2 of the Wft, but also by Chapter 5.1 of the Financial Markets Conduct Supervision of the Wft concerning, among other things, the requirement to produce a prospectus in accordance with the provisions of the prospectus directive (see below). Non-transferable securities in closedend investment undertakings or transferable or non-transferable securities in open- and semi-open-end investment undertakings are exempt from the rules of Chapter 5.1 Financial Markets Conduct Supervision of the Wft by virtue of Article 52a of the Wft exemption regulation (Vrijstellingsregeling Wft Vr). All types of securities in investment undertakings, however, are included under the broad concept of financial instruments as defined in Section 1:1 Wft. Since it is basically possible for new participants to join an open-end investment undertaking or for participants to leave at the prevailing intrinsic value on a daily basis, stricter rules apply to the way in which and the frequency with which the intrinsic value is calculated. This is not so important where closed-end investment undertakings are concerned because there are no or hardly any changes in the outstanding securities.

7 7 Netherlands Regulation 2.2 Offering securities in the Netherlands The prohibition of Section 2:65 Wft/authorization requirement Pursuant to Section 2:65 Wft, it is not allowed to offer securities in an investment undertaking if the investment manager, or in some instances the investment undertaking personally, has not been duly authorize by the AFM. This prohibition means that an investment undertaking or an investment manager of such an undertaking who wishes its securities to be transferred on the Dutch market (by the investment manager or undertaking personally, or by a third party) basically requires authorization from the AFM. The duty to obtain authorization is charged primarily to the investment manager of the investment undertaking. An investment company without a separate investment manager must personally obtain authorization from the AFM. The applicable provisions for obtaining authorization from the AFM are summarized in Part 2 of the Wft (Market access of financial undertakings). The relevant articles refer in turn to the supervisory requirements of Part 3 (Prudential supervision of financial undertakings) and Part 4 (Conduct of business supervision of financial undertakings) of the Wft. The investment manager must satisfy a number of conditions in order to obtain authorization, and to retain authorization, the investment manager must continue to demonstrate that it and the investment undertaking (and the custodian, where applicable) comply with a number of rules. The AFM is the competent body to grant authorization to investment managers pursuant to Section 2:65 to Section 2:69 Wft, and the AFM and DNB jointly perform the subsequent supervision of the granted authorizations. Investments companies and/or investment managers of investment products are required to inform the potential investors if the investment is not regulated and supervised by the AFM. Currently this is performed by the investment companies or investment managers in a form free format in a warning of exemption. As of 1 July 2010 the following securities, investments, and shares in investment funds will be required to issue a warning of exemption in a format prescribed by the AFM: Securities with a counter value of less than EUR 2.5 million per year Securities with a value of more than EUR per investment Securities offered to less than 100 investors Investments with a value of more than EUR per object Investments offered to less than 100 investors

8 8 Netherlands Regulation Shares in investment funds with a value of more than EUR per share Shares in investment funds offered to less than 100 investors In the guidance ruling of the AFM it is described how the warning should be disclosed and in what kind of publications, for instance in marketing brochures and other information issued to investors. The warning is intended to inform the future investor about the fact that the AFM does not supervise the object or product and therefore that new prudential tests have been performed by the AFM before the product or object is marketed. Also the warning stresses the fact that no license is obtained or needed for the object or product to be marketed. This should make the investor aware that different risks might exist for the particular product or object compared to objects and products for which a license is required. Even though the AFM does not issue a license for the marketing and offering of these products, the AFM does have the authority to act when it feels that the marketing and offering of the product or object is performed in a dishonest or aggressive way of doing business Two types of authorization With respect to granting authorization, the Wft makes a distinction between UCITS and non-ucits. Pursuant to the UCITS Directive, a UCITS is an investment undertaking: whose sole objective, in accordance with the articles of association or rules regulations, is to invest in transferable securities applying the riskspreading principle; whose securities, at the request of participants, are purchased or redeemed directly or indirectly against the assets of the undertaking (openend); and whose registered office or, in the case of an investment fund, that of the investment manager, is based in an EU Member State. If these three conditions are satisfied, the undertaking basically falls under the UCITS regime and is required to obtain authorization with due consideration for Section 2:65(2) Wft. All the other investment undertakings should obtain authorization solely with reference to Section 2:65(1) Wft. To obtain authorization, so-called UCITSs must satisfy stricter conditions than investment undertakings that do not qualify as UCITSs. On the other hand, however, a UCITS with authorization in the meaning of Section 2:65(2) Wft can freely transfer its securities in other EU Member States without having to separately satisfy foreign conditions and duties applicable in the context of the UCITS Directive. A Dutch UCITS can obtain a so-called European passport by completing a fairly straightforward notification procedure.

9 9 Netherlands Regulation The other side of this scheme is that a UCITS established in another EU Member State and with authorization to operate there does not have to obtain authorization in the Netherlands, but can be allowed access via the local rules that apply to investment undertakings (more details in below). The distinction between a UCITS and a non-ucits is not without consequences. If an investment undertaking wishes to meet the UCITS criteria, it will have to meet stricter conditions than a non-ucits in order to obtain authorization, even if it does not intend to operate in other EU Member States. Once a UCITS has been granted authorization, it is not allowed to amend its articles of association or regulations such that it no longer falls under the UCITS provisions of the Wft. Particularly in view of the investment restrictions that apply to a UCITS, an investment undertaking established in the Netherlands will generally only want to qualify as a UCITS if it intends to offer securities in other EU Member States. A number of years ago, different guidelines were adopted to amend the UCITS Directive that has been incorporated in Dutch law and regulations. Pursuant to these new guidelines, the duty to obtain authorization will no longer rest with the investment undertaking itself, but with the investment manager of the investment undertaking. A major change concerns the introduction of the simplified prospectus. The simplified prospectus must always be made available free of charge to subscribers before concluding the agreement. Thus the statutory requirement to provide information to subscribers before concluding the agreement is satisfied. The simplified prospectus should, however, include a reference to the full prospectus, the annual report and the interim report of the UCITS. Finally, the new guidelines make it possible for a UCITS, in addition to certain securities, to invest in cash bank deposits, financial derivatives, money market instruments and in securities of other UCITSs, among other things, albeit with different conditions applying. The concept to offer The prohibition clause of Section 2:65 Wft concerns the offering of securities in an investment undertaking. Section 1:1 Wft defines to offer as follows: to make a direct or indirect and sufficiently specific proposal in the course of a profession or business to enter into a contract as the other party with a consumer or, where it concerns insurance, a client with regard to a financial product that is not a financial instrument or to enter into, manage or perform such a contract in the course of a profession or business; or to make a direct or indirect and sufficiently specific proposal to enter into a contract as the other party with a client with regard to units issued by a collective investment scheme or to request or acquire, directly or indirectly,

10 10 Netherlands Regulation funds or other goods from a client in order to hold a unit in a collective investment scheme. Only the definition under the second bullet above appears to be relevant to offering securities in investment undertakings. The notes to the proposal to use this definition show that the definition is derived from what the Netherlands Civil Code defines as an offer. Not only making a direct offer by the offeror itself, but also making an indirect offer via an intermediary, falls under the definition of to offer in Section 1:1 Wft, and thus under the offer prohibition in Section 2:65 Wft. Furthermore, to directly or indirectly request or acquire funds or other goods to hold a unit in an investment scheme is also included in the offer definition. In the letter of the Wft, the duty to obtain authorization does not yet appear to arise when an invitation to make an offer is extended. Under the old Investment Institutions Supervision Act (Wtb), however, the AFM argues in its Beleidsregel aanbieden ex art. 4 Wtb [policy rule on offering ex Section 4 Wtb (nr , Dutch Government Gazette 2005, 241, p. 15) it deems the concept to offer in Section 4 Wtb to also mean extending an invitation to make an offer. At the time of producing this brochure, it was unclear whether the AFM had changed its policy in this respect. To offer in the Netherlands Section 2:65 Wft prohibits offering in the Netherlands. The investment manager or the investment undertaking in principle requires authorization from the AFM only if securities in an investment undertaking are offered on the Dutch financial markets. This prohibition is not as broad as the old Wtb, which also prohibited offering from within the Netherlands (art. 4 Wtb). In the active in the Netherlands policy rule (Beleidsregel Actief zijn in Nederland) (AFM policy rule no , 12 December 2006) the AFM explained how it decides whether securities are offered in the Netherlands. The AFM also lists some negative factors in this policy rule, upon the application of which it concludes that there is no offering in the Netherlands. The scope-setting in Section 1:17 Wft includes an elaboration of the concept to offer in the Netherlands. It follows from this Section that an investment undertaking, or the investment manager of such an undertaking, with its registered office or a secondary office in the Netherlands, which offers securities via the internet in an investment undertaking in another EEA Member State, and the offer as such can be qualified as a service provided by an information company in the meaning of Section 3:15(3) of the Netherlands Civil Code, will also be deemed to offer in the Netherlands. Furthermore, a Dutch investment undertaking will always have to be alert to a foreign supervisor who, under certain circumstances, could argue that the

11 11 Netherlands Regulation securities are offered in the relevant country where generally local authorization is required Exceptions, exemptions and options to waive the prohibition imposed by Section 2:65 Wft General In the event of securities in an investment undertaking being offered in the Netherlands as referred to above, the prohibition imposed by Section 2:65 Wft will apply in principle. Different situations are described below where this prohibition does not apply. These can be sub-divided into three statutory exceptions, various exemptions, and the authority of the AFM to waive the provisions in individual cases. Legal exceptions It follows from the scoping provisions of Section 1:12 Wft that the prohibition to offer as referred to in Section 2:65 Wft does not apply to investment undertakings or investment managers of such undertakings that offer securities to: fewer than 100 people who are not qualified investors; or exclusively qualified investors. It appears that these two exceptions may be combined. When offering securities not being transferable securities in closed-end investment undertakings exclusively to qualified investors and in advertising publications and documents announcing such an offer, it must be stated that the offer is or will be aimed exclusively at qualified investors. 1 1 In the letter of the law, this warning also applies to transferable securities in closed-end investment undertakings in view of the broad definition of security in the Wft as adapted following the incorporation of the Markets and Financial Instruments Directive (MiFID) in the Wft on 1 November It must also be assumed that this is a slip of the pen on the part of the legislator. The original notes to the Wft as implemented on 1 January 2007 unambiguously shows that the legislator s intention was to exclude transferable securities in closed-end investment undertakings from the scope of Section 1:12(3) and 4 Wft since these are so-called prospectus-directive securities that are subject to their own regime as implemented in Part 5 of Wft, with the domestic legislators of the Member States basically not being allowed to impose further requirements. The notes to the change in the Wft in the context of the implementation of MiFID also do not imply that the legislator intended a change with respect to this point.

12 12 Netherlands Regulation When offering to fewer than 100 people who are not qualified investors, and in advertising publications and documents announcing such an offer, it must be stated that the investment undertaking does not require authorization pursuant to the Wft and that the investment undertaking is not subject to supervision by virtue of Part 3 (Prudential supervision of financial undertakings) and Part 4 (Conduct of business supervision of financial undertakings) of the Wft (Section 1:12(3) Wft). This again does not apply to the offer of transferable securities in closed-end investment undertakings.2 There is a second legal exception by virtue of Section 2:66(3) Wft, on the basis of which the prohibition to offer as contained in Section 2:65 Wft does not apply if the securities are offered in a UCITS with its registered office in another Member State, and the UCITS or the investment manager of such an undertaking is in possession of a so-called European passport. This exception is the result of the UCITS Directive. If the UCITS or the investment manager of such an undertaking has obtained authorization from the competent body of the Member State, this authorization can serve as a European passport provided the applicable notification requirements of the AFM have been satisfied (more details in below). The third legal exception exists by virtue of Section 2:66(1) Wft and is limited to an exception to the prohibition to offer for non-ucitss. The prohibition does not apply if the investment undertaking or the investment manager of such an undertaking in which the securities are offered in the Netherlands has its registered office in a state where, in the opinion of the Ministry of Finance, investment undertakings are properly supervised and the notification requirements of the AFM have been satisfied. However, certain ongoing supervisory conditions do still apply to such an investment undertaking or its investment manager or custodian, where appropriate (more details in below). Exemptions Section 2:74 Wft provides the legal basis for implementation rules that allow for exemption from the prohibition to offer as referred to in Section 2:65(1) Wft. This is contained in Section 4 of the Wft exemption regulation (Vrijstellingsregeling Wft Vr). Section 4(1) Vr stipulates that exemption from Section 2:65(1) Wft applies to those who offer securities in an investment undertaking: to the extent that these securities can only be acquired at a counter value of at least EUR 50,000 per participant; 2 See footnote above.

13 13 Netherlands Regulation to the extent that these securities have a nominal value per unit of at least EUR 50,000; as referred to in Section 1:12(1) Wft; that is a starter fund in the meaning of the Techno starters seed capital scheme (Regeling seed capital technostarters); of which less than 50 percent of total assets consists of investments, and less than 50 percent of total income realized is generated from investments; or to directors, supervisory directors, or employees of the investment undertaking concerned, or to directors, supervisory directors or employees of a company or undertaking that is formally or actually associated with the investment undertaking in question. The exemption referred to in the third bullet above is included in the exemption regulation (Vr) because Section 1:12(1) Wft only exempts investment undertakings that offer securities and investment managers of such undertakings from the application of the prohibition to offer as referred to in Section 2:65 Wft. In certain instances, other legal entities that offer transferable securities could still be subject to the prohibition imposed by Section 2:65 Wft. Section 4 Vr as yet exempts these legal entities from the prohibition to offer. It is further important to note that, pursuant to Section 4(2) Vr, exemption from the first sub-section only applies to the extent that offerors state in the relevant offer of securities and in advertising publications and documents announcing such an offer that they do not require authorization to offer securities as provided for by the Wft, and that they are not subject to AFM supervision. Finally, it should be noted that Section 2:74 Wft only offers exemption options to non-ucitss. The UCITS Directive, in fact, does not provide the basis for exemption from the authorization requirement for a UCITS or the investment manager of such an undertaking. Option to grant a waiver Pursuant to Section 2:65(3) Wft, the AFM can grant a waiver of the prohibition conditions of Section 2:65(1) Wft. To obtain this waiver, the applicant will have to demonstrate that the interests which Part 2 (market access of financial undertakings) and Part 4 (conduct of business supervision of financial undertakings) of the Wft aim to protect are otherwise properly protected. The waiver may be granted in full or in part and for a definite or indefinite period. The UCITS Directive does not provide a basis for granting a waiver of the authorization requirement for a UCITS or the investment manager of such an undertaking.

14 14 Netherlands Regulation 2.3. Prohibition of Section 5:2 Wft / prospectus requirement Transferable securities in closed-end investment undertakings Section 5:2 Wft prohibits anyone in the Netherlands from offering securities to the public or have securities admitted to a regulated market situated or operating in the Netherlands (for example, the NYSE Euronext Amsterdam), unless a prospectus relating to the offer or the admission is available to the public which is in accordance with the Prospectus Directive (No. 2003/71/EC). Such a prospectus has to be approved prior to publication by the AFM. Nontransferable securities in investment undertakings do not fall under the definition of security in Section 1:1 Wft. Pursuant to Section 52a Vr, offers of securities in open-end investment undertakings and pursuant to Section 54 Vr offers of securities in open-end investment undertakings offered through a MTF or a similar platform to a MTF in a non European Member State are exempt from the requirements arising from Chapter 5.1 of the Wft, and thus also from the prohibition imposed by Section 5:2 Wft. Transferable securities in closed-end investment undertakings fall under the definition of security in Section 1:1 Wft, and the exemption granted in Section 52a Vr does not apply to offers of this type of securities. Therefore, when offering transferable securities in closed-end investment undertakings to the public or allowing such securities to a regulated market based or operating in the Netherlands, a prospectus will have to be produced in accordance with the prospectus directive (and the secondary legislation) that has to be approved by the AFM Exceptions Section 5:2 Wft does not apply, among other things, to the public offering of securities if: offered exclusively to qualified investors (which are investors); offered to fewer than 100 people, not being qualified investors; the offered securities can only be acquired at a counter value of at least EUR 50,000 per participant; the nominal value of each security is at least EUR 50,000; and the total counter value of the public offer of securities is less than EUR 100,000, which threshold amount is calculated over a period of 12 months.

15 15 Netherlands Regulation Furthermore, there are exceptions to the prohibition to allow securities to a market established or operating in the Netherlands. However, it goes beyond the remit of this brochure to go into more details Other observations Perhaps superfluously, we should point out here that an open-end investment undertaking or the investment manager of such an undertaking (or a closed-end investment undertaking with non-transferable securities) is still required to produce a prospectus in the context of ongoing information requirements in connection with the duty to obtain authorization pursuant to Section 2:65(1) Wft (see below). However, this prospectus does not have to comply with the requirements of Part 5 Wft (and the secondary legislation and regulations), and will not need to be approved by the AFM prior to publication. Naturally, this prospectus requirement does not apply to the extent that the prohibition of Section 2:65 Wft does not apply due to an exception or an exemption, or a sufficiently broad waiver. 2.4 Conditions for obtaining authorization General conditions Sections 2:67 to 2:69 Wft list the requirements that investment managers have to satisfy in order to obtain (and retain) authorization from the AFM. In addition, the entity applying for authorization must satisfy the conditions for applying for authorization as set out in the Wft Market access of financial undertakings decree (Besluit markttoegang financiële ondernemingen Wft), including providing all sorts of information to the AFM by using standardized forms agreed by the AFM. In order to obtain authorization, all investment undertakings (including UCITS and investment managers of such undertakings) must satisfy the conditions arising from the following categories: expertise of the people charged with deciding the day-to-day strategy of the investment undertaking; trustworthiness and integrity of the people charged with deciding or codeciding the day-to-day strategy and general strategy of the investment undertaking in the long term; policy concerning structuring and organization to ensure integrity; consultations structure; minimum number of people implementing day-to-day strategy and the place of day-to-day strategy implementation;

16 16 Netherlands Regulation the agreement to be concluded between the investment undertaking and custodian where a separate custodian has been appointed; requirements set by the articles of association for the tasks of the custodian; information provision to participants, the public and the supervisor; and financial guarantees. A number of additional conditions apply to investment funds and UCITS (see below). Expertise of day-to-day policymakers The entity applying for authorization must be able to demonstrate that the dayto-day policy pursued by the investment manager and the custodian, if applicable, is decided by experts in the business of investment manager or custodian, if applicable. The AFM verifies this when granting authorization on the basis of criteria elaborated in Expertise of day-to-day policymakers Section 4:9 Wft policy rule (Beleidsregel Deskundigheid dagelijks beleidsbepalers artikel 4:9 Wft). The AFM distinguishes two types of expertise: general expertise; and specific expertise. General expertise refers to the required managerial skills required for determining the day-to-day strategy of the investment manager or custodian. This includes leadership skills in a hierarchical set-up. According to the AFM, the nature of the undertaking co-determines the managerial skills required. In addition, the day-to-day policymaker must have general knowledge about the financial markets, financial products, financial services relevant to the investment manager, or the custodian and the legal supervisory framework applying to the undertaking. Specific expertise refers to the knowledge and experience with respect to the structuring of the business, including monitoring and controlling financial risks. This knowledge and experience may have been gained in a non-financial undertaking. The nature of the undertaking co-determines the required knowledge and experience. It also refers to expertise in collective asset management required for actually performing the tasks in the investment undertaking, or expertise of keeping assets in custody for actually performing the tasks of the custodian. If the investment manager of an investment undertaking performs administrative work for different types of investment undertakings, the expertise of the day-to-day policymaker can refer to certain

17 17 Netherlands Regulation types of investment undertakings, provided that the day-to-day policymakers, or the investment manager jointly have the required expertise in respect of all the investment undertakings on offer. The expertise of a day-to-day policymaker is partly determined on the basis of information and documents to be submitted to the AFM concerning training and relevant work experience during the five years preceding the assessment. The relevant work experience must have been gained over a period of at least two full years, which do not have be two successive years. Under certain conditions, no new assessment is required if the supervisor has assessed the aforementioned people earlier. Trustworthiness of day-to-day policymakers and co-policymakers The entity applying for authorization must be able to demonstrate that the dayto-day policy pursued by the investment manager and the custodian, if applicable, is decided or co-decided by people whose trustworthiness is without doubt. If a body in the investment undertaking, investment manager, or custodian is charged with supervising the policy and general affairs of the investment undertaking, investment manager, or custodian, this supervision must equally be done by people whose trustworthiness is without doubt. The AFM determines whether the aforementioned people s trustworthiness is without doubt based on the person in question s intentions, actions, and antecedents. This is contained in the Conduct of business supervision of financial undertakings under the Wft decree (Besluit Gedragstoezicht financiële ondernemingen Wft BGfo). As part of this process, the AFM considers: the mutual relationship between the action or actions forming the basis for an antecedent and other circumstances in the case; the interests that the law intends to protect; and the other interests of the investment manager, custodian, and the party involved. When confirming antecedents, the AFM considers the antecedents listed in Appendix C to the BGfo. Furthermore, the AFM can gather information about the person involved, including data and information from the public prosecution service and the tax authorities. All in all, a relatively large number of people can be subject to their trustworthiness being assessed, and it is not impossible either that owners of large units of securities in investment undertakings fall within the reach of this assessment. Once authorization has been granted, the people referred to above can only be appointed after approval by the supervisor.

18 18 Netherlands Regulation Policy on integrity, structuring and organization Policy The entity applying for authorization must be able to demonstrate that the investment manager or custodian pursues adequate policies that guarantee the integrity of its business. These policies should be designed to prevent: conflicts of interest; the investment manager or custodian or their staff from committing criminal acts or other breaches of the law that could undermine the trust in the investment manager or custodian or in the financial markets; the trust in the investment manager or custodian or in the financial markets being undermined due to their clients; and other actions being performed by the investment manager or custodian or their staff that goes against everything considered proper in unwritten law, such that the trust in the investment manager or custodian or in the financial markets is seriously undermined. These adequate policies must satisfy certain minimum conditions that are elaborated in the BGfo. These conditions refer to: the treatment, recording, and reporting of incidents; the assessment of the trustworthiness of the staff in a sensitive position; acceptance of clients; and investigation of certain people or undertakings. Structuring The entity requesting authorization must furthermore be able to demonstrate that the investment manager or custodian has structured the business management such that it ensures controlled and sound operations. In this instance, too, the management of the entity must satisfy certain minimum requirements as set out in the BGfo and which relate to: general aspects of management (managing and controlling business processes and business risks); the integrity of management; and

19 19 Netherlands Regulation the conduct of the management (orderly and transparent financial market processes, open relationships between market parties and proper treatment of participants). The management of the investment manager and the custodian must satisfy a number of minimum requirements. It should guarantee, among other things, that: every transaction involving the investment undertaking can be reconstructed; the managed assets of the investment undertaking are invested in accordance with the investment strategy and the corresponding rules pursuant to the Wft; the decision-making process and the agreements reached between the investment manager and the custodian are transparent; a reliable, accurate and consistent intrinsic value is determined for the investment undertaking; the integrity, ongoing availability and security of the electronic data are guaranteed; the risks associated with investments are managed and analyzed systematically; the managers receive regular (also interim, in the case of exceptional events occurring) updates about the business; and there is segregation of duties between performing legal actions concerning the assets of the investment undertaking and controlling, and administering these actions. Furthermore, it is important that investment managers in charge of several investment undertakings ensure that each investment undertaking has a management that meets the aforementioned minimum requirements. Consultations structure The consultations structure of the investment manager, and the custodian where applicable, must satisfy certain conditions. For example, it is not allowed to have a formal or actual consultations structure that is so obscure that it hinders or can hinder the supervisors from properly carrying out their tasks. In addition, and investment manager or custodian may not enter into formal or actual consultations with people if the law of a state, not being an EU Member State, that applies to such people hinders or can hinder the supervisors from properly carrying out their tasks.

20 20 Netherlands Regulation Minimum number of people for and place of day-to-day strategy The entity applying for authorization will have to be able to demonstrate that the day-to-day strategy of the investment manager, and the custodian, where applicable, is determined by at least two natural persons (the so-called four-eye principle). Moreover, the people determining the day-to-day strategy are required to perform the associated tasks from the head office in the Netherlands. Head office is deemed to be the place where the people determining the day-to-day strategy are accommodated. Finally, the investment manager of an investment undertaking must at all times be the manager as defined in the articles of association of every investment undertaking it administers. Contract between investment manager and custodian If the assets of an investment undertaking are in the care of a custodian, the entity applying for authorization must be able to demonstrate that the investment manager has concluded a written contract with the custodian covering administration and custodianship. This written contract should at the very least stipulate that: the custodian acts in the interests of the participants in the investment undertaking; custodianship on behalf of the investment undertaking is performed such that that the assets in custodianship can only be accessed by the investment manager and the custodian jointly; the custodian will only release the assets upon receipt of a letter from the investment manager that clearly states that the release of the assets is required in connection with regular administrative processes; pursuant to the law of the state where the investment manager has its registered office, the custodian is liable towards the investment undertaking and the participants for any damage suffered by them to the extent that such damage is the result of imputable negligence or inadequate fulfillment by the custodian of its obligations, also if the custodian has entrusted all or part of the assets to a third party; if receipts are issued for securities, these receipts will be signed by the custodian; and a proposal by the investment manager to amend the conditions that apply between the investment undertaking and the participants will only be done together with the custodian.

21 21 Netherlands Regulation A number of additional conditions regarding the contract of administration and custodianship also apply to the UCITS. Tasks of the custodian provided for in the articles of association If an investment undertaking has a separate custodian, the entity applying for authorization must be able to demonstrate that only a legal entity acts as custodian whose sole objective as defined in the articles of association is: the custodianship of assets and the administration of the goods in which an investment undertaking has invested. Information provision During the process of applying for authorization, the investment manager should publish a registration document on its website containing information about the investment manager, and the custodian, where applicable. The registration documents must at least contain the information included in Appendix D to the BGfo, attached to this brochure as Annex A. This includes information about the types of investment undertakings administered or to be administered by the investment manager and the custodians, where applicable, that will be charged with the custodianship of the assets of the investment undertakings. In the event of subsequent changes to the registration document, the AFM should be notified and permission be obtained from the AFM. In addition, the application should be made using the different standard documents specially prepared by the AFM. A range of data have to be submitted as part of the application, including the registration document and the articles of association of the investment manager, the investment undertaking, or the custodian, and information on the basis of which the AFM can ascertain whether the expertise and trustworthiness requirement and the other conditions are satisfied. All of this is elaborated in the Wft market access of financial undertakings decree (Besluit markttoegang financiële ondernemingen Wft ). Financial guarantees The entity applying for authorization must be able to demonstrate that the investment manager and/or the custodian have a minimum capital requirement (shareholders equity). The investment manager of a non-ucits has to have minimum shareholders equity of EUR 225,000 if the assets to be managed are at least EUR 250 million, and minimum shareholders equity of EUR 125,000 if the managed assets are less than EUR 250 million. The custodian has to have minimum shareholders equity of EUR 112,500. If the investment manager of a non-ucits or a custodian anticipates or can reasonably anticipate that