Instruction regarding Inducements for SEB Fund Services S.A.

Transcription

1 = = Instruction regarding Inducements for SEB Fund Services S.A. Adopted by the Board of Directors of SEB Fund Services S.A. on September 20, 2011 (updated and re-adopted on December 9, 2013) This instruction applies to SEB Fund Services S.A, and is effective July 1, Instruction No. TBD Responsible : Ann-Charlotte Lawyer Senior Management Date of next review : December, 2014 Annual Date last reviewed: December, 2013 Updated

2 1. Background Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (the UCITS Directive ) and the Law of 17 December 2010 transposing the UCITS Directive into Luxembourg law require that a management company acts honestly and fairly in conducting its business activities in the best interest of the UCITS its manages and the integrity of the market. They further provide that a management company tries to avoid conflicts of interests, and when they cannot be avoided, ensures that the UCITS it manages are treated fairly. According to Directive 2010/43/EU implementing the UCITS Directive (the Management Company Directive ) and CSSF Regulation 10-4 transposing the Management Company Directive into Luxembourg law one area likely to create potential conflicts of interest is when a firm gives or receives payments or other types of benefits (i.e. goods or services), in relation to a service provided to the client ( inducements ). For the purpose of this Instruction the client is here to be understood as the investor into one of the investment funds under management of SEB Fund Services S.A (the Company ). This Instruction sets out the Company s internal procedures to be followed in situations where a payment/benefit arrangement is negotiated or otherwise current, to ensure full compliance with the UCITS inducements regime. This Instruction should be read in conjunction with the Instruction for handling of Conflicts of Interest in SEB Fund Services S.A. adopted by the Board of Directors on 30 May This Instruction shall be revised when necessary or reviewed at least annually by the Board of Directors. 2. General principles Proper Fees. Payments or benefits which are generally permitted are proper fees. A proper fee is a payment or benefit which enable or is necessary for the provision of a specific service and further by its nature cannot give rise to conflicts with the Company s duty to act honestly, fairly and professionally in accordance with the best interest of the client. It includes (but is not limited to) custody costs, settlement and exchange fees, regulatory levies, legal fees or other similar costs. Payment or benefit to or by a client or someone acting on behalf of a client. This type of payment/benefit, which can take the form of a fee, commission or a non-monetary benefit is generally permitted. Except that it does not include payments or benefits that may fall under the scope of bribery or another criminal offense. Payment or benefit to or by a third party or someone acting on behalf of a third party. This type of payment/benefit is only permitted if the following cumulative conditions are fulfilled: the existence, nature and amount of the payment or benefit, or where the amount cannot be ascertained, the method of calculating that amount must be clearly disclosed to the client in a manner that is comprehensive, accurate and understandable, prior to the provision of the relevant service; the payment or benefit must be designed to enhance the quality of the relevant service and not impair compliance with the Company s duty to act in the best interest of the client. 2

3 Payments between legal entities within the SEB group are also covered by the rules regarding inducements with a third party. However, please note that payments between different departments/divisions within the same legal entity are not covered by these rules. This means that the prohibited area of inducements applies only to third party payments/- benefits, made in relation to a service provided to a client. The prohibited area further applies only to such payment-/ benefit arrangements that in some way are such as to be reasonably likely to influence the receiver, and as a result thereof has a material negative effect on the interests of a client and including a possible disadvantage to the client. 3. Prior approval process and record keeping All agreements within the Company, including any kind of third party payment/benefit arrangements as described above, shall be in writing and shall after consultation with Group Compliance, see below, be reviewed and approved beforehand by the Board of Directors, or as delegated by the Board, bearing conflicts of interests in general, and specifically the inducements regime as described in this Instruction, in mind. Group Compliance is responsible to provide support in the area of inducements. Group Compliance shall be consulted prior to entering into an agreement of third party payment/benefits arrangements. Group Compliance is responsible to monitor that the requirements in this Instruction with respect to third party payments/benefits but also with respect to payments from clients and proper fees, are met. (Until the new Group Compliance organization is established the respective Compliance Officer at each division is responsible.) In situations were a payment/benefit arrangement has been reviewed in relation to the inducements provisions and been regarded permitted, it is important to properly describe and document the basis on which it has been concluded not to have a material negative effect on or including any disadvantage to the client, i.e. (i) that it does not impair compliance with the Company s duty to act in the best interest of its clients and (ii) how it will enhance the quality of the service provided to the client. Such documentation shall be filed together with the relevant agreement. Material issues relating to inducements shall be reported at each Board of Director s meeting. 4. Practical test The following practical test can be used to ensure that a payment/benefit arrangement does not fall within the prohibited area: A. Is a payment/benefit made to or received from a client or someone acting on behalf of the client? If YES permitted If NO continue to point B. below. B. Does a payment/benefit fall within the definition of a proper fee? Proper fees are defined in item 2. General principles above. They have quite a narrow scope, and even though there might be other payments which can be included in the definition, it must be payments similar to the ones mentioned, such as fees necessary for the management of investment funds. If YES permitted If NO continue to point C. below. 3

4 C. In order for a payment/benefit to or from a third party, not falling within A or B above, to be permitted, the payment/benefit has to: be designed to enhance the quality of the service provided to the client, and not impair compliance with the Company s duty to act in the best interest of its clients. If so, the payment/benefit arrangement, in addition, has to be disclosed to the client prior to providing the service. 5. Prior Disclosure If a payment/benefit arrangement shall be disclosed to the client according to item 4 point C above, such prior disclosure shall cover the existence, nature and the amount of the fee, commission or benefit. If the amount cannot be ascertained, it is sufficient to disclose the method of calculation provided that it is done in a manner that is comprehensive, accurate and understandable. The Company is allowed to provide a summary disclosure provided the full information is available on request. The summary should however contain enough information to enable the client to make an informed decision. A generic disclosure which explains merely that the Company will/may pay or receive an amount or benefit is not considered sufficient. The Company will provide summary and standardized disclosures (Level I information) of any relevant payment/benefit arrangements in a product fact sheet or similar regarding the specific product. These disclosures shall always be provided together with information to the client that further information about the arrangement is available on request. However, please note that an existing summary disclosure must be provided to the client even if no written material exists. Please, see Appendix 2 for further guidance about proposed disclosure text etc. If and when a client requests more information the Company shall inform the client of the amount of the fee, commission or benefit, or where the amount cannot be ascertained, the method of calculating the amount (Level II information). Client requests for Level II information shall be escalated to the appointed Investor Complaints Manager who will be responsible to provide and/or for appointing a person/unit responsible for providing Level II information to clients, as well as to the local Group Compliance Function. 4

5 Annex 1 Practical examples Since the tests in item 3 point A and point B above are quite straight forward, a test of the applicability of the inducements regime to specific payment-/benefit arrangement, often ends up in a test according to item 3 point C above. Below, you find a few practical examples of payment- /benefit arrangements and a recommended approach/argumentation. a) Commission sharing arrangements As long as all parties sharing the commission contribute to the service provided to the client in some way, it may be viewed as designed to enhance the quality of the service provided to the client. It also has to be ensured that the arrangement does not contain any element of inducing the receiver to act in a way which is inconsistent with the best interest of the client. The arrangement has to be disclosed to the client. b) Investment advice or general recommendation Payments/benefits in connection with investment advice or general recommendations to a client (incl. investment research) may be considered as normal commercial commission sharing arrangements and, as such, as designed to enhance the quality of the investment advice to the client. As an example a fund manager pays part of the client charges to an investment firm giving the client advice to invest in the fund. Such arrangements should be permitted, as long as the advice or recommendation given is not biased. The arrangement has to be disclosed to the client. If in the same example as above, the fund manager makes a one-off bonus payment to the investment firm on the sole condition that sales of a specific product reach an agreed level, this should normally NOT be permitted. In this situation it becomes more likely that the advice or recommendation is biased and impair the duty to act in the best interest of the client. It is also difficult to consider the arrangement as designed to enhance the quality of the investment advice to the client. c) Distribution arrangements Payments/benefits in connection with distribution arrangements where an issuer or product provider uses an investment firm for distribution, should be considered in the same manner as under a) above. Also, see d) below. If the commission receipt is depending on thresholds special attention has to be paid in order to see to that the Company always acts in the best interest of the client. 5

6 d) Rebates As an example, a portfolio manager transmits orders to a broker for execution. The portfolio manager charges its client a management fee and additional commission for the transactions made. The broker offers the portfolio manager a rebate or kick back, i.e. a sum of money based on the total number or value of the orders transmitted from the portfolio manager to the broker. If the benefit of the rebate is not transferred to the portfolio manager s client(-s) the arrangement is normally NOT permitted, since the payment can be considered as made with the purpose of influencing the receiver to direct transactions to the broker, materially affecting the client in a negative way in the event that the broker is not best placed to execute its business. If, on the contrary, the benefit of such a rebate is transferred to, or otherwise used for be considered permitted the benefit of the client(-s), the arrangement should normally, provided that the arrangement is clearly disclosed to the client by the firm who is providing the service to the client. There are also situations within the Company were the department receiving the rebate from the broker are not giving any investment advice to its clients, but is merely forwarding the order for execution and consequently can not influence the orders given by its clients. Then, there is no element of influencing the receiver to direct the transactions to a certain broker. Further, in the absence of payment by the broker/product provider these investment services, most likely, would not be provided; therefore, the payments may be seen as being designed to enhance the quality of the service to the client. Such arrangements should be permitted. The arrangement has to be disclosed to the client. e) Providing office equipment etc Providing, or being provided with, office equipment (such as computer terminals etc) is in some areas of the financial markets common practice. In some cases there is actually a need for certain equipment to be able to do business with a certain counterparty. Such equipment is normally provided, often for free, by that counterparty. Since it is possible that equipment is provided to a third party subject to terms imposed by the provider which induce the receiver to do (more) business with the provider in preference to other counterparties, and since this could be inconsistent with the interest of the underlying client(-s), any such Company arrangements have to be reviewed to ensure they are justifiable. Where the equipment provided is closely related to services provided to clients, for example pure trading systems, the arrangement is more likely to be permitted. (Please note that these types of arrangements are already banned in certain jurisdictions. Consult your local compliance officer or legal advisor.) f) Soft commission and bundling Soft commission means commission paid in non-cash form, which could give raise to problems because the arrangement is not transparent. The most common example of this is the provision of research to fund managers in return for brokerage business. Bundling is the practice of supplying two separate products together so that a client who only wants one must buy both, or when giving a client who buys products together a discount. 6

7 An example of an arrangement that may include a soft commission is the arrangement of providing office equipment as described under e) above. Any other such Company arrangements should also be reviewed to ensure compliance with the UCITS inducement regime, i.e. to ensure that the arrangement either can be considered as including a proper fee, or is designed to enhance the quality of the service provided, not impairing compliance with the Company s duty to act in the best interest of its clients and properly disclosed to the client. g) Client introduction agreements A client of the Company is introduced by the Company to another investment firm or a client of another investment firm is introduced to the Company by the firm, where after the customer is provided an investment service. A payment to the Company of a share of the fee related to the investment service provided shall be considered as enhancing the quality of the service to the client and permitted. The payment to the Company has to be disclosed. The receipt by the Company of such a payment should be permitted, as long as the introduction is not biased. The arrangement has to be disclosed to the client. 7

8 Annex 2 Guidance on disclosure to clients EXAMPLES Local rules and market practice should be taken into account, where relevant. Information text 1 introduction of client You as a client have been introduced to SEB by a third party. Such third party receives a commission as payment for the introduction. The commission is calculated as a one time payment, an annual payment calculated as a percentage of the managed capital, an annual payment calculated as a part of paid brokerage fee, or a combination of these three. Further information is available on request. Information text 2 General, included in Information about SEB and its services, agreements etc. SEB distributes funds managed by various fund management companies and is compensated therefore in accordance with each distribution agreement between SEB and the fund management company in question. The compensation is based on sold fund shares in each fund management company s funds. Such remuneration is normally calculated as a one-off compensation upon sale as a percentage of the invested amount, an annual compensation based on the invested capital, or a combination of these. The compensation arrangement can vary between fund management companies and funds managed by the same company. SEB may also provide or receive compensation upon referral of a client from or to a third party. Such remuneration are normally calculated as a one-off compensation, an annual compensation in the form of a percentage of the assets under management, an annual compensation based on a share of paid commissions or a combination of these. SEB may also receive remuneration in conjunction with making investments in financial instruments for managed assets, in accordance with the applicable terms of referral in force at the time. SEB can, upon request, provide further details of these remunerations. Information text 3 to be included in agreement re: investment advice for prospects In performing investment services SEB may in addition to the commission received from the client receive a commission from or pay commission to a third party. For more information about such payments please see SEB s information document Information about SEB and its investment services. Information text 4 text to be printed on order forms or confirmation notes For execution of orders SEB s Execution Policy applies. The Execution Policy is available at < or at SEB s branch offices. When executing an order regarding fund units SEB may, in addition to the commission paid by the client, receive or pay a commission to a third party. For more information about such payments, please see SEB s information document Information about SEB and its investment services, available at < or at SEB s branch offices. Further information is available on request. 8

9 Further information is available on request The wordings in the above examples aim to meet the requirements of a summary disclosure (Level I information), which is regarded sufficient only provided the full information (Level II information) is available on request. That is why wording must be added to the information texts above reflecting this, for example Further information is available on request. 9