International Survey of Investment Adviser Regulation

1 International Survey of Investment Adviser Regulation International Survey of Investment Adviser Regulation THIRD EDITION. Marcia L. MacHarg Kenneth J. Berman Editors Published by: Kluwer Law International PO Box 316. 2400 AH Alphen aan den Rijn The Netherlands Website: Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704. United States of America Email: Sold and distributed in all other countries by: Turpin Distribution Services Ltd. Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ. United Kingdom Email: Printed on acid-free paper. ISBN 978-90-411-3602-2. # 2012 Kluwer Law International BV, The Netherlands All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or trans- mitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher.

2 Permission to use this content must be obtained from the copyright owner. Please apply to: Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY 10011-5201, USA. Email: Printed and Bound by CPI Group (UK) Ltd, Croydon, CR0 4YY. Preface The genesis of International Survey of Investment Adviser Regulation grew out of our day-to-day contact with Investment advisers around the world. In 1994, the first edition of this Survey covered 18 jurisdictions. We correctly predicted that there would be increased focus on the Regulation of Investment advisers and, indeed, five years later, the second edition of the Survey included 28 countries and the European Union. Since 1999, the explosion in the growth of the world's securities markets, together with the exponential development of International Investment manage- ment products, such as collective Investment vehicles developed to serve individual investors as well as public and private retirement plans, have compelled regulators to respond.

3 This third edition of the Survey , which covers Investment Adviser Regulation in 39 countries and the European Union, is evidence of the pace of Regulation and the emergence of other relevant laws on the use of electronic media and the Internet, data protection and consumer privacy. We believe that Investment management firms, regulators, legal practitioners and those who study comparative legal systems will find this third edition of the Survey to be a valuable resource. Our aim is to foster understanding, development and rationalization of the Regulation of Investment advisers in a global environ- ment. To that end, the chapters are organized in a manner to facilitate comparisons among and between different legal systems and approaches. This Survey reflects the true dedication of our contributors, to each of whom we express our deepest gratitude for their commitment to this project and their patience with us through the process of publishing this book.

4 The contributing authors are lawyers who are experts in the field of Investment management Regulation . Each of them has taken the time to share his or her knowledge, practical insights and expertise. Our assistant editor, Daniel Wiedemann, a senior associate in the firm's Frankfurt office, provided us with invaluable support in organizing the Survey Preface and coordinating with the contributors, as well as in reviewing many of the chapters. Our colleagues in the Investment Management Group of Debevoise &. Plimpton, Gregory Larkin and Jaime Doninger Schecter, devoted long hours to the review of many of the chapters in this book. We are truly indebted to each of them for their excellent and important assistance. Finally, this book could not have been completed without the substantial efforts of the staff in the Frankfurt office of Debevoise & Plimpton LLP. Claudia Naumann supported us throughout the entire process with unfailing professional- ism, dedication and good humor, and Anna Gremmers and Abby Carrigan provided important assistance at crucial times.

5 Marcia L. MacHarg Kenneth J. Berman lxxvi Luxembourg Alex Schmitt & Philipp Mo ssner*. Bonn & Schmitt, Luxembourg A. OVERVIEW OF THE REGULATORY STRUCTURE. 1. Applicable Laws and regulations Regulatory Structure Pursuant to the Law of April 5, 1993 on the Financial Sector, as amended (the 1993 Law''), Investment advisors and private portfolio managers are deemed to be professionals of the financial sector ( PFS'') and fall into the sub-category of Investment firms.'' The activities of Investment advisors, persons that provide non-discretionary Investment advice, are governed by Articles 13 to 24 of the 1993. Law. The activities of private portfolio managers, persons allowed to provide discretionary Investment advice, are governed by Articles 13 to 23 and Article 24-3. of the 1993 Law. These provisions were amended by the law of 13 July 2007 on * Alex Schmitt is a partner at Bonn & Schmitt.

6 Bonn & Schmitt has special expertise in corporate law, taxation, banking, finance and Regulation , Investment management, litigation and dispute resolution. Philipp Mo ssner is a senior associate at Bonn & Schmitt. The authors gratefully acknowledge the assistance of Laurent Henneresse, an associate of the firm, in the preparation of this chapter. Marcia L. MacHarg & Kenneth J. Berman (eds), International Survey of Investment Adviser Regulation , pp. 593 615. # 2012 Kluwer Law International BV, The Netherlands. Alex Schmitt & Philipp Mo ssner markets in financial instruments (the MiFID Law''), which transposed into Luxembourg law the EU Directive 2004/39/EC of the European Parliament and of the Council of April 21, 2004 on markets in financial instruments (the MiFID. Directive''). The 1993 Law differentiates among Luxembourg, European Union ( EU''). and non-EU or third-country Investment firms.

7 Third-country Investment advisors and private portfolio managers are essentially subject to the same authori- zation rules as those applying to Investment advisors and private portfolio man- agers governed by Luxembourg law. However, Investment advisors and private portfolio managers established and authorized in a Member State of the EU can benefit from the European passport'', which allows them to exercise their activ- ities in Luxembourg through the establishment of a branch or to provide services on a cross-border basis without needing prior authorization from the Luxembourg authorities. The authorization requirements do not differ if Investment advisors and private portfolio managers also provide services to Investment vehicles, institu- tional accounts or certain clients, provided that such services otherwise fall within the scope of Articles 13 to 23, Article 24 ( Investment advisors) and Article 24-3.

8 (private portfolio managers) of the 1993 Law. Regulatory Authorities The supervision of the financial services sector, including activities performed by Investment advisors and private portfolio managers are entrusted to the Commission for Supervision of the Financial Sector, Commission de surveillance du Secteur Financier ( CSSF''), a supervisory authority created pursuant to the law of December 23, 1998, as amended, which replaced the Institut Mone taire Luxembourgeois. Self-Regulatory Organizations Investment advisors and private portfolio managers are required to respect the principles of the rules of conduct of the Association luxembourgeoise des Pro- fessionnels du Patrimoine (the ALPP''), which sets out a series of guidelines aimed at ensuring the provision of quality services to clients. The rules of conduct of the ALPP establish certain principles relating to the relationship between the members of the ALPP and their clients, such as the obligation to maintain secrecy of the information provided by clients and to adopt know your client measures.

9 The ALPP guidelines also state the public regulations to which members are subject, including the obligation to prevent the use of their services for money laundering purposes or for insider dealing, and contain principles gover- ning relationships among the members of the ALPP and financial inter- mediaries (notably, for the amicable settlement of disputes between members of the ALPP). 594. Luxembourg 2. Registration Requirements Activities or Actions Requiring Registration Non-Discretionary and Discretionary Advisory Activities Investment firms regulated solely as Investment advisors are not authorized to intervene directly or indirectly in the implementation of the advice they provide. In other words, Investment advisors do not have the discretion to effect transactions for clients, provide so-called discretionary Investment advice, or engage in asset allocation or portfolio management, all of which are subject to a separate authorization.

10 The provision of discretionary Investment advice (referred to in this chapter as private portfolio management) requires authorization as a private portfolio man- ager pursuant to Article 24-3 of the 1993 Law, discussed in further detail in section below. Provision of Investment Advisory Services Pursuant to the 1993 Law, any natural person established in Luxembourg for professional reasons, or any legal person governed by Luxembourg law, whose regular occupation or business is to provide personal recommendations to a client, either at the initiative of such person or upon request of a client, in respect of one or more transactions relating to financial instruments'' (as defined below in section ), is required to obtain an authorization from the minister responsible for the CSSF (currently, the Minister of Finance). The key characteristic for determining whether an activity involving Investment advice should be authorized in Luxem- bourg by the Minister of Finance is the provision of personal recommendations''.