New Executive Order and Guidance Note on investor protection in securities

Date 19 aug. 2011
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The Ministry of Economic and Business Affairs has issued a new Executive Order No. 768 of 27 June 2011 on investor protection in securities (the "Order") with accompanying guidance note no. 15 of 18 July 2011 (the “Guidance Note"). The Order is a part of the implementation of certain directives relating to investor protection, including the UCITS IV Directive (Directive 2009/65/EC).

 

The Order came into force on 1 July 2011 and replaces the former order on investor protection, see below regarding the time when each amendment came into force.

 

The Order and the revised rules

The Order is issued by the Danish FSA (Finanstilsynet) under Section 43(2) and (5), Section 44(3), no. 1, and Section 373(4), of the Financial Business Act and contains certain rules on the protection of investors in their interaction with securities dealers, including securities dealers’ duty to act fairly and professionally and securities dealers’ disclosure obligations to the various categories of customers (retail clients, professional clients and eligible counterparties, as defined in the Order).


The Order contains the following changes compared to the previous order: (i) duty to issue key investor information for an investment fund, hedge fund, special fund or department thereof in the marketing of these and (ii) requirements for the contents of sales notes as well as a transitional arrangement that allows funds approved under the current Act on Investment Funds etc. to choose to prepare a simplified prospectus instead of a document with key investor information until 1 July 2012.


The changes are in line with the other changes that are the result of the UCITS IV Directive; according to Section 84 of the Act on Investment Funds etc., investment funds, hedge funds and special funds are required to produce documents with key investor information and accordingly, securities dealers who market these associations are obliged to procure these documents to customers.


The key investor information is to be prepared in the same way by all investment funds, hedge funds and special funds. The topics to be included in the document are regulated by the EU, and the rules apply to funds throughout Europe. The aim is to make it easy for investors to compare different investments. In Denmark, rules on content and form of the document are provided in a separate executive order based on EU-regulation.


The document must stipulate the essential characteristics and risks of investing in the fund, so that a retail investor can understand the nature and risks of investing in the shares they are offered. The document is an "informative label" on investment certificates. The document containing key investor information replaces the previous duty to produce a simplified prospectus.


When a securities dealer executes an order for a retail customer, with the exception of portfolio management, the securities dealer must send a sales note within the first business day after executing the order. Under current rules, there are a number of disclosure requirements for this sales note, see Section 21(3) of the Order. In addition, the sales notes now have to contain additional information.

 

Key investor information

The documents on key investor information are compiled by the fund itself, but, according to Section 15 of the Order, at the marketing of shares of an investment fund, hedge fund, special fund or department thereof, the securities dealer is obliged to state that there is a document with key investor information and is obligated to inform the customer on how to claim the document with key investor information, or how to gain access thereto. The document containing key investor information is to be provided free of charge to retail customers before the transaction and also at the customer's request.


The document containing key investor information is to be provided on a durable medium. Retail Customers may choose a durable medium other than paper when appropriate. If the key investor information is given via a link to a website, this reference must be directly to the document with key investor information for the fund in which shares are traded.


The transitional provision provides investment funds, hedge funds and special funds authorised under the Act on Investment Funds etc. with the option of continuing to provide a simplified prospectus according to the previous executive order instead of the document with key investor information until 1 July 2012. The commencement is postponed to give the industry a chance to adapt their IT systems to be able to provide the direct reference to the document with key investor information.


The above provision for the postponed commencement date is not authorised in the Order, but appears solely in the Guidance Note. The provision in the Guidance Note is therefore an unauthorised postponement of the commencement of provisions in the Order. FSA is aware of this.

 

Extended requirements for sales notes

Section 21(3) of the Order contains a number of disclosure obligations for sales notes to retail customers.


In addition, the sales notes at trading of investment fund shares covered by the Act on Investment Funds etc. now have to contain information about:


1)    the date and time of receipt of the order,

2)    payment method and

3)    the value date applied


Under the EU regulation (the UCITS IV Directive) (i) securities dealers, (ii) investment funds governed by the Act on Investment Funds etc. and (iii) investment management companies without the authorisation as a securities dealer under the Act on financial activities, are subject to an increased obligation of disclosure regarding the sale of shares in an investment fund. At the sale of this type of shares, the above information must be given.


The requirement for information about the date of receipt of the order can be fulfilled by reference to the time of registration. The requirement for information about payment method can be fulfilled by reference to the account number from which the transaction amount will be debited and credited.


These rules will come in force on 1 January 2012.

 

Assessment

The revised rules ensure implementation of existing EU regulation in the area. In addition, it is ensured that retail customers across Europe receive consistent and comparable key information on the proposed investment.


The discrepancy between the Order and the Guidance Note about the postponed commencement date may result in the release of a revised order and/or guidance note.



If you have any questions or require additional information on the rules, please contact Partner Dan Moalem (dmo@mwblaw.dk) or Attorney Lennart Meyer Østenfjeld (lmo@mwblaw.dk)


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.