Royal Decree 1464/2018 of 21 December developing the consolidated text of the Securities Market Law and adapting Spanish law to EU financial markets regulations

OFFICIAL STATE BULLETIN No. 313 Friday, 28 December 2018 Sec. I. Page 129227 I. GENERAL PROVISIONS MINISTRY OF ECONOMY AND ENTERPRISE 17879 Royal Decree 1464/2018, of 21 December, developing the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, and the Royal Decree-Law 21/2017, of 29 December, on urgent measures to adapt Spanish law to European Union legislation in the field of securities markets, and partially amending Royal Decree 217/2008, of 15 February, on the legal regime of investment service companies and other entities providing investment services, and partially amending the Regulation of Law 35/2003, of 4 November, on Collective Investment Institutions, approved by Royal Decree 1309/2005, of 4 November, and other royal decrees in the matter of securities markets.

I The recent Royal Decree-Law 14/2018, of 28 September, modifying the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, aims to advance the incorporation into our legal system of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directives 2002/92/EC and 2011/61/EU; and of Commission Delegated Directive 2017/593/EU of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards safeguards for financial instruments and funds belonging to clients, organisational requirements for investment firms, and the rules applicable to the payment or receipt of fees, commissions or other monetary or non-monetary benefits. It also carries out the adaptation of Spanish regulations to the novelties of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 and Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 constitute the so-called "MIFID II regulatory package" or "MIFID II/MIFIR", hereinafter MIFID II, which includes not only these two level 1 acts, but also the aforementioned delegated directive; as well as more than thirty-four development rules of European law, between delegated acts and regulatory and implementing technical standards.

MIFID II, which began to apply from 3 January 2018, represents a substantial modification of the functioning of markets and trading venues in the European Union, not so much because of the objectives pursued, since they essentially remain the same as those that inspired and directed Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, but because of the scale of the operational modifications imposed to comply with the transparency and mandatory trading obligations in trading venues set out in the aforementioned Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014.

The MIFID II regulatory package has the following objectives: a) to ensure high levels of investor protection in financial products, especially retail investors; b) to improve the organisational structure and corporate governance of investment service companies; c) to increase the security, efficiency, proper functioning and stability of securities markets; d) to guarantee regulatory convergence that allows competition within the framework of the European Union; and e) to promote access for small and medium-sized enterprises to capital markets.

Although the approval of Royal Decree-Law 21/2017, of 29 December, on urgent measures to adapt Spanish law to European Union legislation in the field of securities markets, and Royal Decree-Law 14/2018, of 28 September, have resulted in the incorporation into the Spanish legal system of much of the MIFID II regulatory package, it is necessary to complete its incorporation with regulatory development. This royal decree aims to finalise said incorporation and complete the regulatory development of the legal regime of Royal Decree-Law 21/2017, of 29 December, and the consolidated text of the Securities Market Law, approved by Royal Legislative Decree 4/2015, of 23 October, which has been modified by Royal Decree-Law 14/2018, of 28 September, and by other subsequent norms (from which it receives the authorisation for regulatory development), deepening into its principles.

The regulatory principles inspiring this royal decree and emanating from Royal Decree-Law 21/2017, of 29 December, and Royal Decree-Law 14/2018, of 28 September, are as follows: a) to ensure high levels of investor protection in financial products, especially retail investors; b) to improve the organisational structure of regulated markets; c) to improve the organisational structure and corporate governance of companies; and d) to increase the security and efficiency of securities markets.

II This royal decree responds to the principles of necessity, effectiveness, proportionality, legal certainty, transparency, and efficiency. With regard to the principles of necessity and effectiveness, it is one of the optimal instruments to carry out the partial transposition of the MIFID II regulatory package, and thus comply with the obligations of the Kingdom of Spain regarding the incorporation of European law norms into our legal system.

As for the principle of proportionality, certainly the transposition of the MIFID II regulatory package maintains the necessary balance between providing an adequate, agile normative framework that favours the development and competitiveness of our financial sector, on the one hand; and guaranteeing investor protection, which will result in greater confidence in the financial sector and better performance by this sector of the functions it must carry out in the Spanish economy as a whole, on the other.

The principle of legal certainty is reinforced, insofar as the royal decree develops regulatory matters that, due to their level of detail or eminently technical character, must be regulated in norms of regulatory rank. The distribution of matters between the law and this regulation thus improves the knowledge and understanding of the norms by their recipients, facilitating their interpretation and application.

With this royal decree, compliance is given to the provision contained in the 2018 Annual Regulatory Plan under the corresponding denomination. In application of the principle of transparency, both in the public consultation phase and in the public hearing phase, interested parties had access to the draft of the aforementioned royal decree project, from which the current royal decree derives, and to other supporting documents at the electronic headquarters of the Ministry of Economy and Enterprise, so it has not been deemed necessary to reproduce public consultation and hearing regarding the new text.

This royal decree is issued in accordance with what is provided in Article 149.1.6th, 11th, and 13th of the Spanish Constitution, which attribute to the State exclusive competence over commercial legislation, bases of the organisation of credit, banking and insurance, and bases and coordination of the general planning of economic activity, respectively.

cve: BOE-A-2018-17879 Verifiable at http://www.boe.es

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III The royal decree consists of 28 articles divided into three titles, three transitional provisions, two additional provisions, one repealing provision, and eleven final provisions.

Title I contains the legal regime of regulated markets. Chapter I collects the authorisation regime. Chapter II regulates the governing bodies of regulated markets, specifying the requirements applicable to the administrative body, functions and responsibilities, the incompatibility and limitation regime for directors, the appointments committee, as well as rules on corporate governance.

Chapter III collects the figure of members of regulated markets, regulating access, loss and suspension of status, and the management of conflicts of interest.

Chapter IV regulates the admission to trading of financial instruments, and Chapter V contains the regulation of markets for contracts on financial derivatives, collecting the general conditions of such contracts.

Title II regulates position limits, detailing position limits relative to the volume of a net position in derivatives on commodities, and regulating aspects such as supervision or the application of more restrictive limits in exceptional cases. Within this title, the communication of positions in derivatives on commodities, emission allowances or derivatives on emission allowances is also regulated, developing the regime of information and classification obligations.

Title III regulates the figure of data supply services. The conditions and effects of the authorisation of companies providing this type of service are detailed, highlighting the regulation of requirements applicable to the administrative body of data supply service companies, as well as conditions applicable to authorised publication agents, consolidated tape providers, and authorised information systems.

The first additional provision regulates the communication by the CNMV (National Securities Market Commission) to the European Banking Authority of sanctions imposed on investment service companies as well as appeals lodged against them and their results.

The second additional provision establishes that the processing of personal data that must be carried out as a consequence of the application of this royal decree must be carried out in accordance with Regulation (EU) No 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data and repealing Directive 95/46/EC (General Data Protection Regulation), and in the rest of the legislation on personal data protection.

The third additional provision specifies that in those autonomous communities where there are regional markets, references in the royal decree to the CNMV must be understood as made to the competent regional body.

The first transitional provision establishes a period of two months for the application of the modifications introduced in Royal Decree 217/2008, of 15 February, on the legal regime of investment service companies and other entities providing investment services, and partially amending the Regulation of Law 35/2003, of 4 November, on Collective Investment Institutions, approved by Royal Decree 1309/2005 of 4 November, and of the modifications of Royal Decree 1082/2012, of 13 July. Specifically, regarding the incentive regime regulated in the norm, a period of two months is also granted to adapt those financial instruments that had been marketed prior to the entry into force of said modifications.

The second transitional provision collects the necessary provisions to guarantee legal certainty regarding the requirements applicable in admissions to trading regulated in this royal decree, until the complete entry into force of Regulation (EU) No 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and repealing Directive 2003/71/EC, maintaining until then the applicability of the laws transposing the latter Directive.

The third transitional provision regulates the adaptation of company names by Financial Advice Firms (EAFI), which become known as Financial Advice Firms (EAF), upon the entry into force of the Royal Decree.

The single repealing provision repeals Royal Decree 710/1986, of 4 April, creating a second securities market in the Official Stock Exchanges and modifying the conditions for the circulation of fixed-income securities; Royal Decree 726/1989, of 23 June, on Governing Societies and members of Stock Exchanges, Stock Exchange Society and Collective Bond; Royal Decree 949/1989, of 28 July, on commissions applicable to transactions on securities admitted to trading in Stock Exchanges and on the constitution of the Colleges of Commerce Brokers of Madrid, Barcelona and Bilbao; Royal Decree 1416/1991, of 27 September, on special stock market operations and on off-exchange transmission of listed securities and weighted average changes; Royal Decree 1333/2005, of 11 November, developing Law 24/1988, of 28 July, on the Securities Market, in the matter of market abuse; and Royal Decree 1282/2010, of 15 October, regulating official secondary markets for futures, options and other financial derivatives.

The first final provision modifies Royal Decree 948/2001, of 3 August, on investor compensation systems, to accommodate it to the novelties of the consolidated text of the Securities Market Law after the modifications introduced in the relationship of investment services and activities by Royal Decree-Law 14/2018, of 28 September.

The second final provision modifies the Regulation of Law 35/2003, of 4 November, on Collective Investment Institutions, approved by Royal Decree 1082/2012, of 13 July, to comply with MIFID II rules on commissions that may be charged in relation to market research studies in relation to incentives.

The third final provision modifies Royal Decree 1310/2005, of 4 November, partially developing Law 24/1988, of 28 July, on the Securities Market, in the matter of admission to trading of securities in official secondary markets, public offers for sale or subscription, and the prospectus required for such purposes.

The fourth final provision constitutes one of the axes of this royal decree and of the entire transposition of MIFID II by introducing a profound modification of Royal Decree 217/2008, of 15 February, on the legal regime of investment service companies and other entities providing investment services, and partially amending the Regulation of Law 35/2003, of 4 November, on Collective Investment Institutions, approved by Royal Decree 1309/2005 of 4 November.

The legal regime of investment service companies provided for in the consolidated text of the Securities Market Law is developed regulationally after the modifications introduced by Royal Decree-Law 14/2018, of 28 September. Thus, the provisions included in said norm are developed in matters of authorisation, activity, organisational requirements, legal regime of financial advice firms, protection of client assets, cross-border activity, product surveillance and control, incentives, and information obligations to clients and potential clients, and the legal regime of significant shareholdings and information obligations on the composition of share capital. Furthermore, the requirements applicable to investment service companies in matters of corporate governance established in the consolidated text of the Securities Market Law are developed, which, among other issues, represent the regulatory development of the transposition carried out in Articles 184 to 186 of the consolidated text of the Securities Market Law of Article 91, paragraphs 8, 9, and 10 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, known as "CRD IV". Likewise, Articles 29.2, 38, and 124.3 are transposed regarding the possibility of certain investment service companies to carry out proprietary trading with capital requirements of entities that do not carry out this type of operation, the treatment of branches of EU credit institutions in Spain, and ensuring adequate information exchange between the CNMV and other competent authorities of the European Union, in the case of Spanish entities controlled by an EU parent entity, respectively.

Within the fourth final provision, the transposition of the regime of incentives and rebates stands out. MIFID II allows incentives or rebates to be received when investment services are provided, other than discretionary portfolio management or independent advice (as these are totally prohibited in these cases), provided that it is demonstrated that there is an increase in the quality of service provision that justifies their charge, for which it establishes a system of scenarios.

The scenarios that allow considering that an increase in the quality of the service provided occurs appear in Commission Delegated Directive (EU) 2017/593 of 7 April 2016, and are consequently collected in this royal decree. Specifically, it is considered that the quality of the service increases if, among other elements, non-independent advice is provided or access to a wide range of financial instruments is provided, including an appropriate number of third-party products. To contribute to reducing the legal uncertainty of the indeterminate concepts used by European law, the Spanish norm provides some elements to help specify what is understood by an appropriate number of third-party products.

Regarding product surveillance and control, the fourth final provision develops the regime by which investment service companies that design financial instruments for marketing to clients must implement a prior approval process for each instrument, to identify a market of end clients to whom the instrument will be directed. The objective is that the characteristics of the products are the most suitable for each type of identified client, including in the analysis matters related to the distribution channels of the financial instruments concerned.

In this way, the objective of investor protection is reinforced, since matters related to the suitability of the financial instrument for the specific client to whom it is directed are no longer present only at the moment of marketing, but from the very conception and design of the instrument. It is also noteworthy that the aforementioned approval procedures must be approved by the board of directors of the investment service company itself.

Another issue that reinforces both investor protection and the CNMV's supervisory capacity is the obligation to include in the records of investment service companies, telephone conversations and electronic communications related to the execution of orders on own account and with the provision of the service of receiving, transmitting, and executing orders.

The fourth final provision also includes adjustments in the matter of supervision of investment service companies, to advance in the complete transposition of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

The fifth final provision modifies Royal Decree 84/2015, of 13 February, developing Law 10/2014, of 26 June, on the organisation, supervision and solvency of credit institutions, with the objective of ensuring adequate information exchange between the Bank of Spain and other competent authorities of the European Union, in the case of Spanish entities controlled by an EU parent entity. With this, Article 124.3 of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 is transposed for credit institutions and the transposition of said directive is completed.

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The sixth final provision modifies Royal Decree 878/2015, of 2 October, on compensation, settlement and registration of negotiable securities represented by book entries, on the legal regime of central securities depositories and central counterparties, and on transparency requirements for issuers of securities admitted to trading on an official secondary market, to make the essential adjustments to guarantee their correct interpretation and application in relation to the novelties of MIFID II regarding trading venues.

The seventh to eleventh final provisions respectively contain references to the competent title, the incorporation of European Union law, the regulatory authorisations, the entry into force of the norm, and the entry into force of certain modifications of articles of the consolidated text of the Securities Market Law carried out by Royal Decree-Law 14/2018, of 28 September.

In compliance with what is provided in Law 50/1997, of 27 November, on the Government, the project of royal decree has been submitted to the mandatory procedure of consultation and hearing by making it available to the affected sectors in