Circular 3/2013 by the CNMV on information obligations for investment service clients regarding the assessment of financial instrument suitability and appropriateness (Amended by Circular 1/2014)

OFFICIAL STATE GAZETTE
No. 146 Wednesday, June 19, 2013 Sec. I. Page 46150
I. GENERAL PROVISIONS
NATIONAL SECURITIES MARKET COMMISSION
6658 Circular 3/2013, of June 12, by the National Securities Market Commission, on the development of certain information obligations to clients to whom investment services are provided, regarding the assessment of the suitability and appropriateness of financial instruments.
The third final provision of Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, introduced certain modifications to Law 24/1988, of July 28, on the Securities Market (LMV), giving mandatory character to certain recommendations that the National Securities Market Commission had already transmitted as best practices to entities providing investment services. Among other changes, it modified paragraph 3 of Article 79bis of this Law, empowering the National Securities Market Commission to require that, in the information provided to investors prior to the acquisition of a securities market instrument and in its advertising, all warnings regarding the financial instrument deemed necessary be included, and in particular, those highlighting that it is a product not suitable for non-professional investors due to its complexity. The modifications also affect the aforementioned Article 79bis in its paragraphs 6 and 7, relating respectively to the assessment of suitability and appropriateness. Specifically, regarding the assessment of suitability, the new wording of the legal text establishes that entities will provide the client in writing or on another durable medium a description of how the recommendations they make align with the investor's characteristics and objectives. This description, in accordance with the Law, must refer to the three components of the suitability assessment, namely the appropriateness of the product to the client's knowledge and experience, their financial situation and investment objectives, as well as the main risks the investor may incur (market, liquidity, and credit risk), which, in accordance with Article 64 of Royal Decree 217/2008, of February 15, on the legal regime of investment service companies and other entities providing investment services, must be disclosed. Regarding the assessment of appropriateness, the Law specifies that entities must deliver a copy to the client of the document recording the assessment performed and empowers the National Securities Market Commission to establish the terms in which the client must express in handwriting that they have been warned by the entity that the product they are about to acquire is not appropriate for them, or that they could not assess its appropriateness due to lack of information. Additionally, the CNMV is also empowered to establish the terms in which the register of clients and unsuitable products must be maintained as a result of an assessment yielding a negative outcome. The fifth provision of this Circular addresses this. In compliance with the duty to act in the clients' best interests, this register must be maintained for the purpose, among others, of contributing to ensuring that products whose appropriateness was previously assessed with a negative result are not offered to them on a personalized basis. Consequently, the new wording of Law 24/1988, of July 28, establishes new obligations for entities and empowers the CNMV
to specify the terms in which entities must warn clients, the specific handwritten expressions that must be obtained alongside the client's signature, and the requirements for maintaining the register of clients and unsuitable products. This Circular aims to develop the new matters incorporated into the Securities Market Law regarding the assessment of suitability and appropriateness of the products and services offered or acquired by investors. Specifically, the Circular establishes as a means of accrediting compliance with the information obligation regarding recommendations and the assessment performed that entities obtain a signed copy from clients of the documentation delivered. On the other hand, it defines the wording of the warnings that the investor must sign in each case and, alongside the signature, the specific text that they must write themselves. By virtue thereof, the Council of the National Securities Market Commission, in its meeting of June 12, 2013, in exercise of the conferred powers, in accordance with the Council of State and prior report of the Advisory Committee and the Bank of Spain, has ordered:
First Provision. Purpose.
This Circular aims to issue the precise rules for the development of the information obligations provided for in Article 79bis of Law 24/1988, of July 28, on the Securities Market.
Second Provision. Scope of Application.
This Circular shall apply to the following entities providing investment services in Spain:
a) Investment service companies mentioned in Article 64 of Law 24/1988, of July 28, including natural persons with the status of financial advisory companies. b) Entities mentioned in Article 65 of Law 24/1988, of July 28, authorized to provide certain investment services and auxiliary services. c) The following foreign entities:

1. Branches of investment service companies, management companies of collective investment institutions, and credit institutions.
2. Investment service companies and credit institutions from European Union Member States operating in Spain under the free provision of services regime through agents established in Spain.
3. Investment service companies, management companies of collective investment institutions, and credit institutions from non-EU Member States providing investment services in Spain without a branch.
   Third Provision. Information Obligations in the Suitability Assessment Process.

1. Entities that assess suitability in order to provide investment advice services to their clients must provide in writing or on another durable medium a description of how the recommendation made aligns with the investor's characteristics and objectives each time they make a recommendation. The recommendation must be coherent with all aspects evaluated for the client, and the description must refer at least to the terms in which the investment product or service has been classified from the perspective of market, credit, and liquidity risk, as well as its complexity, and to the suitability assessment performed on the client in its three components. When dealing with professional investors, the entity may omit this explanation regarding knowledge and experience as well as their financial situation, in the latter case, unless it concerns a client listed in letter e) of Article 79bis.3 of Law 24/1988, of July 28. The description may be abbreviated when recommendations are made repeatedly on the same type or family of products.
   For the purposes of this Circular, a product shall be considered of the same type or belonging to the same family of products when the complexity of its characteristics and the nature of its risks are similar, taking into account at least market, liquidity, and credit risks.
2. The entity must accredit compliance with the information obligation referred to in this provision, for which purposes it may do so by obtaining a signed copy from the client of the delivered document, which must include the date on which such delivery occurs, through the registration of communication to the client by electronic means, or by any other reliable means.
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OFFICIAL STATE GAZETTE
No. 146 Wednesday, June 19, 2013 Sec. I. Page 46151 Fourth Provision. Information Obligations in the Appropriateness Assessment Process.

1. Entities that assess the knowledge and experience of clients when providing investment services other than investment advice or portfolio management must deliver to the client a copy of the document recording the assessment performed. The assessment must be coherent with all information provided by the client or available to the entity and used in the assessment. This documentation must be delivered each time an assessment is performed for a specific type or family of products.
   The entity must accredit compliance with the information obligation referred to in this provision, for which purposes it may do so by obtaining a signed copy from the client of the delivered document, which must include the date on which such delivery occurs, through the registration of communication to the client by electronic means, or by any other reliable means.
2. When the assessment cannot be performed because the client does not provide sufficient information, the entity must warn them that the lack of information prevents it from determining whether the investment service or product is suitable for them. The warning shall have the following content:
   "We inform you that given the characteristics of this transaction XXX (the transaction must be identified), ZZZ (name of the entity providing the investment service) is obliged to assess its appropriateness for you; that is, to assess whether, in our opinion, you possess the necessary knowledge and experience to understand the nature and risks of the instrument on which you wish to trade. By not providing the necessary data to carry out this assessment, you lose this protection established for retail investors. By not carrying out this assessment, the entity cannot form an opinion as to whether this transaction is appropriate for you or not."
3. When the transaction involves a complex instrument, the entity must obtain the client's signature on the above text together with a handwritten expression by the client stating:
   "This is a complex product and due to lack of information it has not been assessed as appropriate for me."
   The warning and the handwritten expression shall form part of the contractual documentation of the transaction even when formalized in a document separate from the purchase order.
4. When the assessment has been performed and the entity considers that the service or product is not appropriate for the client, it must warn them. The warning shall have the following content:
   "We inform you that, given the characteristics of this transaction XXX (the transaction must be identified), ZZZ (name of the entity providing the investment service) is obliged to assess its appropriateness for you. cve: BOE-A-2013-6658

OFFICIAL STATE GAZETTE
No. 146 Wednesday, June 19, 2013 Sec. I. Page 46152 In our opinion, this transaction is not appropriate for you. A transaction is not appropriate when the client lacks the necessary knowledge and experience to understand the nature and risks of the financial instrument on which they are about to trade."
When the transaction involves a complex instrument, the entity must obtain the client's signature on the above text together with a handwritten expression stating:
"This product is complex and is considered not appropriate for me."
The warning and the handwritten expression shall form part of the contractual documentation of the transaction even when formalized in a document separate from the purchase order.
5. When the entity provides a service relating to complex instruments other than investment advice or portfolio management and wishes to include in the documentation to be signed by the investor a statement to the effect that it has not provided investment advice services, it must obtain alongside the client's signature a handwritten expression stating:
"I have not been advised on this transaction."
Fifth Provision. Updated Register of Assessed Clients and Unsuitable Products.

1. In order to facilitate supervisory activity by both the CNMV and internal control bodies, entities must maintain an updated register of assessed clients and unsuitable products that will reflect, for each client, the products whose appropriateness has been previously assessed with a negative result. This is without prejudice to entities being able to carry out as many assessments for clients as they deem appropriate.
   This register, which shall form part of the client register referred to in the Resolution of October 7, 2009, by the National Securities Market Commission, will allow identifying the date from which the entity considered each type of product unsuitable for each specific client, also recording, when necessary, the date from which it ceased to be considered unsuitable. In compliance with the obligation to keep clients adequately informed at all times, entities must provide free of charge to clients who request it the information about their particular situation contained in this register.
2. This register must be kept by electronic means that prevent manipulation of the information, allowing its consultation in an agile manner, and must be maintained in compliance with the requirements set forth in Article 32 of Royal Decree 217/2008, of February 15.
   Sixth Provision. Compliance with Information Obligations in the Provision of Services via Electronic or Telephone Means.
3. When the service is provided, complying with the requirements established for such purposes in current regulations, via electronic or telephone means, the information referred to in this Circular that entities must obtain from their clients may likewise be obtained through electronic or telephone channels, provided that effective measures are established to prevent manipulation of the information after the transaction is carried out.
4. In the case of telephone service provision, the entity must preserve the recording with the client's verbal expression corresponding to the terms set forth in the fourth provision of this Circular. The recording shall be made available to the client upon request.
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OFFICIAL STATE GAZETTE
No. 146 Wednesday, June 19, 2013 Sec. I. Page 46153
3. In the case of electronic service provision, the necessary means must be established to ensure that the client can type the corresponding expression indicated in the fourth provision of this Circular, prior to placing the order, and the entity must be able to accredit that this has been done.
Additional Provision.

1. When the FROB agrees to carry out management actions on hybrid capital instruments and subordinated debt instruments as provided for in Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, the appropriateness assessment obligations provided for in Article 79bis, paragraph 7, of Law 24/1988, of July 28, shall not apply due to their binding nature and because prior consent from investors is not required.
2. When management actions on hybrid capital instruments and subordinated debt are carried out at the instigation of the issuing entity and on a voluntary basis for the investor, the entity may propose to the CNMV that the content of the warning and the handwritten text referred to in the preceding provisions may be adjusted to the special characteristics of the transaction offered to the investor.
   Transitional Provision.
3. Entities must obtain from their clients the handwritten expression referred to in the fourth provision from the entry into force of this Circular. However, the specific wording of the warnings regulated in this provision must be used from three months after the entry into force of this Circular.
4. The register referred to in paragraph 5 of the fifth provision must be operational, under the terms set forth in this Circular, from three months after the entry into force of this Circular.
   Final Provision. Entry into Force.
   This Circular shall enter into force two months after its publication in the "Official State Gazette".
   Madrid, June 12, 2013.–The President of the National Securities Market Commission, María Elvira Rodríguez Herrer. cve: BOE-A-2013-6658 http://www.boe.es OFFICIAL STATE GAZETTE D. L.: M-1/1958 - ISSN: 0212-033X