Guidelines Further Describing Situations Considered Conflicts of Interest

The Croatian Financial Services Supervisory Agency (hereinafter: Hanfa), pursuant to Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette nos. 140/05 and 12/12) and Article 49.a(4) and Article 211.a of the Act on Mandatory Pension Funds (Official Gazette nos. 19/14, 93/15, 64/18 and 115/18), at the meeting of its Management Board held on October 31, 2019, hereby adopts GUIDELINES FURTHER DESCRIBING SITUATIONS CONSIDERED AS CONFLICTS OF INTEREST

INTRODUCTION
According to Article 49 of the Act on Mandatory Pension Funds (Official Gazette nos. 19/14, 93/15, 64/18 and 115/18, hereinafter: the Act), a pension fund management company must organize its operations so as to minimize the risk of conflicts of interest, taking into account the type, scope and complexity of its business. It must also take all reasonable steps to identify, detect, prevent or resolve conflicts of interest and establish appropriate criteria for determining the type of conflict of interest whose existence may harm the interests of pension funds and their members. In accordance with Article 49.a(4) of the Act, Hanfa is authorized to issue guidelines that further describe situations it considers conflicts of interest. Furthermore, pursuant to Article 211.a of the Act, Hanfa is authorized to inform specific groups of supervised entities and other addressees through various types of publications (instructions, guidelines, etc.) regarding the explanation or application method of certain regulations within its competence or related general legal acts. In light of the foregoing, Hanfa adopts these Guidelines that further describe situations considered conflicts of interest (hereinafter: the Guidelines).

SITUATIONS CONSIDERED AS CONFLICTS OF INTEREST Pension fund management companies manage pension funds and make investment decisions on behalf of all members. The integrity of the management company is crucial for the relationship of trust, which arises by law between pension fund members and the management company. This implies that when making investment decisions, the management company must always act in the best interests of the pension fund members and place their interests ahead of its own. Conflicts of interest may arise in situations where the management company (or a relevant person thereof) is expected to act in the best interests of members, but simultaneously holds a separate interest that may conflict with its obligation to act in the fund's best interests, which conflict the management company must prevent or properly resolve. The following provide examples of situations that may be considered conflicts of interest, noting that other forms may also arise in practice. The mere existence of one of the described situations does not automatically mean a conflict of interest has materialized; therefore, all relevant circumstances of each specific case must be assessed to evaluate the possibility of a conflict arising. a) situations in which a shareholder of the management company or an affiliated person has an interest for the pension fund's assets to be invested in specific assets (for example, when a shareholder has claims against an issuer or its affiliated persons, into which issuers the management company invests pension fund assets, as well as situations where a shareholder has claims whose fulfillment may be positively affected by investing pension fund assets in specific assets - as these are situations where persons affiliated with the management company could realize financial gains or avoid financial losses to the detriment of the pension fund, provided that information on the claims is publicly published or known to the management company or otherwise available) b) situations in which the management, a relevant person, or the management company may have an interest to invest pension fund assets in specific assets and/or in a manner that ensures higher short-term returns, which may conflict with the interests of pension fund members to have assets invested in specific assets that ensure long-term returns. This represents a conflict of interest between the short-term interests of management, relevant persons, or the management company and the pension fund's investment strategy, i.e., the long-term interests of members. c) situations involving trading for multiple pension funds managed by the same management company, where one fund is placed in a less favorable position than another or others (cases in which the management company executes transactions on behalf of multiple pension funds it manages, at different times and prices, potentially favoring one fund over another. This may be particularly pronounced when investing in
less liquid assets, where market supply for executing such transactions is limited.) d) situations involving trading between pension funds managed by the same management company under terms that differ from market conditions. e) situations involving investing pension fund assets in financial instruments issued by an issuer whose provider of financial services (for example, arranger or issuing agent) is a shareholder of the management company or an affiliated person, and the situation may result in benefits accruing to the shareholder or its affiliated person, to the detriment of the pension fund. Benefits do not include necessary costs associated with acquiring assets. f) situations involving relevant persons of the management company (or an affiliated person of a relevant person, or a person related by blood to a relevant person), for example analysts or fund managers who simultaneously hold financial instruments for which they prepare analyses or issue trading orders on behalf of the pension fund, potentially placing their own interests ahead of the pension fund's interests g) situations in which relevant persons of the management company use the same investment company/credit institution for personal transactions as the pension fund, and based on this, the relevant person obtains any benefit or advantage from the investment company/credit institution, which may result in an excessive number of orders being directed to that specific investment company/credit institution, to the detriment of the pension fund. h) situations in which the management company issues trading orders on behalf of the pension fund for execution by an affiliated investment company or credit institution, to which excessively high fees are paid. i) situations in which the management company or relevant persons receive incentives, namely monetary or non-monetary benefits from third parties (for example, for investing in specific assets), except for acceptable minor non-monetary benefits that do not hinder the management company from acting correctly, in accordance with industry standards and in line with the best interests of pension fund members. j) situations in which pension fund assets are invested in a specific issuer or in shares/units of an alternative investment fund, and such issuer or investment fund divests its specific investment (for example, a venture capital or private equity fund), and the management company makes an investment decision to invest pension fund assets in such assets in a manner or circumstances indicating that the investment may be contrary to the interests of the pension fund. k) where management fees are calculated on the total assets of the pension fund reduced by financial liabilities, the management company may have an incentive to overvalue pension fund assets valued using estimation techniques, in order to charge higher management fees. l) following the previous example, the management company may also have an incentive to overvalue
pension fund assets valued using estimation techniques, with the aim of increasing the returns of the pension fund, in connection with Article 91(6) of the Act, or to obtain a larger number of unallocated insured persons. m) following the previous example, the management company may also have an incentive to overvalue pension fund assets valued using estimation techniques, in order to avoid activating the use of a guarantee deposit under Article 113(3) of the Act, if it failed to achieve the minimum guaranteed return.

TRANSITIONAL AND FINAL PROVISIONS
Pension fund management companies are required to take all necessary actions to align their operations with these Guidelines.
Hanfa will review these Guidelines, as well as their application and implementation, and may revise them as necessary.
These Guidelines are published on Hanfa's website and enter into force upon publication.
CLASS: 011-02/19-03/05
REFERENCE NO.: 326-01-70-72-19-5
Zagreb, October 31, 2019.
CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman