Order on Investor Protection in Securities Trading

Order on Investor Protection in Securities Trading 1)

Pursuant to Section 45, paragraphs 2, 3, and 4, and Section 270, paragraph 1, of the Act on Fund Brokerage Companies and Investment Services and Activities, as per Statutory Order No. 232 of 1 March 2024, Section 43, paragraphs 2 and 5, and Section 373, paragraph 4, of the Act on Financial Business, as per Statutory Order No. 1731 of 5 December 2023, Section 7, paragraphs 2 and 3, and Section 26, paragraph 4, of the Act on Financial Advisors, Investment Advisors and Mortgage Credit Intermediaries, as per Statutory Order No. 2016 of 1 November 2021, and Section 18, paragraph 3, and Section 190, paragraph 5, of the Act on Alternative Investment Fund Managers, as per Statutory Order No. 231 of 1 March 2024, it is hereby ordered:

Chapter 1 Scope and Definitions

Scope

Section 1. This Order applies to the following securities traders, subject to paragraphs 2-6:

1. Credit institutions, mortgage credit institutions, fund brokerage companies, investment management companies, and alternative investment fund managers that provide or perform investment services and activities as mentioned in Annex 1 to the Act on Fund Brokerage Companies and Investment Services and Activities.

2. Investment firms, credit institutions, and management companies that have been granted authorization for investment services or activities in another country within the European Union or in a country with which the Union has concluded an agreement in the financial field, and which conduct business in this country through a branch or an attached agent established in this country.

3. Branches of credit institutions and investment firms that have been granted authorization for investment services or activities with or without ancillary services in a country outside the European Union, with which the Union has not concluded an agreement in the financial field, when the branch conducts such business in this country.

4. Credit institutions and investment firms that have been granted authorization for investment services or activities with or without ancillary services in a country outside the European Union, or a country with which the Union has not concluded an agreement in the financial field, when this is conducted as cross-border activities without the establishment of a branch.

Paragraph 2. Sections 3-5, Section 6, paragraphs 1, 2 (items 2 and 3), and paragraphs 3 and 4, Section 8, Sections 9 and 10, and Sections 15-17 apply to investment advisors and financial advisors covered by the Act on Financial Advisors, Investment Advisors and Mortgage Credit Intermediaries.

Paragraph 3. The Order does not apply, except for Section 3, Section 4, paragraph 1, Section 5, paragraph 1, Section 6, paragraph 4, second sentence, and Section 8, paragraph 5, second sentence, when the securities trader's customers are approved counterparties.

Paragraph 4. Sections 4-6, Section 8, and Sections 9-13 do not apply to securities trading with mortgage bonds, specifically covered mortgage bonds (SDROs) or covered bonds (SDOs), when the securities trading is carried out in connection with and as a prerequisite for the execution of customers' borrowing, redemption, or restructuring of a loan secured by real estate.

Paragraph 5. The Order does not apply to transactions between members of a multilateral trading facility or a regulated market in this country or in other countries within the European Union or countries with which the Union has concluded an agreement in the financial field.

Definitions

Section 2. In this Order, the following terms are understood as:

1. Securities Trading: Investment services and activities as well as ancillary services as mentioned in Annex 1 to the Act on Fund Brokerage Companies and Investment Services and Activities.

2. Financial Instruments: The instruments mentioned in Annex 2 to the Act on Fund Brokerage Companies and Investment Services and Activities.

3. Investment Advice: Personal recommendations to a customer, either upon request or on the investment advisor's own initiative, regarding one or more transactions related to financial instruments, as per Annex 2 to the Act on Fund Brokerage Companies and Investment Services and Activities, and structured deposits.

4. Personal Recommendation: A recommendation given to a person in their capacity as an investor, based on the person's own circumstances, and constituting a recommendation to: a) buy, sell, subscribe, exchange, redeem, hold, or guarantee a specific financial instrument or structured deposit, or b) exercise or refrain from exercising a right arising from a specific financial instrument, to buy, sell, subscribe, exchange, or redeem a financial instrument or a structured deposit.

5. Portfolio Management: Portfolio management according to the individual customer's mandate with discretionary power, provided such portfolios include one or more financial instruments or structured deposits.

6. Cross-selling: The offer to provide an investment service together with another service or product as part of a package or as a condition for the same agreement or package.

7. Professional Client: A client who meets the criteria in Annex 1 to this Order.

8. Approved Counterparty: A client who meets the criteria in Annex 2 to this Order.

9. Retail Client: A client who is neither a professional client nor an approved counterparty, as per paragraphs 7 or 8.

10. Equivalent Third-Country Market: A regulated market located in a country outside the European Union, with which the Union has not concluded an agreement in the financial field, which is considered to correspond to a regulated market if the legal and supervisory framework in the country outside the European Union, with which the Union has not concluded an agreement in the financial field, can be regarded as equivalent according to an equivalence decision adopted by the European Commission pursuant to Article 89a, paragraph 2, of Directive (EU) 2016/1034 of the European Parliament and of the Council of 23 June 2016 amending Directive 2014/65/EU of 15 May 2014 on markets in financial instruments.

11. Hybrid Core Capital Instruments: Instruments that can be regarded as hybrid core capital, as per Section 5, paragraph 6, item 13, of the Act on Financial Business, and corresponding foreign instruments according to Article 61 of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms.

12. Additional Capital Instruments: Instruments that can be regarded as additional capital, as per Section 5, paragraph 6, item 12, of the Act on Financial Business, and corresponding foreign instruments according to Article 63 of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms.

13. Securities Trader: An undertaking that, as a regular occupation or on a professional basis, provides investment services or performs investment activities mentioned in Annex 1, Section A, of the Act on Fund Brokerage Companies and Investment Services and Activities, and which is mentioned in Section 1, paragraphs 1-5.

14. Electronic Format: Any durable medium other than paper.

15. Switching of Financial Instruments: Sale of a financial instrument and purchase of another financial instrument or exercise of the right to make changes regarding an existing financial instrument.

Chapter 2 General Rules on Investor Protection

General Clause

Section 3. A securities trader must act honestly, fairly, and professionally and in the best interests of its customers.

Client Categorization and Client Agreements

Section 4. A securities trader may, at the request of an approved counterparty, either generally or on an ad hoc basis, treat this client as a professional client or a retail client.

Paragraph 2. Before a securities trader provides services to a client who is considered to be professional according to Section A of Annex 1 to this Order, the securities trader must inform the client that this client is considered to be a professional client and will be treated as such, unless the securities trader and the client enter into another agreement, as per paragraph 3.

Paragraph 3. A securities trader must inform a client who is considered to be professional according to Section A of Annex 1 to this Order that the client has the opportunity to request a change in the agreement's terms to obtain a higher degree of protection. It is the responsibility of a client who is considered a professional client to request a higher degree of protection when they believe themselves unable to make a correct risk assessment or management. It is voluntary for the securities trader whether it wishes to enter into an agreement for a higher degree of protection for the client, as per the first sentence.

Paragraph 4. An agreement according to paragraph 3 must be in writing and must provide the client with a higher degree of protection by applying the rules of good conduct. It must appear from the agreement whether this applies to one or more specific services or transactions, or whether the agreement applies to one or more types of products or transactions.

Paragraph 5. A securities trader must enter into and document an agreement with its customer, which contains a description of the parties' rights and obligations, as well as which financial services are covered by the agreement.

Paragraph 6. Terms included in the agreement may appear by reference to separate documents, including the securities trader's general business terms and standard terms.

Chapter 3 Information

General Information to Customers

Section 5. A securities trader's commercial communication, including advertising and marketing, to customers or potential customers in relation to the promotion, sale, or offering of a product or service, must be clear and must not be misleading.

Paragraph 2. A securities trader's marketing material must clearly appear as such.

Specific Information to Customers

Information about the Securities Trader and its Investment Services and Financial Instruments

Section 6. A securities trader must provide the customer with relevant information about the securities trader and its services.

Paragraph 2. When a securities trader provides investment advice, the securities trader must, in good time before the advice, inform the customer of the following:

1. Whether the advice is provided on an independent basis or not, as per Section 2, item 6, of the Order on Third-Party Payments etc.

2. Whether the advice is based on a general or a more limited analysis of different types of financial instruments, including whether the selection is limited to financial instruments issued or provided by legal entities that have close connections to the securities trader or other legal or economic connections that may weaken the independent basis for the advice.

3. Whether the securities trader will periodically assess the suitability of the financial instruments recommended to the customer.

Paragraph 3. A securities trader must, in good time before an agreement is entered into, inform the customer about the financial instruments and investment strategies offered by the securities trader, including:

1. Providing relevant guidance and warnings about the risks associated with investing in the relevant financial instruments and specific investment strategies, and

2. Informing whether the financial instrument is targeted at retail clients or professional clients, as per Section 4 of the Order on Product Approval Procedures.

Paragraph 4. The information in paragraphs 1-3 must be given in an understandable manner that enables customers to understand the nature and risks of the service and the specific type of financial instrument. The information may be given in a standardized manner and must be delivered electronically. The securities trader must inform existing and potential retail clients that they have the opportunity to receive this information on paper. Existing retail clients who receive the information on paper must be informed that they will receive this information in electronic format at least eight weeks before the securities trader sends this information in electronic format.

Cross-Selling

Section 7. When a securities trader offers cross-selling, the securities trader must inform the customer whether the different parts of the package can be purchased separately.

Paragraph 2. When the parts included in a cross-sale can be purchased separately, the securities trader must inform the customer about the costs and fees associated with each individual part.

Paragraph 3. When it is likely that the risks associated with a cross-sale to a retail client will differ from the risks associated with the parts purchased separately, the securities trader must inform the customer about how the interaction between the parts changes the risks.

Price Information

Section 8. A securities trader must, in good time, provide the customer with information about all costs and associated fees, including costs associated with:

1. The relevant investment service and any ancillary services.

2. The financial instruments recommended or marketed to the customer, which are not due to the presence of underlying market risks.

Paragraph 2. The securities trader must inform the customer about how the costs mentioned in paragraph 1 are to be paid, including whether certain costs are paid indirectly via a third party. Information about costs paid via a third party must be given in accordance with Section 9, paragraph 1, of the Order on Third-Party Payments etc.

Paragraph 3. The securities trader must summarize the information about the costs and fees covered in paragraph 1, so that the customer gets an overview of the total costs and the total effect on the return of the investment, and if the customer requests it, the information must be itemized.

Paragraph 4. The securities trader must, when relevant, make the information mentioned in paragraph 1 available to the customer regularly and at least once a year during the life of the investment.

Paragraph 5. The securities trader must give the information in an understandable manner, so that the customer can make their investment decision on an informed basis. The information must be given in a standardized manner and in electronic format. The securities trader must inform existing and potential retail clients that they have the opportunity to receive this information on paper. Existing retail clients who receive the information on paper must be informed that they will receive this information in electronic format at least eight weeks before the securities trader sends this information in electronic format.

Paragraph 6. Paragraphs 1-5 do not apply when a securities trader provides other investment services or ancillary services than investment advice and discretionary portfolio management to professional clients, as per Annex 1.

Paragraph 7. If an agreement is entered into to buy or sell a financial instrument using remote communication, the securities trader may provide the information, as per paragraph 1, in electronic format without undue delay after the transaction's completion, provided that the following conditions are met:

1. The securities trader has given the customer the opportunity to postpone the completion of the transaction until the customer has received the information, and

2. The customer has agreed to receive the information without undue delay after the completion of the transaction.

Chapter 4 Know Your Customer Principle

Suitability Test and Suitability Statement

Section 9. When a securities trader provides investment advice or portfolio management, the securities trader must obtain the necessary information about a customer's:

1. Knowledge and experience in the investment area relevant to the specific type of product or service,

2. Financial situation, including the customer's ability to bear losses, and

3. Investment objectives, including the customer's risk tolerance.

Paragraph 2. When a securities trader provides investment advice and portfolio management, the securities trader must, based on the information mentioned in paragraph 1, recommend to the customer the service and financial instruments that are suitable for the customer and are in accordance with their risk tolerance and ability to bear a loss.

Paragraph 3. When a securities trader provides either investment advice or portfolio management that includes switching of financial instruments to retail clients, the securities trader obtains the necessary information about the customer's investment and analyzes the costs and benefits of the switching of financial instruments. When securities traders provide investment advice, they inform the customer whether the benefits of switching the financial instruments are greater than the costs associated with such a switch or not. Professional clients may request in writing to receive the information after the first sentence. The securities trader must keep a register of requests according to the second sentence.

Paragraph 4. When a securities trader provides investment advice that results in a recommendation for cross-selling, the securities trader must ensure that the total package of services or products is suitable for the customer.

Section 10. When a securities trader exercises investment advice to a retail client, the securities trader must, before the transaction is carried out, prepare a suitability statement, from which it appears what type of investment advice has been provided and how this advice corresponds to the customer's preferences, objectives, and other characteristics. The statement must be given on a durable medium.

Paragraph 2. When an agreement to buy or sell a financial instrument is entered into using remote communication, which prevents a prior issuance of a suitability statement, the securities trader may issue the written suitability statement on a durable medium immediately after the customer is bound by an agreement, provided that the following conditions are met:

1. The customer has agreed to receive the suitability statement without undue delay after the completion of the transaction.

2. The investment firm has given the customer the opportunity to postpone the transaction to receive the suitability statement in advance.

Sale of Subordinated Write-Down Liabilities to Retail Clients

Section 11. A fund brokerage company, a credit institution, an investment management company, and an alternative investment fund manager, that provide investment services or investment activities as mentioned in Annex 1 to the Act on Fund Brokerage Companies and Investment Services and Activities, which sell write-down relevant liabilities that meet all the conditions in Article 72a of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms with later amendments, except for Article 72a, paragraph 1, letter b, and Article 72b, paragraphs 3-5, in the aforementioned regulation, may only sell such liabilities to a retail client when the following conditions are met, subject to paragraph 3:

1. The fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund has performed a suitability test, as per Section 9.

2. The fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund finds, based on the suitability test, that the subordinated write-down liabilities are suitable for the relevant retail client.

3. The fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund documents the suitability, as per Sections 10 and 16.

Paragraph 2. The fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund must ensure, based on the information provided by the retail client, that the retail client provides the fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund with accurate information about their portfolio of financial instruments, including any investments in subordinated write-down liabilities as mentioned in paragraph 1.

Paragraph 3. If the retail client's portfolio of financial instruments at the time of purchase is an amount corresponding to 500,000 EUR or less, the following conditions must additionally be met at the time of purchase, before the fund brokerage company, credit institution, investment management company, or manager of the alternative investment fund can sell the subordinated write-down liabilities to the retail client:

1. The retail client's total investment in subordinated write-down liabilities that meet the conditions in paragraph 1 does not exceed 10 percent of the relevant client's portfolio of financial instruments.

2. The original amount invested in subordinated write-down liabilities that meet the conditions in paragraph 1 is at a level corresponding to at least 10,000 EUR.

Paragraph 4. The retail client's portfolio of financial instruments, as per paragraphs 2 and 3, includes cash holdings and financial instruments, with the exception of financial instruments that the retail client has provided as security.

Paragraph 5. Paragraphs 1-4 apply correspondingly to the sale of hybrid core capital instruments, additional capital instruments, and instruments that meet the conditions in Article 72b, paragraph 2, of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms.

Appropriateness Test

Section 12. When a securities trader executes or places orders for a retail client without providing investment advice or portfolio management, the securities trader must request information from the customer about their knowledge and experience in the investment area relevant to the type of product or service offered or requested. Based on the information, the securities trader must assess whether the intended product or service is appropriate for the customer, subject to Section 13.

Paragraph 2. In the case of cross-selling, as per Section 7, the securities trader must assess the overall appropriateness for the customer of the services or products included in the package.

Paragraph 3. If the securities trader finds, based on the information received according to paragraph 1, that the product or service is not appropriate for the customer, the customer must be explicitly made aware of this.

Paragraph 4. If the customer provides insufficient information about their knowledge and experience, as per paragraph 1, the customer must be explicitly made aware that the securities trader, due to the deficient information, cannot assess whether the product or service is appropriate for the customer.

1. The Order contains provisions that implement parts of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ EU 2014, No. L 173, page 349, parts of Directive 2016/1034/EU of the European Parliament and of the Council of 23 June 2016 amending Directive 2014/65/EU on markets in financial instruments, OJ EU 2016, No. L 175, page 8, parts of Directive 2019/879/EU of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU insofar as it concerns the loss absorption and recapitalization capacity of credit institutions and investment firms and of Directive 98/26/EC, OJ EU 2019, No. L 150, page 296, and parts of Directive 2021/338 of the European Parliament and of the Council of 16 February 2021 amending Directive 2014/65/EU, insofar as it concerns disclosure requirements, product governance, and position limits, and of Directive 2013/36/EU and (EU) 2019/878, insofar as it concerns their application to investment firms, with a view to contributing to recovery after the COVID-19 crisis.

Official Gazette A 2024 Published on 22 June 2024 14 June 2024. No. 760. Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, Ref. No. 22-017512 CQ002907