COB Rules

Question 1

What is the IF authorization regime based on?

Answer 1

The nature of the client and intensity of reliance on investment firm discretion

This distinction is important for tailoring conduct-of-business rules.

Question 2

When is authorization required to establish an investment firm?

Answer 2

Authorization needed for both stand-alone firms and subsidiaries

This includes licensure and meeting specific conditions.

Question 3

What is required for authorization of subsidiaries?

Answer 3

• Creates new IF with own legal personality
• NCAs of host and home countries sould consult before a subsidiary is authorized

Refer to Art 5 MiFID II.

Question 4

What are the conditions for refusal authorization?

Answer 4

Refusal of authorization can occur if
(1) sound management is not ensured or
(2) if the ability to exercise investment services is not ensured

Verification of conditions is crucial.

Question 5

What does the geographical scope of authorization allow?

Answer 5

It allows banks and investment firms to provide services throughout the Union under mutual recognition

Refer to Art 6(3) MiFID II.

Question 6

What is a branch according to MiFID II?

Answer 6

A place of business without legal personality providing investment services

This is distinct from the head office.

Question 7

What is required for establishing first branch?

Answer 7

Prior notification to host NCA w/in 3 months of request and
business can commence within 2 months of notification

Host Member States cannot impose additional requirements.

Question 8

What is the classification of clients under MiFID II?

Answer 8

• Retail clients (residual category)
• professional clients, and
• eligible counterparties

Each classification has different protection levels.

Question 9

Why might professional investors opt for lower protection regimes?

Answer 9

(1) To reduce compliance costs or
(2) access financial instruments only available to professionals

This requires written agreement.

Question 10

Who are considered retail clients?

Answer 10

Clients that are not professional or eligible counterparties, deserving maximum protection

This includes individuals and certain legal entities.

Question 11

What defines professional clients?

Answer 11

Clients with experience, knowledge, and expertise to assess risks and make investment decisions

This includes investment firms and certain large undertakings.

Question 12

What must investment firms inform professional clients about?

Answer 12

• That they are deemed professional clients unless agreed otherwise
• Resp. of PC to ask for more protection

Clients should be aware of the protections they may lose.

Question 13

What are the minimum conditions for reclassification (up) to professional clients?

Answer 13

• Significant transactions (10 per quarter)
• Financial instrument portfolio exceeds EUR 500,000
• Worked in the financial sector for at least one year

2 of 3

These criteria ensure clients have adequate experience.

Question 14

What is the suitability test?

Answer 14

An assessment of client’s experience, financial situation, investment objectives, and sustainability preferences

Required for fiduciary-based investment services.

Question 15

What information must firms gather for the suitability test?

Answer 15

• Client’s experience and knowledge
• Financial situation
• Investment objectives

This is crucial for ensuring suitable advice.

Question 16

What happens if an investment is not suitable according to the suitability test?

Answer 16

It should not be recommended or purchased

Firms must provide a suitability report outlining the advice.

Question 17

What are sustainability preferences in investment?

Answer 17

Client’s choices regarding the integration of environmentally sustainable investments

These preferences are considered in investment advice and portfolio management.

Question 18

What is the role of sustainability preferences in the suitability test?

Answer 18

They are assessed alongside investment objectives to determine suitability

They are not relevant for transactional services.

Question 19

What must investment firms do regarding sustainability preferences?

Answer 19

Help clients determine how much of their portfolio should include sustainable investments

This involves assessing how ‘green’ the financial instruments should be.

Question 20

What is the elevator mechanism in client classification?

Answer 20

Allows clients to opt for maximum protection or lower protection based on their request

This mechanism facilitates movement between classifications.

Question 21

How important is sustainability in investment objectives?

Answer 21

Not as much as the other elements defining investment objectives.

Question 22

What happens when clients do not share their sustainability preferences?

Answer 22

Clients are classified as ‘neutral’ when silent.

Question 23

Can sustainability preferences trump other investment objectives?

Answer 23

No, sustainability preferences can never trump other investment objectives.

Question 24

What must investment firms ensure before assessing sustainability profiles?

Answer 24

Only investments/portfolios suitable under any other respect can be assessed for their sustainability profile.

Question 25

Can investment firms change clients' profiles to recommend investments?

Answer 25

No, investment firms cannot change the clients’ profile to ensure they can recommend an investment/portfolio.

Question 26

What may a client decide if no financial instrument meets their sustainability preferences?

Answer 26

The client may decide to adapt its own sustainability preferences by scaling them down.

Question 27

What is the appropriateness test?

Answer 27

a test that determins whether FI is appropriate for C ## Footnote For Transactional services

Question 28

What information must firms gather for the appropriateness test?

Answer 28

Firms must obtain information on clients’ experience and knowledge, including: * Types of financial service, transaction and financial instruments familiar to the client * Nature, volume and frequency of the client’s transactions * Level of education, profession or former profession of the client.

Question 29

What are the outcomes of the appropriateness test?

Answer 29

Investment firms assess whether the investment service or product envisaged is appropriate for the client.

Question 30

When must investment firms warn clients?

Answer 30

(1) When a financial instrument or service is deemed inappropriate or (2) when the client did not share required information.

Question 31

What can a client do if the investment firm warns them of inappropriateness?

Answer 31

The client may still confirm the transaction; the investment firm shall perform it.

Question 32

What presumptions may investment firms rely on for professional investors?

Answer 32

Rebuttable presumptions regarding the ability to understand risks involved.

Question 33

What is the status of appropriateness tests for eligible counterparties?

Answer 33

No appropriateness (and no suitability) test is required for eligible counterparties.

Question 34

What principles apply to eligible counterparties?

Answer 34

General principles that apply across the board remain: * Act honestly, fairly and professionally * Communicate fairly and clearly * Identify + manage or disclose conflicts of interest.

Question 35

What are execution only services?

Answer 35

Services where an online trading platform runs an appropriateness test for every order received.

Question 36

What does MiFID II provide for in the context of transactional investment services?

Answer 36

MiFID II provides for derogations for non-complex financial instruments only upon request.

Question 37

What tests are not required for non-complex financial instruments under MiFID II?

Answer 37

No appropriateness (and no suitability) test is required.

Question 38

Factors that NCAs use to evaluate IF entering the market

Answer 38

* fit & proper board * Initial capital endoument * reputable and financially found shareholders * registered office/head office in the same country * Adequate organization

Question 39

What does adaquate organization mean when evaluating new IF

Answer 39

* product governance * operational risk * Transaction records * asset separation

Question 40

In order for IF to provide services in another MS

Answer 40

* Home NCA notice host NCA w.in 1 mo * provision can start immediately upon notice

Question 41

Allocation of supervision for a branch

Answer 41

* Conduct: Host NCA * Org. rules: Home NCA ## Footnote records of services and/transaction follows rules by host

Question 42

Allocaton of supervision for provision of services

Question 43

Reclassification Formalities (reclassifying up)

Answer 43

2 written docs: * K specifing the terms of the reclassification * C states they are aware of the protections they are losing

Question 44

When reclassifying a C up to PC what must IF evaluate

Answer 44

asses C's expertise, experience and knowlege C must: * be capable of making investment decisions * understand the risks

Question 45

How are COB rules structured?

Answer 45

Conduct rules are tailored based on (1) client classification (2) nature of services

Question 46

Elements of professional conduct

Answer 46

* Loyalty * Informed Consent * Know Your Customer Rules * Know Your Products Rules

Question 46

Baseline duties IF owes to all clients

Answer 46

* Fair, professional, and honest behavior * Clear and fair communication * COI management

Question 47

What are fiduciary services

Answer 47

* Investment services * Portfolio Management

Question 48

Info to gather for KYC for Fid. Services

Answer 48

* C's experience and knowlege * C's financial situation * C's Investment objectives

Question 49

What are the consequences of being classified as a PC in the suitability test?

Answer 49

Two rebuttable presumptions: * C can understand the risks involved * C can bear losses

Question 50

What are transactional services?

Answer 50

* receive and transmit orders, * execute orders, * deal on own account, * underwrite and place financial instruments.

Question 51

Info to gather for appropriatness test

Answer 51

C's experience and knowlege