New investment adviser legislation

14 December 2003

Tweet
Facebook
LinkedIn
Google plus
Send to

SJ Berwin has released information regarding the French parliamentÂ’s recent approval of legislation covering a broad range of investment professionals whose activity has never before been subject to regulation. Investment advisory companies, placement agents, family offices, gatekeepers, finders and other private equity professionals operating in the French market (whether based in France or outside of France) will need to review their status to determine whether they are subject to this new legislation.

The law, adopted in August, defines a Â‘financial investment advisorÂ’ (conseiller en investissements financiers) as an individual or company whose regular professional activity consists of giving advice on any of the following: transactions involving Â‘financial instrumentsÂ’ (that is, securities): banking transactions, the supply of Â‘investment servicesÂ’, certain operations involving annuity contracts or certain passive real estate investments. In its 2002 annual report, the French Commission des OpÃ©rations de Bourse (COB) estimated that these new rules will cover between 1,000 and 2,000 individuals. These rules will not apply to those whose activity is already subject to specific regulation in France (for example, banks, insurance companies and portfolio management companies).

Anyone wishing to act as a financial investment advisor must register with one of the French industry associations that are specifically licensed for such purposes by the AutoritÃ© des MarchÃ©s Financiers (AMF), the new French financial markets regulator. Such industry associations will verify that the financial investment advisor (or each of its managers in the case of a company) meets basic prerequisites in terms of age, personal integrity and professional competence. Any person convicted of a crime or other serious offence during the last ten years will be prohibited from registering. The industry association will also ensure that the financial investment advisor has adequate professional liability insurance coverage.

Membership of an industry association is a matter of public record. Every financial investment advisor will receive an individual registration number which must be communicated to all existing and potential clients and which must appear on all documents issued by the financial investment advisor. Failure to register as a financial investment advisor could have disastrous consequences: anyone caught rendering unauthorised investment advice in France faces up to five years in prison and/or a EUR 375,000 fine.

Registering with an industry association will require the financial investment advisor to adhere to specific rules of professional conduct that are agreed and approved by the AMF. These rules will generally require the advisor to deal fairly and act in the best interest of its clients at all times. Financial investment advisors will be subject to Â‘know your clientÂ’ rules, requiring them to enquire about their clients' financial situation, investment experience and objectives before giving any investment advice. In addition, the association rules will set mandatory minimum standards of professional competence, due diligence and disclosure. They will also require financial investment advisors to have adequate internal resources and procedures to render the services they are called upon to provide. Finally, financial investment advisors will be prohibited from receiving any client money, unless such money is intended for payment of the advisor's services.

Failure to comply with applicable rules of professional conduct may lead to disciplinary proceedings before the AMF. Possible sanctions include fines and/or withdrawal of the financial investment advisor's registration.

Although the general regulatory framework has been adopted, it is still too early to know how all these rules will be applied in practice by the AMF and by the relevant industry associations. Over the next few weeks, the government will disseminate a decree spelling out some of the specific rules that will apply to the new profession. In addition, the law gives the AMF broad rule making authority in this area.