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13 September 2013
The Constitutional Court was recently asked to review the legality of the conflict of interest provisions stated in Articles 35(1) to (4) of the Securities Supervision Act, as well as in a regulation issued thereto by the Financial Markets Authority (FMA) (for further information please see "Constitutional Court challenges EU directive's conflict of interest provisions").
The provisions were amended to transpose the EU Markets in Financial Instruments Directive (2004/39/EC, as amended) as well as EU Directive 2006/73/EC.
When a bank trades in securities or other financial instruments, these provisions require that the bank establish, implement and maintain an effective conflicts of interest policy, set out in writing, that is appropriate to its size and organisation and the nature, scale and complexity of its business. The bank must also specify the procedures to be followed and the measures to be adopted in order to manage conflicts of interest.
The managing directors of a bank were fined by the FMA for not having properly implemented effective measures (ie, personal and spatial separation between clients' business and proprietary trading) to prevent conflicts of interest. There were two grounds under which the provisions could possibly be unconstitutional:
The principle of legal certainty requires that the legislature use clearly defined terms, so that all legal subjects are able to recognise clearly a breach of the provisions as an administrative offence.
However, the court mentioned that even if the legislature did not fully meet the expected certainty, the principle would still apply if the terms had determinable content for the affected persons, so that all relevant subjects can adjust their behaviour to the provisions and the administrative authorities can examine the practice of the terms in accordance with the applicable laws. Furthermore, according to its precedents, provisions must be merely adequately determined, taking into account the different areas of life, circumstances and their legal consequences.
In the course of proceedings, the federal government and the FMA both issued official statements claiming that the mentioned provisions were in conformity with the pertinent rulings of the Constitutional Court and would not harm the principles of legal certainty. The court mostly shared the arguments put forward in these statements and ruled that the principle of legal certainty was unharmed.
According to decisions concerning other rules of professional conduct, a penal law that is aimed at a group of specialised professionals is not uncertain if it is in line with the general experience and the rules of conduct for that particular professional group. Therefore, the content of the challenged provisions was in that form determinable, as the affected group had primarily a common perception of the indictable behaviour.
The court ruled that Articles 35(1) to (3) of the Securities Supervision Act target a group which can be assumed to comprehend what is meant by the term 'conflict of interest', as well as under which circumstances such conflicts occur. Furthermore, the affected group should be able to determine which procedures and measures must be adopted in order to prevent conflicts of interest effectively.
Concerning the objections to the technique through which internal policies become binding, the court mentioned that it can be expected that the group can evaluate which procedures and measures are required to manage conflicts of interest, given the size and organisation and the nature, scale and complexity of the business. The legislature has consciously decided to leave the decision about the appropriateness with the affected legal entities. Culpability is measured not by the specific internal regulation that the bank has imposed on itself, but by the subset of procedures and measures that are reasonably required to avoid conflicts of interest. Any over-compliance would not be the standard for imposing fines.
Therefore, the statutory provisions do not harm the principle of legal certainty of Article 18 of the Constitution or Article 7 of the European Convention on Human Rights.
Since the concerns of the constitutional conformity of the provisions stated in Articles 35(1) to (3) of the Securities Supervision Act could be dispersed, the proceedings concerning Article 35(4) of the act and Article 2 of the FMA regulation were also to be discontinued, as they would require the aforementioned statutes to be repealed by the Constitutional Court.
For further information on this topic please contact Tibor Fabian at Binder Grösswang Rechtsanwälte GmbH by telephone (+43 1 534 800), fax (+43 1 534 808) or email (email@example.com). The Binder Grösswang Rechtsanwälte GmbH website can be accessed at www.bindergroesswang.at.
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