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30 July 2010
Conflicts of interest
On April 16 2010 SwissBanking – the Swiss bankers' association – adopted a revised version of its Portfolio Management Guidelines. The revised guidelines were previously approved by the Financial Market Supervisory Authority (FINMA). The guidelines constitute self-regulatory rules, but are considered to be minimum standards that apply to all entities regulated by FINMA and are active in asset management. Auditors of regulated entities are charged with monitoring those entities in order to ensure that the standards are met. The guidelines have no immediate impact on underlying contractual relationships between banks and their clients, since such relationships are governed by the legal provisions and the relevant agreements between banks and clients. The revision introduced major amendments to the guidelines regarding conflicts of interest and remuneration.
Conflicts of interest
The rules on conflicts of interest have been clarified by analogy with SwissBanking's Code of Conduct for Securities Dealers and in line with Swiss banks' common practice. Pursuant to the new rules, any bank which manages assets must take appropriate measures in order to avoid conflicts of interest arising between the bank and its clients or between staff and clients. Where such conflicts of interest cannot be ruled out, the bank must prevent any potential discrimination between clients which may result. In the event that discrimination cannot be ruled out, the bank must inform its clients to this effect.
The rules also stipulate that no bank may restructure a client's portfolio on its own initiative if doing so is not in the client's best interests, but rather serves the exclusive purpose of increasing the bank's commission income (so-called 'churning').
These amendments entered into force with immediate effect on April 16 2010.
Following FINMA's adoption of Circular 2009/1, "Guidelines for the recognition of self-regulation in asset management as minimum standard", FINMA required SwissBanking to adapt its guidelines to conform with the circular. Hence, a new section on banks' remuneration has been introduced in the guidelines.
The new section sets out certain rules regarding remuneration:
These provisions will enter into force on January 1 2011.
As a result of these revisions, Swiss banks must now provide their clients with detailed information regarding their remuneration. These transparency requirements were first promoted by a Federal Supreme Court ruling in 2006. The distinction between payments that are made in direct connection with the order issued and payments received by the bank solely upon executing an order may be difficult to trace in practice. In any case, particular attention should be paid to potential conflicts of interest.
SwissBanking aims to finalize the revision of other parts of the guidelines by the end of 2010. A such, banks can expect a fully revised version of the guidelines to be published in 2011.
For further information on this topic please contact Christophe Rapin, Christophe Petermann or Daphné Lebel at Pestalozzi Attorneys at Law by telephone (+41 22 737 1000), fax (+41 22 737 1001) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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