Information on Dealing with Conflicts of Interest
as of April 2021
Conflicts of interest cannot always be avoided at a private bank, which among other things provides a range of securities services or ancillary securities services (hereafter also referred to as “services”) for its customers and also finances and advises companies. In compliance with the provisions of the German Securities Trading Act (WpHG) and the Securities Services Code of Conduct and Organizational Regulation (WpDVerOV), we therefore inform you in the following about our extensive efforts for the avoidance, identification, and handling of these conflicts of interest.
Potential and actual conflicts of interest within the meaning of this information may result, for example, between our Bank, other companies of our Group, our management, our employees or other persons who are associated with us, and our customers, or between our customers.
In particular, conflicts of interest may arise
• In providing investment advice and portfolio management services from the Bank’s own (revenue) interest in selling financial instruments, in particular the group’s own products
• During the execution of independent securities orders by the Bank
• In giving or receiving inducements (e. g. sale/portfolio commissions) to or from third parties in connection with securities services or ancillary securities services for our customers
• In giving performance-related remuneration to our employees and intermediaries
• In giving or receiving gifts or invitations, e. g. to or from customers and business partners
• From other business activities of our firm, in particular from the Bank’s interest in own-account trading profits
• From relationships of our firm with issuers of financial instruments, e. g. when a credit relationship exists, in connection with consultation services for a financing strategy, in connection with collaboration on securities issues, and for partnerships
• In providing consultation and/or financing services with the objective of acquiring or selling companies or properties, e. g. if different investors intend to acquire the same target company
• In preparing investment and investment strategy recommendations, financial analyses, and promotional communications regarding financial instruments that are offered to the customer for sale
• By obtaining information that is not publicly known
• From employees’ transactions in financial instruments
• From personal relationships of our employees or management or persons associated with them
• In the participation of those persons in supervisory or management boards
2 General Precautions
To prevent extraneous interests from influencing, for example,
our investment advice and portfolio management services, order execution or the creation of investment recommen¬dations, price-setting, and allocation recommendations and having a negative impact on the interests of our customers, we and our employees have dedicated ourselves to compliance with laws and regulations as well as high ethical standards. At all times, we expect diligence, honest, integrity, lawful and professional action, observance of market standards, and – in particular – constant observance of the customer’s interest, which always takes precedence over the interests of the Bank and its employees. Our firm has an independent compliance office that reports directly to management and whose duty is to identify, avoid, and manage conflicts of interest, as well as to avoid misuse of insider information and market manipulation.
For the identification of conflicts of interest, we take into consideration – among other things – the extent to which we, our employees, or third parties directly or indirectly associated with us via control, due to the provision of securities services, ancillary securities services, and other potentially conflict-prone services
• Gain a financial advantage or could avoid a loss to the detriment of the customer
• Have an interest that conflicts with that of the customer in the result of a service provided for the customer or in a transaction conducted on the customer’s behalf
• Have a financial or other incentive to place the interests of one customer or group of customers above the interests of other customers
• Pursue the same transaction as customers
• Receive, or could receive in the future, an inducement from a third party in favor of the Bank in association with a service provided for the customer above and beyond the typical commission or fee, be it in the form of commissions, fees, or other cash benefits or cash-equivalent advantages
Among others, we take the following measures for the early identification and avoidance of conflicts of interest
• Creation of organizational processes to preserve the customer’s interest in the areas of investment consultation and portfolio management (e. g. approval process for new products, investment selection processes in portfolio management) as well as in securities issues and placements
• Rules on giving and receiving inducements and their disclosure and – if accepting this inducement is not permitted by the Bank – on the payout of these to the customer
• Rules on sales targets within the framework of remuneration
• Creation of confidentiality zones by establishing information barriers, separation of responsibilities, and /or spatial separations (“Chinese walls”)
• Limitation of the internal flow of information pursuant to the so-called need-to-know principle
• Keeping an insider list and a watch list that serve to monitor the extent and flow of sensitive information and to prevent the misuse of insider and other compliance-related information
• Keeping a restricted list of issuers and the financial instruments issued by them to counter possible conflicts of interest through sales, transaction, or consultation bans or a ban on the creation of investment recommendations
• Disclosure of securities transactions to the compliance office by employees for whom conflicts of interest could arise as part of their activities
• Keeping a conflict register for the identification and documentation of potential conflicts of interest
• Definition of an escalation process for identified conflicts of interest in regard to which no solution can be agreed upon between the Bank and the parties involved, as well as for potential reputational risks – up to the level of management if required
• Keeping of a register for tracking our employees’ secondary activities not associated with their employment relationship
• Compliance with internal guidelines for handling issues and placements
• Regular monitoring activities conducted by the compliance office as well as risk-based monitoring activities with a focus on the implementation of and compliance with regulatory requirements
• Processes regarding the creation and dissemination of investment recommendations aimed at avoiding or managing conflicts with the customers to whom investment recommendations are offered
• Processes for reviewing and approving new products
• Internal instructions and compliance guidelines (e. g. on gifts, invitations and hospitality, code of conduct for securities transactions of employees)
• Provision of a whistleblower system that offers employees of the Bank – also anonymously – to make the Bank aware of fraudulent activities and economically criminal actions
• Training of our employees
The Bank has thus created organizational preventive measures to manage and avoid the risk of damage to the interests of customers. Wherever the measures for avoiding, preventing and managing conflicts of interest are not sufficient to reasonably ensure that the risk of damage to the interests of customers is avoided, the Bank will distance itself from the transaction that has caused the conflict. Only in exceptional cases will the Bank disclose the general nature and cause of the conflict to the customer, along with the resulting risks and measures taken by the Bank to reduce this risk, before the Bank executes transactions for this customer, so that the customer can make an informed decision with regard to the acceptance of the services offered. This disclosure is carried out – provided that a customer classification in accordance with the WpHG exists – under consideration of the customer’s classification as investment customer, professional client, or eligible counter¬party. Disclosure will only be used if there is no other possibility to resolve the identified conflicts of interest. Disclosure will be made in meaningful anonymized form so that business and Bank confidentiality as well as, where applicable, the legal data protection are ensured. In the following, you will receive more detailed infor- mation on topics relevant in association with conflicts of interest that we would like to make you aware of in particular.
3 Specific Information
Within the meaning of theWpHG, inducements are commissions, fees, or other cash benefits, as well as all nonmonetary benefits. As part of the provision of services the Bank is not permitted to accept inducements from or give inducements to third parties who are not customer of this service or acting on behalf of the customer, unless the inducement is designed to improve the quality of the service provided for the customer and does not conflict with the proper provision of the services in the best possible interest of the customer.
Before provision of the services, the existence, nature, and scope of the inducement – or, if the scope cannot yet be determined, the manner of calculation – must be disclosed to the customer in a comprehensive and appropriate manner that cannot be misunderstood. Specifically, this is done as part of preliminary cost information. If the Bank is not yet able to determine the scope of the inducement and instead discloses the method of calculation to the customer, the Bank will subsequently inform the customer of the exact amount of the inducement it received or gave.
If the Bank receives ongoing inducements in association with services provided to the customer, the Bank will regularly inform the affected customers about the actual amount of the accepted inducements.
The Bank is not permitted to accept and keep any monetary inducements in connection with portfolio management. Monetary inducements received are paid out to the customer on a quarterly basis without interest. The customer will be informed about the inducements paid out.
The Bank accepts negligible nonmonetary inducements, provided that these are appropriate for the improvement of the quality of the services provided to the customer and that these are justifiable and proportional with regard to their scope. Permissible nonmonetary inducements that the Bank receives include written information materials, invitations to training events, and hospitality of little value.
Upon request, the Bank will inform its customers in more detail about monetary and nonmonetary inducements.
3.2 Principles for the Execution of Orders in Financial Instruments
In accordance with its obligations pursuant to the WpHG, the Bank has established execution principles for orders in financial instruments in association with the execution of independent customer orders for which, under certain circumstances, a conflict between the interests of the customer and those of the Bank could arise. The Bank therefore fulfills its obligation to determine such principles for executing orders in financial instruments in order to achieve the best possible result for its customers. There is no guarantee associated with achieving the best possible result for the customer or the determination of the best possible execution venue that the actual best possible result will be achieved for each individual order. It is essential that the applied procedure typically lead to the best possible result. These execution principles are an integral part of the special conditions for the securities services of the Bank and therefore form the basis of the business relationship with the customer. The compliance office is involved in the conception and planning of these processes as well as the review of said processes. You can find more detailed information in the Policies for the Execution of Orders in Financial Instruments that were also provided.
3.3 Structuring Sales Targets to Avoid Conflicts of Interest
Sales targets are all principles and targets that – regardless of the hierarchy level – relate to concrete sales, volume, or income figures for the financial instruments or investment products recommended directly or indirectly as part of investment consultation. These include measures taken by management or the sales divisions to control product sales in investment consultation. Pursuant to WpHG, the Bank is required to structure, implement, and monitor sales targets in such a way as to ensure that the interests of the customer are not impaired.
To this end, the Bank has decided not to create any concrete income targets for individual employees. The decision of which products and services within the product catalog of the bank generate income is left to the investment advisers. Sales targets are thus to be considered as guidelines. Furthermore, to avoid detriment to the interests of the customer, the Bank has taken certain measures: as such, the compliance office is involved in the creation and review of the principles of remuneration, the review of internal instructions, and the approval processes for new products of the Bank; the compliance office also advises in the creation of information materials for advertisements and customers.
3.4 Remuneration System
The Bank’s remuneration system is designed to ensure that the
customers’ interests are not negatively affected by the remuneration of Bank employees. The remuneration system is therefore designed to not give incentives that could cause employees to place the interests of the Bank or their own interests above the interests of the customers.
3.5 Portfolio Management
As part of portfolio management, our customers delegate the management – and thus also the decisions regarding purchase and sale of financial instruments – to their portfolio managers. We therefore make decisions regarding purchases and sales within the framework of the investment guidelines agreed upon without first obtaining the approval of the customer. This structure could strengthen an existing conflict of interest or lead to a new one. We counter the risks resulting from this through suitable organizational measures, in particular an investment selection process in line with the interests of the customer. In this way, we ensure that the results of the fund, the continuity of management, and compliance with the investment goals are in the forefront when selecting the investment funds. It could be in the interest of the Bank to acquire financial instruments within the framework of portfolio management if this purchase would result in special advantages for the Bank.
To counter this risk
• Portfolio management is organizationally and spatially separated from the investment banking, trading, and own-account trading departments
• Portfolio management makes its investment decisions independently
• The Bank is not permitted to accept and retain payments from third parties as part of portfolio management; in exceptional cases, nonmonetary payments can be accepted if they are negligible in nature, they could improve the quality of the service provided, they are not contrary to the interests of the customer in scope and nature, and they are clearly disclosed to the customer
• Portfolio management does not purchase any financial instruments issued by the Warburg Group which is quoted on the stock exchange
• Portfolio management and investment consultation are organizationally seperated
Another typical conflict of interest within the framework of portfolio management can result from the agreement of performance-related remuneration. Here, the employee who is responsible for the portfolio management might take disproportionate risks in order to achieve the highest possible performance level and therefore an increased level of remuneration. This risk is countered by the following measures:
• No allocation of proceeds to the portfolio management unit
• Internal performance monitoring for all managed portfolios
• Detailed risk and performance monitoring of the portfolio management strategy.
To achieve high transaction-related commissions, it may be advantageous for the Bank to generate a high number of transactions as part of portfolio management or to choose execution venues where the highest commission levels are generated. This risk is countered by the following measures
• Only lump-sum price models are used (no transaction-related commissions)
• Execution principles for orders in financial instruments will be created and implemented to achieve the best possible ex- ecution of customer orders
3.6 Establishment of Confidentiality Zones
Through the establishment of information barriers (so-called Chinese walls) between the individual confidentiality zones defined within the Bank, we ensure that the disclosure of confidential information is limited to the minimum required in the ordinary course of business (so-called need-to-know principle). Exceptions to this are subject to a special process that includes the compliance office. In particular the investment banking department – including the activities of corporate finance and financial consultation and trading – are separated from the market units by physical information barriers. Furthermore, the research department, which creates investment recommendations, is spatially and organizationally separate from all other departments of the Bank.
3.7 Investment Recommendations and Investment Strategy Recommendations
In accordance with the provisions of the German Securities Trading Act and the requirements of the market abuse regulation (EU) No. 596/2014, the Bank has established suitable internal policies and processes for the disclosure of potential conflicts of interest in the creation and dissemination of investment recommendations and investment strategy recommendations. Disclosure is carried out directly in the respective investment recommendation and can be accessed on the Internet via a link contained in the investment recommendation.
3.8 Credit-Financed Transactions in Financial Instruments
Conflicts of interest which might arise when granting credit for financing of transactions in financial instruments are prevented by legal regulations and internal Bank policies and working instructions (e. g. lending limits for depositing securities).
3.9 Avoidance of Conflicts with Personal Interests of the Employees
Guidelines for personal transactions (employee transactions) in financial instruments have been established to avoid conflicts with personal interests of the employees. Furthermore, employees are subject to the strict ban on insider trading and market manipulation in accordance with market abuse regulation (EU) No. 596 /2014 as well as the rules for employee transactions that result from the organizational requirements pursuant to the WpHG and Section 25a of the German Banking Act (KWG). The interests of the customer always take precedence over the interests of employees in cases of a conflict of interest.
Employees who as part of their official duties, occasionally or regularly have access to insider information that could significantly influence the market conditions in securities trading as well as derivatives trading bear special responsibility and are therefore subject to specific obligations (e. g. disclosure requirements vis-à-vis the compliance office for their own transactions in financial instruments). Additionally, depending on the need, trading bans, holding periods, or approval requirements could be imposed.
Persons who make significant business decisions in the Bank, as well as persons who are closely associated with them, are subject to special statutory regulations with regard to transactions on their own account (so-called directors’ dealings).
Furthermore, employees are required to inform the Bank of – and receive prior approval for – any activities and business interests not directly related to the employment relationship that may directly or indirectly influence the interests of the Bank or its customers.
Employees of the Bank are not permitted to either request or accept, for themselves or their family members, inducements or other ben- efits from third parties that could impair their independence.
To avoid conflicts of interest with respect to the assumption and realization of proxies for companies within and outside of the Warburg Group (e. g. membership in a supervisory board) by members of its management and its employees, the Bank has created regulations and established an internal approval process.
3.11 Equity Holdings
There are special rules for equity holdings of the Bank in other companies to avoid conflicts of interest within the Bank. In particular, decisions about entering into and withdrawing from equity holdings are made by management. The Bank’s equity holdings activities are organizationally separate from the lending activities. Decisions with regard to loans to holdings (credits to executives and staff) are made in accordance with the provisions of the German Banking Act (KWG). The compliance office is informed about current and relevant changes in equity holdings. Significant equity holdings of the Bank will be disclosed to the public in the annual report. Changes to the equity holdings in issuers for which the Federal Republic of Germany is the country of origin are reported immediately pursuant to the provisions of the WpHG and, subsequently, can be seen by the public on the website of the German Federal Financial Supervisory Authority (BaFin).
3.12 Investment Banking
Within the framework of investment banking, for example, conflicts of interest between the Bank and customers could arise, but also between different customers, if the Bank acts on the behalf of customers with different business interests.
For such cases, the Bank introduced a management procedure for conflicts of interest with the objective of identifying and documenting potential conflicts of interest as early on as possible using a conflict register and to solve them using appropriate measures. For example, an appropriate measure for the management of such conflicts is the case-by-case formation of transaction-specific information barriers between the teams involved. Internal guidelines for pricing, placement, and allocation with the corresponding documentation requirements serve to identify potential conflicts between the Bank, the issuer, and the investors in the security in the process of issuing a financial instrument.
At your request, we will provide you with further details on these principles.