Investment Firms Face Organisational Obligations to Protect Clients
Luxembourg - Investment firms operating in the Grand Duchy must adhere to strict organisational obligations to ensure that conflicts of interest are managed effectively and client orders are executed fairly.
Managing Conflicts of Interest
According to Article 37-2 of the Law, investment firms must inform clients of potential conflicts of interest before undertaking business on their behalf. This is a key measure aimed at preventing and managing these conflicts.
- Inform clients of potential conflicts of interest
- Prevent and manage conflicts of interest
Establishing Rules of Conduct
The law also requires investment firms to establish rules of conduct when providing services to clients (Article 37-3). These rules must ensure that the firm acts fairly and honestly in the best interests of its clients, taking into account each client’s individual risk profile.
- Establish rules of conduct
- Ensure fairness and honesty in client relationships
Order Execution Policy
In addition, investment firms must adopt an order execution policy that ensures the best possible result for clients (Article 37-5). This policy must be known and approved by clients, and take into account factors such as:
- Price
- Cost
- Speed
- Likelihood of execution and settlement
- Size and nature of the order
Client Order Handling Procedures
The law also requires investment firms to implement procedures for client order handling (Article 37-6). These procedures must ensure that orders are executed promptly and fairly, taking into account other client orders or the firm’s own trading interests.
- Implement procedures for client order handling
- Ensure prompt and fair execution of orders
Reorganisation, Winding-Up, and Penalties
In the event of serious financial difficulties, investment firms may be subject to reorganisation or winding-up proceedings. The Law provides for a reorganisation procedure (Article 60) that allows firms to suspend payments and seek assistance from the Court.
- Reorganisation procedure
- Suspension of payments
The CSSF or the firm itself can apply for suspension of payments in cases where the firm is insolvent, has had its licence withdrawn, or is unable to meet its commitments. In the event of winding-up proceedings, the Court may appoint an official receiver and one or more liquidators to manage the firm’s assets.
- Winding-up proceedings
- Appointment of official receiver and liquidators
The Law also provides for administrative and criminal penalties for firms that fail to comply with regulatory requirements (Articles 63-64).
- Administrative penalties
- Criminal sanctions, including fines up to €250,000 and prison sentences of up to five years
Conclusion
The Law is clear: investment firms operating in Luxembourg must adhere to strict organisational obligations to protect their clients. Failure to comply can result in severe penalties, including fines and even criminal prosecution.
As the financial services sector continues to evolve, it is essential that investment firms prioritize transparency, fairness, and sound management practices to maintain public trust and confidence.