In part two (read part one here) of Patrick Laure’s new legal column, he discusses how Monaco’s unclear laws left investors exposed until rules were clarified….

  1. The Law and the 2018 Implementing Ordinance

In summary, and apart from the Monegasque Code, certain laws (which are not codified) take the form of specific or special laws, sometimes accompanied by implementing ordinance if their complexity requires clarification.

• Laws and implementing ordinances governing financial activities applicable in the Principality of Monaco in spring 2018.

• Analysis of Law No. 1.338 of 7 September 2007.

The provisions of Article 11of the law exhaustively determine the list of “activities” that financial institutions are authorised to carry out in the Principality of Monaco.

Article 1er

“The following activities, carried out on a regular or professional basis, are subject to the provisions of this law:

1°) the management, on behalf of third parties of portfolios of securities or financial futures instruments.

2°) the management of mutual funds or other collective investment undertakings governed by Monegasque law.

3) the reception and transmission of orders on financial markets relating to securities or financial futures instruments on behalf of third parties.

4) providing advice and assistance in the matters referred to in points 1) to 3).

5) executing orders on behalf of third parties.

6) management of foreign collective investment undertakings.

7) trading on own account.

Thus, a simple reading of the Law shows that the list of activities that banks are authorised to carry out includes “advice and assistance in matters relating to R.T.O.” (Art. 11(4), see underlined).

It was therefore necessary to refer to Implementing Order No. 1.284 of 10 September 2007 to determine the legal framework governing the obligations of financial institutions when carrying out their authorised activities, and in this case the activity referred to in Article 11(4)(3) of the Law.

• Analysis of Order No. 1.284 of 10 September 2007 implementing Law No. 1.338 of 7 September 2007.

Upon reading and analysing the Order, and without going into detail on the articles that comprise it, no article referred to point 4) of Article 11of the Law.

The seven paragraphs of Article 11of the Law are cited, with the exception of point (paragraph) 4).

Article 10 of the Order summarises this peculiarity:

“Article 10 […] companies authorised to carry out the activities referred to in points 1) to 3) and 5) to 7) of Article 1 of Law No. 1.338 of 7 September 2007 must obtain the best possible execution of orders.“

Thus, even though the legislator had provided in its Law for the concept of “advice and assistance” devolved to banks, within the framework of their activity of “advice and assistance in the matters referred to in points 1) to 3)”, as a reminder:

1) management on behalf of third parties (management mandate)

2°) management of mutual funds (UCITS management)

3°) Receipt and transmission of orders (RTO)

The legislator, in paragraph 4) of Article 1, did not mention this in its order. In doing so, it failed to define the terms and conditions for its application.

• Regarding point 1) (management mandate), this was not very important, since the mandate entrusted by the client to the banker entailed the latter’s responsibility in the transfer of power he held. Any breach of this responsibility could be proven (no risk, moderate risk or risky).

This is because, with a loss of 80% on a prudent mandate, it would be easy to prove the bank’s liability.

The obligation arising from the activity of “advice and assistance” appeared to be implied in the extension of the mandate, subsequent to the mandate.

• Regarding point 2) (management of Monegasque mutual funds), this was not very important, since the establishment of the term sheet or prospectus for the financial product carried with it responsibility for the very definition of the product (risky or non-risky mutual fund (FCP)).

Because with a loss of 80% on a mutual fund with a “prudent” prospectus, it will be easy to prove the bank’s liability.

The obligation arising from the activity of “advice and assistance” appears to be implied in the extension of the identity sheet (Term Sheet or Prospectus) of the Monegasque mutual fund, subsequent to its description sheet.

• Regarding point 3) (R.T.O), however, since the bank only provides a “technical” service and the client remains free to make his own choices, the question had to be asked.

Why did the legislator provide for an activity of “advice and assistance” in its Law, and in what circumstances would this positive activity (the concept of “assistance” is more engaging than that of “advice”) apply?

Why did the legislator provide for such a positive activity to be carried out by the bank under the RTO regime, without defining its scope?

What meaning could be given to this situation, other than that the legislator’s lack of precision regarding the implementation of this activity, and the obligations that would then arise placed investors under the RTO regime in a legal no man’s land vis-à-vis their bankers?

Darwin, you’ve got us there, but we should have rejected the analogy. Analogies is not evidence.

  1. The legal no man’s land

• This situation was used (understandably) by banks to point out that:

“Paragraph 1.4) of Law No. 1.338 includes within the scope of activities covered by the law the case of an institution that assists and advises a person in the context of an activity of “1°) securities portfolio management” or 2°) management of mutual funds or “3°) reception and transmission of orders.

Under no circumstances does this impose on institutions a duty to provide advice and assistance in relation to the reception and transmission of orders, which by its nature excludes any duty to provide assistance and advice.”

The bank’s position was incorrect, in that “nature” has nothing to do with the case; Darwin is definitely a tough nut to crack.

• But also taken up at the time by the courts:

 “The obligations of financial institutions are governed by Articles 7 et seq. of the aforementioned Order 1.284.

These do not expressly provide for any duty to advise in the context of an RTO relationship, but only in the context of the conclusion of a management mandate.”

The judges’ position could still be improved, as it fails to answer the question: What status should be given to “advice and assistance” if this activity is not accompanied by a real obligation to monitor its good execution?

Contrary to all expectations, while the case was still pending before the courts, the Monegasque legislature filled this legal gap.

Patrick LAURE
Secrétaire Particulier
+33 6 35 45 27 02
laurepatrick@wanadoo.fr

**The information provided in this article is for general informational purposes only and does not constitute legal advice. It is not intended to create an attorney-client relationship. Laws and regulations vary by jurisdiction and may change over time. Readers should consult a qualified legal professional for advice specific to their situation. The author and publisher are not responsible for any actions taken based on this information.