1. 1 1 DAY II

2. 2 2 I.Principles of brokerage activity for the client – contacts between investment companies and clients and potential clients, principles of services on promotion of products of investment companies, contracts and execution of contracts. A.GENERAL INFORMATION REQUIREMENTS AND PROMOTION OF PRODUCTS art. 19.2 2004/39/EC, 42, 43, 46, 47 recitals and art. 27 2006/73/EC CLIENT STATUS – key factor when exchanging information and selling products AND ANY information, marketing communications sent to the clients or potential ones should have to be fair, clear and not misleading Marketing communications shall be clearly identifiable as such No requirement for approbating content of adverts but also no rules in respect of preventing establishing such a law but based to 19.2. 2004/39

3. 3 3 CLIENT’S STATUS (1) PROFESSIONAL – see Annex II to 2004/39/EC e.g. 1.Having appropriate knowledge & expertise to make his own investments decisions & risk evaluation 2.Bank, investment firm, insurance undertaking, investment fund 3.Entrepreneur meeting two of the following size requirements on a company basis: — balance sheet total: >= EUR 20 mln — net turnover: EUR >= 40 mln — own funds: EUR >= 2 mln 4.ECB, WB, etc. 5.OTHER entity (than above) classified as retail based to its application – must have knowledge and experience 6.Professional client may ask for changing its classification to retail 7.Firm may classify professional as retail without appropriate application

4. 4 4 CLIENT’S STATUS (2) Other client (than professional – See Annex) – may change (upon firm’s consent) its status (application) – must meet at least two of the following criteria: (a)Concluded transactions >= 50 K Eur each on appropriate market with average frequency at least 10 transactions over last 4Qs (b)Value of his portfolio of financial instruments including cash >= 500 K Eur (c)He works or used to work in financial sector (1 year at least) on appropriate position  Changes in above criteria – no changes in classification BUT  Investment firm must commencing action for changing classification of PROFFESIONAL CLIENT when factors for this type of client have changed. Client may submit application as other client

5. 5 CLIENT’S STATUS (3) ELIGIBLE COUNTERPARTY – art. 24.2 2004/39/EC, § 7.1. RC Investment firms, credit institutions, insurance companies, UCITS and their management companies, pension funds and their management companies, other financial institutions authorised or regulated under Community legislation or the national law of a Member State, undertakings exempted from the application of this Directive under Article 2(1)(k) and (l), national governments and their corresponding offices including public bodies that deal with public debt, central banks and supranational organisations For which investment firm, within conducting services in respect of execution of orders, reception and transmission of orders or within dealing on own account, investment firm executes transactions or intermediates with executing transactions ELIGIBLE COUNTERPARTY may ask to be classified as retail or professional client. Investment firm may recognise such entity as retail or professional 5

6. 6 SCOPE OF INFORMATION PROVIDED (firm and services) CLIENT A. Firm/name, statement that firm has a licence, name of authority which issued licence R B. Direct contact details R C. Language of contact, including language of documentation/information R D. Methods of contact/transmission of orders R E. Short description of procedures in respect of protection client’s assets including basic information, re: systems that guarantee security of assets R F. Detailed rules of service based to agreement concluded R G. Rules of complaints submission and their examination R H. Basic rules of proceedings in respect of conflict of interests and info, that on request, detailed rules may be provided R I. Descriptions, frequency and terms of reports R J. Costs & fees including Total price to be paid (specification cost & fees paid within firm) Foreign currency, rates and transfer fees, when price is set out in foreign currency Info that additional costs may be incurred, including tax, related to transaction which are not paid to be paid to the firm R INFORMATION FOR RETAIL CLIENTS

7. 7 SCOPE OF INFORMATION (financial instruments & risk)CLIENT A. General description of essence of financial instruments – in order to allow clients taking aware decisions – information MUST consider client classification R & P B. Description of risk when investing in financial instruments  Showing risk related to given types of instruments, including leverage, and its influence on risk of lost funds  Showing variability of prices or limitations of markets of instruments  Showing opportunity of contract, as a result of transaction, financial or additional obligations, including obligations related to delivery of instrument, which are additional obligations in relation to cost of purchase of financial instrument  Requirements in respect of keeping and complete deposit R & P INFORMATION FOR CLIENTS

8. 8 SCOPE OF INFORMATION (related to Client’s classification)CLIENT A. Information of rules of dealing with professional clients P B. Information of possibility for asking to be classified as retail client P C. Scope of investment service, transactions or instruments related to the agreement with professional client based to which such a client will be classified as retail P D. Information about rules of dealing with retail client as professional R & P E. Information ordering professional client informing firm about changing factors which decides that the client is classified as professional P F. Information about classification and its consequences R & P INFORMATION FOR CLIENTS

9. 9 SCOPE OF INFORMATION (other)CLIENT A. Information about policy of providing investment services honestly, fairly and professionally in accordance with the best interests of clientso/policy of best execution and key changes in policies R B. Information about inducements R & P C. Information about existing conflict of interests related to given investment service (unless firm and its internal regulations do not ensure that when conflict appear this will not have affect client’s interest) – prior conclusion of the agreement R & P

10. 10 INFORMATION FOR RETAIL CLIENTS MAY INCLUDE (under specific conditions): Comparisons Historical data (investment data) Simulations of historical results Future results (!) BUT NOT THE NAME OF AUTHORITY WITH ANY SUGGESTIONS OF ITS APPROVAL FOR PRODUCTS BUT NOT THE NAME OF THE AUTHORITY WITH ANY SUGGESTION ITS APPROVAL OF THE PRODUCTS OF GIVEN FIRM

11. 11 INFORMATION FOR CLIENTS – FORM OF COMMUNICATION and, as an exception, PAPER Non PAPER DURABLE CARRIER www Not specified – acceptable by phone in communication in banking system Durable Carrier – must enable storage information for vital period in a way that disenabling changing or making possible to reproduce information – fax, e-mail, letter, file in appropriate format (pdf), link to the document on web site. Carrier could be other that paper when: This type of carrier is reasonable for conducting service Client – having possibility of choice (paper and other mode) – precisely chosen other mode Not applicable for eligible counterparties

12. 12 INFORMATION FOR CLIENTS – WEB SITE POSSIBLE IF A.Document is addressed directly to given client B.When information is not sent individually to the client, under conditions: 1. It is suitable for making transaction 2. Client has access to Internet (assumption: when client sent his e-mail) 3. Client’s clear consent 4. E-message to the client including address of the web site along with the „place” on that site where information is „parked” 5. Current information 6. Access to information as long as it is necessary that client could familiarize with information

13. 13 INFORMATION FOR CLIENTS - INDUCEMENTS A.INDUCEMENTS – fees, commissions, non cash benefits related to the conducting investment service conducted for client’s account - § 8.2. RC B. GENERAL RULE – when conducting service, investment firm receive, transfer above funds to the exclusion: fees, commissions & non cash benefits received from client (transferred to the client) fees, commissions necessary for conducting service for the client (legal fees, stock exchange fees, depositary costs, custody) fees, commissions & non cash benefits other than type I and II (received or transferred to third person) under condition: Information about these funds was provided to the client prior agreement These funds are collected in order to improve quality of service TYPE I TYPE II TYPE III DOES NOT

14. 14 II. Proper production of investment companies – principles of investment companies activity, internal control and audit, risks management and compliance, process of resources risen, custody of real assets and cash, management of conflict of interests and motivation MiFID REQUIREMENTS COMPLIANCE INTERNAL AUDIT OUTSOURCING RISK MANAGEMENT INSIDER & PROSESSIONAL SECRECY TRANSACTIONS ON OWN ACCOUNT

15. 15 INTERNAL CONTROL - § 13 RT Investment firm must elaborate & implement internal control system as for protection against actions that are versus internal procedures & decisions THE PURPOSE Ensuring oversight on rules of conduct preventing putting in to the financial system illegal funds Ensuring oversight on rules of conduct preventing putting in to the financial system illegal funds Examination whether firm’s activity and related persons corresponds with market rules on which firm operates, depositary, etc Examination whether firm’s activity and related persons corresponds with market rules on which firm operates, depositary, etc Supervision on insider & professional secrecy flow & protection against access to above information Supervision on insider & professional secrecy flow & protection against access to above information Supervision on examination of complaints, clients applications & conducting register of complaints Supervision on examination of complaints, clients applications & conducting register of complaints INSTITUTIONAL Made by dedicated unit SELF CONTROL On daily basis – EACH employees FUNCTIONAL Board of directors, directors, employees

16. 16 AUDIT - § 15 RT GENERAL PURPOSE – IMPROVING BUSINESS IF scale or scope of brokerage activity of the firm is rather big – INTERNAL UNIT INEPENDENT SEPARATED Internal control Compliance Risk Management INSPECTOR – Daily monitoring, regular verification of internal SYSTEMS, REGULATIONS, implemented PROCEDURES, (compliance, risk management, systems of internal control) regarding their accordancy and efficiency in performing obligations by the firm in respect of the rules of law. Ensuring eliminating all abnormalities Current examination, evaluation of systems – preparing & perform audit plan, giving advice related to the plan execution, evaluation execution of advice, drafting reports (1 at least for a year) in respect of duties performed

17. 17 RISK MANAGEMENT - § 24 RT Investment firm draws up and implements system of risk management related to firm’s activity, its systems & procedures used in ongoing activity witch its goal is identification, measurement, estimation and monitoring of risk. System should ensuring correctness of setting and realisation of detailed aims of performed activity Alike audit, internal, independent unit could be created, which: (a) Implement system of risk management (b)Gives advices to the management board in respect of risk management (c) Prepare written reports (at least 1 a year) in respect of system working including measures undertaken in risk management In banks conducting brokerage activity or in brokerage houses (stock company & limited liability company) – supervisory board receives regular, written reports in respect of system function Internal audit – investigate and evaluate adequacy and effectiveness of the system along with level of its usage

18. 18 COMPLIANCE (1) STRUCTURE SUPERVISOR Y BOARD MANAGEMENT BOARD COMPLIANCE INTERNAL AUDIT LEGAL RISK PR

19. 19 COMPLIANCE (2) DESIRABLE ORGANISATION COMPLIANCE True business support Initiation of changes & control improvement Risk managemet is engaged to business Current & forehand reactions Full methodology of risk management

20. 20 CONFLICT OF INTEREST - notification employeemanager compliance Conflict of interest not appeared Conflict of interest appeared Procedure when conflict of interest appeared

21. 21 CONFLICT OF INTEREST – PROCEEDINGS (1 ) Procedure when conflict of interest appeared Is it possible to resolve conflict of interest by the existing internal rules preventing creation conflicts? If so, then Investment service may be performed & no need for additional actions Manager in given unit Register

22. 22 CONFLICT OF INTERST – PROCEEDINGS (2) Procedure when conflict of interest appeared If not, so Detailed description of existing conflict, including source & character Manager of given unit Register Letter to the client showing source & character of Conflict. Must be clear, fair and not misleading

23. 23 END OF DAY II THANK YOU Andrzej Krawczyk Expert Investment Firms and Capital Market Infrastructure Department Regulation and International Cooperation Unit E-MAIL: andrzej.krawczyk@knf.gov.pl