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Frequently asked questions about clustermunitions

Frequently asked questions - Clustermunitions

What is meant by “adequate measures”' in the preamble to Section 21a(1) of the Market Abuse Decree under the Financial Supervision Act?

A financial enterprise, as defined by Section 5:68 of the Financial Supervision Act, must adopt adequate measures to prevent it from investing in prohibited companies, or granting loans to such entities. “Adequate measures” mean measures that are legally possible and that the financial enterprise can enforce unilaterally. This is certainly the case if a financial enterprise trades in its own name and account, manages a collective investment scheme itself, or, without detailed specifications, receives an explicit instruction from a client to invest in a company subject to the ban (known as an “execution only” situation). 
 
The AFM considers that the legal phrase “adopting adequate measures” is an obligation to take action. The ban and the indicative list should be soundly embedded in the organisation. The financial enterprise has to meet the requirements for ethical and controlled operations, with internal controls designed to effectively instil the ban in the organisation. This can be achieved through internal reporting, regular assessments and the procedure for dealing with infringements. 

A common and practical method is to use an exclusion list in combination with a warning system, to determine whether investments have been made or are made in prohibited companies. 

The AFM employs an indicative list of companies as a tool for its supervisory activities. Self-assessments include questions from the AFM on the implementation of Section 21a of the Market Abuse Decree under the Financial Supervision Act. 

The AFM stresses the imperative of checking at least once a year whether prohibited companies are  ‘on the blacklist’ in the transaction and trading systems, and, if new systems are implemented, repeating the test to determine whether these companies remain ‘closed’. 

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Does the statutory regulation concerning cluster munitions also apply to advice?

Advising does not strictly fall within the scope of the rules on cluster munitions. 

The ban is clearly aimed at preventing the effecting or commissioning of transactions, the granting of loans and the acquisition of shares that are not freely tradable. Advising within the meaning of Section 1:1 of the Financial Supervision Act does not encompass this. However, the intent of the legislation is that financial enterprises, as referred to in Section 5:68 of the Act, should develop policy for advising in connection with cluster munitions. In any such cases, therefore, the appropriateness of the advice will also have to be assessed in the light of Section 21a of the Market Abuse Decree under the Financial Supervision Act.

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Where can I find Section 21a of the Market Abuse Decree under the Financial Supervision Act?

Link to Section 21a of the Market Abuse Decree under the Financial Supervision Act: http://wetten.overheid.nl/BWBR0020417

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At what level should it be verified that the 5% threshold has not been breached?

The assessment of whether more than 5% of the investments of a collective investment scheme managed by a third party are in companies that are subject to the investment ban has to be performed at the fund or sub-fund level, and not at the umbrella level.

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What is considered a critical component of cluster munitions?

A component is critical if it is essential for the functioning of cluster munitions, or is intended solely for use in the production of cluster munitions. Dual-use components, which can also be used for purposes other than cluster munitions, are therefore outside the scope of the provision.

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What about subsidiaries and parents of cluster munition companies?

Section 21a(2) of the Market Abuse Decree under the Financial Supervision Act forbids investments in or loans to parent companies of cluster munitions companies if the parent owns 50% or more of the share capital of the subsidiary. What is the approach to the reverse situation, where investments are made in a subsidiary that, unlike its parent company, does not engage in cluster munition activities? 

A subsidiary whose parent company is involved in cluster munition activities, while the subsidiary itself is not, falls outside the scope of the legal ban. Section 21a of the Market Abuse Decree under the Financial Supervision Act actually expresses the Dutch Parliament’s desired “ban on evidently direct investments in the manufacture, sale and distribution of cluster munitions.” However, this does not dilute the responsibility of a financial enterprise or restrict its freedom to place such a subsidiary on a more extensive exclusion list. In this example situation, obviously no loans should be granted to the parent company involved in cluster munitions or any investments made in it. 

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How does the AFM use the list for its supervision?

The AFM uses an indicative list as a risk radar for its supervision. 

Information is collected monthly on whether financial enterprises, as referred to in Section 5:68 of the Financial Supervision Act, have taken positions in securities of the excluded companies. If so, the AFM will contact the relevant enterprises for an explanation. It is possible that a transaction fell under one of the exceptions to the ban. As with other areas of its supervision, therefore, the AFM does not immediately go public with the discovery. This will only occur if a final sanction process has been followed and completed. 

As part of its supervision, the AFM will closely question financial enterprises each year and make the ban an item in the self-assessments.
 
The AFM will take enforcement action if an enterprise cannot explain why it invested in a company subject to the ban. The indicative list is not static. It remains the responsibility of each financial enterprise to ensure that it complies with the ban in Section 21a of the Market Abuse Decree under the Financial Supervision Act.

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What steps can the AFM take in the case of a violation?

If the ban has been violated, the AFM can: 

  • Impose a basic fine of between EUR 500,000 and EUR 1 million.
  • Report the matter to the Public Prosecution Service.
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Where can I find more information about the ban?

Where can market parties report violations of the ban?

Reports can be by e-mail to marketsupervision@afm.nl or by phone to the Market Supervision Department on +31 (0)20 797 3777.

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What enterprises are EXEMPT from applying the ban?

Clearing institutions, foreign subsidiaries of financial enterprises, natural persons and legal entities that are not financial enterprises are EXEMPT from applying the ban.
 
Clearing houses are exempt because, when settling a securities transaction, the parties to the transaction are not transparent to the clearing house concerned. 
 
Foreign subsidiaries of financial enterprises, natural persons and legal entities that are not financial enterprises are EXEMPT for a practical reason. Such parties are not in a position to enforce the ban effectively.

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What is meant by “reasonable period”' in 21a(4) of the Market Abuse Decree under the Financial Supervision Act?

Although the legislature has not been more specific about the meaning of “reasonable period”, it has explained what must be understood by the expression: “What a ‘reasonable period’ is will depend on the company concerned, the nature and duration of the investments, and the possibilities of terminating the related obligations. It is also important whether compliance with the obligation to dispose of or terminate financial instruments, loans, or not-freely-tradable shares within a reasonable period is legally possible or unilaterally enforceable by a company. 

The AFM assumes that if new companies are placed on the indicative list, it should be possible to terminate existing investments in them over a period of six months. 

Unforeseen investments made in and/ or loans to companies covered by the ban, statutory exceptions aside, must be immediately disposed of or terminated.

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What about government bonds?

A sovereign state can be an owner, manufacturer, distributor and seller of munitions prohibited under the Convention on Cluster Munitions. A sovereign state can also have a majority interest in a company that manufactures cluster munitions. Is the ban of Section 21a of the Market Abuse Decree under the Financial Supervision Act then also applicable to transactions in government bonds of that country? 

The ban concerns financial enterprises as referred to in Section 5:68 of the Financial Supervision Act, not sovereign states. 

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How is the list of prohibited companies created?

At the request of the AFM, the sector (a representative selection of market parties and interest groups) meets to agree on a list of companies that should be subject to the ban.

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Are there any exceptions to the ban?

The ban allows three exceptions.  

  1. It is permitted to execute transactions based on an index, but only if less than 5% represent individual companies that are subject to the investment ban.  
  2. The ban does not apply either to transactions in a collective investment scheme, if less than 5% of the scheme’s investments are in individual companies that are subject to the investment ban.  
  3. In addition, investments can be made in precisely circumscribed projects of a company that is subject to ban, insofar as the finance is not used for the manufacture, sale or distribution of cluster munitions.
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How often is the list updated?

The sector meets with the AFM towards the end of each calendar year to update the indicative list. The resulting list then applies for the subsequent calendar year.

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When did the ban on investing in cluster munitions come into effect and who supervises compliance?

The ban came into effect on 1 January 2013. Since 1 April 2013, its supervision has been in the hands of the AFM.

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What does the ban entail?

In accordance with Section 21a of the Market Abuse Decree under the Financial Supervision Act, a financial enterprise with registered office in the Netherlands must adopt effective measures to prevent it from:

  1. conducting or commissioning transactions for the purpose of acquiring or offering a financial instrument that has been issued by a company that produces, sells or distributes cluster munitions, or critical components of them;
  2. granting loans to a company as referred to in paragraph a;
  3. acquiring shares in the capital of a company as referred to in paragraph a that are not freely tradable. 
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What is meant by “cluster munition”?

For the definition of “cluster munition”, Section 21a(1)(a) of the Market Abuse Decree under the Financial Supervision Act refers to Article 2(2) of the Convention on Cluster Munitions. 

The Convention was published in Treaty Series 2009-45. 

According to the definition in Article 2(2) of the Convention, cluster munition means “a conventional munition that is designed to disperse or release explosive submunitions each weighing less than 20 kilograms, and includes those explosive submunitions”. 

Three categories of munition are excluded under Articles 2(2)(a) to 2(2)(c): 

  1. “A munition or submunition designed to dispense flares, smoke, pyrotechnics or chaff; or a munition designed exclusively for an air defence role”; 
  2. “A munition or submunition designed to produce electrical or electronic effects”; 
  3. “A munition that, in order to avoid indiscriminate area effects and the risks posed by unexploded submunitions, has all of the following characteristics”: 
    1. “Each munition contains fewer than ten explosive submunitions”; 
    2. “Each explosive submunition weighs more than four kilograms”; 
    3. “Each explosive submunition is designed to detect and engage a single target object”; 
    4. “Each explosive submunition is equipped with an electronic self-destruction mechanism”; 
    5. “Each explosive submunition is equipped with an electronic self-deactivating feature”;   

Link to the Convention: https://zoek.officielebekendmakingen.nl/trb-2009-45.html
The English text is “authentic” (original text); later in the document is a Dutch translation. 

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Which enterprises have to apply the ban?

The ban has to be applied by a financial enterprise that is established in the Netherlands and is a:

  • Bank;
  • Management company;
  • Collective investment scheme; 
  • Investment firm; 
  • Financial institution; 
  • Pension fund; 
  • Premium pension institution; or 
  • Insurer.

Application of the ban is also mandatory for branches and tied agents abroad of such an enterprise, but only if the head office based in the Netherlands bears responsibility for their operations.

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