Ethics and governance in the European Financial centers

Jean Guill was interviewed by Les Echos.

What he said is worth commenting:

L'information afférente au sous-dépôt de l'intégralité des actifs d'un OPC auprès d'une seule et même entité constitue une information nécessaire qui devrait être mentionnée dans le prospectus de vente d'un OPC. Il en est de même pour les clauses limitatives de responsabilité qui auraient vocation à s'appliquer à tous les investisseurs et qui n'ont pas été négociées individuellement. Il s'est avéré que dans le cas de Luxalpha, ces deux informations ne figuraient pas dans le prospectus. En principe, la CSSF vérifie, par exemple, si de telles clauses limitatives de responsabilité peuvent être valables en vertu de la liberté contractuelle ou si la formulation desdites clauses est contraire à des dispositions d'ordre public, parce qu'elles dénaturent, le cas échéant, les obligations principales de l'intervenant concerné ou auraient comme conséquence d'externaliser une de ses prestations essentielles

(free translation : The information relating to the under-deposit of all of the assets of a UCITS at one sole entity constitutes esential information which should be mentioned in the prospectus. It is the same for provisions that limit the liability which would have vocation to apply to all the investors and that were not negotiated individually. It proved that in the case of Luxalpha, this information did not appear in the prospectus. In theory, the CSSF checks, for example, if such provisions that limit the liability can be valid under the terms of contractual freedom or if the wording of the aforesaid clauses is contrary with provisions of public order, because they may denature the main obligations of the actor concerned or would have as a consequence the outsourcing of one of its essential services)

Then I read again CSSF CIRCULAR 05/177 dated 6 April 2005 that states that “From now on, persons and companies subject to the prudential supervision of the Commission de Surveillance du Secteur Financier ("CSSF") are no longer compelled to communicate to the CSSF, for comments, the content of their advertising messages intended for distribution to their clients or to the public. (…) Obviously, the persons and companies subject to the supervision of the CSSF must continue to comply with the rules of conduct of the financial sector both in Luxembourg and abroad, in refraining from issuing misleading advertising material with regard to the services offered and by mentioning, where necessary, the particular risks inherent to these services and in bringing to the client's attention his own responsibility »

Luxalpha was created in February 2004.

The critical question in the debate is: when did UBS create its subscription form that limits the liability and specified the particular risks inherent to the services and brought to the client's attention his/her own responsibility?

When I read the Luxalpha documentation,  a provision is written in the subscription form, to be signed by investors or their agents, that states that assets would be “safekept” by a US broker – although it did not name Mr Madoff, and investors would bear most of the risk of that broker’s default. A subscription form is not an advertising material but it seems that UBS complies with the spirit of circular 05/177 that requires to mention, where necessary, the particular risks inherent to the services and bring to the client's attention his/her own responsibility. What UBS did.

If the subscription form was created after CIRCULAR 05/177, I am afraid there is definitely a correlation between the new rule that was decided under the influence of the ALFI in the pragmatic committees and the subscription form that was circulated with the litigious provision.

Moreover, Jean Guill said “en principe”. I am afraid this means there were anyway no obligations for UBS to submit documents. He did not say that the submission was mandatory. Otherwise he would have said something like “legally”.

As I said a lax business environment with many conflicts of interests is responsible for the Madoff affair in Luxembourg.