Translation: BaFin This translation is furnished for information purposes only. The orginal German text is binding in all respects.

This letter serves as an explanation of the interpretation by BaFin of certain terms that are of particular significance for the application of section 34b WpHG in conjunction with the Financial Analysis Regulation. The contents of section 34b WpHG, the Financial Analysis Regulation and this letter represent minimum requirements. Under the conditions set out in section 34b (4) WpHG, the provisions set forth in section 34b (1), (2) and (5) WpHG and in this letter do not apply to journalists.

Previous interpretive letters of BaFin on section 34b WpHG dated 16 December 2003, 1 September 2005 and 8 February 2006 are replaced by this letter.

1. Analysis of financial instruments

The Securities Trading Act and the Financial Analysis Regulation contain two different concepts of ‘financial analysis’ which, for the purposes of this letter, are referred to below as ‘financial analyses in the narrower sense’ and ‘financial analyses in the broader sense’.

The concept of ‘financial analysis in the narrower sense’ is defined in section 34b (1) sentence 1 WpHG. According to this definition, financial analysis in the narrower sense is constituted by

• information concerning financial instruments within the meaning of section 34b (3) WpHG in conjunction with section 2 (2b) WpHG or their issuers
• that contains a direct or indirect recommendation for a particular investment decision and
• is intended to be made available to an unspecified group of individuals.

It is of no importance how the analysis is presented (in written or electronic form, or in some other way, e.g. in the context of public presentations).

The concept of ‘financial analysis’ is also used in a wider sense in section 34b (5) sentence 3 WpHG and in section 5a (1) sentence 1 FinAnV and includes

• investment services enterprises' financial analyses of financial instruments within the meaning of section 2 (2b) WpHG (excluding the restriction defined in section 34b (3) WpHG) or their issuers
• where such analyses are intended or likely to be distributed to clients or to the public.

Consequently, the provisions relating to financial analyses in the broader sense only apply to investment services enterprises. These enterprises must check whether the analysis in question might be defined as financial analysis in the broader sense in cases where it is not financial analysis in the narrower sense, either because the analysis does not refer to a financial instrument within the meaning of section 34b (3) WpHG, or because the analysis is not intended to be made available to an unspecified group of individuals. An analysis is considered a financial analysis in the broader sense if it relates to a financial instrument within the meaning of section 2 (2b) WpHG and/or is intended to be distributed to the clients of an investment services enterprise.

Because the production, distribution or communication of financial analyses constitutes an ancillary investment service within the meaning of section 2 (3a) no. 5 WpHG, financial analyses produced by investment services enterprises are subject to the general provisions outlined in Part 6 of the WpHG to the extent that these provisions can be applied to financial analyses. This does not affect the existing legal requirements placed on financial analyses in the narrower sense.

2. Information concerning financial instruments or their issuers containing a direct or indirect recommendation for a particular investment decision (section 2 (3a) no. 5 and section 34b (1) sentence 1 and (5) sentence 3 WpHG)

A financial analysis must

• comprise the preparation of information concerning one or more financial instruments or their issuer(s) and
• contain an investment recommendation for a particular investment decision (e.g. “Buy”/ “Sell” or a price target).

(a) In order to be considered information concerning a financial instrument or its issuer containing a recommendation, it must, in addition to contain a recommendation and taking full account of all relevant circumstances, convey the impression that the financial instrument or issuer concerned has been the subject of detailed consideration. The financial instrument or its issuer must not necessarily have been the subject of examination. In particular, it is not mandatory to analyse and evaluate an enterprise's financial or trading data. It is generally sufficient that the impression of such consideration is delivered via facts, opinions and/or comments relating to the recommendation, or – in exceptional cases – via the presentation of or the context in which the recommendation is made.

A mere recommendation that does not convey the impression that the financial instrument or the issuer has been the subject of detailed consideration, however, does not qualify as a financial analysis. This should be distinguished from a situation in which a mere recommendation is to be regarded as a summary of a financial analysis produced by a third party pursuant to section 34b (2) WpHG.

In line with the prerequisites set out above, a technical analysis of a financial instrument deriving projections for future performance from past price movements, or a sector report covering several enterprises and containing a recommendation, may also be considered a financial analysis.

A financial analysis is not, however, constituted by

• the rendering of a pure price chart that does not project the future price performance;
• the analysis of an index;
• a report analysing the economic, political or market environment that does not contain recommendations for specific financial instruments;
• a sample portfolio which does not offer additional information on the financial instruments included or their issuers that would convey the impression of detailed consideration;
• a portfolio recommendation referring to regions or sectors that does not refer to individual financial instruments or their issuers;
• a warrant calculator or a similar tool that is used to evaluate statistical data on the basis of generally accepted algorithms;
• a pure product description;
• a company description that does not include a direct or indirect recommendation for a particular investment decision;
• pure marketing material (e.g. advertising or other informational material used in marketing), unless it gives the impression of unbiased information or constitutes marketing communication within the meaning of section 31 (2) sentence 4 no. 2 WpHG (see below);
• the pure dissemination of company news without giving a direct or indirect recommendation for a particular investment decision;
• information prepared to fulfil statutory obligations (e.g. ad hoc notifications pursuant to section 15 WpHG, stock exchange admission or sales prospectuses, information on domestic or foreign asset management companies pursuant to the Investment Act (Investmentgesetz));
• an investment recommendation which does not give the impression that a financial instrument or its issuer has been the subject of detailed consideration ("We recommend buying X stocks");
• a simple summary of recommendations made by the enterprise itself (recommendation lists); section 34b (2) WpHG must, however, be observed in relation to lists containing summaries of third-party financial analyses.

(b) A financial analysis must always contain a recommendation for a financial instrument or its issuer (see (a) above). Such recommendation for a particular investment decision can be made directly, for instance in the form of a recommendation to buy, hold or sell particular financial instruments, or indirectly, e.g. by defining particular price targets.

For an indirect recommendation for a particular investment decision, it is sufficient, but also necessary, that if the statement is considered as a whole, it clearly expresses how the current or future price or value of a financial instrument is assessed. An evaluation which presents or assesses past events, without offering an opinion on the current or future price or value of the financial instrument, is not an indirect investment recommendation (e.g. ranking lists based on a financial instrument’s past performance).

Correspondingly, explanations referring to transactions completed in the context of individual asset or fund management would not generally be regarded as an indirect investment recommendation.

In line with the prerequisites set out above, the following statements may constitute indirect recommendations:

• "The stock is overvalued"
• "The bond is undervalued"
• "The investment fund/certificate has high recovery potential"
• "Outperformer"
• "Underperformer"
• "Bullish stocks"
• "Bearish stocks"
• "Our best performers"
• "Tip of the day"
• "Trading idea"
• "Top player"

3. Intended to be made available to an unspecified group of individuals (section 34b (1) sentence 1 WpHG)

In order to qualify as financial analysis within the meaning of section 34b (1) sentence 1 WpHG, the financial analysis must be intended to be made available – possibly by a third party right from the outset – to an unspecified group of individuals. This is the case if the financial analysis is not designed to serve purely internal purposes, but is also intended for distribution channels or for the public as defined in Directives 2003/6/EC, 2003/125/EC and 2006/73/EC. A distribution channel is a channel which makes the financial analysis available to such a large number of people that it is tantamount to public distribution (e.g. copies displayed in offices, the internet, other media, but also correspondingly extensive postal or electronic mailing lists).

A recommendation that was prepared as part of specific investment advice based on the individual requirements of a particular client does not constitute a financial analysis. A recommendation given when providing investment advice cannot be considered to have been tailored to the client's individual circumstances, taking into account for example the client’s personal, financial or tax situation, only because it was provided to selected clients, for example in conjunction with a personal letter. The decisive factor is that the recommendation was prepared on the basis of the individual situation of the particular client or group of clients from the outset, resulting in a personal recommendation.

Informal short-term investment recommendations that stem from the sales or trading department of an investment services enterprise and are communicated to clients (e.g. sales and morning notes) do not constitute financial analyses in the narrower sense. This is only the case, however, if they are not released or intended to be made available to the public or to a large number of people, via distribution channels or the media for instance (see above). The title of such information is immaterial with regard to its classification. The question of whether informal short-term investment recommendations that stem from the trading or sales department of an investment services enterprise and are communicated to clients should be regarded as financial analyses in the broader sense needs to be clarified at European level in order to ensure a level playing field for all market participants. Until such clarification is forthcoming, the arrangements currently applied to financial analyses in the narrower sense will also be applied to financial analyses in the broader sense until further notice.

4. Public distribution and communication (section 34b (1) sentence 2 and (5) sentence 3 WpHG)

A financial analysis is publicly distributed pursuant to section 34b (1) sentence 2 and (5) sentence 3 WpHG if it is made available to the public or to a large number of people (e.g. via postal delivery, via e-mail or by posting it on the internet). The existence of a disclaimer does not serve to prevent a financial analysis from being publicly distributed.

In the context of public distribution it is immaterial whether the recipients had or could have had access to the financial analysis via other sources.

Financial analysis is deemed to have been communicated if it is made available by someone other than the person responsible for producing the analysis. The number of recipients of the financial analysis does not determine whether or not it has been communicated.

The party communicating a financial analysis can rely on the enterprise responsible for producing the analysis having fully complied with its obligations under section 34b WpHG and the Financial Analysis Regulation provided that the enterprise responsible for producing the analysis is a German enterprise supervised by BaFin. This can be assumed in the case of investment services enterprises and persons who have notified BaFin of their activities pursuant to section 34c WpHG. This also applies to journalists if they have either notified BaFin of their activities pursuant to section 34c WpHG or, pursuant to section 34b (4) WpHG, are subject to self-regulation comparable to the provisions set forth in section 34b (1), (2) and (5) and in section 34c WpHG. Such notification and/or self-regulation can be assumed to exist unless there is evidence to the contrary.

The provisions described above do not apply to cases where the party producing the analysis has evidently not complied with the requirements placed on financial analyses because, for example, the analysis is explicitly only intended to be used for internal purposes within a corporate group or financial services network.

The communication of financial analyses that have been produced in another member state of the European Economic Area (EEA) is subject to the provisions described above, provided that the enterprise responsible for producing the analysis is supervised in the member state concerned. The provisions described above apply mutatis mutandis to financial analyses that have been produced outside the EEA if, before being communicated or publicly distributed in Germany, the financial analysis has already been communicated or publicly distributed in another EEA member state and these activities are supervised in the member state concerned.

These provisions do not apply in cases where the financial analysis has not been produced, communicated or previously publicly distributed in another EEA member state in accordance with the aforementioned principles. As in this case there is no way of ensuring that compliance with European provisions will be monitored by another competent authority, the party that communicates or publicly distributes the financial analysis in Germany is responsible for doing its utmost to perform its own checks to establish whether the financial analysis has been produced in compliance with the provisions of section 34b WpHG and the Financial Analysis Regulation. If this is not the case, the financial analysis is not allowed to be communicated or publicly distributed in Germany (section 34b (1) sentence 2 WpHG).

5. Marketing communications within the meaning of section 31 (2) sentence 4 no. 2 WpHG

Marketing communications within the meaning of section 31 (2) sentence 4 no. 2 WpHG are financial analyses in either the narrower or broader sense that are distributed by investment services enterprises and whose production is either wholly or partially non-compliant with the organisational provisions of section 33b (5) and (6) WpHG and of section 34b (5) WpHG in conjunction with section 5a FinAnV or with comparable foreign provisions. In return for their non-compliance with these organisational provisions, section 31 (2) sentence 4 no. 2 WpHG states that such financial analyses must be clearly identified as marketing communications and contain a statement that they do not meet all legal requirements designed to guarantee the impartiality of financial analyses and that they are not subject to any prohibition on dealing ahead of the publication of financial analyses (see section 33b (5) and (6) WpHG). With the exception of the aforementioned organisational provisions, however, all other provisions concerning the fair production and presentation of financial analyses and the disclosure of conflicts of interest apply to the extent that they are pertinent in each case.

The aforementioned provisions do not apply to material that is intended purely for advertising purposes because this does not constitute financial analysis (see section 2. (a) above). This advertising material does not have to be clearly identified as such or contain a statement as described in section 31 (2) sentence 4 no. 2 WpHG.

6. Interpretation of other legal terms

The issue of how to interpret some other undefined legal terms used in section 34b WpHG and in the Financial Analysis Regulation is also still unresolved. The main problems that arise here are

1. the definition of the term ‘affiliated enterprise’;
2. the quantification of the ‘major shareholding’ mentioned in section 5 (3) no. 1 FinAnV;
3. the issue of what items should be disclosed as ‘other significant financial interests’ pursuant to section 5 (3) no. 2 (e) FinAnV; and
4. the question of what period constitutes a ‘timely’ collection of the information requiring disclosure pursuant to section 6 (1) sentence 3 FinAnV.

Having carefully considered the various arguments to be taken into account, I have decided not to issue any more general guidance on how to interpret these undefined legal terms in the foreseeable future. Instead, it will be left to the enterprises concerned to find an appropriate solution for the way in which they disclose information based on their individual situation. Each enterprise will therefore be responsible for how it interprets and applies the relevant statutory requirements and for ensuring that it puts in place the necessary arrangements appropriate to its own situation so that it complies with the statutory provisions. This approach is intended to give more responsibility to the enterprises themselves and to make it easier to use analyses of financial instruments across Europe.

BaFin will be keeping a close eye on these arrangements as part of its supervisory duties.

7. Requirements pursuant to section 31d WpHG and payment by issuers of financial analysts' travel expenses and accommodation costs for analysts' meetings and related events

Issuers should not bear the travel expenses or accommodation costs of financial analysts who work for investment services enterprises as this could give rise to potential conflicts of interest.

Consequently, I presume that most market participants will already have adopted the practice of not allowing issuers to bear analysts' travel expenses and accommodation costs in much the same way as it is no longer acceptable for such issuers to give gifts to financial analysts.

As far as investment services enterprises are concerned, compliance with this best practice is one way of meeting the requirements of section 31d (2) WpHG in conjunction with section 5a (2) no. 2 FinAnV. Bearing in mind Recital (37) of EU Commission Directive 2006/73/EC, it is recommended that all other persons adhere to these principles as well. I would also like to point out in this context that the Society of Investment Professionals in Germany (DVFA) and the German CFA Society (GCFAS) have likewise enshrined these principles in their codes of conduct.