Periodically, one of our legal consultants briefly discusses a relevant supervisory decision of the Dutch Authority for the Financial Markets (AFM), the Dutch Central Bank (DNB) or the Dutch Data Protection Authority (AP). This is always done by asking the same three questions and in plain language so that the issue is easily understood by the non-lawyers among us.
This time, Gerard Jong reflects on an appeal ruling by the District Court of Rotterdam in response to a decision by the AFM to reject a request to enforce the bonus cap rule. This ruling was published on 3 August 2021.
Party X has an AFM licence for proprietary trading in financial instruments. X operates on various European exchanges as a market maker in exchange-traded funds (ETFs) and is also registered with the European Securities and Markets Authority (ESMA) as a systematic internaliser (SI). Party Y is also active as a proprietary trader and a market maker in ETFs on the same exchanges but does so under a licence from a foreign regulator.
In April 2018, Y asked the AFM to take enforcement measures against X for violating the bonus cap rule and thereby disadvantaging Y in its recruitment of personnel. The bonus cap rule states that an employee’s variable remuneration (bonus) may be no more than 20% of its fixed annual remuneration. X pays higher bonuses to its employees.
Initially, the AFM declared Y’s enforcement request inadmissible because Y was not an interested party. In its ruling of 19 September 2019, the District Court of Rotterdam ruled against this and ordered the AFM to take a substantive decision on the issue. According to the court, Y had sufficient substantiation that taking enforcement action against X could affect Y’s competitive position. The AFM took this substantive decision in December 2019, again deciding negatively for Y, which then started a new appeal procedure at the District Court of Rotterdam.
The reason for bringing this action was the AFM’s policy of tolerance: may it decline to enforce the bonus cap rule on a proprietary trader that violates this rule?
May the AFM decline to enforce the bonus cap rule on a proprietary trader that violates this rule?
The District Court of Rotterdam answered this question in the affirmative. Regarding the so-called “general duty to enforce”, the court stated that this duty does not negate the fact that in each situation the interests involved in enforcement and how they should be weighed must be carefully considered. According to the court, there may be two grounds for non-enforcement in this case.
In this respect, the court established the following:
Considering these circumstances, the court found that the AFM could reasonably take the position that enforcement in this particular situation was not necessary or proportionate. The fact that X is also registered with ESMA as an SI did not change this finding. It is true that the legal definition of SI states that these traders “execute client orders”, but according to the court, the decisive factor in the term “external client” was that X deals exclusively on own account and possesses no external clients with whom it has an investment service provision relationship.
This ruling teaches us that, although the premise is the regulator’s non-tolerance of Wft violations, there may be special circumstances in which enforcement is waived. Notable here is that, according to the court, the general duty to enforce is “given less compelling weight” in the financial sector “because the stability of the financial market should be an important guiding principle.”
The AFM and the DNB do not include this latitude in their joint enforcement policy, which was published on 2 November 2020 in the Netherlands Government Gazette. The main principle of this policy is that both regulators act as soon as they learn of a violation: so, zero tolerance. But in this specific instance, the AFM deviated from this principle and the court approved.
