sent to Assogestioni

Subject: Distance promotion and marketing via the Internet

In a letter dated 28 July 1999 Assogestioni commented on and asked for clarifications concerning the interpretation contained in Consob Communication 99052838 of 7 July 1999 ⁽¹⁾ on the promotion and marketing in Italy of financial products and services on the Internet.

In particular, the comments and queries concerned:

1)the criteria the Commission intends to adopt to determine whether the use of an Internet site constitutes distance promotion or marketing of products or services in Italy;

2)the use of financial salesmen for distance selling on the Internet.

1)As regards the first issue, Consob Communication 99052838 of 7 July 1999 specifies:

- three conditions for concluding that a site is not used for distance promotion or marketing in Italy (hereinafter the "first-level conditions"), that is:

- explicit indications that the content of the site is targeted exclusively at residents of states other than Italy;

- procedures for determining whether acceptances and applications come from Italy;

- the rejection of acceptances and applications coming from Italy;

- indicators that can be used to determine whether sites not satisfying the first-level conditions are targeted at Italy (hereinafter the "second-level indicators"), divided into:

- indicators referring to the content of the site (such as the presence of facts or circumstances regarding Italy, use of the Italian language, the indication of prices and amounts in Italian lire);

- indicators referring to related circumstances (such as the fact that persons are operating in Italy through which the offer can be taken up, the dissemination in Italy of information that is analogous to that on the site, the possibility of gaining access to the site by way of search engines that are Italian or specialized in Italian affairs).

The communication also specifies that a site may be deemed to be targeted at Italy, regardless of the foregoing conditions and indicators, on the basis of an assessment made by the Commission (considering, for example, the number of residents in Italy who have followed up the promotion or taken up the offer.

The following is a summary of Assogestioni's comments on these issues.

1.a)It would be wrong to use the second-level indicators only for sites that did not satisfy the first-level conditions. In fact, applying the criteria established in the communication of 7 July 1999, it would not be possible, for example, to consider as targeted at Italy a site that contained the first-level indications and procedures but which nonetheless used the Italian language or referred to facts or circumstances regarding Italy;

1.b)Any site that failed to satisfy the first-level conditions, even if in a language other than Italian and not containing references to Italy or "related circumstances" linking it to Italy, should be considered as targeted at Italy. In other words, sites that did not satisfy the first-level conditions should always be considered as targeted at Italy regardless of the second-level indicators;

1.c)The third first-level condition (rejection of acceptances and applications coming from Italy) should be interpreted as meaning that the obligation for the site operator to reject acceptances and applications exists where there are indications suggesting that the person solicited resides in Italy.

In the light of the foregoing considerations, Assogestioni suggested reformulating the criteria for identifying offers targeted at Italy so as to apply the conditions and indicators in parallel instead of in series (starting with the first-level conditions and going on to the second-level indicators). In particular, it suggested that sites should be considered as targeted at Italy that:

- contained references to Italy, used the Italian language or showed prices and amounts in Italian lire (site-content indicators); or

- could be linked to Italy on the basis of related circumstances (related circumstances indicators); or,

- even where such indicators were not present, did not state that the offer was not targeted at persons resident in Italy, did not contain procedures for determining whether acceptances and applications came from Italy, and did not reject acceptances and applications coming from Italy.

The reasons for the difference between Assogestioni's position and that of Consob in Communication 99052838 of 7 July 1999 can be clarified by looking briefly at the considerations set out in points 1.a)and 1.b)above.

As regards Assogestioni's comments in point 1.a), it should be noted that the Commission's position does not consider behaviour that, in view of its inconsistency, can only be explained by the intention of circumventing the controls put in place by the regulatory authority.

This, for example, would appear to be the intention of a site which states that the offer is not targeted at persons resident in Italy and that it uses procedures preventing such persons from taking it up but which gives the names of intermediaries in Italy through which it may be taken up. Such a situation is possible but, considering the confusion that the discordant indications posted on the site would produce in investors and the consequent adverse commercial effect, it would appear that it will occur only where the intention is to circumvent the action of the regulatory authority.

In this respect it should be noted that, precisely in order to deal with anomalous situations of the type described above, Communication 99052838 of 7 July 1999 contains the third first-level condition, i.e. rejection by the site operator of acceptances and applications coming from Italy, and provides for Consob to classify an offer posted on a site as being targeted at Italy even if the first-level conditions are not satisfied and the second-level indicators are not present or are inaccurate or discordant.

Turning to the comments set out in point 1.b), it should be noted that the decision not to use only the first-level conditions and to make a second selection of sites on the basis of the second-level indicators is justified by the unreasonableness of the alternative of considering a priori all sites open to acceptances and applications by investors wherever they are resident as being targeted at Italy.

In this respect it is worth repeating that the Commission can always override the criteria laid down in Communication 99052838 of 7 July 1999 and evaluate specific cases, taking account among other things of the acceptances and applications actually received from investors resident in Italy.

In view of the foregoing considerations, the Commission confirms the indications contained in Communication 99052838 of 7 July 1999 concerning the criteria it will use to decide whether an Internet offering is targeted at Italy. It is to be understood that in performing its supervisory function Consob will give priority to investigative methods that permit the identification of "financial" sites that use the Italian language.

The Commission agrees with the view expressed by Assogestioni in point 1.c).

2)As regards the second issue, the use of financial salesmen for distance selling on the Internet, very briefly, Communication 99052838 of 7 July 1999 clarifies that:

- the obligation to use financial salesmen to carry out promotion and marketing activities on a site is impossible owing to the technical characteristics of the web;

- the interaction between intermediaries and investors based on e-mail must be handled by financial salesmen, except for some types of interaction (described in the communication) initiated by investors, for which intermediaries may employ persons who are not financial salesmen.

The queries put by Assogestioni on this matter are as follows:

2.a)whether, in carrying out promotion and marketing activities on a site, the obligations referred to in Articles 28.2 and 29 of Consob Regulation 11522/1998, ⁽²⁾ concerning respectively the information to be provided to customers and the evaluation of the suitability of transactions, can be fulfilled without using financial salesmen and, if so, whether they can be fulfilled by means of automated procedures installed on the site;

2.b)whether the obligation to use financial salesmen is triggered by a means of distance communication having just one of the two characteristics referred to in Article 76.1 of Consob Regulation 11522/1998 (individualized communication and immediate interaction) or whether they must both be present;

2.c)whether, where a site contains an e-mail address or a telephone or fax number permitting investors to make individualized contact with the intermediary, in the subsequent interaction with the intermediary initiated by the investor by one of the foregoing means it is always necessary to use a financial salesman even though it is the investor who takes the initiative.

As regards the first query, point 2.a), distance selling is a type of door-to-door selling since it is dealt with in Article 32 of Legislative Decree 58/1998, which is included in Chapter IV of Title II of Part II of that decree under the heading "Door-to-door selling", and, as Assogestioni points out, Article 36.1b) of Consob Regulation 11522/1998 requires intermediaries, in performing the activity of door-to-door selling, to use financial salesmen to supply investors with the information referred to in Articles 28 and 29(3) of the same regulation.

However, Article 32.2 of Legislative Decree 58/1998 allows Consob to establish in a regulation the extent to which the rules on door-to-door selling are applicable to distance selling. In fact, Articles 71-77 of Consob Regulation 11522/1998 differentiate the regulation of distance selling from that of door-to-door selling, among other things by not requiring financial salesmen to be used always but only where the means of distance communication employed permits individualized communication and immediate interaction with investors (Article 76.1).

As mentioned earlier, Consob Communication 99052838 of 7 July 1999 considers a web sit to be a means of distance communication that, in view of its technical characteristics, does not require the use of financial salesmen. There thus does not appear to be any justification for reintroducing the obligation to use financial salesmen, previously excluded because web sites do not possess the characteristics referred to in Article 76.1 of Consob Regulation 11522/1998, on the basis of Articles 28, 29 and 36 of the same regulation.

It should also be noted that the information requirements laid down in Articles 28.2 and 29 of Consob Regulation 11522/1998 are not specific to the regulation of door-to-door and distance selling (of which the obligation to use financial salesmen is an element) but are part of the broader regulation of investment services. In fact, they are continuing obligations that are not restricted to the actual placement of the financial instrument, product or service but apply to all the transactions arising over time in the relationships between investors and intermediaries. In the case of sales of financial instruments arising from orders given by investors over the telephone as part of a dealing service, for example, the obligations in question must always be fulfilled by the intermediary but not necessarily by using financial salesmen.

There remains the question as to whether the obligations referred to in Articles 28.2 and 29 of Consob Regulation 11522/1998 can be fulfilled in standard ways by means of automated procedures installed on Internet sites.

Article 28.2 of Consob Regulation 11522/1998 refers to the information an intermediary must provide on the nature, risks and implications of a given transaction (or of the management service it provides). This obligation does not require the intermediary to evaluate the objective elements regarding the transaction or the service jointly with the subjective elements regarding the investor. The information it must provide to the customer pursuant to Article 28.2 is of a purely objective nature or, in other words, refers exclusively to the transaction itself.

By contrast, Article 29 of Consob Regulation 11522/1998 requires the intermediary to evaluate the suitability of the transaction (the objective element) in the light of the investor's profile (the subjective element). In view of their complexity, such evaluations must be made by the intermediary using predetermined standard procedures.

Consequently, since the information referred to in Article 28 is of an objective nature and the assessment provided for in Article 29 must be the result of a procedure established by the intermediary, it can be concluded that both the provision of information and the assessment of suitability can be carried out by means of automated procedures installed on a web site (that, for example, would automatically process information on investors, gathered by way of questionnaires or otherwise, and their operating profiles in order to classify customers in homogeneous classes and identify transactions those in given classes would not be allowed to carry out, etc.).

The considerations concerning Articles 28 and 29 also clarify, confirming the conclusions already reached with regard to the use of financial salesmen for distance selling on the Internet, the aim of Article 36.1b) of Consob Regulation 11522/1998, which is to entrust financial salesmen with the task of describing the objectivecharacteristics of individual transactions to investors (Article 28.2) and of informing them of the reasons why, on the basis of the evaluation procedure adopted by the intermediary, particular transactions may be unsuitable (Article 29.3).

As to the second query, point 2b), Article 76.1 of Consob Regulation 11522/1998 explicitly requires the use of financial salesmen for means of distance communication that simultaneously permit individualized communication and immediate interaction with investors. However, the term "immediate" should not to be interpreted literally but understood to refer to all forms of interaction in which investors' weighing up of offers is abbreviated (and their acceptance accordingly rendered impulsive) by the psychological state induced by the means of communication employed. E-mail is a typical example of such forms of interaction.

Turning to the last query, point 2c), the Commission has already given its opinion (in Communications 99051449 of 1 July 1999 of 1 July 1999 ⁽³⁾ and 9905283 of 7 July 1999) on the use of financial salesmen in cases where, regardless of the initiator, the interaction between intermediaries and investors is effected by telephone, fax or e-mail. The indications given in these communications still apply when investors contact intermediaries after obtaining their telephone or fax number or e-mail address from a web site.

THE CHAIRMAN

Luigi Spaventa

¹Available on the Internet at www.consob.it under "Regulations".

²The resolution and the annexed regulation are published in Supplemento Ordinario no. 125 to the Gazzetta Ufficiale della Repubblica italianano. 165 of 17 July 1998 and in Consob, Bollettinono. 7/1998. Resolution 11520 of 1 July 1998 abrogates Consob Resolution 10943 of 30 September 1997 and Consob Resolution 10418 of 27 December 1996 and subsequent amendments. Consob Regulation 11522/1998 has been amended by Consob Resolution 11745 of 9 December 1998, published in Gazzetta Ufficiale della Repubblica italianano. 297 of 21 December 1998 and in Consob, Bollettinono. 12/1998.

³Published in Consob's Bollettino,July 1999.