investment services & regulated markets

Investment Services & Activities & Regulated Markets Law 114 (1) 2007 (MIFID) In Cyprus Georgiades & Mylonas – Advocates & Legal Consultants

INVESTMENT SERVICES AND ACTIVITIES AND REGULATED MARKETS

LAW 144 (1) 2007 (MIFID) IN CYPRUS

As of November 2007, Cyprus has been fully compliant with the Markets in (Financial

Instruments Directive), known as MIFID. The legislation was passed on 25 November 2007 and

published in the Cyprus Gazette on 26 November 2007. The new law replaces the Investment

Firm Law of 2002.

The European Union is aiming, via MIFID, to facilitate the integration of Europe’s financial

markets.

All of the enterprises that are involved with the provision and performance of investment

services, activities and the operation of regulated markets must be licensed by the Cyprus

Securities and Exchange Commission.

According to section 4(2) of the new law 144(1)2007, which came into force on 1 November

2007, the persons who are entitled to provide investment services are (a) Cyprus investment

companies authorised to operate under S. 6 (2) of the law, (b) investment companies of member

states according to section 77(1) and S.80(1) (c) Third County investment companies under

S.78(1) and banks under S.118 and co-ops.

The authorities which are authorised to regulate the operation of the investment companies under

the provisions of this law are the Central Bank, the authority for the supervision and

development of co-op societies and the Cyprus Securities and Exchange Commission.

Under the law, no-one is entitled to receive payment for services unless they have a licence to

provide investment services and if they do so without one, this amounts to a criminal offence.

The criminal court has the jurisdiction to stay the activities of any person who is charged for any

offence under the provisions of this law.

If he finds the accused guilty of an offence under the law, the judge can not only punish him with

a fine and by imposing imprisonment, but he can also order him not to provide any investment

services regulated by the law for a 5-year period.

Terms such as “investment services”, “investment activities”, “regulated market”, “stock

exchange”, financial services, “stock broking services”, broker or any other similar words in any

language may not be used by anyone unless he is licensed according to the provisions of this law.

Under section 6(5) of the law, the licence to operate investment companies is valid in all member

states, either through a branch or by simply providing services or activities in any of the member

states.


According to the new law, the company is entitled to provide the services indicated in their

licence and in order to avoid changing their memorandum and articles of association every time

they want to expand their services, they are required to include in their memorandum and articles

of association a clause providing that the company will provide the investment services specified

in their memorandum of incorporation.

REQUIREMENTS FOR GRANTING A LICENCE

The requirements for granting licence for an investment company to operate may be summarised

as follows:

Initial share capital

(a) In cases of reception, transmission, execution, portfolio management and investment advice

200,000

(b) For reception, transmission, investment advice without handling any clients’

funds/instruments 80,000 or 40,000 and professional indemnity insurance with coverage in all

member state countries for at least 1,000,000 for each loss and a total of 1,500,000 annually for

all losses due to negligence

(c) for own account, underwriting and operation of Multilateral Trading Facilities MTF

1,000,000

(d) reception, transmission, investment advice without handling client funds/instruments and

insurance intermediary 40,000 or 20,000 and professional indemnity insurance with coverage for

all member states for at least 500,000 for each loss and 750,000 for all losses for each year.

2. In the memorandum of association, it must be mentioned that the company is operating as an

investment company and provides the services provided in their licence, which was granted to

them by the Commission.

3. The people who direct the company must have the required good standards of integrity and

experience and the company must be managed by at least 2 such people.

4. The names of the shareholders or the ultimate beneficial owners must be disclosed and the

shares they hold in the company. If the shareholders are not considered suitable, the Commission

may refuse authorisation.

5. The persons employed by the company must have such integrity, good repute, skills,

knowledge and expertise so that they can carry out their duties properly.

6. The company’s head offices must be located in Cyprus.


7. The company must be a member of the investor compensation fund.

According to the law, the Commission will not arrange authorisation if according to the laws,

regulations or administrative provisions of a third country, the effective exercise of the

supervisory functions of the Commission are prevented.

ORGANISATIONAL REQUIREMENTS

Many of the provisions of the law aim to protect the customers’ best interests by imposing

organisational requirements. The organisational requirements may be summarised as follows:

The company must have certain policies and procedures to facilitate compliance with the

legislation, rules for personal transactions, measures for protecting clients from any conflict of

interest, to maintain continuous and regular performance of services, activities, outsourcing of

functions, services, activities to third parties in such a way that it will not influence the internal

control and efficiency of the investment company when complying with their obligations,

maintaining proper governance with transparency.

Use of efficient administrative accounting procedures and internal audit mechanisms, risk

management procedures and arrangements for information processing systems, good recording

of services and activities, prevention of money laundering (separate directive will be issued),

policies, arrangements for the safeguarding of ownership/interests and prevention of the use of

clients’ instruments/funds.

There are some additional requirements in cases of Multilateral Trading Facilities (MTF). The

company must also use in this case the rules and procedures for trading and criteria for the

execution of orders and for determining the instruments, provision of publicly available

information and access to such information, rules governing access to the MTF and provide

information to users for their responsibilities for the settlement of transactions and maintain

procedures to facilitate the settlement of transactions:

The investment company must have an internal procedure’s manual which includes all of the

policies, procedures, regulations and mechanisms and the employees must acknowledge its

existence and be aware of its context.

The procedures and mechanisms to be implemented must be proportionate to the nature and

complexity of the business activities of each investment company.

The Commission is entitled to issue a separate directive concerning what they consider necessary

in order to clarify, specify or add things.


THE APPLICATION

According to S21(1), enterprises which are interested in applying for a permit must file an

application using the prescribed forms from the Commission.

The Commission decides upon the style and the context of the forms and the kind of information

to be supplied by interested parties. The Commission is always entitled to request additional

information.

The application will not be examined unless there is written confirmation that the company has

funds for the requested share capital and that they are willing to freeze them at the Commission’s

request.

The application must be signed by the directors of the company.

Under S.22, the Commission must decide on the outcome of the application within 6 months of

the moment the application is completed. It is considered to be complete if it contains all of the

information provided by article 21.

If the applicant does not receive an answer within 6 months, he can proceed with recourse to the

Supreme Court against the Commission under article 146 of the Constitution.

TERMINATION

The licence may be terminated by the Commission or stayed under the circumstances outlined in

S.24 of the law.

The licence automatically ceases to apply in cases where the investment company does not start

using its licence at all within 12 months of the time when the licence was issued when the

investment company expressly decides to stop having the licence if the investment company

does not provide any investment services and/or has not exercised any investment activities for a

period of 6 months

Under S. 25 and 26 of the law, the Commission is entitled to either wholly or partially revoke or

stay the investment company’s licence if it finds out that it has acquired the licence under false

pretences, through misrepresentation or by using any other improper means;

If they do not comply with the conditions of their licence and the provisions of the law and the

directives;

They are in serious breach and or continuous breach of their operational requirements and

obligations provided by the law and the directives;


The stay is provided by any other Cyprus law which is relevant and applies to a particular

investment company.

Since the coming into force of the new law, the Commission has already passed 2 directives 144-

2007-01 and 144-2007-01.

The first one concerns the licensing and operation of the investment company and the other, the

rules of ethics. The Commission has also prepared another directive which provides for the

format and context of the application forms which need to be filled in by the applicants.

IN CONCLUSION

The new law and the directives afford better protection to the interests of clients of providers of

investment services. It will improve transparency since under the law, the investment institutions

are obliged to provide their clients with more information with regard to their transactions,

activities and their product as well as warning them about various risks that the products that

they offer might entail.

The law covers all financial firms which offer investment advice, the receipt and transmission of

orders, the execution of orders, trading on their own account, portfolio management, multilateral

trading facilities and the underwriting or placing of financial institutions.

investment services & regulated markets

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