In October of this year, the Israel Securities Authority published a memorandum of law aimed at regulating broker-dealer activities in Israel. Public comments will be accepted until 21/11/24. At issue is an initiative that the ISA and the Ministry of Finance have been trying to promote for several years since the publish of the previous memorandum of law in 2020.
Background
While most financial brokerage activities (such as activities by investment managers, investment advisers, underwriters, trading platforms, distributors, etc.) are supervised and regulated in Israel, the activities of brokers and dealers are not currently regulated under specific regulation – unlike the norm in other countries.
Currently, these activities are only partially regulated: Tel Aviv Stock Exchange (TASE) members’ activities in Israel are regulated by the TASE Regulations and are supervised by the TASE, which is not a regulatory authority. TASE members that are banking corporations are supervised by the Bank of Israel’s Supervisor of Banks.
Highlights of the Memorandum of Law
The new memorandum of law proposes comprehensive regulation of broker-dealer activities, including a licensing obligation for entities engaging in these activities in Israel. These entities will be obligated to operate under full regulation and will be subject to the ISA’s supervision and authorities. The licensing obligation will apply, inter alia, to non-bank TASE members, while banking corporations will receive an exemption from this obligation.
The current situation in relation to entities providing foreign brokerage services relies on a limited permit regime. Pursuant to authorities delegated under section 49A of the Securities Law, the ISA imposed conditions limiting the possibilities of marketing foreign brokerage services in Israel. These conditions do enable a permit to be granted, inter alia, to foreign entities operating in territories implementing an adequate regulatory regime.
The purpose of the memorandum of law and the regulatory provisions contained therein is to create comprehensive regulation of broker-dealer activities, while narrowing the current regulatory gap compared with other countries. This regulation is important, inter alia, due to the fact that these activities entail the holding and safeguarding of clients’ funds and securities. The legislation also aims to facilitate the entry of new players into the Israel market.
Broker-Dealer Activities
The definition of “broker-dealer activities” in the memorandum of law includes “carrying out clients’ instructions to execute securities transactions or the receipt and transfer of instructions for the purpose of executing clients’ transactions (brokerage activity), as well as the purchase or sale of securities for a nostro account as part of executing clients’ instructions (dealer activity).
The memorandum of law prescribes a licensing obligation for entities engaging in broker-dealer activities. Nevertheless, the memorandum stipulates that particular entities, which are already subject to supervision and regulation, will receive an exemption from the licensing obligation, including portfolio managers, underwriters and distributors, market makers in ETFs, stock exchanges, banks, auxiliary corporations and trading platforms.
Licensing Criteria
The memorandum of law prescribes threshold criteria for obtaining a license, such as technical qualifications and means suitable for broker-dealer activities, equity and insurance requirements, a business plan and a statement regarding the license applicant’s financial means. In addition, the party controlling the license applicant will be obligated to obtain a control permit from the ISA.
The memorandum of law also regulates the activities of TASE members that have no clients and are buying and selling securities on the TASE for their nostro accounts. These TASE members will be obligated to obtain a license and will be subject to some of the obligations imposed on broker-dealer licensees.
Licensees’ obligations
The memorandum of law proposes that licensees should be obligated to comply with corporate governance rules, including with regard to the composition of the board of directors and board committees and directors’ qualification criteria. Licensees will also be obligated to appoint officers and to implement information security and cybersecurity, risk management, internal control, credit control and business continuity mechanisms.
The memorandum of law also imposes various client protection obligations on licensees, including fiduciary duties and the duty of care, reporting obligations and provisions preventing conflicts of interest and misleading of clients, and obligations to protect clients’ assets.
Concessions to foreign entities
With respect to foreign entities, the memorandum of law prescribes that entities already holding a foreign broker-dealer license may be subject to lower threshold requirements for obtaining the license, including with regard to the obligation to obtain a control permit. These exemptions and concessions will be granted provided that the ISA is convinced that the foreign law regulating broker-dealer activities provides an appropriate and adequate response to the matters regulated in the sections in which the exemption is requested.
The ISA is also authorized to exempt foreign entities and other entities – such as those with low volumes of activity or entities providing services to qualified clients pursuant to the Securities Law – from some of the law’s obligations, after considering the public’s best interests. We emphasize that at issue is not an exemption from an Israeli broker-dealer license, but rather, an exemption from specific obligations.
Provision of Ancillary Services
Under the proposed amendment, a broker-dealer licensee will be allowed to engage in ancillary services, such as providing credit for securities transactions, currency exchange services relating to transactions and custodian services for funds and securities.
Transitional Provision
The amendment includes a transitional provision for holders of a Section 49A permit (permit to offer brokerage services under the current law), enabling them to continue engaging in broker or dealer activities requiring a license, provided that they submit a license application within three months of the law’s inception and receive the ISA’s confirmation that the application has been submitted, and provided that no decision has been made in relation to their application.
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