After a series of dramatic collapses of trading platforms, among them Short Trade and General Trade, the loss of tens of millions of shekels of investors' money, and the arrests and investigations in connection with these affairs amid allegations of fraud, the Israel Securities Authority (ISA) published a draft bill yesterday for regulating broker-dealer activity - brokers that are not Tel Aviv Stock exchange members - under its aegis.
ISA chairperson Anat Guetta said on publication of the draft bill, "This is an additional step by the Securities Authority aimed at providing investors with better protection. It comes in addition to legislative amendments concerning trading arenas, dealing with investment in binary options, and other measures that the Authority introduced to minimize unsupervised activity. The bill is intended to provide protection to investors acting through financial intermediaries, and to contribute to shaping a fair and competitive market."
The draft proposed by the ISA, on which comments can be submitted until September 26, imposes a duty of care and a fiduciary duty on broker-dealers, and also includes corporate governance requirements similar to those required of most companies that manage the general public's money.
The ISA wants unlicensed broker-dealer activity to be classed a criminal offense, and that criminal sanctions should also apply to misleading advertising or reporting by a licensed firm.
The bill proposes to regulate for the first time brokers that are not stock exchange members and that do not come within the category of trader platforms, which the ISA began to regulate several years ago. The ISA points out that broker-dealer activity is regulated in most Western countries, and that it seeks to apply similar supervision in Israel, except for underwriting.
The draft bill defines brokerage activity as "the receipt and transmission of instructions to carry out transactions in securities for others, or execution of transactions for others in some other way," while dealer activity is defined as "execution of transactions for the purchase of securities from customers against the licensee's own account, or the execution of transactions for the sale of securities to customers against the licensee's own account." The bill states that a company will be allowed to act as a broker dealer only if it has obtained a license from the ISA, and that individuals will not be allowed to act as broker-dealers unless they are employed by a licensed corporation.
The ISA proposes that a broker-dealer will be obliged to examine the suitability of its activity to the customer and the customer's degree of understanding of the opportunities and risks involved in the securities trading activity in which he or she engages. The draft bill also contains provisions for protecting customers' cash and securities deposited with a licensee.
One of the main new obligations is that a broker-dealer's board of directors should have at least five members, of whom at least two are external directors, and that all directors should have the qualifications required of a director of a public company.
The bill in effect turns these companies, which in some cases have a small staff and a turnover that will not support such a board of directors, into quasi-public companies. This will strengthen corporate governance in this industry, but it will also be a burden on the companies. The bill also stipulates that a licensed corporation must have a chairperson who is not the CEO, like financial entities in much more tightly regulated areas.
Published by Globes [online], Israel business news - www.globes-online.com - on August 13, 2018
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