Amendments on the Requirements for the Investment Intermediaries
In August 2021, the Financial Supervision Commission (FSC) passed amendments to its Ordinance 38 that regulates the requirements for the activities of investment intermediaries (i.e. investment firms) licensed in Bulgaria.
In retrospect, Ordinance 38 was thoroughly renewed in May 2020 in order to ensure more precise rules for investment intermediaries, transparency and stability on the financial instruments market. It defines the requirements for the management bodies of intermediaries and for the staff performing key functions. The Ordinance also focuses on the internal organizational structure of intermediaries, the record-keeping process and the reporting for regulatory purposes. Enhanced requirements are also in place for the Compliance Function Units of intermediaries, as well as for securities brokers and investment consultants.
One of the main objectives of Ordinance 38 is to specify the rules for providing investment services and assessing their suitability with regard to every particular client. The additional provisions in the Ordinance cover registration agency (registration of transfers in financial instruments on the basis of donation, inheritance procedures or preliminary executed deals between the counterparties, all being settled at Central Depository AD) and cross-selling. Ordinance 38 establishes the minimal requirements on the contents of contracts for margin trading and short selling. The term ‘robo advice’ is introduced by the Ordinance with the meaning of portfolio management through an automated or semi-automated system used as a client-relationship management tool.
The highlights of the recently passed amendments prescribes that the investment intermediary has to maintain an independent committee that assesses, on a continuous basis, the professional qualification of every member of its management body, the management body as a whole, and the procurator. Investment intermediary staff with executive functions cannot be included in the committee. The results from performed assessment have to be presented to the management body of the investment intermediary.
Furthermore, the Compliance Director of the investment intermediary is required to prepare and present a report to the management body and, subsequently, to FSC regarding the outcome of the annual risk-policy monitoring program. The program covers all areas in which the investment intermediary performs activities and delivers investment services. Depending on the level of risk associated with breach of regulatory requirements, the program must prioritize the measures that guarantee the comprehensive monitoring and management of the particular risks.
The most important points that the aforementioned report must contain are a description of the structure of the Compliance Unit, a summary of the main findings from the annual review of the internal procedures and policies, as well as the ad-hoc audits performed by the Compliance Unit including the identified shortages, if any, and the remedial actions being recommended. It must also include the strategy applied by the Compliance Unit for ensuring and monitoring that the investment intermediary fulfills its obligations regarding the investment services it offers and for early detecting of potential risks, a summary of all risks inherent to the investment intermediary and the regulatory changes that entered into force during the reviewed period and their impact on the internal policies and procedures of the investment intermediary. Crucial information which must be taken into account include information about conflict of interests, the fulfilled obligations as per Commission Delegated Regulation (EU) 2017/565 with respect to, particularly, the monitoring applied by the Compliance Unit to the product management process, as well as information about the financial instruments created or distributed by the investment intermediary, the distribution strategy, the products and services being offered
The requirements introduced with the amendments of Ordinance 38 must be fulfilled by investment intermediaries, within three months of the date of their publication in Bulgaria’s State Gazette, i.e. three months from 17 August 2021.