Areas of Practice

Main Legal Framework

OUTLINE OF BASIC PROVISIONS OF MIFID LAW NUMBER 144{1} OF 2007

Requirements for granting the license

The requirements for granting license for an investment company to operate may be summarized as follows:

  • • Initial share capital

  1.  
    1. 1. In cases of reception, transmission, execution, portfolio management and investment advice 200,000
    2. 2. 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
    3. 3. for own account, underwriting and operation of Multilateral Trading Facilities MTF 1,000,000
    4. 4. 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.
  • • 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 license, which was granted to them by the Commission.

  • • 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.
  • • 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 authorization.
  • • 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.
  • • The company’s head offices must be located in Cyprus.
  • • The company must be a member of the investor compensation fund.


According to the law, the Commission will not arrange authorization 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.

Organizational requirements
Many of the provisions of the law aim to protect the customers’ best interests by imposing organizational requirements. The organizational requirements may be summarized 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.

Application
According to S.21 (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 license may be terminated by the Commission or stayed under the circumstances outlined in S.24 of the law.

The license automatically ceases to apply in cases where
the investment company does not start using its license at all within 12 months of the time when the license was issued
when the investment company expressly decides to stop having the license
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 license if it finds out that it has acquired the license under false presences, through misrepresentation or by using any other improper means.

if they do not comply with the conditions of their license 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.

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.  

Although it came into force on 1 November 2007, the Commission has clarified that they will not be adamant on penalizing firms at this initial stage, provided that investment firms show that they are making a genuine effort to comply with the provisions. Instead they will try to co-operate with the firms in order to help them achieve full compliance within a very short space of time.