EU watch: The new Act on Capital Market Businesses has been adopted in the Czech Republic

Czech Republic

The Capital Markets Act (the "Act") which imposes new regulations on the provision of capital market services and public offers of securities comes into effect as of 1 May 2004.

Provision of Investment Services

The new Act enables domestic securities dealers to do business in the Member States of the European Union and in turn enables persons from Member States to provide investment services in the Czech Republic.

A domestic securities dealer intending to provide the investment services specified in the Act in another Member State may do so either with or without establishing a branch in that Member State. In either case, the securities dealer is obliged to notify the Czech Securities Commission ("Commission"). If the Commission does not have any objections against the commencement of such activities, the Commission will then inform the supervisory body of the host country, thereby allowing the securities dealer to commence the provision of investment services in the host country upon the expiry of the time-limit stipulated by the Act. The time-limit starts running from the day on which the supervisory body of the host country received the information stated above from the Commission. Should the Commission be of the opinion that it would not be suitable for the securities dealer to establish a branch or carry on activities in the chosen Member State, the Commission will then send a notice to the securities dealer within three months stating that it declines to provide the information stated above to the supervisory body of the host country. There is no remedy against such a resolution of the Commission.

A non-Czech based entity, with its registered office in a Member State, holding the authorisation issued by such a Member State to provide investment services, may also provide such investment services in the Czech Republic, either through a branch or without the means of a branch office. The supervisory body of the home country that issued the authorisation to the non-Czech based entity will inform the Commission of the intended provision of investment services; the Commission will then inform the respective foreign entity of its consent. The authorisation of the non-Czech entity to provide investment services in the Czech Republic will come into effect, in the case of the provision of services through a branch, on the day on which the Commission communicates the obligations to notify and the rules for dealing with clients to the non-Czech entity. Such authorisation, in the case of the provision of services through a branch, will, however, come into effect no later than upon the expiry of a two-month period, as stipulated by the Act. In the case of the provision of investment services without a branch, such authorisation will come into effect on the day on which the Commission receives the information relating to the provision of such services from the supervisory body of the home country, or upon the expiry of a period of one month from the day on which such information was received by the supervisory body of the home country.

A non-Czech entity with its registered office in a non-EU State may provide investment services in the Czech Republic only on the basis of a licence issued by the Commission, and only through and by the establishment of a branch.

Investment broker

The Act introduces a new concept in Czech law: the investment broker. An investment broker may be a legal or natural person, that provides investment services through receiving and transmitting orders relating to investment securities. An investment broker does not accept funds from clients, its function is to arrange the transmission of orders regarding investment securities to a limited number of entities defined by the Act (i.e. banks, securities dealers, investment companies etc.). A person who intends to carry out activities as an investment broker is obliged to register themselves with the Commission. Registration is successful upon the satisfaction of certain conditions laid down by the Act, for instance, that the activities of the investment broker will be carried out through a person with experience in capital markets, or through a person who has undertaken specialised training focused on dealing with investment instruments and the provision of information about such investment instruments.

Public auction of securities

The new Act also regulates the public auction of securities. The Public Auctions Act No. 26/2000 is now fully applicable as subsidiary legislation, so if the provisions of the Act concerning the public auction of securities do not provide a solution to a certain issue the Act on Public Auctions will be applied. Only securities dealers may organise public auctions; they are required to draw up the rules for the organisation of such public auctions in a form that is subject to the Commission's approval. The Act stipulates that in the event of a non-voluntary public auction, an expert opinion assessing the price of the auction's subject matter must be attached to the auction notice. However, provided that the lowest offer does not exceed CZK 100,000, the expert opinion may be replaced by a simple estimate of the value of the auction's subject matter. The new Act also explicitly stipulates that a non-voluntary public auction of securities may be organised in the event that a claim, secured by a pledge over a security, is not duly fulfilled on time.

For clarification, the Act replaces the term "securities proprietor" with a new term "securities owner". The change reflects the earlier amendments to the Civil Code in which a security is deemed to be a "rem" in legal language.

Organisation of the investment instruments market

In connection with the adoption of the Act, parts 3 to 5 of the Securities Act No. 591/1992 are thereby repealed and all regulations relating to the capital markets (formerly "financial market,") are now governed exclusively by the Act.

The Act introduces new rules relating to the organisation of the investment instruments market. The Act distinguishes between the regulated market with investment instruments and the free market. The regulated market (in Czech "regulovaný trh") with investment instruments is interpreted as meaning a market which meets the statutory criteria, including the adoption of the rules stipulated for receiving investment instruments and for the registration of these markets in the list of regulated markets published in the Official Journal of the European Union. The regulated market may only be organised by a stock exchange or an OTC market organiser. The regulated market may further be divided into an official securities market (in Czech "oficiální trh s cennými papíry") and a special market with investment instruments that are not securities (in Czech: "zvláštní trh s investičnimi nástroji, které nejsou cennými papíry"). The regulated market organiser may also organise a free securities market. The free market (in Czech "volný trh") means a market governed by rules that are stipulated by the regulated market organiser through general business conditions.

Securities accepted for trading on the official market are listed securities (in Czech "kótované cenné papíry"). The regulated market organiser may accept shares or bonds for trading on the official securities market only upon the satisfaction of a number of criteria stipulated by the Act. If the application to accept securities for trading on the official market also covers securities to which the right to acquire securities of a company with its registered office in a different Member State is attached, the regulated market organiser must also seek an opinion of the body that decided on acceptance of a security for trading in the respective country, prior to deciding on the acceptance of such a security for trading on the official market.

The term "listed securities", newly defined in the Act, thus replaces the term "registered securities" (in Czech "registrované cenné papíry") adopted recently.

Particulars of listed securities and details relating to the required methods of publication are laid down in the implementing regulations. A security may be de-listed from tradingon the official market by its issuer filing an application with the regulated market organiser. The application must be accompanied by proof that the issuer, or any other authorised person, decided to de-list the security from trading on the official market in accordance with the Commercial Code, or any other special regulation. The decision of the issuer, or other authorised person, to de-list a security should  be notified to the Commission and published in such a way that allows remote access. The regulated market organiser is deemed to have de-listed the security upon satisfaction of specific conditions ensuing from special legal regulations.

The regulated market organiser is entitled to suspend trading in a security on the official market if such trading represents a threat to the due operation of the market, or if it is in the interests of investors' protection. If the conditions laid down in the Act have not been fulfilled, the regulated market organiser may reject the security for trading on the official market. The remedy against this decision lies with the Commission. The decision to approve or reject an application for acceptance of a security for trading must be issued within six months (as stipulated by the Act) from the day on which the application was filed. However, the Act does not cover the situation in which this time limit is not met, i.e. the breach of the time limit stipulated by the Act does not result in the decision being deemed to have been issued. The applicant may only proceed in accordance with Section 50 of the Administrative Code (the measure against inactivity) and ask the Commission to decide on the matter, or enforce its rights by filing a statement of claim against the inactivity of an administrative body pursuant to the Act on Administrative Procedure.

One of the conditions which has to be met in order for a security to be accepted for trading on the official market is the publication of the securities prospectus in a manner stipulated by the Act. The Act now regulates the possibility of having this prospectus recognised by the Commission for the purposes of offering securities in a different Member State, or for the purposes of an application to accept a security for trading on an official market of a different Member State's stock exchange.

Stock Exchange

The Act also regulates the management, organisation and activities of the Stock Exchange. For example:

  1. The Commission's consent is required for the execution of an agreement for the transfer of the whole or part of the Stock Exchange's business, or for an agreement on the pledge or lease of such business;
  2. The new Act is stricter in respect of the requirements to be met in order to obtain authorisation from the Commission to act as a Stock Exchange. These requirements include: the minimum amount of share capital needed (CZK 100 million); a registered office including an effective registered office in the Czech Republic; legitimate and transparent origins of share capital; plus logistical, personnel and organisational prerequisites for the operation of a Stock Exchange. In contrast to the previous regulation on this issue, the Act does not stipulate the minimum number of founders that is required.

The new Act stipulates various changes to the organisation of the Stock Exchange. For example, the Act introduces a new position: the General Manager of the Stock Exchange.

The Stock Exchange is obliged to comply with the provisions of the Act by 31 December 2004.

OTC Market

The Act also lays down the rules for organising and carrying out activities on the OTC market. An OTC market may only be organised by a company which has received authorisation from the Commission and which meets the conditions stipulated by the Act, including: a minimum amount of share capital (CZK 100 million); a registered office including an effective registered office in the Czech Republic; transparent and legitimate origins of share capital; logistical, personnel and organisational prerequisites for organising an OTC market. The Commission is obliged to inform the European Communities Commission of the fact that it has granted an authorisation to organise an OTC market. The OTC market organiser may only carry out activities listed in the authorisation granted by the Commission. The rules of trading on the OTC market must also be approved by the Commission in advance.

An OTC market organiser may commence activities from the date on which authorisation to organise an OTC market was granted. The OTC market organiser is entitled to provide services through another regulated market, including a non-Czech market, and to enable another regulated market organiser, including a non-Czech organiser, to provide services through the market of the OTC market organiser.

The OTC market organiser is obliged to comply with the provisions of the Act by 30 June 2005.

Clearing

There are new and more detailed provisions relating to the settlement of transactions with investment instruments. The core provisions stating that a clearing system may only be operated by a person with authorisation from the Commission to operate such a system, remain unchanged. However, the conditions for granting authorisation to operate the clearing system are much stricter under the new Act.

The existence and the name of each clearing system (operated by the system's operator) must be reported to the Commission and to the Commission of the European Communities. Trading on the clearing system will take place under rules approved by the Commission and published in such a way as to allow remote access.

The Act also regulates the obligation of the clearing system operator, the system members and the Commission to notify.

The OTC market operator is obliged to comply with the provisions of the Act by 31 December 2004.

Investment Instruments Records

One of the major changes to the Czech legal system brought about by the Act is the new regulation of investment instruments records. So far, book-entered securities have been entered in records maintained by the Securities Centre. Under the new Act investment instruments will be recorded in the following way:

A)    A central securities register (in Czech "Centrální evidence cenných papírů") will contain records of all book-entered securities issued in the Czech Republic, with minor exceptions as stipulated by the Act. The central securities register will be maintained by the central depositary (in Czech "centrální depozitář) and other persons entitled to maintain records related to the central records maintained by the central depositary. Other persons include:

  1. a securities dealer holding authorisation to carry out such an activity;
  2. an investment company whose investment services listed in the authorisation include the deposit of investment instruments;
  3. the Czech National Bank;
  4. a foreign entity whose objects of activities correspond with those of a securities' depositary and who is entitled to provide investment services in the Czech Republic; and
  5. a foreign central depositary or a non-Czech entity entitled to maintain records of investment instruments.

B)    Separate records of investment instruments (in Czech: "samostatná evidence investičních nástrojů") may include records of:

  1. book-entered certificates of open mutual funds;
  2. deposited certificated investment instruments;
  3. foreign investment instruments entrusted to a securities dealer for the purposes of providing an investment service;
  4. investment instruments not listed in the preceding paragraphs, whose nature makes such records possible.

These records may be maintained by the central depositary and persons specified under the Act, provided that their authorisation permits this.

The work of the central depositary may only be carried out by a legal entity that holds authorisation to carry out such an activity, as issued by the Commission. A number of conditions must be met by such a legal entity in order for the authorisation to be issued. The conditions that must be met include the following: 1) share capital amounting to at least CZK 100 million; 2) a limited number of shareholders (i.e. a bank, securities dealer, government, regulated market organiser etc;) 3) readiness to maintain the central securities register; 4) personnel, organisational and logistical prerequisites to carrying out the activities of the central depositary.

The activities that will be performed by the central depositary include: a) maintaining securities records in the Czech Republic; b) allocating ISIN numbers to securities; and c) operating the clearing system. The central depositary will be entitled to carry out further activities should it be explicitly stipulated in the authorisation awarded to the central depositary. Together with granting the authorisation, the Commission will also approve the rules of operation governing the central depositary in the authorisation itself.

Authorisation of the Securities Centre to carry out the existing activities governed by the Securities Act, will cease to exist from the day following the central depositary's take over of the book-entered securities records, maintained by the Securities Centre until now.

Until such time as the central depositary takes over the book-entered securities records, currently maintained by the Securities Centre, the following will apply:

  1. the provisions of the Act governing the activities of the central depositary shall not apply;
  2. the Securities Centre will carry on the existing activities; and
  3. ISIN numbers will be allocated by the Commission.

The Czech Republic will transfer the records, so far maintained by the Securities Centre, to the central depositary for consideration. The amount of the consideration will be stipulated by an expert. The transfer of these records will take place on the basis of an agreement that will be entered into between the Czech Republic and the central depositary. The agreement must be entered into no later than two months after the central depositary obtains authorisation to carry out activities as a central depositary. The Securities Centre will cease to exist from the day on which the records of book-entered securities are taken over by the central depositary. The rights, obligations and liabilities accruing to the Securities Centre will not pass on to the central depositary.

Protection of Capital Markets and Investors

In connection with the adoption of the new Act, the issuers of listed securities will take on the following new obligations:

  1. to publish, in such a way as to allow remote access, their annual report and consolidated statements no later than four months from the end of the financial year and to send one copy of these documents to the Commission;
  2. the issuer of a listed security is obliged to draw up a semi-annual report containing the particulars stipulated by the Act. The issuer must additionally send the same to the Commission within two months after the expiry of the first six months of the financial year. The issuer is also obliged to publish the same in such a way as to allow remote access to these documents;
  3. to inform the regulated market organiser of any change in the Articles of Association or decrease/increase of the share capital; and
  4. to publish information concerning the convening of a general meeting, the issue of new shares, payments of dividends etc. in such a way as to allow remote access.

The new Act regulates the obligation to notify imposed on an entity that reaches, exceeds or reduces its interest, below the limit laid down by the Act, in all voting rights of the issuer. This obligation applies where the issuer of shares has its registered office in the Czech Republic and whose shares have been accepted for trading on the official market in the Czech Republic, or on the official market of a stock exchange in a different Member State. The obligation to notify is linked to reaching or exceeding the limit of 3%, if the share capital of the issuer is higher than CZK 100 million, the thresholds are 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50% or 75%. The same obligation is imposed on an entity whose holding in the company, (the shares in which have been accepted for trading on the official market in the Czech Republic for the first time, or on the official market of a stock exchange in a different Member State,) reaches at least 5%. This obligation also applies to an entity that increases or decreases its interest in voting rights in a company as a result of an increase of or reduction in the share capital. By virtue of this provision, the provision of Section 183d of the Commercial Code, which has so far included a broader obligation to notify, (i.e. in addition to the above, it included an obligation to notify for voting rights reaching 33%, 55%, 60%, 66%, 70%, 80%, 90%, and 95%) is thereby repealed. For the purposes of meeting the obligation to notify, the interests in voting rights of parties acting in concert add up. The obligation to the issuer and the Commission to notify is now deemed to be fulfilled within 3 working days of the day on which the respective party learned or could have learned about the facts giving rise to the obligation to notify. The sanction linked to the breach of such obligation is regulated in the same manner as above; it does not result in the invalidity of the legal act but the voting rights connected with such an interest may not be exercised. However, in the event of a breach of the obligation to notify, the party in breach now faces the threat of a penalty, potentially up to the value of CZK 5 million.

The new Act prohibits so-called market manipulation, deemed to be an activity of a person which could distort the views of capital market participants concerning the value of, and supply and demand of an investment instrument accepted for trading on the regulated market or the acceptance of which has been applied for. The Act explicitly stipulates which acts are deemed not to amount to acts of market manipulation (for example, the dissemination of information by a journalist, while acting under the profession of a journalist, provided that the journalist has acted in accordance with the rules of the journalistic profession and has not gained any benefit beyond the usual remuneration). A penalty of up to CZK 20 million may be imposed for the act of market manipulation. The same penalty may be imposed on a person who has failed to report any suspicion of market manipulation.

Guarantee Fund

The Act establishes a legal entity, known as the Guarantee Fund. The Guarantee Fund ensures a guarantee system from which compensations are paid to the clients of securities dealers who are not able to fulfil their obligations towards their clients. The Act stipulates mandatory contributions to be made by securities dealers to this fund and also stipulates the highest possible amount of payment that can be awarded, amounting to 90% of the amount calculated in accordance with the Act, however, not exceeding EUR 20,000. Upon payment from the Guarantee Fund, the Fund becomes the creditor of the securities dealer, for the amount of the compensation paid.

A non-Czech entity providing investment services in the territory of the Czech Republic does not have to be a member of the Guarantee Fund, provided that it is a member of a guarantee system in the country of its registered office, and provided that the standard compensation provided from such a system is equal to or higher than compensation provided for under the Act. Membership of a non-Czech entity to the Guarantee Fund is decided upon by the Commission.

The Act expressly stipulates that the assets of securities dealers' clients do not form a part of a bankrupt's estate in the event of a declaration of bankruptcy. It is the obligation of the administrator to release such assets.

Supervision

State supervision of capital markets is exercised by the Commission. The Commission has a variety of tools at its disposal to remedy insufficiencies, ranging from the right to suspend trading in securities; to a ban on the discharge of activities; to the right to order forced administration.

Provided that the obligations laid down by the Act are breached by a non-Czech entity entitled to provide investment services in the Czech Republic, the Commission will notify such an entity of the breach of these obligations. If no remedy is introduced on the part of the respective entity, the Commission will inform the supervisory body in its home country. If the measures adopted by the supervisory body in the home country have not led to a remedy of the situation, the Commission may adopt measures to remedy the insufficiencies laid down in the Act, including the right to impose a penalty up to CZK 10 million.

If a securities dealer entitled to provide investment services in a different Member State is in breach of an obligation in that Member State, the Commission may request the securities dealer to remedy the situation at the request of the supervisory body of such a country.

Administrative violation of law and other wrongs

The Act contains provisions for a variety of penalties that may be imposed for a breach of the obligations listed in the Act. In many cases, the Commission is entitled to impose a penalty of up to CZK 20 million.

For further information please contact Kveta Vojtova on  kveta.vojtova@cms-cmck.com or on +420 221 098 847