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:
- 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;
- 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:
- a securities dealer holding authorisation
to carry out such an activity;
- an investment company whose investment services listed
in the authorisation include the deposit
of investment instruments;
- the Czech National Bank;
- 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
- 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:
- book-entered certificates of open mutual funds;
- deposited certificated investment instruments;
- foreign investment instruments entrusted
to a securities dealer for the purposes
of providing an investment service;
- 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:
- the provisions of the Act governing the activities of
the central depositary shall not apply;
- the Securities Centre will carry on the existing
activities; and
- 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:
- 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;
- 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;
- to inform the regulated market organiser of any
change in the Articles of Association
or decrease/increase of the share capital; and
- 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