Licensing and Supervision of Broker-Dealers: Key Points of the New Memorandum of Law
In October 2024, the Israel Securities Authority and the Ministry of Finance issued a memorandum of law aimed at regulating broker-dealer activities in Israel. Public comments on the proposal will be accepted until November 21, 2024. This initiative builds on ongoing efforts to regulate the broker-dealer sector, following a previous memorandum released in 2020.
Background
Currently, the activities of most financial intermediaries in Israel, including investment managers, advisers, underwriters, trading platforms, and distributors, are regulated. However, broker-dealer activities remain largely unregulated, unlike the standard practice in many other jurisdictions.
At present, such activities are only partially governed: members of the Tel Aviv Stock Exchange (TASE) are regulated under TASE rules and supervised by the TASE itself, which is not a regulatory authority, while banking corporations that are TASE members are supervised by the Bank of Israel.
As for entities providing foreign brokerage services currently operate under a limited permit regime under Section 49A of the Securities Law. The ISA imposes conditions on marketing foreign brokerage services in Israel and grant permits only to foreign entities regulated in jurisdictions deemed adequate.
Key Provisions of the Memorandum
The proposed memorandum introduces comprehensive regulation for broker-dealer activities, including a mandatory licensing requirement for entities operating in Israel. Licensed entities will be fully regulated and subject to ISA supervision. Non-bank TASE members will be required to obtain a license while banking corporations will be exempt from this licensing requirement.
The proposed law seeks to close regulatory gaps compared to international standards and address risks associated with handling clients’ funds and securities. The legislation also aims to facilitate the entry of new players into the Israel market.
The memorandum defines broker-dealer activities as: (1) Executing or transmitting client instructions for securities transactions (brokerage activities); and (2) Buying or selling securities for a nostro account as part of executing client instructions (dealer activities).
Certain entities, already under regulatory oversight, will be exempt from the licensing obligation, including: portfolio managers, underwriters, distributors, ETF market makers, stock exchanges, banks, auxiliary corporations, and trading platforms.
Applicants for a broker-dealer license must meet criteria, such as: technical qualifications and means suitable for broker-dealer activities; equity and insurance requirements; submission of a business plan and financial statements; and obtaining a control permit from the ISA for controlling parties.
Additionally, TASE members that have no clients and are buying and selling securities solely for their nostro accounts, will be obligated to obtain a designated license and will be subject to some of the obligations imposed on broker-dealer licensees.
Licensed broker-dealers will be required to meet organizational obligations, including: implement corporate governance measures, including specific board composition and director qualifications; appoint relevant officers; implement information security, cybersecurity, risk management, internal control, credit control and business continuity mechanisms.
They will also have to adhere to client protection obligations, including fiduciary duties, reporting requirements, and safeguarding client assets.
Concessions for Foreign Entities
The ISA is also authorized to exempt foreign entities and other entities – such as those with low volumes of activity or entities providing services to foreign broker-dealers with licenses in their home jurisdictions may face lower thresholds for licensing in Israel, provided their regulatory framework is deemed adequate by the ISA. The ISA may also exempt foreign entities, as well as other types of entities (such as those with low volumes of activity or regulated entities), from certain obligations after considering the public’s best interests. We emphasize that these exemptions will not eliminate the requirement to hold an Israeli broker-dealer license but will reduce specific compliance burdens.
Ancillary Services
Licensed broker-dealers will be permitted to offer ancillary services, including: credit for securities transactions; currency exchange services related to transactions; and custodial services for client funds and securities.
Transitional Provisions
Entities currently holding Section 49A permits may continue their activities under the existing framework during a transitional period, provided they apply for a license within three months of the law’s effective date and receive confirmation from the ISA that their application has been submitted.