Licensing and Supervision of Broker-Dealers: Key Points of the New Memorandum of Law
In October 2024, the Israel Securities Authority (ISA) and the Ministry of Finance issued a memorandum of law to regulate broker-dealer activities in Israel. Public comments on the proposal will be accepted until November 21, 2024. The initiative builds on ongoing efforts to regulate the 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 in many other jurisdictions.
At present, broker-dealer activities are only partially regulated. Members of the Tel Aviv Stock Exchange (TASE) are subject to TASE rules and supervised by the TASE itself, which is not a regulatory authority. Banking corporations that are TASE members are supervised by the Bank of Israel.
Entities providing foreign brokerage services currently operate under a limited permit regime under Section 49A of the Securities Law. The ISA imposes conditions on the marketing of foreign brokerage services in Israel and grants permits only to foreign entities regulated in jurisdictions deemed adequate.
Key Provisions of the Memorandum
The memorandum proposes comprehensive regulation of 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 requirement.
The proposed law seeks to close regulatory gaps compared to international standards and address risks associated with handling clients’ funds and securities. It also aims to facilitate the entry of new players into the Israeli 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 subject to 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 having technical qualifications and means suitable for broker-dealer activities, meeting equity and insurance requirements, submitting a business plan and financial statements, and obtaining an ISA control permit for controlling parties.
Additionally, TASE members that have no clients and buy and sell securities solely for their nostro accounts will be required 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 implementing corporate governance measures, such as specific board composition and director qualification requirements; appointing relevant officers; and implementing 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
Foreign entities, including those providing services to foreign broker-dealers licensed in their home jurisdictions, may face lower licensing thresholds in Israel, provided the ISA deems their regulatory framework adequate. The ISA may also exempt foreign entities and other types of entities, such as those with low volumes of activity or regulated entities, from certain obligations after considering the public interest. 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.