TaxLegi 30.9.2024

The CySEC circular issued on Friday 26/09/24 in relation to the Cyprus Investment Firms’ (CIFs) status and obligations vis-à-vis the offering of fractional shares to traders, has clarified both the expectations on CIFs from a regulator’s perspective, as well as the obligations on CIFs when offering fractional exposure.

What is fractional exposure?

When offering a fraction of a share, the CIF in essence offers a trader the ability to acquire a part of a share, which is duly issued as a whole share. As such, the trader pays a proportion of the share price for the acquisition of the equivalent percentage of such share (i.e. the fraction) pro rata. The proportion acquired gives the trader the equivalent percentage in the rights and characteristics of the share, such as the voting, the dividend and other interests attached to the share.

The highlights of the relevant CySEC Circular can be summarised as follows:

a)      Offering a fraction of a share, which has been initially issued in whole, creates a trust relationship between the CIF, as the party offering such fraction pro rata and holding it/safeguarding it on behalf of the investor, and the investor holding the relevant fraction through the CIF.

b)      The essential elements in order for CIFs to offer fractional exposure in a compliant manner are the existence of an explicit trust arrangement, and the robust holding and safeguarding of such financial instruments on behalf of clients, in line with the existing local and EU regulations on safeguarding and product governance.

c)      The robustness of the holding element as per c) above, shall be evident in CIFs facilitating all rights and characteristics of shares to which fractional exposure exists, such as the right to vote, the right to receive dividend, the right to receive interest in case of the issuer’s liquidation and the ability of fractional shares to be transferred

The next step for CIFs offering traders the acquisition of fractions of shares through their operations / platforms, is a thorough check of their own terms and conditions, to ensure the trust relationship is explicitly revealed therein, and their prime brokerage agreements to confirm compliance with the overall framework.

By:

George Marios Constantinou

Andria Koukounis

Through a Policy Statement, CySEC has a few weeks ago provided significant guidance on regulated entities’ ability to utilise advanced technologies during remote onboarding, whilst complying with all their legal and regulatory obligations.

What are obliged entities, i.e. entities authorised by and operating under the supervision of CySEC, asked to undertake in order to incorporate remote onboarding methods into their operations?

a)       Apply a thorough end-to-end testing and risk assessment connected to the use of one, or a combination of, remote customer onboarding solution(s) to evaluate and address the different risks stemming from such solutions.

b)       Select the remote customer onboarding solution(s) suitable to their business operations prudently, and notify CySEC in advance that they intend to implement remote customer onboarding solutions via the Notification Form contained as Annex III to the relevant Policy Statement.

c)       Adapt their customer due diligence processes and policies in line with the risk assessment performed and the functionalities of the remote customer onboarding solution(s), whilst observing the requirements of all applicable laws and regulations (such as money laundering laws, and data protection laws).

d)       Monitor the remote customer onboarding solution(s) on an ongoing basis and have adequate and proper contingency plans to address any failures.

The CySEC Policy Statement is a very comprehensive set of guidelines addressing, among others, the depth of testing and the risk assessment expected to be performed, the information that must be contained in the revised policies and procedures to reflect the use of remote customer onboarding solution(s), and the level of reliability that these solutions must have. For example, a built-in security feature that can detect images that are or have been tampered with, is a duly acceptable way of a regulated entity being discharged of their duty to ensure the customer onboarding data obtained comes from a reliable source.

CySEC-regulated entities must now revise their non-traditional customer onboarding procedures and policies, to align with the relevant guidelines. This mandatory exercise will be very useful in enhancing their digital and operational resilience, as prescribed by the Digital and Operational Resilience Act.

By:

Thekla Sorokkou

Marianna Kyriacou

Andria Koukounis