1 11 DAY I

2 22 I. Detailed description of conditions for securities market authorization of investment companies (qualification, technical, organizational, legal and other requirements for the beginning of the activity), which intend to perform brokerage activity. Agenda: A. Legal basis B. Investment services and activities in Poland C. Types of Investment Firms operating on Polish capital market & general rules D. Qualifications & basic obligations

3 33 LEGAL BASIS EU Directive 2004/39/EC Directive 2006/73/EC Commission Regulation No 1287/2006 POLAND (basic regulation) Act on Trading in Financial Instruments – 29 July 2005 with amendments Regulation of Ministry of Finance ( ) as regards detailed technical and organisational standards for investment firms (…) Regulation of Ministry of Finance ( ) as regards of course and conduct of investment firms (…) Both regulations update previous ones from 2009

4 44 Investment services and activities in Poland – based to 2004/39/EC, Annex I Section A, B. Core and Ancillary Services - art. 69 section 2 and 4 Important Term: Investment Firm – entity conducting investment services and activities based to the permission issued by PFSA (exceptions – 69.4) Definition: Investment Firm shall mean a brokerage house, a bank conducting investment services*, a foreign investment firm (EU) conducting investment services in Poland or any foreign legal person with a registered office in territory of an OECD state or WTO member state, which conducts investment services in Poland. * Service provided by non Polish EU entity based to art. 117 („passport”) – CREDIT INSTITUTION (definition: see Directive 2006/48/WE)

5 5 Based to art. 19.1, 2004/39/EC Conduct of business Note (!) „Best execution” is another issue 5 Acting honestly, fairly, professionally, in accordance with best interests of the client

6 6 TYPES of INVESTMENT FIRMS 1. Brokerage – art. 95 Act on Trading … 2. Bank – art. 111 (credit institution) - art Foreign legal person – art Branch of the foreign investment firm – art. 117 List of licensed investment firms is published on PFSA website entities/entities.html 6 List is closed. Firms without licence are not published - easy to check

7 7 1.BROKERAGE Legal form: Capital companies: joint stock or pls and limited liability company Personal companies: limited joint stock partnership, limited partnership, limited liability partnership, general partnership - professionals: brokers and investment advisers as shareholders/partners, shareholding Broker and Investment Adviser – specific occupation and position on Polish capital market (to be cancelled – projects in legislation). Who is a „broker” (individual) ? (a)A person entered on the list kept by PFSA, passed, inter alia, state exams organised by PFSA (b)Regulated position and official title under protection of law (c)Two types of brokers: securities broker and commodity broker (d)The „state” licence - issued only by PFSA (other licences, e.g, CFA – without legal power) – exceptions are set out in different provisions (recognition) Who is an Investment Adviser ? (a)A person entered on the list kept by PFSA, passed, inter alia, state exams organized by PFSA (b)Regulated position and official title under protection of the law (c)The „state” licence - issued only by PFSA - exception: (Certified International Investment Analyst - CIIA) issued by Association of Certified International Investment Analysts - ACIIA)

8 8 Broker & Investment Adviser – job description at glance and main differences (1) Having a position in management board or board of directors (supervisory board) of the investment firm and supervising (or executing) activities listed below – art. 125 (Annex I, Section A,B) (a) Reception and transmission of orders to acquire or dispose of financial instruments (b) Execution of orders referred to above for the account of the customer (c) Dealing on own account - acquisition or disposal of financial instruments (d) Management of portfolios including one or more financial instruments (e) Investment advice (f) Offering financial instruments (g) Placing of financial instruments (h) Organising a multilateral trading facility

9 9 Broker & Investment Adviser – job description at glance and main differences (2) The Rule – art. 83: to employ appropriate number of persons – brokers and investment advisers. What is the main difference ? Investment firm shall employ, at least: 1) one securities broker – to provide each of the activities: reception and transmission of orders (acquiring or disposing of financial instruments); execution of orders referred above for the account of the customer, acquisition or disposal, for the broker’s account of financial instruments; offering of financial instruments, organising MTF, keeping of securities accounts and cash accounts 2) two investment advisers – to provide the activities in respect of management of portfolios including one or more financial instruments 3) one investment adviser or one securities broker – to provide the activities in respect of investment advise OBLIGATION

10 1. BROKERAGE Capitals (art. 98): Min. 125 K Eur (equivalent in PLN) If safekeeping and administration of instruments/keeping accounts is not carried out – 50 K Eur BUT If only dealing on own account and underwriting is carried out – 730 K Eur If brokerage is an tied insurance agent/broker and he does not perform execution of orders, dealing on own account, portfolio management, offering instruments, underwriting and MTF – 25 K Eur  Insurance  Board of Directors – education, practice, reputation  Capital adequacy – keeping supervised capitals on giving levels, determining total capital requirement, managing risk and estimating internal capital and reviewing the process of estimating and maintaining the capital, introducing rules of establishing components of top managers’ remuneration

11 2. BANKS - art. 111 (licence) and exception in art. 70 section 2 (non licence) (a) Capitals: min. 5 mln Eur (b) Legal requirements – banking law, separate licence for brokerage activity (c) HQ – in Poland (c) Organisation – organisational separation (brokerage office – branch or other separated unit for receiving orders or concluding agreements) having appropriate managers - education, practice, reputation (d) Exception – banks may render investment ACTIVITIES (brokerage) without licence (without underwriting and ATF) in respect of instruments: shares issued by State Treasury, Central Bank and other financial instruments or bonds which are not admitted to organised trading, mentioned in Act on Toll Motorways and the National Road Fund, and, may render underwriting services in respect of financial instruments Above activity is not investment (brokerage) activity although bank carries out activities subject to investment services - this business in regulated by internal banking law

12 3. FOREIGN LEGAL PERSON – art. 115 Only branch – without legal status, HQ in Poland All organisational separated units carrying out brokerage – one branch Written opinion received by PFSA from mother authority Permission under conditions: (a) Solutions in place enabling PFSA to obtain information necessary in the context supervision over services rendered in Poland (co - operation agreement with mother authority is desirable) (b)Legal person is subject to capital requirements equivalent to those in Poland (c)Separated funds for conducting investment services in Poland - amount is not lower than specified in rules governing the initial capital of local brokerage (d)Adequate managers – education, practice, reputation

13 4. BRANCH OF THE FOREIGN INVESTMENT FIRM – art. 117 No permission – based to licence issued in mother EU country Legal form – branch - All organisational separated units carrying out brokerage – one branch OR No branch – no such situation in Poland NOTYFICATION - art Mother authority informs PFSA No branch – commencing activity – once notification is received by PFSA Branch – after specifying by PFSA conditions for conducting investment services or upon the lapse of two months from the date of the receipt by PFSA relevant information from the foreign competent authority.

14 REGULATIONS and AGREEMENTS (1) 1.With the CLIENT - § 24 Regulation as regards of conduct (…) (RC) NOTE: Only for RETAIL CLIENTS. For professional and eligible counterparties – only description of rendering services (detailed) or when professional asked to be classified as retail or when firm classified professional as retail Document must govern all activity set out in permission 2.ORGANISATIONAL - § 9 Regulation as regards detailed technical and organisational standards (RT) Must include description of internal organization with tasks of all units, rules of responsibility and duty – dependence of all positions, procedures of taking decision Must show separation powers, persons responsible for given activity, e.g. particular member of the board Internal procedures, internal reporting, qualified professionals to be dealt with brokerage activity, IT solutions – back ups, history of account Chinese walls When reception & transmission of orders is conducted by telephone, fax or other equipment – firm must ensure confidentiality, security against modification or delete orders

15 REGULATIONS and AGREEMENTS (2) 3.INTERNAL CONTROL - § 13 RT Protection against breaching internal decisions and procedures Mechanisms, results and effects of internal inspections Functional, self control, institutional control 4.COMPLIANCE - § 14 RT Separated, unit or position (compliance inspector) ensuring that legal rules will be followed Independence guaranteed – resources, qualifications, remuneration, reports Essential: Policies, advisory, (real business support), trainings Inspections and oversight: Compliance tests, ad hoc inspections, remedial measures. Current examinations and evaluation of appropriateness and efficiency of compliance system implemented Reporting: Reports for Management & Supervisory Board, for PFSA Prior and current reactions

16 REGULATIONS and AGREEMENTS (3) 5.INTERNAL AUDIT - § 15 RT. Unit separated from internal control, compliance, risk management Permanent monitoring, verification of internal systems, procedures, regulations (compliance, risk management), especially systems of internal control Independent, objective investigation & view in respect of efficiency, regularity fulfilment of the rules Ensuring eliminating all abnormalities Reports General idea: IMPROVING Business 6.CONFLICT OF INTERESTS – § 3 RT. and § 23 RC. Should include procedure preventing creating conflict of interests When a firm is a member of the capital group – rules should include all factors may create conflict of interests which are known or which should be known to member Should include procedures of managing conflicts Register of existing or potential conflict of interests – § 3.4 RT

17 REGULATIONS and AGREEMENTS (4) CONFLICT OF INTERESTS – continuation Obligation to inform given client about conflicts – before agreement is signed unless ensured that client’s interest will not be broken Information adjusted to client status (retail, professional) – provided on durable Clients’ conscious decision upon receiving information – agreement may be concluded Secondary conflict – immediate information & suspension unless client decides otherwise Inducements - § point 5 RC 7. RELATED PERSONS INVESTMENT - § 4 i 5 RT Related persons – members of the board, employees, tied agents, persons conducting outsourcing and their managers, employees Should include:  Definition, rules and methods of preventing using and disclosing information or having access to inside information or professional secrecy  Obligation of informing related persons about restrictions of personal transactions – at once  Rules of conducting register of transactions for own account Exceptions – no restrictions. i.e. management & units in collective undertakings 17

18 REGULATIONS and AGREEMENTS (5) 8.PROTECTION INSIDER INFORMATION, PROFESSIONAL SECRECY & MONEY LAUNDERING - § 7 RT Chinese walls Circulation of information & documentation 9.OTHER REGULATIONS & PROCEDURES Accountancy – must let provide all financial statements on demand PFSA System of risk management - § 24 RT. Goals:  Identification, measurement, monitoring of risks  Business support – for management board – reports (indication of measures)  Regular information for Supervisory Board Types of risks - § 26 RT. (operational, credit, concentration, market, etc.). 18

19 II. Procedure of Authorisation At a glance… Administrative rules and procedure – informing applicant (art. 9 Administrative code), active participation (art. 10), closing cases within code terms (art. 35, 36) Administrative decisions Licences issued for particular brokerage activity – previous global Formal conditions – art. 82 Act of Trading Very detailed checking, especially procedures and internal rules Case by case verification Applicant must provide information about type of activity (type of core and/or ancillary) Economic analyse – 1 year ahead (for the type of activity). Declarations – managers Information about previous activity – ESPI, new firms – time, forms and type of activity, clients, disputes, complaints Regulations (attached) & other documentation – agreement with depository

20 Outsourcing – art. 81a Act on Trading, ESMA – guidelines sub - outsourcing is forbidden – no EU rules in this regard Inducements – § 8.2. RC Investment firm must inform about types and sources of payments and other benefits received Refusal of licence issue – art. 85 Act of Trading, e.g. Lack of fulfilment formal conditions in application Lack of fulfilment requirements by applicants (capital, legal form, etc) Capital group connections are not clear PFSA opinion is negative – for foreign investment firm or legal person Funds contributed – taken from unclear sources No guarantee for performing service in most favourable manner

21 III. Detailed description of brokerage activity – types of such activity, particulalry those types which are the most difficult and complex in use (execution of orders on behalf of clients, portfolio management, investment advice, offering financial instruments, account of securities), part I & II GENERAL REMARKS Core and Ancillary services – Annex I, Section A i B 2004/39EC Core and non core – investment firms (licence), non core – other firms without licence Appropriateness & Suitability – retail and professional client Conduct of business - Acting honestly, fairly, professionally, in accordance with best interests of the client /39/EC, art Acting of Trading… Best execution – execute clients orders - 33, 41 recitals and art /39/EC, 68 – 76 recitals, art /73/EC, § 47 RC

22 EXECUTION OF ORDERS Written agreement, but with retail client – form: ad solemnitatem; dealing for client’s account – art. 73 Cash separation, bankruptcy and court execution – 73.5a Dealing on own account when executing client’s order firm may use clients funds (!) only for setting up by firm guarantee deposit when required BEST EXECUTION - § 48 RC Execution of orders policy, also firms with portfolio management along with reception & transmission of orders service Procedure and relative weights of factors (client’s category, order specification, place of execution, etc.) Client’s consent Warnings to the client - retail

23 PORTFOLIO MANAGEMENT (1) Making & implement, for the client’s account, investment decisions within client’s cash left for managers disposal - art. 75 Act on Trading, § RC Employment at least 2 investment advisers – this obligation must to be changed. Need for providing detailed investment strategy (evaluation that given strategy accomplishes client’s investment purposes, risk level and understanding) Client rating: retail, professional, eligible counterparties (a)Only non complex financial instruments (b) Agreement is concluded based to client’s initiative (c) Client is warned that he will not be protected as he will not be examined (d) Firm fulfilled rules in respect of protecting commencing conflict of interests EXECUTION ONLY - § 20 RC

24 MIFID – checking whether service or instrument is suitable based to client’s individual situation SUITABILITYAPPROPRIATENESS RetailProfessionalRetailProfessional Portfolio management & Investment advice YES NO Reception & transmission of orders, execution of orders – non complex products EXECUTION ONLY NO Other services NO YESNO Frequency Dynamic test - Before each transaction – recommendation (advisory) and commencing transaction (management) Static test – Before service is rendered PORTFOLIO MANAGEMENT (2)

25 PORTFOLIO MANAGEMENT (3) REQUIRED INFORMATION SUITABILITY & APPROPRIATENESS – SUBJECT FIELD MIFID/MIFID II RetailProfessional SuitabilityKnowledge & experience Investment goals Financial situation Investment goals Financial situation AppropriatenessKnowledge & experience Assumption that client has appropriate knowledge & experience Further information are not required

26 INVESTMENT ADVICE (1) Oral or written recommendation based to PARTICULAR client’s needs and situation - art. 76 Act on Trading, 16 RC, /73 EC Direction of action – element of the opinion. Important context (emphasise positive aspect of product) Double check whether firm intends to prepare financial analysis, investment research & general recommendations – Ancillary services Preventing conflict of interests – fundamental rule, especially when instruments are offered by members of the capital group (Chinese Walls between units preparing recommendation and selling departments) Recommendation – standardized elements shown in regulation Failed recommendation – irrelevant from economic situation, markets risks, currency rates, etc. – RISK TRANSFERRED TO THE CLIENTS (!)

27 INVESTMENT ADVICE (2) Recommendation – should include sources and information in respect of reliability of sources, exact methods of evaluation of instruments, facts – separated from opinions Types of recommendation (a)Instrument could be presented as appropriate for client precisely or per facta concludentia (impliedly) (b)Mailing to the group of chosen clients (appropriate product) based to the chosen criteria (c)General opinion turns into recommendation when indicates for given instrument within given category of assets

28 OFFERING FINANCIAL INSTRUMENTS Intermediation - placing of financial instruments - Art. 72 Acting on Trading…, § 83 RC. Written agreement, with retail client – form ad solemnitatem Check whether this service is not related to subscription – at this stage next licence for holding securities accounts Ask about less market conditions – whether there is a need for such business

29 ACCOUNT OF SECURITIES Ancillary service – Annex I, Section B, 2004/39/EC, art Act on Trading… § 29 RC. Separation clients funds from investment firm cash with guarantee of clients’ rights to the funds. Protection of using clients’ founds for dealing on own account by the firm When bankruptcy – client’s funds are not collected by the receiver Court execution – funds are not under execution carried out by bailiff Funds are kept in: central bank, country bank, foreign credit institution, foreign bank, reputed fund Investment firm must carry out periodical evaluation of service of above entities Client may deny to keep his funds in reputed fund

30 END OF DAY I THANK YOU Andrzej Krawczyk Expert Investment Firms and Capital Market Infrastructure Department Regulation and International Cooperation Unit