When is a person authorized to engage in securities activities in a major default situation? What are the procedures that the authorized person and the Capital Markets Authority should take in this case?

The concept of defaults

It is the realization of a realistic or legal emergency situation for a person authorized to engage in securities activities that may lead to the inability to continue performing business or fulfill obligations or loss of administrative ability, which threatens the safety of clients’ money and assets in his possession.

There are two types of default cases: a major default and a secondary default, and in this article we will talk about the major default, and we will dedicate another article to talk about the secondary default.

Major defaults

In accordance with the executive regulations of Law No. 7 of 2010 regarding the establishment of the Capital Markets Authority and Regulating Securities Activity, a person authorized to engage in securities activities shall be in a major default in the following cases:

First: Disruption of the authorized person’s financial situation, including but not limited to the following cases:

1- The percentage of accumulated losses reached 75% of the capital.

2 – The inability of the authorized person to fulfill its obligations that have a material financial impact when they become due.

3- There is a fundamental doubt on the part of the authorized person’s auditor in his ability to continue carrying out his purposes.

4- Any other cases that the Capital Markets Authority may deem to affect the ability of an authorized person to continue carrying on his business.

Second: If the administrative status of the authorized person is disturbed, including but not limited to the following cases:

1- Sudden submission of collective resignations by members of the board of directors or the executive management.

2- It is not possible to convene the annual ordinary general assembly for more than one year from the last date set for its convening.

3- Not to form the board of directors for a period exceeding six months from the date of the vacancy.

4- Issuance of a decision by any supervisory authority to dismiss the majority of the members of the Board of Directors.

5- Any other cases that the Capital Markets Authority may deem to affect the ability of an authorized person to continue carrying on his business.

Third: In the event that a judicial receiver or a bankruptcy manager is appointed or an executive seizure of his assets is not less than 50% of those assets.

Actions to be taken in the event of a major default

In the event of a major default event, the authorized person must immediately notify the Capital Markets Authority in writing. In the event the authorized person fails to comply with this, the Authority announces that the authorized person has fallen into a major default after studying and evaluating the state of financial or administrative turmoil, or both. The Authority may also suspend the transactions of the authorized person in the cases it determines, such as suspending the company’s shares from trading in the Stock Exchange.

When the authorized person falls into a major state of default as a result of a disorder in the financial or administrative situation, he shall submit an action plan to the Capital Markets Authority to address this disorder within ten working days from the date of notification or the Authority’s announcement. If the Authority accepts this plan, the authorized person shall implement it immediately and provide the Authority With periodic reports on the results of implementation. The Authority shall announce, upon the completion of the implementation of this plan, the demise of the main case of default.

In the event that the Capital Markets Authority rejects the plan submitted by the authorized person, or in the event of his failure to implement it and the expiry of the specified period for that, or when the authorized person falls into a major default as a result of appointing a judicial receiver or a bankruptcy manager or an executive seizure of his assets for a percentage not less than 50% of those assets, the authorized person shall take immediate measures to hand over the money and assets of the clients to them or those who are related to keeping them, managing them, or keeping them, provided that the contracts and agreements related to those funds and assets are observed within six months.

The Capital Markets Authority may request the application of measures or procedures different from the previous procedures to deal with any major default cases, and the previous rules regarding the major default case do not apply to banks, as coordination is made between the Capital Markets Authority and the Central Bank in this regard in accordance with the memorandum of understanding signed between the two parties.

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To book an appointment or request legal advice about the duties of securities companies in the optimal implementation of clients’ orders, we are pleased to receive your inquiries at (info@Taqneen.com).