Decree No. 58 of 28.02.2018 on Requirements for the Protection of Clients' Financial Instruments and Funds, Product Governance, and Remuneration

DECREE No. 58 of 28.02.2018 on the Requirements for the Protection of Clients' Financial Instruments and Funds, Product Governance, and the Provision or Receipt of Remuneration, Commissions, and Other Monetary or Non-Monetary Benefits

Pub. - State Gazette, No. 22 of 13.03.2018, effective from 13.03.2018; amended, No. 21 of 13.03.2020; amended, No. 49 of 30.06.2022, effective from 22.11.2022; added, No. 67 of 04.08.2023; amended, No. 22 of 15.03.2024, effective from 15.03.2024; amended, No. 20 of 11.03.2025, effective from the date of introduction of the euro in the Republic of Bulgaria

Adopted by Decision No. 212-N of 28.02.2018 of the Financial Supervision Commission (FSC)

Chapter One GENERAL PROVISIONS

Art. 1. This Decree regulates the requirements for investment intermediaries in relation to:

1. the protection of clients' financial instruments and funds;
2. product governance in the creation and distribution of financial instruments;
3. the provision or receipt of remuneration, commissions, or other monetary or non-monetary benefits.

Art. 2. (Added - SG, No. 22 of 2024, effective from 15.03.2024) (1) The requirements of this Decree also apply to:

1. management companies that provide additional services under Art. 86, para. 2, items 2-4 of the Law on Collective Investment Schemes and Other Undertakings for Collective Investment (LCISDU), and
2. persons managing alternative investment funds that provide one or more additional services under Art. 198, para. 5 of the LCISDU.

(2) (Added - SG, No. 22 of 2024, effective from 15.03.2024) This Decree also applies to banks acting as investment intermediaries when they provide one or more investment services and/or carry out investment activities under Art. 6, para. 2 and 3 of the Law on Markets in Financial Instruments (LMFI), and when they sell (offer) structured deposits or advise clients in relation to structured deposits.

Chapter Two REQUIREMENTS FOR THE PROTECTION OF FINANCIAL INSTRUMENTS AND CLIENT FUNDS

Section I General Requirements for the Protection of Financial Instruments and Client Funds

Art. 3. (1) The investment intermediary maintains records and keeps accounts of the financial instruments and funds of its clients, which:

1. allow it at any time to distinguish assets held for one client from assets held for another client, as well as from its own assets;
2. accurately reflect the financial instruments and funds held for clients;
3. can be used for documentary traceability (audit trail).

(2) The investment intermediary reconciles the accounts and records it maintains with those of the person referred to in Art. 93, para. 1 and Art. 94, para. 1 of the LMFI, which hold the assets of the intermediary and its clients, whereby the reconciliation for funds is daily, and for financial instruments is regular, but not less than once a week.

The reconciliation referred to in the first sentence is carried out in the manner and procedure determined in the internal rules of the investment intermediary.

(3) The investment intermediary takes the necessary measures to ensure that all client financial instruments deposited with a person referred to in Art. 94, para. 1 of the LMFI can at all times be clearly distinguished from the financial instruments of the investment intermediary, as well as from the financial instruments of the person referred to in Art. 94, para. 1 of the LMFI, by means of accounts with different names in the accounting records of the person referred to in Art. 94, para. 1 of the LMFI or by equivalent measures that achieve the same level of protection.

(4) The investment intermediary deposits client funds with a person referred to in Art. 93, para. 1 of the LMFI in an account or accounts separate from all accounts used for holding the investment intermediary's own funds.

(5) The investment intermediary establishes the necessary organization to minimize the risk of loss or reduction of client assets or restriction or loss of rights in relation to these assets resulting from misuse of assets, fraud, poor management, inappropriate record-keeping and storage, or negligence.

Art. 4. (1) In the cases referred to in Art. 92, para. 5, second sentence of the LMFI, the investment intermediary provides the client with timely and sufficient information on the risks to which the client is exposed.

(2) When an investment intermediary can exercise set-off, establish security, or take other actions regarding client financial instruments or funds, or when the investment intermediary is informed of actions under Art. 92, para. 5, second sentence of the LMFI, it specifies in the contract with the client all relevant information regarding rights or actions relating to client assets.

(3) The investment intermediary immediately notes in the contract with the client and in its own accounts the established security or exercised set-off or other actions regarding client assets in the accounts under Art. 3, para. 1 to ensure clarity of the status of client assets, including in the event of insolvency proceedings.

Section II Provision of Information

Art. 5. In the cases referred to in Art. 91, para. 6 of the LMFI, the information provided by the investment intermediary to the liquidators, respectively the restructuring authorities, includes:

1. accounts and records establishing the available funds and financial instruments held for each client;
2. information on any person with whom client funds are kept in accordance with Art. 93, para. 1 of the LMFI and identifying data on the accounts in which the funds are held, as well as on the agreements of the intermediary with the persons with whom client funds are kept;
3. information on any person referred to in Art. 94, para. 1 of the LMFI, in which financial instruments are kept and identifying data of the accounts opened with a person referred to in Art. 94, para. 1 of the LMFI, as well as detailed data on the agreement of the intermediary with a person referred to in Art. 94, para. 1 of the LMFI;
4. information on third parties to whom the investment intermediary has outsourced important operational functions and information on these functions;
5. information on employees of the investment intermediary who perform functions related to the storage of client assets, including identifying data of the employee under Art. 10;
6. agreements related to the establishment of the client's ownership right over the assets.

Section III Depositing of Clients' Financial Instruments

Art. 6. (1) The investment intermediary exercises due diligence in:

1. choosing a person referred to in Art. 94, para. 1 of the LMFI in which to keep the financial instruments of its clients, and in determining the terms of the contract with them;
2. carrying out periodic review and assessment of the person referred to in Art. 94, para. 1 of the LMFI and the terms of the contract with them in relation to the storage of the financial instruments of its clients.

(2) The investment intermediary carries out the review and assessment under para. 1, item 2 when necessary, but at least once a year.

(3) For the purposes of para. 1, the investment intermediary takes into account the experience and market reputation of the person referred to in Art. 94, para. 1 of the LMFI, as well as all legislative requirements or market practices related to the holding of the relevant financial instruments that may adversely affect the rights of clients.

(4) The investment intermediary deposits client financial instruments only with persons referred to in Art. 94, para. 1 of the LMFI in jurisdictions where persons referred to in Art. 94, para. 1 of the LMFI and the storage of financial instruments on behalf of third parties are subject to specific regulation and supervision.

(5) The investment intermediary may not deposit client financial instruments with a person referred to in Art. 94, para. 1 of the LMFI in a third country that does not regulate the holding and storage of financial instruments on behalf of others. The requirement in the first sentence may not apply only if one of the following conditions is met:

1. the nature of the financial instruments or the related investment service requires them to be deposited with that person in the relevant third country;
2. the financial instruments are held on behalf of a professional client and this client has requested in writing from the investment intermediary to deposit them with a person referred to in Art. 94, para. 1 of the LMFI in the specified third country.

(6) The requirements under para. 4 and 5 also apply when the person referred to in Art. 94, para. 1 of the LMFI has outsourced important operational functions related to the holding and storage of financial instruments to a third party.

Section IV Depositing of Client Funds

Art. 7. (Amended - SG, No. 20 of 2025, effective from the date of introduction of the euro in the Republic of Bulgaria) (1) The investment intermediary exercises due diligence in:

1. choosing a credit institution, respectively a qualified money market fund, in which to deposit the funds of its clients, and in determining the terms of the contracts with them;
2. carrying out periodic review and assessment of the credit institution, respectively the qualified money market fund, and the terms of the concluded contracts for the storage of funds of its clients.

(2) For the purposes of para. 1, the investment intermediary takes into account the experience and market reputation of the credit institution, respectively the qualified money market fund, to ensure the protection of client rights, as well as all legal and regulatory requirements or market practices related to the holding of client funds that may adversely affect client rights.

(3) When the investment intermediary has chosen to deposit client funds in a credit institution, respectively a qualified money market fund, the investment intermediary considers the need for diversification of client funds and, when appropriate, deposits them in more than one entity to protect client rights.

(4) The investment intermediary deposits client funds in a qualified money market fund only after having informed the client in writing that they will not be held in accordance with the requirements for the protection of client funds under this Decree and the LMFI, and having received written consent from the client for the deposit of their funds in a qualified money market fund.

(5) When an investment intermediary deposits funds held on behalf of a client in a qualified money market fund, the shares or units in this money market fund should be held in accordance with the requirements for holding client financial instruments.

(6) The investment intermediary assesses the credit quality of a money market instrument based on quality indicators of the instrument, whereby, when one or more credit rating agencies registered by ESMA have assigned a rating to the instrument, the assessment also takes into account the assigned credit ratings. The investment intermediary carries out a credit quality assessment of the money market instrument when there is a downgrade below the two highest short-term credit ratings given by a credit rating agency registered by ESMA that rated the instrument, to ensure that it continues to be of high quality.

(7) When an investment intermediary deposits client funds with a credit institution or a qualified money market fund that are in the same group as the investment intermediary, the total amount of deposited funds in group entities may not exceed 20% of all client funds of the investment intermediary.

(8) The investment intermediary may decide not to comply with the limitation under para. 7 when it is not proportional in view of:

1. the nature, scale, and complexity of the activity of the investment intermediary;
2. the security offered by the relevant credit institution or qualified money market fund, and
3. (Amended - SG, No. 20 of 2025, effective from the date of introduction of the euro in the Republic of Bulgaria) the total amount of client funds that the investment intermediary holds in group entities, provided that this amount does not exceed 250,000 euros.

(9) The investment intermediary notifies the Financial Supervision Commission of any decision under para. 8 by the end of the first working day following the day of depositing the funds in a credit institution or a qualified money market fund, providing an explanation for the decision taken.

(10) The investment intermediary reviews the decisions and explanations under para. 9 at least once a year and notifies the Financial Supervision Commission of changes resulting from the review within 7 days of their completion.

Section V Use of Clients' Financial Instruments

Art. 8. (1) The investment intermediary may not conclude securities financing transactions within the meaning of Art. 3, item 11 of Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ, L 337/1 of 23.12.2015) regarding financial instruments held by it on behalf of a client, or use these financial instruments in any other way for its own account or on behalf of another person or client of the investment intermediary.

(2) The limitation under para. 1 does not apply if the following conditions are met simultaneously:

1. the client has given its prior explicit consent for the use of the financial instruments, which is in writing;
2. the use of the financial instruments of that client is limited to the specific conditions with which the client has previously agreed.

(3) The investment intermediary keeps on a durable medium the document with which the client has given consent for the use of its financial instruments under specific conditions.

(4) The investment intermediary has no right to conclude securities financing transactions regarding financial instruments held on behalf of a client in an omnibus account maintained by a person referred to in Art. 94, para. 1 of the LMFI, or to use in any other way financial instruments held in such an account.

(5) The limitation under para. 4 does not apply if, in addition to the conditions specified in para. 2, at least one of the following conditions is met:

1. each client whose financial instruments are held together in an omnibus account has given prior explicit consent in accordance with para. 2, item 1;
2. the investment intermediary has introduced systems and control mechanisms that ensure that only financial instruments of clients who have given prior explicit consent in accordance with para. 2, item 1 are used.

(6) The investment intermediary maintains records containing detailed data on the client whose financial instruments it uses, the number and type of financial instruments used for each client who has given consent. The data in the records must allow for the correct allocation of any potential loss.

(7) The investment intermediary creates mechanisms against unauthorized use of clients' financial instruments for its own account or on behalf of another person, including:

1. concluding an agreement on actions to be taken by the investment intermediary if the client does not have sufficient funds in its account on the settlement date, whereby the agreed actions may include borrowing the relevant financial instruments on behalf of the client or closing the position;
2. monitoring and forecasting by the investment intermediary of the client's ability to fulfill its obligations on the settlement date and introducing corrective measures if this cannot be done;
3. monitoring and timely request from the client to provide the financial instruments that were not delivered on the settlement date and after that date.

(8) The investment intermediary adopts and applies procedures in its operations to ensure that:

1. the borrower of the client's financial instruments provides appropriate collateral, and
2. the intermediary monitors that this collateral remains appropriate, by maintaining its compliance with the value of the instruments borrowed by the borrower.

Section VI Contracts for Financial Collateral with Transfer of Ownership over the Collateral

Art. 9. (Amended and supplemented - SG, No. 21 of 2020) (1) The investment intermediary may not conclude with non-professional clients contracts for financial collateral with transfer of ownership over the collateral to secure present, future, determined, conditional, or expected obligations of the client.

(2) (Added - SG, No. 21 of 2020) The investment intermediary has the right to conclude a contract for financial collateral with transfer of ownership over the collateral with a professional client or an eligible counterparty in cases of the client's obligations to the intermediary, when the subject of the collateral is client assets.

(3) (Added - SG, No. 21 of 2020) The investment intermediary adopts and applies a procedure for concluding contracts for financial collateral with transfer of ownership over collateral with professional clients and eligible counterparties.

(4) (Amended - SG, No. 21 of 2020) Before concluding a contract for financial collateral with transfer of ownership over collateral with the subject assets of a professional client or an eligible counterparty, the investment intermediary prepares a written analysis regarding the appropriateness of concluding such a contract. The analysis is kept in the intermediary's archive.

(5) In preparing the analysis under para. 4, the investment intermediary takes into account the following factors:

1. whether the relationship between the client's obligation to the intermediary and the use of the contract for financial collateral with transfer of ownership over the collateral is weak, including whether the probability of the client's obligation to the intermediary arising is low or insignificant;
2. whether the amount of the client's funds or financial instruments subject to the contract for financial collateral with transfer of ownership over the collateral significantly exceeds the client's obligation or is unlimited, including whether the provision of such collateral is allowed without the client having an obligation to the intermediary, and
3. whether the financial instruments or funds of all clients are subject to contracts for financial collateral with transfer of ownership over the collateral regardless of what obligation each client has to the intermediary.

(6) In addition to taking into account the factors under para. 5, the analysis under para. 4 contains a justification of whether the contract for financial collateral with transfer of ownership over the collateral is suitable for the client, as well as what are the risks and effects on the financial instruments and funds of the client from concluding such a contract.

(7) (Added - SG, No. 21 of 2020) The investment intermediary may conclude a contract for financial collateral with transfer of ownership over the collateral with a professional client or an eligible counterparty only if, based on the analysis under para. 4, it concludes that this contract is suitable for the client and after receiving prior explicit consent from the client for the use of its assets.

(8) The investment intermediary notifies professional clients and eligible counterparties of the risks and effects on the financial instruments and funds of the client from the respective contract for financial collateral with transfer of ownership over the collateral.

Section VII Management Rules Affecting the Protection of Client Assets

Art. 10. (1) The investment intermediary appoints one employee who is responsible for compliance with the obligations of the investment intermediary related to the protection of financial instruments and funds of clients.

(2) The employee under para. 1 must possess the necessary skills, knowledge, and experience to perform their duties.

(3) The investment intermediary ensures that the employee under para. 1 has access to all documents necessary for them to perform their functions.

(4) The employee under para. 1 provides monthly reports to the management body of the investment intermediary regarding the control over the effectiveness of the fulfillment of obligations for the protection of financial instruments and funds of clients.

(5) The investment intermediary may assign other duties to the employee under para. 1 within the intermediary, observing the rules for preventing conflicts of interest, if this does not hinder the performance of their duties under para. 1 and is consistent with the nature, scale, and complexity of the activity of the investment intermediary, as well as with the type and scope of investment services and activities performed.

Section VIII Report by an External Auditor

Art. 11. The registered auditor of the investment intermediary includes in their report under Art. 128, para. 3 of the LMFI, prepared during the audit of the annual financial report of the investment intermediary, information regarding the compliance of the organization created and applied by the investment intermediary in relation to the storage of client assets with the requirements for the storage of client assets established in this Chapter and in the LMFI.

Chapter Three REQUIREMENTS FOR PRODUCT GOVERNANCE

Section I General Provisions

Art. 12. (Amended and supplemented - SG, No. 21 of 2020) (1) (Amended and supplemented - SG, No. 21 of 2020) An investment intermediary that creates financial instruments complies with the product governance requirements contained in Section II and Section IV of this Chapter, and an investment intermediary that distributes financial instruments and services complies with the requirements of Section III and Section IV of this Chapter.

(2) (Amended - SG, No. 21 of 2020) An investment intermediary that creates financial instruments and participates in the distribution of these products complies with the product governance requirements contained in this Chapter.

(3) (Repealed - SG, No. 21 of 2020).

Section II Requirements for Product Governance in the Creation of Financial Instruments

Art. 13. (Amended - SG, No. 21 of 2020; amended and supplemented, No. 49 of 2022, effective from 22.11.2022) (1) An investment intermediary that creates financial instruments takes into account the nature of the financial instrument, the investment service, and the target market for the product.

(2) An investment intermediary that creates financial instruments adopts and applies procedures and measures for product governance. The procedures and measures for product governance ensure compliance with para. 1, as well as that the creation of the financial instrument meets the requirements for establishing and preventing or managing conflicts of interest, as well as the remuneration policy.

(3) In creating a financial instrument, the investment intermediary analyzes:

1. whether the financial instrument may threaten the normal functioning or stability of financial markets before the product is offered to the market;
2. potential conflicts of interest, by assessing whether the financial instrument creates a situation where end clients may be adversely affected if they take exposure opposite to that which the investment intermediary previously held, or if they take exposure opposite to that which the investment intermediary intends to hold after the sale of the product.

(4) In creating the financial instrument, the investment intermediary ensures that its structure and characteristics:

1. do not adversely affect end clients;
2. do not affect the integrity of the market, by allowing the pos...