Circular PPB-2007-4-CPB/ Law of December 14, 2005 on the abolition of bearer securities (Dematerialization Procedure)

Prudential Policy
Congress Street 12-14 | 1000 Brussels t +32 2 220 53 42 | f +32 2 220 54 93 | www.cbfa.be Brussels, February 26, 2007 CIRCULAR PPB-2007-4-CPB to credit institutions and stockbroking firms following the law of December 14, 2005 on the abolition of bearer securities Madam, Sir,

1. Justification and scope
   The law of December 14, 2005 on the abolition of bearer securities1 and the royal decree of January 12, 2006 implementing this law2 regulate the gradual abolition of bearer securities. Credit institutions and investment firms whose authorization covers the provision of financial instrument custody and administration services have a specific role to play in this matter. These institutions are indeed closely associated with the process of converting bearer securities into dematerialized securities. As account holders for dematerialized securities, they are also subject to a number of specific provisions. For the holding of dematerialized public debt securities, a general authorization had already been granted in 1991 to credit institutions and stockbroking firms authorized to provide custody and administration of financial instruments3. The CBFA, which has been competent in this matter since the entry into force of the law of December 15, 2004, decides on the maintenance of this authorization, as well as the granting of new authorizations. This circular does not in principle cover this already existing category of financial instruments. Regarding dematerialized company securities, the royal decree of January 12, 2006 provides for an automatic authorization for credit institutions and stockbroking firms. Authorized account holders must notify the CBFA in advance of the commencement and cessation of the provision of this service. In application of Article 468 of the Companies Code, the Commission is responsible for monitoring compliance by account holders with the obligations provided for by and under the Code. In the case of instruments that can be considered neither public debt securities nor company securities – the “other dematerialized securities” – only institutions affiliated with clearing organizations4 are authorized to act as account holders. The CBFA is competent to ensure the quality of the administrative and accounting organization and internal control of institutions subject to its supervision (Article 20 of the law of March 22, 1993 and Article 62 of the law of April 6, 1995).

1 Belgian Official Gazette of December 23, 2005. 2 Royal decree relating to dematerialized company securities, B.O.G. of February 3, 2006. 3 B.O.G. of January 24, 1991.
4 Affiliated members within the meaning of coordinated royal decree no. 62 – coordinating royal decree of January 27, 2004

Congress Street 12-14 | 1000 Brussels t +32 2 220 53 42 | f +32 2 220 54 93 | www.cbfa.be PPB-2007-4-CPB - 2 The CBFA is also responsible for ensuring that the institutions concerned comply with their obligations regarding the prevention of the use of the financial system for money laundering purposes.
This circular, which falls within the aforementioned areas of competence, is addressed to:
1° Belgian credit institutions;
2° branches of foreign credit institutions governed by the law of a non-EEA State, which have been authorized in their home State to hold securities on behalf of third parties; 3° Belgian investment firms authorized to provide custody of financial instruments; 4° branches of foreign investment firms governed by the law of a non-EEA State, which are authorized to provide custody of financial instruments. This circular also applies, albeit partially, to branches of foreign credit institutions and investment firms governed by the law of an EEA Member State and which have been authorized in their home State to provide custody of financial instruments. Pursuant to Article 2 of the royal decree of January 12, 2006, these institutions are required, like other authorized account holders, to notify the CBFA in advance of the commencement or cessation of their activities as authorized account holders for the holding of dematerialized securities. They are also subject to regulation5 concerning the prevention of money laundering. The provisions set out in point 2.2 concerning this regulation are therefore applicable to them.
2. Points requiring particular attention during the transitional dematerialization period
2.1. The law provides that the conversion of bearer securities into dematerialized securities can be requested from authorized account holders until the end of 2013.
2.2. The CBFA asks the institutions concerned to exercise particular vigilance during this period for possible money laundering operations. It is indeed to be feared that those who possess funds or securities derived from an offense covered by the anti-money laundering law will take advantage of the significant influx of bearer securities into the institutions concerned to conceal their money laundering operations. Institutions are therefore requested to strictly apply the rules contained in the current regulation5. They must pay particular attention to the following aspects:
ƒ identification of occasional clients;
ƒ rules relating to client acceptance policy;

5 See the law of January 11, 1993 on the prevention of the use of the financial system for money laundering and terrorist financing, the CBFA regulation of July 27, 2004 on the prevention of money laundering and terrorist financing, and circular PPB 2004/8 and D.250 of November 22, 2004, amended by circular PPB 2005/5 and D.258 of July 12, 2005.

Congress Street 12-14 | 1000 Brussels t +32 2 220 53 42 | f +32 2 220 54 93 | www.cbfa.be PPB-2007-4-CPB - 3 ƒ the obligation to exercise constant vigilance with regard to the business relationship and to ensure careful examination of operations carried out, in accordance with Article 4, § 2, of the law of January 11, 1993; ƒ the obligation to examine with particular attention any operation that they consider particularly likely, by its nature or by its unusual character with regard to the client's activities, by the circumstances surrounding it or by the quality of the persons involved, to be linked to money laundering (Article 8 of the same law).
2.3. The CBFA also asks institutions to provide the necessary instructions and training to their employees and delegated agents who will be involved in the dematerialization process. Institutions will also ensure that internal control, compliance, and internal audit procedures and tasks are adjusted accordingly. Furthermore, it is recommended that they take into account a possible influx of bearer securities and, if necessary, allocate sufficient resources to cope with this influx organizationally.
3. Information file
The CBFA assumes that institutions that are authorized account holders will, if necessary, adapt their organization and internal control to meet the objectives defined by the institution regarding the dematerialization process. Institutions must have adequate risk management in this regard.
In this context, the CBFA invites the institutions concerned to submit to it, by the end of June 2007, an information file containing various elements, an inventory of which is included in Annex I.
To enable institutions to better understand the regulation relating to dematerialized securities, Annex II provides, for informational purposes, the different applicable regimes and the main obligations arising therefrom.
A copy of this circular is sent to your institution's auditor(s).
Please accept, Madam, Sir, the expression of my distinguished sentiments.
The President,
E. Wymeersch.
Annexes: - Information file - Overview of the regulation relating to the holding of dematerialized securities accounts