Investment Services Under Capital Markets Law

Capital markets play a crucial role in managing and regulating investments for economic activities. In Turkey, the regulation of investment services in capital markets and the determination of the scope of activities of intermediary institutions are governed by various legal regulations. In this article, we will delve into the fundamental legal regulations and rules that govern investment services and the legal obligations of intermediary institutions in Turkey's capital markets. Within this framework, we will focus on important topics such as the definition of investment services and activities, the powers, responsibilities, and inspection processes of intermediary institutions. Thus, we aim to provide a guide for anyone operating or considering operating in capital markets.

1) Which legislation regulates the investment services within the scope of capital markets in Turkey, the fields of activity and legal obligations that intermediary institutions are subject to?

Under Turkish law, investment services falling within the scope of capital markets and the fields of activity, as well as the legal obligations to which brokerage houses are subject, are regulated by the Capital Markets Law No. 6362 ("Capital Markets Law"), the Communiqué on Principles of Investment Services and Activities and Ancillary Services ("Communiqué on Investment Services") and the Communiqué on Principles of Establishment and Operation of Investment Institutions ("Communiqué on Investment Institutions").

2) What are the investment services and activities defined under the Capital Markets Law?

Investment services and activities are defined under Article 37 of the Capital Markets Law as follows:

1. Reception and transmission of orders in relation to capital market instruments,
2. Execution of orders in relation to capital market instruments in the name and account of the customer or in their own name and in the account of the customer,
3. Dealing on own account,
4. Portfolio management,
5. Investment advice,
6. Underwriting of capital market instruments on a firm commitment basis,
7. Placing of financial instruments without a firm commitment basis,
8. Operation of multilateral trading systems and regulated markets other than exchanges,
9. Safekeeping and administration of capital market instruments in the name of the customer and portfolio custody services,
10. Conduct of other services and activities to be determined by the Capital Markets Board ("Board").

3) What are the ancillary services that investment institutions can provide without obtaining an operating license?

Pursuant to Article 39 of the Capital Markets Law, investment institutions may engage in ancillary services specified in the Capital Markets Law without the requirement for a separate authorization certificate. The ancillary services in capital markets that investment institutions may provide are as follows:

1. providing consultancy services related to capital markets,
2. providing investment research and financial analysis or general advice on transactions related to capital market instruments,
3. providing services related to the execution of intermediary undertakings,
4. providing intermediary services in obtaining financing through borrowing or other means,
5. providing wealth management and financial planning and other services and activities to be determined by the Board.

4) What are the investment activities that intermediary institutions can perform under the Capital Markets Law?

Pursuant to Article 3 of the Capital Markets Law, an intermediary institution may engage in (i) receiving and transmitting orders for capital market instruments, (ii) execution of orders for capital market instruments for and on behalf of the customer or on its own behalf, (iii) purchase and sale of capital market instruments on its own account, and (iv) underwriting and acting as an intermediary in the public offering of capital market instruments and (v) acting as an investment institution authorized by the Board to exclusively perform sales intermediation activities without underwriting in the public offering of capital market instruments.

5) What are the obligations that investment institutions and intermediary institutions are required to fulfil in order to operate in investment activities?

As per Article 3 of the Capital Markets Law, investment institutions include intermediary institutions and other capital market institutions and banks whose establishment and activities are determined by the Board to provide investment services. Per Article 39 of the Capital Markets Law, to perform investment services and activities as a regular occupation, commercial or professional activity, it is mandatory to obtain authorization certificate from the Board. Permission for one or more investment service and activity may be granted through a single license. However, ancillary services including investment advice and FX services can be performed by investment firms and portfolio management companies without obtaining a separate license.

6) What are the conditions that (i) intermediary institutions and (ii) founders of intermediary institutions must meet in order to be granted an establishment permit and an operating permit by the Board?

Pursuant to Article 5 of the Communiqué on Investment Institutions, in order for the Board to grant an establishment permit to intermediary institutions, intermediary institutions must (i) be established as a joint stock company, (ii) all of their shares must be in writing, (iii) all of their shares must be issued against cash, (iv) their establishment capital must not be less than the amount to be determined by the Board, provided that it is not below the minimum equity capital amount required for brokerage houses with broad authority (200 million Turkish Lira for 2024), (v) their shareholding structure must be transparent and open.

Pursuant to Article 6 of the Communiqué on Investment Institutions, the founding shareholders of brokerage houses should (i) not be a bankrupt, not have declared concordat before, (ii) in the case of investment institutions whose operating license has been revoked by the Board, not have any responsibility in the event that necessitated this sanction, (iii) not be sentenced to imprisonment for five years or more for a crime committed intentionally and not be convicted for the crimes listed in the Communiqué, (iv) have the necessary financial strength and the honesty and reputation required by the business.

7) How are intermediary institutions classified according to their fields of activity and scope of authorization?

As per Article 8 of the Communiqué on Investment, intermediary institutions are classified in three different groups according to their authorizations.

1. Those who will conduct any or all of the activities of order transmission and investment advisory are considered "narrowly authorized" ,
2. Those who will conduct any or all of the activities of transaction mediation, best effort mediation activity, limited custody service, and portfolio management activity are considered "partially authorized",
3. Those who will conduct any or all of the activities of portfolio mediation, general custody service, and brokerage commitment activity are referred to as "broadly authorized".

8) Under what conditions can foreign investment institutions provide services to Turkish residents within the scope of capital markets activities?

Foreign investment institutions may provide capital market services to investors either directly or through authorized investment institutions resident in Turkey. The Communiqué on Investment Services which was issued by Board describes the regulatory approach regarding activities of foreign investment institutions. As per Article 9 of the Communiqué, the investment services that a Turkish resident engages in with foreign financial institutions are not within the scope of Board regulations provided that (i) no solicitation, advertisement, marketing promotion or any other similar activity is conducted by such foreign institution targeting the Turkish residents and (ii) the initial contact with the foreign financial institution is established by the Turkish resident fully on his/her own initiative.

As mentioned above, foreign financial institutions are prohibited from engaging any capital market activities in Turkey or addressed to Turkish residents. However, liberty of Turkish residents to contact with any foreign financial institution to receive their services and/or products is valid, and therefore foreign financial institutions may freely provide investment services and/or products to Turkish residents, provided that (i)

no marketing activities, either directly or indirectly, in relation to promotion of their services and/or products are conducted in Turkish borders or addressed to Turkish residents (through electronic means or face to face meetings, etc.) and (ii) contacts with Turkish residents are established on a non-solicited basis.

1. not to engage in any marketing activities (through electronic means or face-to-face meetings, etc.) directly or indirectly within the borders of Turkey or to persons residing in Turkey in relation to the promotion of its services and/or products; and
2. Contacts with persons resident in Turkey shall be established without request.

9) What is the purpose of the Board's supervisory authority over investment institutions, and what sanctions may be imposed as a result of the inspections?

The purpose of the Board's supervision is to prevent all kinds of illegal acts and actions such as negligence, violations, misconduct and similar illegal acts and actions that prevent the capital market from operating in a reliable, transparent, effective, stable, fair and competitive environment and protecting the rights and interests of investors.

In line with the fundamental principles of the Board, all kinds of irregular acts and transactions that disrupt the efficient, honest and reliable functioning of the capital markets are audited to ensure the proper and disciplined functioning of the markets. The audits are conducted in a guiding, constructive and remedial manner on the one hand, while on the other hand, transactions that require penal sanctions are communicated to the relevant authorities. As a result of the Board inspections; warning, administrative fine, judicial fine, prison sentence sanctions may be imposed.

However, preventive measures may also be taken by the Board, without prejudice to civil and criminal proceedings. Examples of such measures include; (i) requesting interim injunction and precautionary attachment in case of unlawful issuances, (ii) requesting the relevant individuals to remedy the violations in case of unlawful transactions and transactions that reduce the capital or assets, (iii) revoking the signature authorizations of those who are responsible, (iv) dismissal and appointment of new board members.

10) Under what conditions can the authorization certificate and operating permit issued by the Board be cancelled?

The Board may revoke the authorization certificates and operating permits granted under the Capital Markets Law under the following conditions:

1. if the authorization to operate is expressly waived or if no activity is carried out within the scope of the relevant permit for a period of two years from the date of granting of the operating permit,
2. if the operating permit is obtained by making false or misleading statements or by other unlawful means, and
3. if the conditions required for obtaining the operating permit are not met again within three months following the determination by the Board that the conditions required for obtaining the operating permit have been lost. Those whose operating licenses have been entirely revoked are obliged to take a decision to cease to exist or to amend the relevant provisions in their articles of association, including the trade name, purpose and fields of activity, so as not to cover investment services and activities within three months at the latest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.