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Location: Central Bank of Bahrain Volume 4—Investment Business > Part A > Introduction > ES Executive Summary > ES-1 Structure and Summary of Volume 4
  • ES-1 Structure and Summary of Volume 4

    • ES-1.1 Structure of Volume 4 (Investment Business)

      • ES-1.1.1

        Volume 4 of the Rulebook covers the investment business sector, i.e. the provision of regulated investment servicesG by investment firm licenseesG . It also includes requirements regarding approved personsG .

        Amended: October 2009

      • ES-1.1.2

        Volume 4 excludes representative offices of overseas investment firm licenseeG , and ancillary services providersG : these activities are covered by separate regulations (see AU-A.1.11 and AU-A.1.12). These regulations will later be incorporated into Volume 5 (Specialised Activities) of the CBB Rulebook, to be released later.

        Amended: July 2010
        Amended: January 2007

      • ES-1.1.3

        Volume 4 is made up of two volumes: Part A is the main Volume (comprising a range of Modules that contains all applicable Rules and Guidance), whilst Part B is an appendix Volume (containing a glossary of defined terms, CBB authorisation forms, CBB reporting forms and supplementary information).

        Amended: July 2010
        Amended: January 2007

      • ES-1.1.4

        Part A of Volume 4 is organised under the following headings:

        • Introduction
        • High Level Standards
        • Business Standards
        • Reporting Requirements
        • Enforcement and Redress; and
        • Sector Guides
        Amended: July 2010

      • ES-1.1.5

        Including this Executive Summary Module, there are plans to issue 23 Modules for inclusion in Part A of Volume 4 (Investment Business). It is planned to release Volume 4 in two phases: the first phase release was in April 2006, and comprised 11 Modules, including most of the key requirements. Remaining Modules will be issued later.

        Amended: July 2010
        Amended: October 2009
        Amended: January 2007

      • ES-1.1.6

        Each Module covers a particular subject area — such as capital or conduct of business. The requirements are tailored according to the three categories of investment firm licenseeG provided for under the authorisation rules, reflecting the different risk profiles of these categories. Sector Guide Modules, to be released as part of the second phase release, will summarise the key elements of the requirements for each of these 3 categories of investment firm, as well as summarise the additional requirements applicable to those investment firms operating purely on a Shari'a compliant basis.

        Amended: January 2007

      • ES-1.1.7

        Part B of Volume 4 is organised under the following headings:

        • Glossary
        • Authorisation Forms
        • Reporting Forms
        • Supplementary Information
        Amended: July 2010

      • ES-1.1.8

        Defined terms used in the Rulebook are underlined; their definitions can be found in the Glossary. Each Volume has its own Glossary, as definitions of terms used apply only to the Volume in question. It is possible for the same term to be used in a different Volume with a different meaning.

      • ES-1.1.9

        There are three authorisation forms, comprising (i) Form 1 (application for a license); (ii) Form 2 (application for the authorisation of a controllerG ); and (iii) Form 3 (application for approved personG status); and (iv) Form 4 (application for registration).

        Amended: January 2007

      • ES-1.1.10

        When completed, Volume 4 will also contain 4 reporting forms: (i) Form QPR (Quarterly Prudential Return); (ii) Form AGR (Annual Group Return); and (iii) Form STR (Suspicious Transaction Report) and (iv) Form ALF (Annual Licence Fee).

        Amended: July 2007

      • ES-1.1.11

        Finally, space is provided in Part B of Volume 4 for any supplementary information that may be of use to users of the Rulebook. For the time being, Part B contains various additional documents relevant to the Financial Crime Module, notably a copy of Bahrain's anti-money laundering legislation (Amiri Decree Law No. 4 of 2001). It also includes information related to the Client Assets Module (CL) and Enforcement Module (EN).

        Amended: July 2010

    • ES-1.2 Module UG (User's Guide)

      • ES-1.2.1

        The User's Guide Module contains introductory material relevant to users of Volume 4. Specifically, it covers (i) the status and application of the Rulebook (with specific reference to Volume 4); (ii) the structure and design of the Rulebook; and (iii) its maintenance, version control and access. These topics are covered in Chapters UG-1 to UG-3 respectively.

      • ES-1.2.2

        The Module contains mostly Guidance material — that is, material that is not binding on licensees, but instead simply helps inform particular Rules or provides other general information. Most of the Guidance material in Module UG consists of general information.

      • ES-1.2.3

        The only Rules are contained in Sections UG-A.1, UG-1.2 and UG-1.4. Amongst other things, these specify that the Module has the legal status of a Directive, that Rules have a binding effect, and that the contents of Volume 4 apply from its date of issue in April 2006, subject to any transition arrangements specified in Module ES (see Chapter ES-2).

        Amended: July 2007

    • ES-1.3 Module AU (Authorisation)

      • ES-1.3.1

        Module AU covers (i) the licensing of persons undertaking regulated investment servicesG ; and (ii) the approval of persons undertaking controlled functionsG in licensees ('approved personsG ').

        Amended: January 2007

      • ES-1.3.2

        The Module sets out when these two types of authorisation are required, and the associated authorisation conditions that have to be satisfied in order for authorisation to be granted.

        Amended: January 2007

      • ES-1.3.3

        With respect to licensing, an investment firm licenseG is required by all persons undertaking, by way of business, regulated investment servicesG within or from the Kingdom of Bahrain. Regulated investment servicesG are fully defined in Section AU-1.4, but in summary they cover the following activities:

        (a) Dealing in financial instrumentsG as principal;
        (b) Dealing in financial instrumentsG as agent;
        (c) Arranging deals in financial instrumentsG ;
        (d) Managing financial instrumentsG ;
        (e) Safeguarding financial instrumentsG (i.e. a custodianG );
        (f) Advising on financial instrumentsG ; and
        (g) Operating a collective investment undertakingG (i.e. an operatorG ).
        Amended: January 2007

      • ES-1.3.4

        There are 3 categories of investment firm licenseG , determined by the regulated investment servicesG undertaken. Category 1 investment firmsG may undertake all regulated investment servicesG . Category 2 investment firmsG may undertake all regulated investment servicesG , except the activity of dealing in financial instrumentsG as principal. Finally, Category 3 investment firmsG may only undertake the activities of arranging or advising on financial instrumentsG . Only Category 1 and 2 investment firmsG may hold client assetsG .

      • ES-1.3.5

        A licensee may hold itself out as an Islamic investment firmG , but only if all its activities are Shari'a compliant. Islamic investment firms are required to comply with certain additional requirements, such as the need to appoint a Shari'a supervisory board.

        Amended: July 2007

      • ES-1.3.6

        Module AU also deals with the requirements and conditions for approved personsG , i.e. those wishing to undertake a controlled functionG in an investment firm licenseeG . Controlled functionsG are those of:

        (a) DirectorG ;
        (b) Chief ExecutiveG or general managerG ;
        (c) Head of functionG ;
        (d) Compliance officer;
        (e) Money Laundering Reporting Officer;
        (f) [This Subparagraph was deleted in October 2013];
        (g) Member of Shari'a Supervisory Board;
        (h) Financial instruments traderG ; and
        (i) Investment consultantG or investment adviserG .
        Amended: October 2013
        Amended: October 2009
        January 2007

      • ES-1.3.7

        The conditions for authorisation of approved personsG are set out in Chapter AU-3.

      • ES-1.3.8 [This Paragraph deleted 07/2007.]

        Deleted: July 2007

      • ES-1.3.9

        The Module also outlines (in Chapter AU-5) the information requirements and procedures that must be followed as part of the process for:

        (a) Licensing;
        (b) Approved personsG .
        Amended: July 2010
        Amended: October 2009
        Amended: January 2007

      • ES-1.3.10

        Chapter AU-6 covers the license application fees as well as the annual license fees.

        Added: July 2010

    • ES-1.4 Module PB (Principles of Business)

      • ES-1.4.1

        The 10 Principles of Business covered in Module PB are a general statement of the fundamental obligations of all CBB investment firm licenseesG and approved personsG . They have the status of Rules; and provide a basis for other, more detailed Rules elsewhere in Volume 4.

        Amended: January 2007

      • ES-1.4.2

        Principles 1 to 10 apply to activities carried out by licenseesG , including activities carried out through overseas branches. Principles 1 to 8 also apply to approved personsG , in respect of the controlled functionsG for which they have been approved. Principles 9 and 10 also take into account any activities of other members of the group of which the licenseeG is a member.

        Amended: January 2007
        Deleted: July 2007

      • ES-1.4.3

        The Principles of Business are:

        Principle 1 — Integrity
        Principle 2 — Conflicts of Interest
        Principle 3 — Due Skill, Care and Diligence
        Principle 4 — Confidentiality
        Principle 5 — Market Conduct
        Principle 6 — Customer Assets
        Principle 7 — Customer Interests
        Principle 8 — Relations with Regulators/Supervisors
        Principle 9 — Adequate Resources
        Principle 10 — Management, Systems and Controls

    • ES-1.5 Module HC (High-level Controls)

      • ES-1.5.1

        Module HC outlines the requirements that must be met by investment firm licenseesG with respect to:

        (a) Corporate governance principles issued by the Ministry of Industry and Commerce as The Corporate Governance Code; and
        (b) Related high-level controls and policies.
        Amended: April 2011
        Amended: July 2007

      • ES-1.5.1A

        The Principles referred to in this Module are in line with the Principles relating to the Corporate Governance Code issued by the Ministry of Industry and Commerce.

        Added: April 2011

      • ES-1.5.2

        The requirements distinguish between different Categories of investment firm licenseeG . Because of their limited business activities, and consequent lesser risk to customers, Category 3 investment firmsG are subject to applicable Guidance Paragraphs included in Chapter HC-10.

        Amended: April 2011
        Amended: July 2007

      • ES-1.5.3

        Module HC applies to Bahraini investment firm licenseesG , including their overseas branches (where either the same or equivalent provisions to those in Module HC should apply). Overseas investment firm licenseesG must demonstrate that the same or equivalent arrangements are in place at the parent entity level, and that these arrangements provide for effective high-level controls over activities conducted in the Bahrain branch.

        Amended: April 2011
        Amended: July 2010
        Added: July 2007

    • ES-1.6 Module AA (Auditors and Auditing Standards)

      • ES-1.6.1

        Module AA contains requirements regarding the appointment and functions of auditors of investment firm licenseesG . It also contains requirements dealing with accounting standards to be applied by investment firm licenseesG .

        Amended: January 2012
        Amended: July 2010
        Amended: January 2007

      • ES-1.6.2

        The auditor requirements deal with:

        (a) The appointment of auditors;
        (b) The removal and resignation of auditors;
        (c) Audit partner rotation;
        (d) Auditor independence; and
        (e) Restrictions on the relationship between a licensee and its auditor.
        Amended: January 2007

      • ES-1.6.3

        The Module also covers the CBB's requirements regarding access to auditors as well as auditors' access to outsourcing providers. In addition, the Module outlines requirements for licensees to arrange for their auditors to review their quarterly prudential returns, and compliance with Module CL (Client Assets).

        Amended: January 2012
        Amended: January 2007

    • ES-1.7 Module GR (General Requirements)

      • ES-1.7.1

        Module GR covers requirements dealing with areas not covered in other Modules. The areas covered are:

        (a) Books and records;
        (b) Corporate and trade names;
        (c) Dividends;
        (d) Business transfers;
        (e) ControllersG ;
        (f) Close linksG ;
        (g) Cessation of business;
        (h) [This Subparagraph was deleted in October 2013]; and
        (i) Professional indemnity coverage.
        Amended: October 2013
        Amended: July 2010
        Amended: January 2007

      • ES-1.7.2

        The above requirements apply to all categories of investment firm licensee, except for the requirements related to the payment of dividends, which apply to Category 1 investment firmsG and Category 2 investment firmsG and the professional indemnity requirement, which applies to Category 2 investment firmsG and Category 3 investment firmsG only.

        Amended: July 2010

    • ES-1.8 Module CA (Capital Adequacy)

      • ES-1.8.1

        Module CA contains requirements on the minimum levels of capital that must be held by investment firm licenseesG , as well as what constitutes capital for regulatory purposes. These requirements are tailored to fit the different risk profiles of the different categories of investment firm licenseesG . The requirements apply to both Bahraini investment firm licenseesG and overseas investment firm licenseesG (see Section CA-B.1)

        Amended: January 2007

      • ES-1.8.2

        Investment firm licenseesG are required to maintain their regulatory capitalG in excess of their regulatory capital requirementsG at all times. For Category 1 and 2 firms, their regulatory capital requirementG is the higher of their Minimum Capital RequirementG and their Risk-based Capital RequirementG . For Category 3 firms, their regulatory capital requirementG is simply their Minimum Capital RequirementG .

        Amended: October 2009

      • ES-1.8.3

        Minimum Capital RequirementsG are as follows:

        (a) Category 1 investment firmsG : BD 1,000,000
        (b) Category 2 investment firmsG : BD 1,000,000 if undertaking the activity of safeguarding financial instrumentsG (i.e. custodianG ), BD 250,000 in all other cases; and
        (c) Category 3 investment firmsG : BD 125,000.
        Amended: October 2009
        July 2007

      • ES-1.8.4

        Risk-based Capital RequirementsG comprise the sum of a firm's Expenditure Requirement, Position Risk Requirement, Counterparty Risk Requirement and Foreign Exchange Risk Requirement. The actual amount of capital that is required to be held varies depending on the size of an institution's cost base and its various exposures. In practice, the Risk Based Capital RequirementG of Category 2 investment firmsG , because they are not allowed to deal in financial instrumentsG as principal (and thus incur position risk), would largely be determined by its Expenditure Requirement (and any currency mismatches between its assets and liabilities).

        Amended: January 2007

      • ES-1.8.5

        In assessing the financial ability of a Category 1 investment firm licenseeG to underwriteG transactions, the CBB will consider, amongst other factors, the licensee'sG capital adequacy, its capacity to undertake the activity, and its track record in complying with applicable regulatory requirements. Any underwritingG activities require the prior approval of the CBB's Capital Market Supervision Directorate and are subject to Module OFS (Offering of Securities) of Volume 6 of the CBB Rulebook.

        Amended: October 2014
        Amended: January 2007

    • ES-1.9 Module BC (Business Conduct)

      • ES-1.9.1

        This Module set out minimum standards of good practice to be applied by investment firm licenseesG , when dealing with their clientsG . These comprise certain base requirements, supplemented by more detailed requirements in the form of an Investment Business Code of Practice.

        Amended: January 2007

      • ES-1.9.2

        The Investment Business Code of Practice covers various matters, relevant to contact throughout a clientG relationship. They are:

        (a) Overarching principles;
        (b) ClientG classification;
        (c) Marketing and promotion;
        (d) Accepting clients;
        (e) Suitability;
        (f) Disclosure of information;
        (g) Dealing and managing;
        (h) Reporting to clients;
        (i) Complaints;
        (j) Conflicts of interest;
        (k) Confidentiality; and
        (l) An appendix, covering various specific matters to be addressed in promotional material, transaction confirmations and the like.
        Amended: January 2007

      • ES-1.9.3

        These requirements may be modified or supplemented over time, in response to evolving market practices or as issues arise.

    • ES-1.10 Module CL (Client Assets)

      • ES-1.10.1

        This Module provides detailed Rules and Guidance with respect to the holding of client assetsG by investment firm licenseesG . They are aimed at ensuring the proper protection of such assets, to restrict the risk of client assetsG being commingled with investment firm licenseeG assets (without clients' consent), or otherwise misused.

        Amended: January 2007

      • ES-1.10.2

        As a general rule, client assetsG are required to be segregated from a firm's own assets, and client moneyG must be held in a client bank accountG . Various other restrictions and protections apply to client moneyG , whilst the rules also apply certain reconciliation and reporting requirements.

      • ES-1.10.3

        Finally, the Module also contains certain requirements relating to the provision of custody services (Chapter CL-2), the treatment of assets when held as collateral (Chapter CL-3), controls surrounding the application of client mandatesG (Chapter CL-4), and rules regarding third party related distribution events (Chapter CL-5).

    • ES-1.11 Module RM (Risk Management)

      • ES-1.11.1

        Module RM provides detailed requirements on risk management systems and controls required for investment firm licenseesG . It builds on the high-level controls requirements contained in Module HC.

        Amended: July 2007

      • ES-1.11.2

        The Module obliges firms to identify the range of risks that they face and to put in place appropriate systems to address those risks. It also requires the establishment of an appropriate framework for identifying, monitoring and managing risks across an investment firm licensee'sG operations.

        Amended: July 2007

      • ES-1.11.3

        Module RM applies to Bahraini investment firm licenseesG , including their overseas branches (where either the same or equivalent provisions to those in Module RM should apply). Overseas investment firm licenseesG must demonstrate that the same or equivalent arrangements apply to the whole company, and that these arrangements provide for effective risk management of activities conducted in the Bahrain branch.

        Added: July 2007

    • ES-1.12 Module FC (Financial Crime)

      • ES-1.12.1

        Module FC implements the Financial Action Task Force (FATF) recommendations on money laundering and special recommendations on terrorism financing that are relevant to the investment business sector in Bahrain.

      • ES-1.12.2

        The Module contains detailed requirements relating to:

        (a) Customer identification;
        (b) Reporting;
        (c) Staff awareness and training;
        (d) The appointment of a money laundering reporting officer;
        (e) Compliance monitoring;
        (f) Record-keeping arrangements;
        (g) Segregation of duties;
        (h) Special measures for non-cooperative countries; and
        (i) Contact with relevant authorities.
        Amended: January 2007

      • ES-1.12.3

        Item FC (iv) in Part B of Volume 4 (Investment Business) provides further examples of transactions that may be suspicious or unusual.

      • ES-1.12.4

        In addition, Module FC has a chapter dealing with financial fraud, which imposes certain basic systems and control, and reporting requirements, in this area. These requirements apply to Category 1 investment firmsG and Category 2 investment firmsG only.

        Amended: July 2007

    • ES-1.13 Module TC (Training and Competency)

      • ES-1.13.1

        Module TC contains requirements that have to be met by investment firm licenseesG with respect to training and competency of individuals undertaking controlled functionsG (i.e. approved personsG ).

        Amended: October 2013
        Amended: July 2010
        Amended: January 2007

      • ES-1.13.2

        Module TC provides Rules and Guidance to investment firm licenseesG to ensure satisfactory levels of competence, in terms of an individual's knowledge, skills, experience and professional qualifications.

        Amended: July 2010
        Amended: January 2007

      • ES-1.13.3

        Module TC applies in full to all three categories of investment firm licenseesG authorised in Bahrain.

        Added: July 2010

      • ES-1.13.4

        The requirements in the Module cover the recruitment and assessing of competence as well as the training and maintenance of competence. In addition, it includes appendices providing guidance on qualifications and core competencies for controlled functionsG as well professional bodies and qualifications.

        Added: July 2010

    • ES-1.14 [This Section was deleted in January 2012]

      • ES-1.14.1

        [This paragraph was deleted in January 2012]

        Deleted: January 2012

      • ES-1.14.2

        [This paragraph was deleted in January 2012]

        Deleted: January 2012

    • ES-1.15 Module BR (CBB Reporting)

      • ES-1.15.1

        Module BR sets out requirements regarding prudential reporting to the CBB, as well as certain pre- and post-notification requirements. It also describes the information gathering powers of the CBB.

        Amended: July 2007

      • ES-1.15.2

        Module BR, amongst other things, prescribes quarterly prudential reporting to the CBB (Form QPR). All investment firm licenseesG are required to submit these: however, Category 3 investment firmsG are only required to complete a subset of the sections included in Form QPR.

        Amended: July 2007

      • ES-1.15.3

        Module BR also obliges all investment firm licenseesG to seek prior approval for certain events, including proposed changes in the licensee'sG name, legal status and controllersG , as well as other events such as carrying out new regulated investment servicesG or opening new offices overseas.

        Amended: July 2010
        Added: July 2007

      • ES-1.15.4

        Finally, Module BR also requires the post-notification of various events, such as breaches of CBB requirements; legal, regulatory or other proceedings being taken against the licenseeG ; or instances of fraud, errors or other irregularities occurring, that could have a material impact on the licenseeG .

        Added: July 2007

    • ES-1.16 Module PD (Public Disclosure)

      • ES-1.16.1

        This Module is to be issued as part of the second phase release of Volume 4.

        Amended: January 2007

      • ES-1.16.2

        When finalised, the Module will contain certain provisions relating to public disclosures, such as the need to publish annual accounts.

    • ES-1.17 Module EN (Enforcement)

      • ES-1.17.1

        This Module outlines enforcement powers and processes that may be applied by the CBB to address failures by investment firm licenseesG , approved personsG or registered persons. The purpose of such measures is to encourage a high standard of compliance by all those authorised by the CBB, thus reducing risk to licensees' clients, counterparties and the financial system.

        Amended: January 2007

      • ES-1.17.2

        The enforcement measures contained in the Module are of varying severity and will be used in keeping with the CBB's assessment of the contravention, reserving the most serious enforcement measures for the most serious of contraventions.

        Amended: January 2007

      • ES-1.17.3

        The CBB's enforcement mechanisms include:

        (a) Formal requests for information;
        (b) Investigations;
        (c) Formal warnings;
        (d) Directions;
        (e) Financial penalties;
        (f) Administration;
        (g) Cancellation of license; and
        (h) Cancellation of 'fit and proper' approval.
        Amended: July 2007

      • ES-1.17.4

        A reminder of criminal sanctions contained in the CBB Law is also set out in Chapter EN-10.

        Amended: January 2007

    • ES-1.18 [This Section was deleted in January 2012 as it is included in Chapter BC-3]

      • ES-1.18.1

        [This paragraph was deleted in January 2012 as it is included in Chapter BC-3]

        Deleted: January 2012

      • ES-1.18.2

        [This paragraph was deleted in January 2012 as it is included in Chapter BC-3]

        Deleted: January 2012

    • ES-1.19 Module CP (Compensation)

      • ES-1.19.1

        This Module provides space, for possible inclusion at a later date, for a description of any investor protection scheme, should such a scheme be developed in cooperation with the industry.

        Amended: January 2007

    • ES-1.20 Sector Guides (Modules C1, C2, C3 and IF)

      • ES-1.20.1

        These Modules will be issued as part of the second phase release of Volume 4.

        Amended: January 2007

      • ES-1.20.2

        When finalised, these Modules will provide a summary — consisting solely of Guidance material — highlighting the key requirements applicable to the different categories of  investment firm licenseesG , as well as to those investment firm licenseesG that operate solely on Islamic principles.

        Amended: July 2007

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