Investment Guarantee Fund

In compliance with the EU Directive No. 97/9/EEC on Investor Compensation Schemes, the new Act anticipates establishment of Investment Guarantee Fund (the ``Guarantee Fund''). The Guarantee Fund should collect funds from Securities Dealers and Branches to repay inaccessible clients' property. Such Guarantee Fund has not existed under the former legislation.

The Guarantee Fund shall be a legal person registered in the Commercial Registry, but it shall not be a state fund under the Act on State Budgetary Rules. Bodies of the Guarantee Fund shall be formed mainly from representatives elected by the Securities Dealers obliged to contribute to the Guarantee Fund and also from representatives of the Ministry of Finance of the Slovak Republic, the Office and the National Bank of Slovakia.

The Act mandatory stipulates the scope of protection of the Guarantee Fund. Mainly the following assets shall be protected: funds and Instruments of natural persons including entrepreneurs, legal persons not established for the purpose of carrying out business activities (foundations, non-profit corporations etc.). From legal persons established for the purpose of carrying out the business activities, under the protection shall be only those which are not obliged to have audited financial statements under the special law. From the protection are excluded e.g. banks, insurance companies, supplementary pension insurance companies, asset management companies, state budget-funded organisations, state contributory organisations, state funds, municipalities and other legal entities stipulated by the Act.

All Securities Dealers with registered seat in the Slovak Republic are liable to participate on the clients protection and to contribute to the Guarantee Fund. Branches have this duty only if their Instruments and funds being subject to the protection under this Act are not protected or insured in the country of their seat (i.e. in the country of seat of their founders) or in case these Instruments and funds are insured in that foreign country on a lower level than under this Act.

If a Branch is insured in a foreign country, in order to keep competitive environment, such Branch provides compensation for inaccessible Instruments and funds up to the maximum sum as stipulated by this Act.

In addition to the above mentioned mandatory insurance, the law enables conclusion of contractual insurance overlapping the level stipulated by the Act.

The Act regulates particular types of contributions to the Guarantee Fund payable by Securities Dealers: initial contributions, annual contributions and extraordinary contributions.

The amount of contributions is based on the type of core investment services provided upon the approval of the Office by a particular Securities Dealer. Securities Dealers and Branches are divided into three groups for the purpose of contribution payment.

The first group includes Securities Dealers which are allowed to provide from the core investment services only acceptance and transmission of client's orders or their execution on the client's account and management of portfolios of Instruments and at the same time, they are not allowed to dispose with funds or Instruments of the client.

The second group comprises of Securities Dealers which are allowed to provide investment services as the first group, however are, in addition to the first group, allowed to dispose with the funds or Instruments of the client.

The third group includes remaining Securities Dealers, i.e. those allowed to execute client's orders also on their own account and/or allowed to underwrite or place Instruments.

The initial contribution is a lump-sum contribution of SKK 5,000 for the first group of Securities Dealers, SKK 12,000 for the second group and SKK 70,000 for the third group. The contribution must be paid within 30 days from the day when the duty to participate on protection has arisen. The initial contribution of the National Bank of Slovakia is SKK 10 million.

The annual contribution is a regular contribution paid quarterly. The annual contribution is determined by the Guarantee Fund annually in advance and within the band stipulated by the Act. The contribution is calculated from the annual amount of fees charged to clients for the investment services performed. The contribution is the same for all Securities Dealers within one group. The band for the first group ranges from 0.1% to 1%, for the second group from 0.5% to 2% and for the third group from 1% to 3%. The law stipulates also minimum annual contributions for particular groups of Securities Dealers, if the contributions calculated as percentage from the annual fees charged to the clients are lower than this minimum contribution. The minimum contributions range from SKK 2,500 to 35,000.

The extraordinary contribution should serve to fill up the Guarantee Fund, if the Guarantee Fund is not able to raise funds for compensation payments otherwise. The Office determines the extraordinary contributions at the same amount for all Securities Dealers. Upon a consent of the Council of the Guarantee Fund, the amount of the extraordinary contributions may, in one calendar year, exceed 3% of the annual amount of fees charged to clients for investment services provided to them in the calendar year preceding the date when the extraordinary contributions are due.

Section 85 of the Act regulates the procedure of contribution payment by Securities Dealers and the procedure for case that duties towards the Guarantee Fund are not satisfied.

A client shall be entitled to compensation in the Slovak currency for his inaccessible assets up to 90% of the protected Instruments and funds, however, maximum compensation equals to EUR 20,000. This complies with Article 4 of the Directive No. 97/9/EEC on Investor Compensation Schemes. Within negotiations with the EU, the Slovak Republic has achieved a three-year transition period for application of this provision. Therefore, the maximum compensation shall be limited to 20-multiple of the average monthly salary in the Slovak Republic for three years after access of the Slovak Republic to the EU.

The Act specifies persons not entitled to compensation from the Guarantee Fund. In particular, persons who caused the inability of the Securities Dealer to meet its duties and they were lawfully sentenced for this action, or persons who acquired Instruments and funds in connection with legalisation of income from criminal activity for which they were lawfully sentenced.

On the day the compensation is paid, the Guarantee Fund acquires a claim towards and becomes a creditor of the relevant Security Dealer or Branch in the extent of compensation paid by the Guarantee Fund to the client. On that day, the client's claim on the Securities Dealer or the Branch is discharged in the extent of compensation paid.

Moreover, the Act regulates a notification duty of Securities Dealers towards the Office and the Guarantee Fund, or in case of banks or a branches of foreign banks towards the Guarantee Fund, the National Bank of Slovakia and the Deposit Protection Fund. This duty arises, if the Securities Dealer is not able to fulfil its obligations towards clients during 48 hours. The Act regulates also the subsequent procedure of competent authorities.

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