Code of Conduct in terms of the new Securities Services Act,
By Karin van Wyk - CEO - SAIFM
and proper standards of behaviour in business and financial
markets have become a hotly debated issue around the world.
Notions of what constitutes ethical and proper behaviour differ
from country to country and culture to culture. Regulators
also face the dilemma that unethical or improper behaviour
cannot always be enforced or sanctioned. There must be a breach
of a legal rule before action can be taken against market
participants for unacceptable behaviour.
It therefore makes a lot of sense that codes
of conduct are issued as subordinate legislation instead of
relying on moral suasion alone. Al market participants will
then operate from the same base set of rules, while enforceability
ensures that non-compliant participants can be taken to task.
The Financial Services Board started to give
legal effect to codes of conduct by issuing them as subordinate
legislation when the Financial Advisory and Intermediary Services
Act, 2002 (FAIS) was promulgated. In terms of this Act, a
General Code of Conduct with general applicability and Special
Codes pertaining to specific sections of the industry have
In line with this practice, the FSB has also
prescribed a code of conduct in terms of section 70 of the
new Securities Services Act, 2004. This code includes not
only ethical rules but also sound business practice requirements.
The new Code of Conduct requires an authorised
user (previously called a member of the exchange) to render
securities services honestly, fairly, with due skill, care
and diligence, and in the interests of clients and the integrity
of the securities services industry. It must exercise independent
professional judgement and comply with all applicable laws,
rules and regulations governing its activities.
More particularly, when rendering a securities
service eg buying or selling securities or advising a client,
an authorised user must ensure that information and representations
are factually correct and made in plain language. Information
may not be misleading but must be adequate and appropriate
and take the level of knowledge of the client into consideration.
Clients must have enough time to take a decision. Consequently
information should be provided timeously to enable clients
to do so. Oral communications must be confirmed in writing
if the clients so requests, while written communications must
be in clear and reasonable print size, spacing and format.
Amounts, values, charges and monetary obligations must be
specific or if not possible, the basis of calculation must
be adequately described.
An authorised user is also obliged to-
- disclose full and accurate information about fees and
- act promptly on and in accordance with the instructions
and exercise any discretion responsibly.
- advise a client in advance of any restrictions or limitations
that may affect the access to his or her funds or securities.
- disclose any personal interest or other actual or potential
conflict of interest and take all reasonable steps to ensure
fair treatment of the client.
- provide best advice taking into account the desires and
circumstances of the client.
- provide a general explanation of the nature and material
terms and risks of a transaction.
The last two disclosures need not take place
if the client is professional, as defined in the Code.
An authorised user may not advise clients with the sole purpose
of maximising its own income. An authorised user may also
not disclose any confidential information of the client unless
the client has consented thereto or disclosure of the information
is otherwise required.
When advising a client (excluding a professional
client), an authorised user must comply with the following
- Taking reasonable steps to obtain information about the
client’s financial situation, investment experience,
particular needs and objectives to enable the authorised
user to provide the client with sound advice;
- Conducting an analysis, based on the information obtained
for the purpose of advising the client and identifying the
securities that will suit the client’s risk profile
and financial needs.
- Taking reasonable steps to ensure that the client understands
the advice and the risks involved and is in a position to
make an informed decision.
An authorised user may not give or receive inducements (valuable
consideration) if it is likely to conflict with its duty toward
its client or the duty towards the recipient’s client.
If the inducement does not directly benefit the client or
the client of the recipient, it will be automatically deemed
prohibited. Inducements that are allowable must nevertheless
be disclosed fully in writing to the client prior to the rendering
of securities services.
An authorised user must maintain proper, complete, accurate
and secure records. Procedures and systems to record and retrieve
instructions relating to a securities service rendered, including
verbal instructions and documents relating to the contractual
arrangements with the client, must be maintained.
Records may be kept in electronic or voice-recorded.
An authorised user may outsource the record-keeping function
but must be able to produce the records within 7 days.
Advertisements must provide accurate, complete and unambiguous
information that emphasise the risk of loss and uncertainty
of future results, discern fact from opinion and may not be
comparative in relation to another authorised user. They may
not contain any statement, promise or forecast that is fraudulent,
untrue or misleading.
Advertisements that contain performance data
(including awards and rankings) must include references to
their source and date. Advertisements that contain illustrations,
forecasts or hypothetical data must contain support in the
form of clearly stated basic assumptions with regard to performance,
returns, cost and charges with a reasonable prospect of being
met under current circumstances. It should be clear that the
returns and performance are not guaranteed and are provided
for illustrative purposes only. Where returns or benefits
depend on the performance of underlying assets or other variable
market factors, this should be stated clearly.
Advertisements should prominently display
a warning statement about risks involved in buying or selling
of securities. Where information about past performances are
included, the advertisement should include a warning that
past performances are not necessarily indicative of future
performance. If the investment value of a financial product
mentioned is not guaranteed, the advertisement must contain
a warning that no guarantees are provided.
and separation of funds and assets
An authorised user must provide the necessary resources and
functionality to ensure that clients are able to contact them
easily and timely. An authorised user must make provision
for the separation and identification of own assets and client’s
assets and properly account for clients’ assets. Client’s
assets may not be used to finance the authorised user’s
Client statements must be provided to clients at regular intervals
not exceeding 3 months unless the client has consented not
to receive them because the information is available continuously
for example through the Internet. If the client’s managed
portfolio includes any open positions in listed derivative
instruments, monthly statements must be provided. Client statements
must be provided at the intervals requested by the client
but not more often than monthly. Professional clients however
may agree any interval with the authorised user.
A client statement must contain such information
as is reasonably necessary to enable the client to produce
a set of financial statements, determine the composition and
market value of the securities in the portfolio and the changes
thereto over the reporting period.
A client statement must contain at least
the following information as at the reporting date to enable
the client or the client’s agent to review the portfolio
and make appropriate investment decisions:
- the quantity, description and market value of each investment
in the portfolio;
- the amount of funds held by the authorised user or which
has been invested by the authorised user on behalf of the
- if any of the securities are reflected in a foreign currency,
the relevant currency exchange rate;
- securities purchased or sold;
- receipts and payments of funds;
- details of income earned and expenditure incurred;
- non-cash transactions, including non-cash components
of corporate actions and option expiries;
- securities transferred into and out of the portfolio;
- identification of those securities which at the reporting
date were loaned to any third party;
- the quantity, description and market value of any securities,
or the amount of funds, held as collateral in respect of
any loans made by the client;
- identification of those securities or funds which were
utilised to secure loans to the client or borrowings made
on behalf of the client;
- identification of those securities or funds which were
utilised as margin in respect of open positions in any financial
- in respect of listed derivative instruments, a description
of the underlying financial product, index, commodity or
thing, the expiry month and in the case of options, the
exercise or strike price; and
- if the statement reflects any securities or funds which
are not held by the authorised user and for which the authorised
user is not accountable to the client, it should clearly
indicate that fact.
and Risk management
An authorised user’s internal control system must be
designed to ensure that-
- the business can be carried on in an orderly and efficient
- financial and other information is reliable;
- all transactions and financial commitments are recorded
and within the scope of authority of the officer concerned;
- there are procedures to safeguard the assets of the authorised
user and clients;
- there are procedures to control liabilities;
- there are measures to minimize the risk of loss to the
authorised user and its clients from any irregularity, fraud
or error and to detect any irregularity fraud or error should
they occur so that prompt remedial action may be taken.
An authorised user should have a risk management
system designed to ensure that business and financial and
business information is available promptly to enable the management
of the authorised user to identify, quantify, control and
manage the risk exposures, make timely and informed business
decisions and monitor the performance of the business and
the capital of the business to ensure compliance with the
capital adequacy requirements.
An authorised user must be able to demonstrate
the objectives and operation of the above-mentioned systems,
principles and procedures to regulatory authorities.
Waiver of rights
Any waiver of rights conferred by the Code on a client is
While there are differences between industries
that should be taken into consideration when laying down codes
of conduct, the all over effect of these statutory codes is
the establishment of a coherent ethical and behavioural framework
for the financial services industry as a whole.