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The Code of Conduct in terms of the new Securities Services Act, 2004.
By Karin van Wyk - CEO - SAIFM

thics 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 been issued.

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 other charges.
  • 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 specific duties:

  • 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.

Record keeping
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.

Safekeeping 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 business activities.

Client Statements
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 client;
  • 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 product;
  • 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.

Internal control 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 manner;
  • 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 void.

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.

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