BEST DISTRIBUTION PRACTICES
|The intention of this document is to define guidelines for the proper distribution of financial instruments to the public. Financial instruments that may be offered are:|
|Non-professional counterparties are defined as non-banks and other companies that are not in the primary business of the products mentioned above. Personnel tasked in distributing should be cognizant of the following principles with regard to their counterparties.|
III. Representations and Disclosures
- CommunicationIn discussions with clients:
- Record all telephone conversations. The sales person must ensure that he gets all the relevant details down clearly.
- Distinguish between facts and recommendation or opinion. Exaggeration or unreasonably upbeat assessments must be avoided.
- Ensure that all sales literature sent to a customer will contain the relevant disclaimers etc. and must be fair, balanced, accurate and truthful. These manuals, prospectuses, etc. should be free from any alterations, markings, etc. made by the sales person that may unduly influence the decision of the prospective client in investing in such a product. Such disclaimers should be prominently printed. In transactions involving publicly offered securities, make every effort to provide the prospectus to the client. Preliminary (or “red herring”) and final prospectuses and selling materials for publicly offered securities must comply with all regulatory disclosure requirements, specifically Securities and Exchange Commission RSA Rules 3-3 and 8(a)(10)-1.
- Distinguish between announced figures or events and estimates, forecasts and projections.
- Do not guarantee or promise a return on future events that will or will not occur.
- Use clear and unambiguous language when negotiating transactions.
- Clearly state and disclose to its client on “without recourse” transactions that it does not guaranty the payment of the securities being sold; that the securities are being sold on an outright and without recourse basis; and that the sole investment risk is with the client.
- Appropriateness and Suitability
- Understand and ensure that the counterparty is aware of all the risks being marketed:
- The leverage
- Regulatory, legal and accounting aspects
- Embedded optionality, if any
- Credit risk
- Call / Put features, if any
- Correlation between markets
- Price risk
- Market risk
- From the customer to the sales person
- Listen to what the customer that one deals with is (or sometimes even is not) saying to make sure that the customer understands the product and the product suits the investment or risk parameters of the customer.
- Be particularly sensitive to conversations that may constitute a customer complaint. Refer all serious complaints to the appropriate party.
- Use your judgement to determine the information to be provided to enable the client to understand the product and its risk, which may include risk disclosure statements or similar documents. In the event the instrument being dealt with is part of a private placement or a public offer, it is preferable that at minimum, the client be provided with the information memorandum or prospectus and the terms of the offer or the term sheet.
- Satisfy yourself that the transaction is consistent with the objectives expressed by the client.
- Retain a copy of any document sent to the client or any important notices, correspondences, sensitivity analyses, in writing, for future reference in the event of a dispute.
- In case of a conversation or a meeting with the client or the appropriateness of a product was discussed, sales personnel should retain a note of the discussion or the meeting.
Large corporations, or even institutional customers, do sue on the grounds that the financial intermediary sold them an unsuitable, overly sophisticated product that they did not understand. It therefore becomes even more critical that institutional customers involved in the purchase of privately placed or publicly offered instruments be provided with the appropriate prospectuses or information memoranda relating to the placement or offer. As a proactive step, the financial intermediary should first determine the target market of its products considering the known parameters of its clients.
- Understand and ensure that the counterparty is aware of all the risks being marketed:
- Arms Length Relationship with Counterparties and Risk Disclosure Sales personnel must exercise care at all times when dealing with clients, writing to clients and holding discussions with clients so as not to cast doubts upon the precise relationship that the financial intermediary has with the counterparty and consequently what the responsibility of the financial intermediary’s dealers and sales personnel is towards the counterparty. Care must be exercised even when discussing the counterparty relationship and counterparty deals internally within the financial intermediary while outside the presence of the counterparty in order to avoid misinterpretation internally.Counterparties should be made aware that, unless specifically confirmed otherwise in writing to them, all dealings, negotiations and conversations with counterparties by financial intermediary personnel are conducted solely on the basis of and in the capacity of an arm’s length principal counterparty basis and not in any form of advisory or fiduciary capacity. Where there are no doubts as to the expectations of a counterparty, financial intermediary personnel must inquire whether any advice, recommendations or risk analysis is being sought from the financial intermediary.
- Disclosure of Financial Intermediary’s Relationship with Parties Involved in a Placement or Offer Full transparency must be exercised with the client in discussing not only the features of the product but likewise in disclosing any interlocking shareholdings, directors, officers and/or related interests between and among the parties and/or related interests to a placement or offer, most especially between the issuer and the financial intermediary. This will allow the client to view the transaction in the appropriate context and make an informed judgement on whether or not the placement or offer is being made under terms at least as favorable to the client as terms available from unaffiliated parties.
- Disclaimer Clauses The offer of securities, especially in the case of a public offer, is governed by numerous regulations which differ from one country to another. The breach of these securities regulations could result in serious adverse consequences not only to the issuer and/or its management but likewise to the financial intermediary and/or its management. These consequences refer not only to the penalties attaching to the violation at hand, but also to the ability of the issuer and/or the financial intermediary to undertake future similar transactions both from the regulatory and reputational perspective. Since investors from various jurisdictions are likely to have access to these securities, especially those offered publicly, various tax and exchange control regulations apply to these investors. Furthermore, investors usually rely heavily on the contents of an information memorandum or prospectus in arriving at investment decisions. Hence, in order to protect the issuer and/or the underwriter or placement agent or the financial intermediary from potential liabilities, legal or otherwise, it is necessary that an offer’s main selling document such as the information memorandum or prospectus or any other selling material include disclaimers, as follows:
- The information memoranda or prospectuses distributed to clients must state the date of the document to clearly indicate that the information regarding the issuer’s business, industry and operating environment contained in the document is true and correct as of the said date. This will clearly indicate that events and information subsequent to the stated date are not contained in the document. The client must therefore rely on other sources of information in the event continuing updated information of this nature is required.
- Preliminary prospectuses for publicly offered securities need to carry the following mandatory Securities and Exchange Commission disclaimer required in RSA Rule 8(a)(10)-1: ” A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date. An indication of interest in response hereto involves no obligation or commitment of any kind. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy.”
- It is desirable that an information memorandum or any other selling materials for a private placement, but necessary in the case of a prospectus for a public offer, include statements in the first two pages of the document clearly indicating (as applicable) that:
- prospective investors in the placement or offer are advised to be aware of certain investment and risk considerations in connection with an investment in the offer contained in a specific section of the said document.
- unless otherwise stated, the information contained in the document has been supplied by the issuer which accepts full responsibility for the accuracy of the information and confirms, after having made all reasonable inquiries, that to the best of its knowledge and belief, there are no other material facts, the omission of which would make any statement in the document misleading in any material respect;
- neither the delivery of the document nor any sale made thereunder shall, under any circumstances, create any implication that the information contained in the document is correct as of any time subsequent to the date of the said document;
- no salesperson or other person has been authorized by the issuer or its underwriter or placing agent to issue any advertisement or to give any information or make any representation in connection with the placement or offer other than those contained in the document and, if issued, given or made, such advertisement, information or representation must not be relied upon as having been authorized by the issuer or its underwriter or placing agent;
- the prospectus for the public offer does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make any such offer or solicitation;
- each investor in the publicly offered security must comply with all applicable laws and regulations in force in the jurisdiction in which it purchases, offers or sells such securities and must obtain the necessary consent, approval or permission for its purchase, offer or sale of such securities under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchase, offer or sale, and neither the issuer nor the underwriter shall have responsibility therefor;
- foreign investors interested in subscribing to a domestically-registered public offer should inform themselves as to the applicable legal requirements under the laws and regulations of the countries of their nationality, residence or domicile and as to any relevant tax or foreign exchange control laws and regulations which may affect them.
- Sensitivity Analysis If a specific product requires a presentation to the customer of a sensitivity analysis and/ or if a customer requests for a sensitivity analysis of any other product being offered for investment, the sales personnel must be prepared to make the presentation of the sensitivity analysis of the investment with the appropriate presentation materials. The sensitivity analysis should be simple, easily understandable, devoid of any ambiguous statement, and should merely present a mathematical formula and computation of the value and/or financial risk of the transaction if specific scenarios happen in the future, such as, currency price movements, securities price movements, inflation, and such other factors which could materially or not materially affect the value of the investment. The presentation of the sensitivity analysis must always be accompanied by an appropriate disclaimer as to the certainly of the specific scenarios presented and the certainty of the investment return.
- Role of the Financial Intermediary In dealing with the client, it is necessary for the financial intermediary and its sales personnel to clearly disclose to the client the financial intermediary’s specific role in the transaction so that the client is able to place the intermediary’s participation in the proper context. The financial intermediary should disclose whether it is acting as broker, dealer or agent. Each specific role has specific implications for the client. If the intermediary is acting as a broker, then he is merely matching up a seller of instruments with a buyer. If the intermediary is acting as a dealer, then it is selling the client instruments which the intermediary has previously bought for its own account or will be part of their risk position. If the intermediary is acting as agent, then it is usually acting for and in behalf of the issuer, in which case the intermediary’s primary concern is the attainment of the issuer’s objectives. While potential conflict of interest is not assumed, i. e., as dealer the financial intermediary may have adverse information regarding the issuer of the securities, or as agent the financial intermediary is perhaps more loyal to its principal, the client is nevertheless informed of the financial intermediaries’ capacity in order that the client is able to make a better assessment of the investment transaction and act and respond accordingly.
- An independent Custody Services unit is normally responsible for all settlement and safekeeping of principal and client securities.
- A Custody Agreement must always be in place and carefully explained to the client. It should include the scope of service and specify special arrangements, if any. It should clearly indicate where the securities are safekept, e.g. ROSS, PCD or CEDEL/EUROCLEAR.
- A custody service group must have proper procedures for handling transactions, securities, safekeeping and reports.
- A periodic statement of holdings should be issued to clients indicating the securities held in their behalf and also indicating the estimated market value of these securities.
- Securities safekept for customers must be held separate and distinct from its inventory and should be periodically reconciled.
- General Policies Related to Settlement
- All trades of any product to the client must be affirmed by a confirmation document.
- Confirmations are to be issued and received by the operations group, independent of sales personnel.
- Discrepancies and disputes must be addressed immediately, including cancellations and/or revisions.
- Failed Trades The operations staff must monitor the movement of funds (payment and receipt) on the value date against the movement of the underlying product (receipts and deliveries) and must notify the sales personnel of any fails, in whole or in part, on value date.Fails by counterparty must be reported to the sales personnel responsible for the counterparty and reported to the proper levels designated by the institution.
- Inquiries and Disputes Resolution Every effort must be made to deal with disputes and inquiries promptly, efficiently and courteously.To facilitate communication with counterparties, the financial intermediary should for each product or portfolio, where relevant, inform all counterparties of the institution’s operational contact person, title, telephone number, facsimile number, telex number and postal address. Similarly, the financial intermediary should obtain the same information from its counterparties.
When responding to inquiries or resolving disputes concise and accurate details of all conversations should be retained giving details of the person contacted, title, telephone number, nature of inquiry and dispute, outcome of the conversation, date and time of conversation.
Compensation for late receipts of consideration should be claimed as soon as possible in accordance with market practice.
- Legal risk Legal risk is the risk that the financial intermediary will suffer financial loss either because contracts or individual provisions thereof are unenforceable or inadequately documented, or because the precise relationship with the counterparty is unclear. It is the ultimate responsibility of the Legal Department, to determine issues of principle and of major importance relating to legal risk.Sales personnel should be aware of: (i) the main legal risks inherent in the products, (ii) the legal risks associated with each of the counterparties they deal with, and (iii) the governing law under which the products were issued.
- Master Agreements and Documentation of Transactions In order to minimize the exposure to the financial intermediary in the event of a dispute arising with a counterparty over a deal or in the event of a counterparty becoming insolvent and seeking legal protection, all transactions must be conducted under the protection of legally binding documents. Derivative deals should preferably be documented under a master agreement. Oral agreements must be confirmed by means of a formal written confirmation acceptable to the financial intermediary without delay.Whenever possible, and unless otherwise approved by the appropriate legal department, the agreements used should be unaltered, recognized, standard industry agreements. Regardless of whether they are industry standards, all such standard agreements and documentation for products are ultimately determined and approved by the Financial Institution’s legal department.
Confirmation Documents should include as a minimum:
- Type of Confirmation Document (Confirmation of Sale/Purchase, etc.)
- Counterparty Name & Address
- Specific Terms (e.g. If the transaction is on an outright and “without recourse” basis, this should be prominently indicated)
- Underlying Security, where applicable
- Trade Date
- Settlement Date
- Maturity Date
VII. Quality of Personnel
- Quantity and Quality of Personnel Senior management must ensure that adequate personnel, both in terms of quantity and quality, are made available not only to distribute each product of the portfolio, but to staff the internal control structure and operate the management information system of the financial intermediary. The need for enhancement in the quality of personnel stems mainly from the increasing rate of change in the markets and the complexity of many products of portfolios, especially derivatives.Senior management needs to ensure that sufficient personnel are attracted and retained who not only have the necessary high standard of education, experience and technical knowledge to cope with advanced mathematical models, understand the business issues involved and assess objectively the limitations of the models, but who also feel comfortable in an environment of rapid change which needs personnel in all functions to react flexibly and quickly to the requirements of the counterparties.
The institution must ensure that its personnel possess acceptable moral and ethical standards with no compromise on the integrity of the individual.
- Dependence on Key Personnel Under no circumstances must a situation be permitted to arise, in either the sales area or in the internal control infrastructure, where the financial intermediary is exposed to risk through the actual or possible loss of key personnel, whether through resignation, holidays, sickness or death. There must at all times be adequate cover in terms of the number of personnel and of the skill set required for all trading and internal control duties and functions to be carried on without risk or disruption to the normal dealing and settlement activities of the financial intermediary.
- TrainingSenior management should ensure that all personnel undergo continuous training, both academic and “on-the-job”, to perform their duties and functions properly.
- AccreditationSales personnel shall be required to be licensed or accredited by the appropriate regulatory body or self-regulatory organization to perform such function. Presently, all sales personnel should undergo and pass the Treasury Certified Professional seminar in order to be recognized as a licensed personnel authorized to trade various financial instruments to the public.
VIII. Chinese Walls
The term “Chinese Walls” is a shorthand way of describing the financial intermediary’s procedures for handling confidential or inside information.
- The “Location” of the Chinese Wall Chinese Walls are not necessarily physical although they can have a physical element. Nevertheless, Chinese Walls do have a location. Broadly speaking, one will find a Chinese Wall between two parts of the firm:
- Departments that normally have inside information as part of their job functions (e.g. structured finance, investment banking, credit department, etc.) or “Potential Insider” functions.
- Departments that normally do not have inside information – and which could not operate normally if they did have such information ( e.g. sales, trading, research, etc.) or “Public” functions.
Two rules of thumb for handling confidential or inside information:
- Presume that the information at hand is confidential.It must be a financial intermediary’s policy to safeguard the confidentiality of information (e.g., information received from clients or transactions with clients).
- Follow a “Need to Know” policy.
- Crossing the Chinese WallFrom time to time, it may be necessary for a person who has inside information to disclose that information to a person from “outside the Chinese Wall”. In this situation, the person receiving the information is “over the wall”. Bringing a person over the wall is perfectly legitimate provided the crossing is in accordance with the firm’s Need to Know policy and the financial intermediary’s Chinese Wall Crossing Procedures have been followed. Exercise caution in revealing:
- Any specific information on any order other than which is publicly available
- Any information on unfilled or partly filled orders
- A client name or identification on narrow references – like a large government bank.
- Procedures for Crossing the Chinese WallBefore crossing the Chinese Wall, senior management, as well as Compliance approval must be obtained. Ensure that the person going over the wall understand the consequences of having inside information. Records of the wall crossing – including who is over the wall, the date and circumstances of the wall crossing, what information was transferred, who approved it, etc. must be maintained.
IX. Premises/Off Premises
- Quoting Rates to Customers Only the dealing room is authorized to determine the basis on which prices/rates are quoted to customers. For standard products, prices/rates which are established daily by the dealing room must be adhered to. Any request for an improvement in prices/rates or for prices/rates not available must be referred to the dealing room.
- After-hours Trading and Off-premises Trading Each entity must, define specifically the hours during which trading is considered to be part of the normal trading day and the hours during which trading is considered to be after-hours trading. After-hours dealing must be treated as the exception, not the norm. Off-premises dealing must be approved by senior management.
X. Handling Of Customer Complaints
Any formal complaints must be brought to the attention of management &/or compliance unit. A formal complaint is defined as any complaint whether received in writing or verbally which calls for immediate escalation to be handled by the proper officer or unit. Any breach of market practice or etiquette must be treated as a formal complaint and the proper officer or unit should be informed of this immediately.
XI. Sales Discipline
Maintain a high standard of professionalism in dealing with counterparties and observe the rules that relate to compliance, with particular reference to the handling of confidential information. Comply with the rules of conduct (e. g. integrity; skill, care and diligence; best market practice; conflict of interest, responsibility of information, interest of justice ‘suitability’ and front-running) at all times.
- In accordance with the principles of data protection, the confidentiality of all conversations held in offices where loudspeakers or intercoms are used must be ensured.
- Do not spread any rumours or misinformation which the personnel knows, or has reason to believe, is false or misleading.
- Do not engage in any practice that is deceptive, manipulative or of a dubious nature even if the practice lies in a “grey area” of legal or ethic acceptability.
- Soliciting or offering explicit inducements or bribes to counterparties or the employees/representatives of counterparties in return for business is forbidden. Under no circumstance will rebating be allowed.
- The acceptance of entertainment or token gifts is permitted, but only on a strict defined basis. Entertainment must not be excessive and must be appropriate in the context of conducting a normal business relationship. Gifts must be of a nominal or immaterial value, otherwise they must be disclosed to the department head and the compliance department. Under no circumstances must the acceptance of entertainment or gifts compromise, or appear to compromise, the integrity of any member of trading and sales personnel.
- Senior management must ensure that in seeking to foster a close professional relationship between the trading and sales areas of the bank and any one client or group of clients, there does not develop, intentionally or unintentionally, a situation resulting in inappropriate or unethical preferential treatment being given to or being received from any one client or group of clients.
- Report promptly any suspicious transaction or activities. Circumstances that may arouse suspicion would include:
- Transactions with no apparent commercial or economic purpose
- Transactions that are “too good to be true”, or the client is oblivious to potential profits or losses
- Parking, “wash” trades, profit or loss sharing agreements or indemnifying clients or counterparties against losses.
- Requests to engage in transactions at non-market prices.
- Transactions where secrecy is important, including requests to suppress confirmations, or issue them direct to a client’s front office.
- Any suspicion that a client may be engaged in illegal activity including fraud, market manipulation or tax evasion
- Any suspicion that your counterpart may be trying to hide transactions, positions, profits or losses from his management, auditors or regulators.
- Refer requests for unusual settlement arrangements directly to Compliance and to Head of Sales.
- On off-market trading:
- Prudent business practice requires that transactions should only be carried at prevailing market rates (This is to avoid being party to a concealment of profit or loss).
- Remember that at all times, lines for trading may be recorded. They may be used to resolve queries.
- All deals must be executed within your trading premises unless there is proper authorization from Compliance.
XII. Personal Trading/Investment
Sales personnel should avoid conflicts of interest between their duties and their personal investments. They must act in accordance with all local legislative and regulatory requirements and act with full integrity. Due to the nature of the investment, separate rules may be set for private equity investments. Each individual should read, understand, and comply with their institution’s personal account dealing rules and failure to comply may subject the employee to disciplinary action including dismissal.
XIII. Selling Conventions
- Preliminary Negotiation of Terms – Any qualifying condition (term, size, etc.,) for a transaction should be clearly stated in preliminary negotiation of terms to minimize disputes.
- Price qouted should be taken as firm unless otherwise qualified (e.g., under reference, indication only); it should be made absolutely clear whether the price is for indication only.
- When a personnel quotes a firm price, whether direct or indirect, he is committed to deal at that price in a marketable amount subject to availability of counterparty lines.
- Non-standard amounts should be qualified qoutes at the onset; request for odd and small amounts should be specified by the bank/client requesting for a price.
- When dealing in fast markets, e.g., spot FX, client should assume that prices are good only for a short length of time, literally, a matter of seconds.
- In less hectic market, the onus is on the sales personnel dealer to place a time limit on the validity of the price or to check with the client if the price has been dealt.
- Where a price to his client has been made and wishes to withdraw this from his customer, he should first check with the client if he /she wished to deal, if nothing has been done, the dealer can withdraw and change his price.
- Sales staff should check with the client when a considerable time has lapsed if the latter has decided to deal on the price quoted.
- A deal is considered concluded upon verbal agreement: “Dictum meum pactum” ( Done) must apply.
- When a dealer is withdrawing a price which is being simultaneously hit by a client, the transaction must be concluded.
- Deal Records All transactions dealt must be recorded comprehensively and accurately as soon as possible. A complete audit trail must be available, from the initial booking of a deal through all stages of its life cycle to its expiration or settlement. All deals must be kept on record for at least two years after final settlement of expiration. Sales blotters must be used to record all relevant details of the transaction.The settlement personnel must elevate to the proper level of authority any delays in the submission of deals.
XIV. Research Reports
- Credit Ratings To keep credit risk within bounds and protect clients from credit failures, reports of reputable rating agencies should be made available to counterparties.
- Investment Risks and Market Strategies Similar to other financial transactions, financial activities may provide significant benefits and involve a variety of significant risks. Before entering into any activity, banks/clients should carefully consider whether the transaction is appropriate for them in light of their objectives, experience, financial and operational resources, and other relevant circumstances. Counterparties should ensure that they fully understand the nature and extent of their exposure to risk of loss, which may significantly exceed the amount of any initial payment by or to them.In general, all financial instrument particularly derivative products involve risks, which include, among others:
- The risk of adverse or unanticipated market movement
- Financial or political developments
- Risk of counterparty or issuer default and other credit and enforcement risk
- Risk of illiquidity and related risks
- Operational risks