IOSCO Publishes Recommendations Regarding Client Asset Protection and Survey of Client Asset Protection Regimes of 20 Jurisdictions

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Published Date : January 30, 2014

The International Organization of Securities Commissions on January 29, 2014, published recommendations regarding the protection of client assets at regulated intermediaries, as well as a survey of the client protection regimes of 20 worldwide jurisdictions. This comprehensive survey and a summary chart are the most helpful part of this publication to brokers and customers. Local regulators provided the information for the survey.

IOSCO identified two particular "regulatory challenges" related to the protection of clients: (1) where a client unknowingly waives protections to which it might otherwise be entitled, and (2) the application of a domestic client asset protection regime where client assets are deposited abroad by an intermediary.

In general, IOSCO's recommendations are mostly very high level, and in some cases reflect minimum standards that may already have been exceeded by local regulatory requirements (e.g., measures adopted by the CFTC and self regulatory organizations in the US post the failures of MF Global and Peregrine Financial Group). Among these recommendations are that intermediaries should:

1. maintain accurate and current records regarding client assets;
2. regularly provide statements to clients regularly regarding client assets held on their behalf;
3. "maintain appropriate arrangements" to ensure their clients' legal rights to client assets are ensured, and to minimize the possibility of loss and misuse;
4. understand foreign regimes of client protection in order to ensure they comply with domestic requirements when they place client assets abroad;
5. adequately disclose in writing to their clients that there may be material differences between the domestic and foreign protection of client assets and the potential consequences of such differences; and
6. where clients can opt out of regulatory protections, ensure that clients' opt outs are explicitly memorialized (i.e, "with the client's explicit, recorded consent"), with evidence of consent retained;

There are also two recommendations for regulators. These are that regulators should:

1. employ adequate measures to oversee intermediaries' compliance  with domestic client asset protection regimes, including receiving appropriate reports directly from intermediaries or self-regulatory organizations that oversee such intermediaries, related to specific requirements of domestic rules; and
2. work with intermediaries under their supervision and foreign regulators to ensure they receive sufficient information regarding the handling of client assets outside their jurisdiction.

In general, client assets are defined as assets for which an intermediary,

"...has an obligation (either contractual or regulatory) to safeguard for its securities or derivatives clients, including, to the extent appropriate, client positions, client securities and money (including margin money) held by an intermediary for or on behalf of a client."

The jurisdictions that provided information that is included both in the comprehensive survey and summary chart regarding client protection regimes are: Australia, Brazil, Canada, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, Pakistan, Poland, Romania, Singapore, Spain, Turkey, United Kingdom and the US (Commodity Futures Trading Commission and Securities and Exchange Commission regimes, separately). The survey provides information regarding the protection of client assets prior to and in the event of an intermediary's insolvency, as well the porting of client assets to a solvent firm.

For more details,see:
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD436.pdf

The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of January 29, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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