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FRAUD

How to protect investors’ assets

 

By Ken Tysiac
January 29, 2014

The recent financial crisis magnified the importance of investor protection.

Regulators can play a vital role in ensuring that securities firms protect client assets. The International Organization of Securities Commissions (IOSCO) on Wednesday published eight principles to guide regulators as they supervise securities firms on the protection of client assets.

The guidance refers to securities firms—including derivatives firms—that are subject to regulatory supervision as “intermediaries.” The principles are as follows:

1. An intermediary should maintain accurate and up-to-date records and accounts of client assets that readily establish the precise nature, amount, location, and ownership status of client assets and the clients for whom the assets are held. The records should also be maintained in such a way that they may be used as an audit trail. 

2. An intermediary should provide a regular statement to each client detailing the assets held for or on behalf of the client.

3. An intermediary should maintain appropriate arrangements to safeguard the clients’ rights in the assets and minimize the risk of loss and misuse.

4. Where an intermediary places or deposits client assets in a foreign jurisdiction, the intermediary should understand and take into account the foreign regime to the extent necessary to achieve compliance with applicable domestic requirements.

5. An intermediary should ensure that there is clarity and transparency in the disclosure of the relevant client asset protection regime(s) and arrangements and the consequent risks involved.

6. Where the regulatory regime permits clients to waive or modify the degree of protection applicable to client assets—or otherwise to opt out of the application of the client asset protection regime—such arrangements should be subject to the following safeguards:

a. The arrangement should take place only with the client’s explicit, recorded consent.

b. Before such consent is obtained, the intermediary should ensure that the client has been provided with a clear and understandable disclosure of the implications and risks of giving such consent.

c. If such arrangements are limited to particular categories of clients, clear criteria delineating the clients that fall within such categories should be defined.

7. Regulators should oversee intermediaries’ compliance with the applicable domestic requirements to safeguard client assets.

8. Where an intermediary places or deposits client assets in a foreign jurisdiction, the regulator should, to the extent necessary to perform its supervisory responsibilities concerning applicable domestic requirements, consider information sources that may be available to it, including information provided to it by the intermediaries it regulates and/or assistance from local regulators in the foreign jurisdiction.

IOSCO is an international policy forum for securities regulators that sets global standards for securities regulation. IOSCO exposed a draft of the principles in February 2013 and considered public comments before publishing its final guidance.

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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