Eight principles designed to protect assets of securities firms’ clients

BY KEN TYSIAC

Events that contributed to the global financial crisis have led to careful examination of the way securities firms protect their clients’ assets.

To help regulators improve supervision of such firms, the International Organization of Securities Commissions (IOSCO) last week published a consultation report, Recommendations Regarding the Protection of Client Assets.

The report describes eight principles to clarify the roles of regulated securities firms—called “intermediaries” in the report—and regulators in protecting the assets of clients. Comments on the report are sought by March 25 and can be submitted via email at clientassetprotection@iosco.org.

Although laws to protect investing clients vary across jurisdictions, the report describes basic responsibilities of intermediaries and regulators. Intermediaries placing client assets with third parties should reconcile the clients’ accounts and records with those of the third party, while regulators must maintain effective safeguarding of clients’ assets, according to the report.

The report contains the following principles:

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 be maintained in a way that they can be used as an audit trail.

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

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

4. When 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. When the regulatory regime permits clients to waive or to 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:

    • The arrangement should take place only with the client’s explicit, written consent.
    • Before such consent is obtained, the intermediary should ensure that the client has been provided with a clear and understandable disclosure of the implications of giving such consent.
    • If such arrangements are limited to particular categories of clients, clear criteria delineating those 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. When an intermediary places or deposits client assets in a foreign jurisdiction, the regulator should, to the extent necessary to perform its supervisory responsibilities concerning the applicable domestic requirements, consider information sources that may be available, including information provided by the intermediaries it regulates and/or assistance from local regulators in the foreign jurisdiction.

Mortgage report

IOSCO also was part of a joint forum that released a consultation report examining the interaction of mortgage insurers with mortgage originators and underwriters that recommends tactics to reduce the likelihood of mortgage insurance failure. Comments on that report are due April 30 and can be submitted by email to baselcommittee@bis.org.

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

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