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SEC approves guidelines for stockbroker firms on good practices

The Securities and Exchange Commission (SEC) has approved a set of guidelines for stockbroker firms on good practices at a meeting held on 13 January 2021, the Colombo Stock Exchange (CSE) said in a recent circular.

The approved guidelines have also been presented to the Chief Executive Officers of  stockbroker firms on 19 January. The firms will be required to adopt these guidelines with immediate effect. 

Under these guidelines, stockbroker firms have to ensure that the brokerage commission applicable to registered investment advisors (RIAs) are at a maximum of 30% in order to maintain consistency within the industry.  However, a grace period of three months have been given for the firms to implement this particular guideline.

Furthermore, the guidelines include that; stockbroker firms should appoint a competent person to carry out the functions in relation to information technology (IT) and ensure the necessary IT infrastructure is available within the firm.

Firms must ensure a RIA is allocated to every client and in the event a client is transferred to a different RIA within the company, the company must ensure that Know Your Client (KYC) procedures are verified by the subsequent RIA.

Further, firms must take steps to ensure a succession plan is in place within the firm and that a satisfactory mechanism is in place to train, develop, and retain its employees in line with the current and projected business objectives. Firms should also ensure the key duties and functions of the persons acting in the capacity of compliance and finance are clearly segregated. They should also ensure instructions are recorded and maintained in relation to the orders received from clients in compliance with Rule 3.2 of the CSE stockbroker rules.

The compliance officer will be responsible to ensure the stockbroker firm complies with the proposed best practices. Prior to extending credit to any client, stockbroker firms should take into consideration the value at risk margin of each security and assess the margins with the existing portfolios of each client. The firm should pay particular attention to high, medium, and low margins in deciding the extent of credit to be granted.

The compliance officer should closely monitor the CDS accounts which constantly trade shares with the high VaR margin, accounts which generate high unusual turnover on a consistent basis, carry out the “running account” test on clients who trade excessively, assess the level of compliance with the credit extendable limit and the single client limit more frequently than on a monthly basis, closely monitor the activities of the investment advisor and the credit extended to each client by each investment advisor, and educate the investment advisors of the stockbroker firm with regard to the best practices and develop the ongoing learning culture within stockbroker firm.