IOSCO Publishes Principles for the Protection of Client Assets

The International Organization of Securities Commissions (IOSCO) has published eight principles to provide guidance to regulators on how to enhance their supervision of intermediaries holding client assets.
By Janet Du Chenne(59204)
The International Organization of Securities Commissions (IOSCO) has published eight principles to provide guidance to regulators on how to enhance their supervision of intermediaries holding client assets.

IOSCO says the principles are the result of investors trying to better understand the potential implications of placing their assets with particular intermediaries, following the Lehman Brothers and MF Global insolvencies, and in certain jurisdictions. Regulators also have been seeking to address risks to client assets and how to transfer or return client assets in default, resolution or insolvency scenarios.

The principles outlines the intermediary’s responsibility to ensure compliance with these rules, including through the development of risk management systems and internal controls to monitor compliance.

Where the intermediary places client assets with third parties, the intermediary should reconcile the client´s accounts and records with those of the third party. While the intermediary must comply with the client asset protection regimes, the regulator has a role in supervising the intermediary’s compliance with the applicable domestic rules and maintaining a regime that promotes effective safeguarding of client assets, according to the report.

IOSCO received 21 public responses to the consultation report Recommendations Regarding the Protection of Client Assets, which was published in February 2013.

Principle 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 client assets are held. The records should also be maintained in such a way that they may be used as an audit trail.

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

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

Principle 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.

Principle 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.

Principle 6 – Where 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 only take place with the client’s explicit, recorded 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 and risks of giving such consent; such arrangements are limited to particular categories of clients, clear criteria delineating those clients that fall within such categories should be defined.

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

Principle 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.

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