IOSCO final report on recommendations to enhance supervision of intermediaries holding client assets
The International Organization of Securities Commissions (IOSCO) has published its final report entitled Recommendations regarding the protection of client assets. The final report is intended to help regulators improve the supervision of intermediaries holding client assets.
The final report contains eight principles that provide guidance to regulators on how to enhance their supervision of intermediaries holding client assets by clarifying the roles of the intermediary and the regulator in protecting those assets. The eight principles are:
- 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 in 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 minimise 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: (i) the arrangement should only take place with the client’s explicit, recorded consent; (ii) 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; and (iii) if 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; and
- 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 assistance from local regulators in the foreign jurisdiction.
The final report outlines the intermediary’s responsibility to ensure compliance with the above, 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.
View Recommendations regarding the protection of client assets; final report, 29 January 2014