IOSCO Publishes Recommendations Regarding the Protection of Client Assets (with DeWaal Comment)

The International Organization of Securities Commissions ("IOSCO") published a final report, "Recommendation Regarding the Protection of Client Assets," which provides regulators with recommendations on the protection of client assets at regulated intermediaries, as well as a survey of the client protection regimes of 20 worldwide jurisdictions.

The survey includes client protection regimes from Australia, Brazil, Canada, France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico, the Netherlands, Pakistan, Poland, Romania, Singapore, Spain, Turkey, the United Kingdom, and the CFTC and SEC, separately.

DeWaal Comment: IOSCO identified two particular "regulatory challenges" related to the protection of clients: (1) where a client unknowingly waives protections to which it might otherwise be entitled, and (2) the application of a domestic client asset-protection regime where client assets are deposited abroad by an intermediary. The most practical aspects of the IOSCO report are the detailed and composite surveys regarding customer protection regimes in 20 jurisdictions. In general, IOSCO's recommendations are mostly very high level and, in some cases, reflect minimum standards that may have been exceeded already by local regulatory requirements (e.g., measures adopted by the CFTC and self-regulatory organizations in the U.S. following the failures of MF Global and Peregrine Financial Group). IOSCO recommended, among other things, that intermediaries should (i) maintain accurate and current records regarding client assets; (ii) regularly provide statements to clients regarding client assets held on their behalf; (iii) "maintain appropriate arrangements" to ensure that their clients' legal rights to client assets, and to minimize the possibility of loss and misuse; (iv) understand foreign regimes in order to ensure compliance with domestic requirements when placing client assets abroad; (v) adequately disclose in writing to their clients that there may be material differences between the domestic and foreign protection of client assets and the potential consequences of such differences; and (vi) where clients can opt out of regulatory protections, ensure that a client's opt outs are explicitly memorialized (i.e., "with the client's explicit, recorded consent"), with evidence of consent retained.There are also two recommendations for regulators. These are that regulators should: (i) employ adequate measures to oversee intermediaries' compliance with domestic client asset-protection regimes, including receiving appropriate reports related to specific requirements of domestic rules directly from intermediaries or self-regulatory organizations that oversee such intermediaries; and (ii) work with intermediaries under their supervision as well as foreign regulators to ensure that they receive sufficient information regarding the handling of client assets outside their jurisdiction.In general, client assets are defined as assets for which an intermediary "has an obligation (either contractual or regulatory) to safeguard for its securities or derivatives clients, including, to the extent appropriate, client positions, client securities and money (including margin money) held by an intermediary for or on behalf of a client."

See: IOSCO Press Release; IOSCO Report: Recommendation Regarding the Protection of Client Assets.Summary provided by Gary DeWaal, President of Gary DeWaal Associates.