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

In response to the Lehman Brothers and MF Global insolvencies, the International Organization of Securities Commissions ("IOSCO") published recommendations for improving the protection of client assets. The report suggests that financial intermediaries and regulators should take a more proactive role in ensuring the safety of client assets. Specifically, the report makes the following suggestions:

1. To ensure compliance with the rules and regulations governing client assets, intermediaries must develop internal systems to monitor compliance;
2. Intermediaries should maintain accurate records of client assets that establish the nature, amount, location, and ownership status of each client's assets;
3. Accounts held with a third party for the benefit of clients should be titled in such a way to clearly distinguish assets held for the client from assets held from the intermediary;
4. When client assets are held in a foreign jurisdiction, the intermediary should inform the client of this fact and disclose the material differences of the foreign jurisdiction's insolvency regime;
5. Where the jurisdiction allows the client to waive or modify its rights under the jurisdiction's client asset protection regime, such waiver should be signed by the client and clearly explain the effect of doing so;
6. Regulators should require periodic reports from intermediaries detailing the amount, location, and value of client assets held, in addition to a report evaluating the intermediaries' compliance with the relevant client asset protection regimes; and
7. To improve orderliness in the event of insolvency, regulators should also take affirmative steps to promote information sharing between jurisdictions.

Lofchie Comment: Recommendation 4 has merit but I question the procedure. Would it not make more sense for each government to produce a description of the way that its insolvency regime worked than for each intermediary to attempt to figure out the various insolvency regimes in 100 different countries? As to the other recommendations listed above, other than item 7, which is a government-to-government issue, each of them is consistent with existing U.S. law governing broker-dealers and FCMs.

Click here to view study in full (links externally to IOSCO website).