In consultation with the Securities and Exchange Commission of Sri Lanka (SEC), the Colombo Stock Exchange (CSE) has issued a set of guidelines on best practices for Stockbroker Firms which are required to be adopted and implemented with immediate effect.
The guideline was approved by the SEC Commission on January 13, 2021 and was presented to the leadership of Stockbroker Firms which were unanimously accepted.
Under these guidelines, as requested by the Stockbroker Firms, a 3-month grace period will be provided for the implementation of a guideline on sharing of brokerage commission with Registered Investment Advisors (RIAs), which has been capped at 30% in order to maintain consistency within the industry.
As per the approved guidelines, prior to extending credit facilities to a client, the Stockbroker Firm is required to assess the client’s credit worthiness. Steps should be taken to determine the buying power of each client, having assessed the credit worthiness of the client taking into consideration the Value at Risk Margin of each security.
The Stockbroker Firms have also been instructed to extend the Online Trading Platform to clients who have not opted for it with a viewer facility in order to view the Statement of Accounts, portfolio positions etc.
The firms are also required to send fortnightly notifications to the clients via electronic means, notifying the outstanding balances and ensure that records of such communications are retained. The Firm is also expected to obtain acknowledgements from the clients on a random basis to verify the receipt of Statement of Accounts, especially from clients who have carried out high volumes.
Further, the Stockbroker firms are required to maintain client instructions in relation to the orders received from clients in compliance with CSE’s Stockbroker Rules. The guidelines require the Stockbroker Firms to segregate the key duties and functions of the individuals acting in the capacity of Compliance Officer and Head of Finance within the Firm.
The guidance document also carries a list of tasks that are required to be carried out by the Compliance Officer who is also assigned with the additional task of ensuring that the Stockbroker Firm complies with the guidelines.
Additionally, the Stockbroker Firms are now required to appoint a competent person to carry out the functions in relation to Information Technology (IT) and ensure that necessary IT infrastructure is available within the Firm and are also expected to ensure RIAs have been allocated to every client. In the event a client is transferred to a different RIA within the Firm, the Firm must ensure that the Know Your Client (KYC) procedures are verified by the subsequent RIA.
The Stockbroker Firms have also been instructed to implement necessary measures to monitor the Sector and Security exposure on a daily basis and conduct stress testing at least weekly to test the risk exposure levels that they may be exposed to and to ensure that they have adequate liquidity to address the stressed conditions.
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