RULES AND REGULATIONS GOVERNING DEALING MEMBERS. (Proposed Amendments and Additions, PART IX)

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1 RULES AND REGULATIONS GOVERNING DEALING MEMBERS (Proposed Amendments and Additions, PART IX) New Rule: Online Trading Portals Executive Summary The launch of the X-Gen trading platform by The Exchange in 2013 has resulted in the creation of online trading portals by Dealing Members. This initiative has provided the investing community with the opportunity to place orders for securities listed on The Exchange via the Order Management System (OMS) of Dealing Members from any location. The objective of the proposed Rules on Online Trading is to ensure that investors who trade in securities via Dealing Members online portals are adequately protected against unauthorized access to their stockbroking accounts by unauthorized persons, and protected against other forms of Cyber-Crime. The proposed Rules aim to guide firms on the general standard, processes and basic requirements for creating an online trading platform. The Rules also set out obligations and responsibilities of Dealing Members that offer online trading services. The text of the proposed Rules on Online Trading is set forth below: Definition Online Trading Portal Cloud Solution An online trading portal is a system using set up by a Dealing Member which allows an investor to create an account, access the account, give instructions (buy or sell securities) on the account, and also access corporate information and products and services of the Dealing Member Firm. This is a solution for storing and accessing data and programs over the Internet instead of a computer system's hard drive. Infrastructure Requirements 1. Every Dealing Member that intends to set up an online trading portal shall procure and set up X- Net connectivity and an Order Management System that is certified by The Exchange. 1

2 2. No Dealing Member shall operate an online trading portal without subjecting the online portal to a vulnerability assessment / penetration test, and submitting to The Exchange, a certified Penetration Testing Report from a credible Security company that the online portal platform is secure for usage. Dealing Members shall only employ companies duly accredited by The Exchange to carry out this task. 3. Where any Dealing Member s online portal was created prior to the commencement of these Rules, such Dealing Member shall within two months of the commencement date confirm that it has procured X-Net Connectivity, an Order Management System (OMS), obtained a penetration testing report certified by The Exchange, and complied with every requirement of these Rules. Know Your Client 4. Any Dealing Member that intends to operate an online trading portal shall carry out a comprehensive Know Your Client exercise on all clients registered through the online trading portal before an online trading account is activated, or any transaction is carried out by investors on the portal, and keep the records in that regard for a minimum period of 6 (six) years, or as may be prescribed from time to time by The Exchange. Risk Management and Supervisory Control 5. Prior to setting up and operating its online trading portal, a Dealing Member shall: a. Establish and adopt robust risk management and information security standards which shall include: i. At least two factor authentication, ii. encryption, iii. secured HTTP, iv. extended validation, v. policies and procedures to mitigate and guard their portals from fraud, Cyber-Crime and other risks to the firm and its clients. vi. Other security standards as The Exchange may prescribe from time to time b. Put in place a system of Change Management control on all the critical applications especially on the online trading portal. 2

3 c. Set up high-level security precautions and provide to The Exchange evidence of strong Authentication, Authorization and Access Controls to The Exchange, where cloud solution is employed. d. Obtain The Exchange s written approval to operate an online trading portal. 6. Only the client of a Dealing Member that is duly registered with the Dealing Member to trade via its portal shall be eligible to log on to the portal using a personalized and non-transferrable password to initiate, submit or effect changes to market orders. Disclosures to Clients 7. Dealing Members operating an online trading portal shall: i. Make a disclosure to their clients, via their trading portals, and on their account opening forms of the risks associated with using the portal. ii. Not share commissions from trade transactions except with other Dealing Members and such other registered market operators as The Exchange may from time to time specify. iii. Clearly display on the trading portal all fees and charges (if any) associated with the usage of the portal, the customer service contact details and the complaints management procedure. iv. Take all reasonable precaution to ensure the availability, integrity, confidentiality and security of transmission of financial information to and from clients. v. Exercise care in determining clients financial sophistication and suitability for particular investments recommended by the Dealing Member. vi. Where necessary, notify clients and give reasons prior to suspending or closing their accounts. The Exchange shall be notified of such suspension or account closure within 48 hours. A client s account may be suspended or closed where the Dealing Member becomes aware that the account is being used for fraudulent transactions, money laundering, market abuse, and any other illegal purpose. Compliance with The Exchange s Rules and Regulations 8. In operating their online trading portals, Dealing Members shall comply with all The Exchange s Rules and Regulations including those on communications, advertisement and publication. 9. All trading activities on the portal shall be duly monitored and supervised by an Authorized Clerk employed by the Dealing Member. 3

4 Obligation to provide Information to The Exchange 10. The Exchange may at any time require a Dealing Member to provide information regarding its online trading portal and any arrangements in that regard, within48 hours of The Exchange s request. 11. The Compliance Officer of the Dealing Member shall be responsible for all matters connected with its online trading portal arrangements, including giving adequate responses to enquiries by The Exchange. Sanctions 12. Any Dealing Member Firm that contravenes any of the above Rules shall be liable to pay a fine of not less than N250, (two hundred and fifty thousand naira only) and such other penalties as may be prescribed from time to time by The Exchange. Proposed Rule Changes Executive Summary The current Rules on marketing and advertising require Dealing Members to seek the Exchange s approval before they can advertise and circulate publications. The Exchange has become aware of complaints that these requirements are stringent and discourage some Dealing Member firms from developing advertisements and publications to promote their businesses. In line with The Exchange s growth strategy and in order to enhance visibility and access to the Capital Market, it has become necessary to revise these Rules to make them less restrictive and bureaucratic. These Rules proposal seeks to alter the current approval requirement system to a notification requirement for marketing and advertisement. The Rules will set the standards Dealing Members are required to meet for advertising and marketing communications and ensure that these communications are not confusing, misleading, or misrepresentative. The process will enable guided communication with the investing public and foster an enabling environment for sufficient investor sensitization, enhanced visibility of the products and services offered by Dealing Members, and the activities of the Capital Market. In view of the related subject matter, we have combined Articles 6, 145 and 147 on Prescribed Mode of Advertisement, Minimum Standards for Communicating With the Public, and Sanctions for Violating the Regulations for Communicating with the Public into the Rules set forth below. Legend: Additions underlined, deletions struck through 4

5 A. Article 6: Prescribed Mode of Advertisement : Amendments a. Dealing Members of The Exchange are shall only be permitted to exhibit outside the offices at which they carry on stockbroking business, a name plate bearing in sufficiently legible characters, the name in which their business is carried on. of a size not larger than 64cm by 32cm or if a circular plate, with a diameter not exceeding 50cm. b. The Secretary shall from time to time cause advertisements to be made to the effect that a list of Dealing Members of The Nigerian Stock Exchange can be obtained from the Secretary; b. c. Dealing Members are also permitted to issue explanatory brochures and such other items for advertisement of their products, services and events to its clients and the investing public provided, ithey complyies with these Rules. the draft is approved by The Exchange. c. d) Dealing Members may be required by The Exchange to discontinue or modify any advertisement which in the opinion of The Exchange infringes theseis Rules egulation. B. New Rule: Notification of The Exchange on Advertisement a. Each Dealing Member shall notify The Exchange of every circular, advertisement (including mobile, written, broadcast, outdoor, digital and online) brochure, publication or distribution made in relation to its services, products, operations and events to its clients and the investing public. b. The notification and a copy of the communication in paragraph a above shall be submitted to The Exchange not less than five (5) working days before it is published. C. Article 145: Minimum Standards for Communicatingon with the Public : Amendment Advertisement means any communication made by a Dealing Member to its clients, the investing public, or any of its other stakeholders, promoting its products, services, operations, and events with the aim of imparting information and attracting patronage. Approved Person means an individual who has been authorized to perform on behalf of a Dealing Member one or more Controlled Functions as laid down by regulations issued by a regulatory authority. Examples of Approved Persons are Compliance Officers, Risk Officers, Control Officers, Brokers, Chief Financial Officers, Internal Auditors, Directors and Chief Executive Officers. 5

6 Communication means any expression, or exchange of information, by speech, writing, conduct or any other medium through which information is expressed by a Dealing Member to its clients, the investing public, or any of its other stakeholders. 1. All information set forth in advertisements, brochures, circulars and publications shall: a. Be fair, Mmade in good faith and shall not confuse, mislead or offend; b. Be Ffree from inaccuracies and be capable of substantiation. Descriptions, claims or comparisons which are misleading about expertise or service shall not be included; c. Be free of descriptions, claims or comparisons which are false, exaggerated, unwarranted, as well as promissory claims about expertise, services, product, or performance of the firm or within the capital market; d. Drafted to clearly describe the Dealing Member with the words Member of The Nigerian Stock Exchange. d. Be Oof such a character as willould be unlikely to bring The Exchange or its Members to disrepute; e. Be Wwritten in such a way as not to unfairly prejudice the interest of investors, The Exchange or other Capital Market Operators; f. Be free of words or phrases that are likely to create unhealthy competition, unfairly discredit, disparage or attack the services offered by other firms or exaggerate the nature of competitive differences; g. Not imitate the slogan(s) or illustration(s) of adverts by other Dealing Members; h. Not use any intellectual property that is not its own, except with the written agreement of the owner of the logo or trademark; i. Not omit any important or material fact or qualification if the omission, in light of the context of the material presented, would cause the communications to be misleading; j. Not place important or material information in a legend or footnote if the absence of such information will inhibit the public understanding of the communication; and k. Consider the nature of its audience and provide details and explanation appropriate to such audience. 2. Disclosure of a Dealing Member s Name in Communications All Communications by Dealing Members shall: a. Be drafted to clearly describe the Dealing Member with the words Member of The Nigerian Stock Exchange except in cases of mobile and digital communication, where 6

7 such description may be abbreviated to Member NSE but shall be sufficiently recognizable; and b. Reflect any relationship with any non-dealing Member of The Exchange or individual relevant to the communication. 3. Internal Review and Approval of Communications a. Every Dealing Member shall develop and establish a robust internal process to review every advertisement at senior management level before publication. b. A minimum of two Approved Persons shall review and approve every advertisement before publication. 4. Comparison in Communications between Investments, Products or Services Any comparison in retail communications between investments, products or services must disclose all material differences between them, including investment objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, and tax features. 5. Recommendations in Communications Where the communication of a Dealing Member includes recommendations, the communication shall: a. include a reasonable basis for the recommendations, and contain adequate disclosures; and b. provide to existing clients, the investing public, and The Exchange upon request, the investment information supporting the recommendation. 6. Testimonials in Communications a. Dealing Members shall not include testimonials in communications except such testimonials are issued by a person who has the relevant knowledge and experience required to form a professional opinion on the subject. b. Any communication that includes a testimonial concerning a product or service offered by a Dealing Member shall disclose that: i. the testimonial may not be representative of the experience of other customers; ii. the testimonial is not a guarantee of future performance or success; and 7

8 iii. it is a paid testimonial (where it was paid for). 7. Public Appearances and Speaking a. Where a Dealing Member sponsors or participates in a seminar, forum, radio or television interview, or is engaged in public appearances or speaking activities that are unscripted, the person representing the Dealing Member shall comply with these Rules. b. Where a representative of a Dealing Member recommends investment in a security during a public appearance, the person shall at that time have a reasonable basis for the recommendation and also disclose its financial interest in the recommended securities. c. Every Dealing Member shall establish written procedures that are appropriate to its business, size, structure and customers, to supervise public appearances by all its representatives. Such procedures shall provide for: i. their continuing education and training on Advertisement for their representatives; ii. the level of experience or seniority the representatives must have achieved within the organisation before being permitted to speak on the Dealing Member s behalf in public; iii. documentation of the content, syllabus and materials for such education and training; and iv. monitoring to ensure that such procedures are implemented and adhered to. d. Any scripts, slides, hand-outs or other written, printed or electronic materials used in connection with public appearances are considered as communication. 8. Third Party Communication Where a Dealing Member advertises or communicates using the platform of a third Party, such advertisement or communication shall comply with the requirements of the Rules of The Exchange. 9. Record of Communication Dealing Members shall keep proper records of all communications issued by them for a period of not less than six (6) years, or as may be prescribed from time to time in applicable legislation. Such records shall include: a. a copy of the communication and the dates of first and (if applicable) last use of such communication; b. the name of the Approved Persons that authorized the issuance of the communications and the date such confirmation was given; 8

9 c. information concerning the source of any statistics, charts, graphs or other illustration used in the communication. D. Article 147: Amendment Sanctions for Violating the Regulations for of publications Communicating with the Public The Exchange may disallow any invitation or advertisement proposed to be published, circulated or distributed by a Dealing Member without specifying the reason or allows the same on such modifications as Council may deem fit. a. If a Dealing Member contravenes these Rules, it shall be liable to a minimum fine of N250, (Two Hundred and Fifty Thousand Naira) and may in addition be liable to such other penalty as may be prescribed from time to time by The Exchange. b. A Dealing Member shall upon The Exchange s directive immediately cease to use or issue any advert, communication or publication which violates these Rules, and make a retraction or recall such advert, communication or publication within five (5) business days of the date of the directive. Article 144: Specific Actions Requiring Prior Consent of The Exchange 1. A Dealing Member shall not be permitted to do any of the following without the prior written consent of The Exchange: a. Establish or maintain any branch office; b. Allow or agree to any change in the control or shareholding structure of the Company; c. Employ any of the following: i. Directors, Authorized Clerks or other persons including Principal Officers such as the Chief Executive Officer, Chief Finance Officer, Chief Compliance Officer and Chief Risk Officer, who have been indicted by The Exchange or the Securities and Exchange Commission. ii. Any person who was an officer or employee of a Dealing Member expelled from the Exchange; iii. Any person expelled, as an authorized clerk or its equivalent, from any other exchange; iv. Any person refused admission as a member of the Chartered Institute of Stockbrokers or any person expelled from its membership; 9

10 v. Any person expelled as a member of any professional association or institute; vi. Any person who is insolvent or has been convicted of theft, fraud, forgery, or any other crime involving dishonesty. d. Publish, circulate or distribute by any means whatsoever any invitation or advertisement. 2. In no circumstances shall a Dealing Member neglect, ignore or fail to obtain prior consent on specific actions as required by The Exchange. 3. If a Dealing Member contravenes the above stated rrules, it shall be liable to a fine of Five Hundred Thousand Naira in addition to any other punishment which the Council may impose as it deems fit. New Article: No Defaults - Amendments and Additions (Part III) Executive Summary In light of a recent trend among some Dealing Member firms who default in their trade settlement obligations by not adequately funding their accounts to accommodate their trades, an urgent need to amend the Rule titled No Defaults has arisen. The Rule currently covers only defaults by Dealing Members to other Dealing Members and their clients. Therefore, in order to address defaults by Dealing Members to settlement banks and any other capital market operators, the scope of the existing Rule needs to be expanded to accommodate other stakeholders. Proposed Rule Changes Legend: Additions underlined, deletions struck through 1. No Dealing Member shall default on a transaction with another Dealing Member, or client, settlement bank and any other capital market operator. 2. A Dealing Member shall be deemed to be in default if it is unable to meet its financial or other commitments to another Dealing Member, or client, settlement bank and any other capital market operator arising out of a transaction. 3. Any Dealing Member that contravenes this rule shall be suspended immediately and will be liable to any of the following penalties in addition to any other sanctions that The Exchange may impose: a. Specific performance of the transaction; b. Suspension; 10

11 c. A fine to be determined; or d. Public Censure. 4. The suspension imposed shall be lifted when the defaulting Dealing Member furnishes The Exchange with proof that any outstanding payment, charges, fees, or interest arising therefrom have been fully settled, or parties to the transaction have reached an agreement to settle, and the Dealing Member has complied or is complying with the settlement terms. 11