GUIDELINES FOR A UNIVERSAL BROKER Practice Note 1 CLARIFICATION ON ADDITIONAL ACTIVITIES ALLOWED TO BE UNDERTAKEN BY A UNIVERSAL BROKER

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1 GUIDELINES FOR A UNIVERSAL BROKER Practice Note 1 Date issued: 19 July 2002 CLARIFICATION ON ADDITIONAL ACTIVITIES ALLOWED TO BE UNDERTAKEN BY A UNIVERSAL BROKER 1 INTRODUCTION 1.1 This Practice Note aims to explain and clarify the additional activities alowed to be undertaken by a Universal Broker. 1.2 While this Practice Note is an explanatory note to complement the Guidelines for a Universal Broker (the Guidelines), nothing contained herein should be construed as prejudicing the powers of the Securities Commission (SC) under the Guidelines. 2 ADDITIONAL ACTIVITIES ALLOWED FOR A UNIVERSAL BROKER 2.1 Other than the current activities already allowed for all stockbroking companies, the following are the additional activities allowed to be undertaken by a Universal Broker: Trading in futures contracts Trading in debt securities Fund management Unit trust (management company) Corporate finance activities 3 TRADING IN FUTURES CONTRACTS 3.1 The structure of the Universal Broker s futures broking activities would be left to the Universal Broker s commercial decision provided always that the structure is in accordance with the provisions as contained herein. 3.2 Where a Universal Broker does not have a futures broking subsidiary/related company and intends to undertake futures broking activities, the Universal Broker shall first: Page 1 of 7

2 Become a Trading Member of the Malaysia Derivatives Exchange (MDEX) and a Clearing Member of the Malaysian Derivatives Clearing House (MDCH). Obtain a futures broker s licence under the Futures Industry Act 1993 and its representatives shall pass the Malaysian Futures and Options Registered Representative (MFORR) examination and be licensed as futures broker s representatives. 3.3 Where a Universal Broker intends to retain its futures broking subsidiary/related company to undertake futures broking activities: The futures broker s representatives and Local Members of the subsidiary/related company may be located at the Universal Broker s principal office or branch offices. The licence of the futures broker s representatives of the subsidiary/related company located at the Universal Broker s premises shall be varied to reflect the Universal Broker s address. There shall be no sharing of employees who are common to the Universal Broker and the subsidiary/related company and the back- office of the futures broking activities must be under the auspices of the subsidiary/related company. The subsidiary/related company must designate a Compliance Officer to monitor the futures broking activities at the Universal Broker s premises. At the initial stage, the subsidiary s/related company s Compliance Officer need not be located at the Universal Broker s premises. (f) The subsidiary/related company may elect to have the Universal Broker s Compliance Officer to monitor the activities of the futures broker s representatives and Local Members and submit compliance reports to the subsidiary s/related company s Compliance Officer provided always that: (i) The Universal Broker s Compliance Officer s roles and responsibilities are not compromised. Page 2 of 7

3 (ii) The Universal Broker s Compliance Officer must have passed the MFORR examination. (g) However, the responsibility for compliance monitoring of the activities of futures broker s representatives and Local Members, rests with the subsidiary/related company and its Compliance Officer. (h) The SC/Kuala Lumpur Stock Exchange (KLSE)/Malaysia Derivatives Exchange (MDEX) reserve the discretion to specify a designated Compliance Officer if, in the course of audits conducted, it is found that the compliance function is not undertaken effectively by the subsidiary/related company. (i) The subsidiary/related company shall declare to KLSE and MDEX whether its futures broker s representatives placed at the Universal Broker s premises is going to undertake proprietary or agency trading. (j) The subsidiary/related company must notify the SC, KLSE, and MDEX where the Local Members under its sponsorship would be relocated prior to the relocation. (k) The subsidiary/related company shall ensure that there are sufficient firewalls/chinese Wall policies in place to prevent any flow of information between the Local Members, and the futures broker s representatives and the dealer s representatives. This must include the physical segregation of trading terminal and restricted access to work stations. 3.4 Where a Universal Broker intends to absorb an existing futures broking subsidiary/related company into the Universal Broker: The Universal Broker may utilise the transfer of membership provisions in the business rules of MDEX and MDCH. The Universal Broker shall contribute to the Fidelity Fund and the Clearing Fund. 4 TRADING IN DEBT SECURITIES 4.1 By virtue of Rules 3A.3.2 and of the Rules of KLSE and Members Circular No. R/R 8 of 1996, all stockbroking companies are allowed to deal in unquoted bonds issued by public listed companies. Page 3 of 7

4 4.2 However, there is a distinction between activities allowed for Universal Brokers and Non-Universal Brokers. 4.3 A Universal Broker is permitted to deal in unquoted bonds issued by public listed companies and all other private debt securities issued by non-public listed companies, subject to the compliance with the applicable rules, in the following manner: All activities in the primary market including acting as a dealer, adviser, lead manager, lead agent, main underwriter, sub-underwriter and placement of unquoted bonds. All activities in the secondary market. 4.4 A Non-Universal Broker is permitted to deal in unquoted bonds issued by public listed companies provided always that: It has adequate capital at all times and in any event, a paid-up capital of not less than RM100 million. It has qualified and experienced personnel and adequate resources, as well as sufficient internal controls, to undertake and manage these activities. It is not permitted to participate in the primary market of such unquoted bonds (whether as dealers, advisers, lead manager, lead agent or main underwriter). However, it is allowed to act as a subunderwriter and to undertake the placement of unquoted bonds. 4.5 A Non-Universal Broker is allowed to deal in other private debt securities issued by non-public listed companies provided always that: It obtains KLSE Committee s approval pursuant to Rule 4.1.3(2). It has adequate capital at all times and in any event, a paid-up capital of not less than RM100 million. It has qualified and experienced personnel and adequate resources, as well as sufficient internal controls, to undertake and manage these activities. It is not permitted to participate in the primary market of such private debt securities (whether as dealers, advisers, lead manager, lead Page 4 of 7

5 agent or main underwriter). However, it is allowed to act as a subunderwriter and to undertake the placement of private debt securities. 5 FUND MANAGEMENT 5.1 A Universal Broker is permitted to undertake securities fund management without having to be licensed as a fund manager provided that: It assigns person(s) on a full-time basis to carry out the activities of a fund manager's representative ("dedicated fund manager's representative(s)"). If the dedicated fund manager s representatives are dealer s representatives who have not passed modules 9 & 10, they are required to pass those modules before engaging in such activities. If the dedicated fund manager s representatives have already passed modules 9 & 10 by virtue of them previously being licensed as fund manager s representatives, they are exempted from passing those modules again provided always that they are licensed as dealer s representatives for the Universal Broker. There shall be no proprietary trading by the dedicated fund managers. 5.2 A Universal Broker is allowed to undertake futures fund management without having to be licensed as a futures fund manager provided that: It has a futures broker s licence. It assigns person(s) on a full-time basis to carry out the activities of a futures fund manager's representative ("dedicated futures fund manager's representative(s)"). If the dedicated futures fund manager s representatives are dealer s representatives who have not passed modules 9 & 10, they are required to pass those modules before engaging in such activities. If the dedicated futures fund manager s representatives have already passed modules 9 & 10 by virtue of them previously being licensed as futures fund manager s representatives, they are exempted from passing those modules again provided always that they are licensed as dealer s representatives for the Universal Broker. Page 5 of 7

6 There shall be no proprietary trading by the dedicated fund managers. 5.3 A Universal Broker is allowed to undertake both securities and futures fund management without having to be licensed as a fund manager/futures fund manager provided that: It has a futures broker s licence. It assigns person(s) on a full-time basis to carry out the activities of a fund manager's representative and futures fund manager's representative ("dedicated fund manager's representative(s)"). If the dedicated fund manager s representatives are dual licence holder who have not passed modules 9 & 10, they are required to pass those modules before engaging in such activities. If the dedicated fund managers have already passed modules 9 & 10 by virtue of them previously being licensed as fund manager s representatives/futures fund manager s representatives, they are exempted from passing those modules again provided always that they are licensed as dual licence holders for the Universal Broker. There shall be no proprietary trading by the dedicated fund managers. 6 UNIT TRUSTS 6.1 A Universal Broker is allowed to operate as a Unit Trust Management Company provided that it complies with the SC s Guidelines on Unit Trust Funds, in particular Clause CORPORATE FINANCE ACTIVITIES 7.1 A Universal Broker is allowed to carry out corporate finance activities including activities undertaken by advisers pursuant to the SC s Policies and Guidelines on Issue/Offer of Securities and submit proposals to the SC. 7.2 The structure of a Universal Broker s corporate finance activities would be left to the Universal Broker s commercial decision. However, the establishment of a Corporate Finance Department must be in an orderly manner and supported by adequate checks and balances. Page 6 of 7

7 7.3 Where a Universal Broker intends to undertake its corporate finance activities through a subsidiary: It must have a controlling stake in the subsidiary (at least 50% plus 1 share). The subsidiary must be licensed separately as an investment adviser. The corporate finance activity of the subsidiary is limited to making submissions to the SC and acting in a strictly advisory capacity only to the Universal Broker in relation to (among others) underwriting and the placement of shares. The Universal Broker is the only one that can undertake the actual underwriting or placement of shares because they are captured under the definition of dealing in securities. Issues of conflicts of interest situations and confidentiality of information would need to be addressed adequately. (f) The subsidiary must sign an agreement with KLSE to allow them to audit the activities of the subsidiary and to be bound by the Rules of KLSE, which includes: (i) Provisions on Chinese Walls and firewalls policies (ii) Monitoring by the Compliance Officers (iii) Reporting Structure Page 7 of 7