February 24, 2010

BSP CIRCULAR LETTER NO. CL-2010-013

TO : All Banks and Non-Bank Financial Institutions

SUBJECT : Code of Ethics Governing Financial Market Activities in the

Philippines

Towards the end of improving financial market integrity, the Bangko

Sentral ng Pilipinas (BSP) hereby informs all banks, their subsidiaries and
affiliates, and other financial institutions supervised by BSP the development
of "The Code of Ethics Governing Financial Market Activities in the
Philippines" (Code) by the Money Market Association of the Philippines
(MART). A copy of the Code is attached as Annex A for your reference. DcSTaC

The Code provides a set of principles and standards for market conduct
of financial market participants, such as banks, brokerage firms and other
financial institutions. It aims to guide market participants in determining the
nature of their responsibilities to one another, clients and the market and in
decision-making when faced with ethical situations. The observance of these
principles and guidelines seek to promote greater professionalism in the
market. The Code is anchored on the belief that high ethical standards are
critical in maintaining the public's trust in the fairness of financial markets,
and allowing markets to function efficiently.
The Code is generally principles-based which can be applied as a
minimum standard in trading across financial product markets. The Code
covers the following topics: Professionalism, Integrity of Capital Markets,
Duties to Clients, Conflicts of Interest, and Duties to Market Counterparties.
The BSP believes that the Code may be a basis or part of the binding market
conventions governing orderly conduct/operations of the market, which is
one of the components in order to recognize an over-the-counter market as
an organized market.
For information and guidance.

(SGD.) NESTOR A. ESPENILLA, JR.

Deputy Governor
Bangko Sentral ng Pilipinas

ATTACHMENT
CODE OF ETHICS GOVERNING FINANCIAL MARKET ACTIVITIES IN THE
PHILIPPINES
Table of Contents
Introduction
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 I. Professionalism
A. Knowledge of the Law
B. Independence and Objectivity
C. Misrepresentation
D. Misconduct
II. Integrity of Capital Markets
A. Insider Information/Material Nonpublic Information
B. Market Manipulation
III. Duties to Clients
A. Integrity, Prudence and Care
B. Fair Dealing
C. Client Suitability
D. Diligence and Reasonable Basis
E. Disclosure of Information and Communication to
Clients/Public
F. Preservation of Confidentiality
IV. Conflicts of Interest
A. Disclosure of Conflicts
B. Dealing for Personal Account
C. Priority of Transactions
V. Duties to Market Counterparties
A. Knowledge of Trading Conventions
B. Firmness of Price Quotations and Deals
INTRODUCTION
The Money Market Association of the Philippines (MART) has compiled
this set of guidelines for the "Code of Ethics Governing Financial Market
Activities in the Philippines" to provide a reference for banks, brokerage
firms and other financial institutions in setting high ethical standards and
professional excellence for market practitioners. This is anchored on the
belief that high ethical standards are critical in maintaining the public's trust
in the fairness of financial markets, and allowing markets to function
efficiently. DTIaHE

The Code was designed to be generally principles-based which can be

applied as a minimum standard in trading across financial product markets.
It is aimed to guide members in decision-making when faced with ethical
situations; and determining the nature of their responsibilities to one
another, to clients and the market.
The Code of Ethics of the following associations were used to sieve the
common thread of trading and selling principles: ACI Philippines, Bankers
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 Association of the Philippines (BAP), Investment House Association of the
Phils (IHAP) and MART. We also used as a reference the CFA Institute
(Chartered Financial Analysts) Code of Ethics and Standards of Professional
Conduct. The Appendices provide copies of the abovementioned codes used
as a reference.
It is to be made clear, however, that the Code does not include trading
conventions, and hence would not supercede the Trading Conventions of the
different associations pertinent to their specific product markets.
It is important then that all market practitioners observe the guiding
principles embodied in this Code to continue to promote greater
professionalism in our treasury markets.
NOTE:
For the purpose of the Code, the term "financial institutions" is used to
represent banks, quasi-banks, thrift banks, investment houses, and
brokerage firms which are members of the abovementioned associations.
The term "members" is used to represent employees of the financial
institutions engaged in the following banking activities, namely, money
market, foreign exchange, fixed-income securities, derivatives and
underwriting.
CODE OF ETHICS GOVERNING FINANCIAL MARKET ACTIVITIES IN THE
PHILIPPINES
I. Professionalism
A. Knowledge of the Law
Financial institutions should employ the resources and
procedures needed for the proper performance of its business
activities. It is therefore essential that financial institutions
employ or appoint persons who are qualified to conduct business
with its clients and counterparties. As they are responsible for the
actions and conduct of its dealers and related personnel, the
financial institutions should ensure that its members have the
authority, as well as the knowledge of and training on the laws
governing the products and markets they are dealing with. CSDTac

Members must understand and comply with all applicable laws,

rules and regulations of any government, regulatory
organization, or professional association governing their
activities. Members must not knowingly participate nor assist in
any violation of such laws, rules, or regulations.
More specifically, members should comply with the regulatory
requirements issued by the Bangko Sentral ng Pilipinas (BSP) and
the Securities and Exchange Commission (SEC), among others,
which are relevant to the banks' trading activities in the money
markets, foreign exchange, fixed income securities and
derivatives, as well as in the underwriting business.
To acquire and maintain knowledge and understanding of the
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 applicable laws, rules, and regulations, members should:
1. Stay informed. The financial institutions should establish a
procedure by which members are regularly informed about
the changes in the relevant laws, rules and regulations. In
many instances, the banks' compliance department can
provide such information in the form of memoranda
distributed to the members. The members should also be
abreast of current issues and developments in the products
and markets they are trading. One way of keeping current is
participating in in-house as well as external training
courses, such as attending industry fora.
2. Review procedures. The financial institutions should review
written compliance procedures on a regular basis to ensure
that the procedures reflect current law and provide
guidance to members what is permissible conduct under the
law.
3. Maintain current files. The financial institutions should
maintain readily accessible current reference copies of
relevant rules and regulations.
aCTcDH

B. Independence and Objectivity

Members must use reasonable care and judgment to achieve and
maintain independence and objectivity in their professional
activities. Although gifts or entertainment can be offered in the
normal course of business, members must not offer, solicit, nor
accept any gift, entertainment, benefit or compensation that
reasonably could be expected to compromise their own
independence and objectivity.
It is therefore important that the members disclose to
management the gifts or benefits received. Financial institutions
should establish clear policies and guidelines on when and how
entertainment and gifts are to be used, supervised and
monitored. At the minimum, the policies should require disclosure
of details of the gifts and entertainment, with said disclosure to
be submitted, preferably on a monthly basis, to the Compliance
Officer and to the Board of Directors or its equivalent committee,
of the member's financial institution.
The financial institution's corporate culture should fully support
independence and objectivity. Given the symbiotic relationship
between different business functions, say research and
investment banking, one method of protecting objectivity is
building a "firewall" or "Chinese wall" between these two
functions. A key element of an enhanced firewall is separate
reporting structures for personnel within two different business
functions. This topic of "Chinese wall" will be discussed in more
detail under Section II. Integrity of Capital Markets, Part A. Use of
Insider Information/Material Non-Public Information.
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 C. Misrepresentation
A misrepresentation is any untrue statement or omission of a fact
or any statement that is otherwise false or misleading.
Members must not knowingly make any misrepresentations
relating to investment analysis, recommendations, actions and
other professional activities. Members must not knowingly
misrepresent nor give a false impression in oral representations,
advertising (whether in the press or through brochures),
electronic communications, or written materials (whether publicly
disseminated or not) and should not issue misleading statements
about the performance of the financial institution. In this context,
"knowingly" means representatives of the financial institution
either know or should have known that the misrepresentation
was being made.
Financial Institutions should ensure that communications with the
public be done only by members with requisite authority to make
public statements, or to make analysis, or provide
recommendation to the general public. Communications should
not contain promises of specific results, exaggerated or
unwarranted claims, or unwarranted superlatives, unfounded
opinions for which there is no basis or forecasts of future events
which are unwarranted, or which are not clearly labeled as
forecasts. Communication to the public includes disclosure or
presentation of the financial institution's performance. HSaEAD

Members should consider several factors when determining

whether communications contain misleading information such as:
1. Overall context in which the statement/s is/are made. A
statement made in one context may be misleading even
though such a statement could be perfectly appropriate in
another context. An essential test in this regard is the
balance of treatment of risks and potential benefits.
2. The audience to which the communication is directed.
Different levels of explanation or detail may be necessary
depending on the audience to which a communication is
directed and the ability of the financial institution given the
nature of the media used, to restrict the audience
appropriately. If the statements made in a communication
would be applicable only to a limited audience, or if
additional information might be necessary for other
audiences, it should be kept in mind that it is not always
possible to restrict the readership of a particular
communication.
3. The clarity of the communication. A statement or disclosure
made in an unclear manner can result in a failure to
understand the statement, or in a serious
misunderstanding. A complex or overly technical
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 explanation may cause even greater misunderstanding than
too scant an information. Likewise material disclosure
relegated to legends or footnotes may not generally
enhance the reader's understanding of the communication.
The term communication includes, but is not limited to:
1. Written material such as research reports, market letters,
newspaper columns, and books.
2. Electronic communications such as Internet
communications, Web pages, chat rooms, and e-mail.
3. Verbal communication such as presentations and telephone
conversations.
Members must not misrepresent any aspect of its practice,
including but not limited to the qualifications or credentials of its
employees, the qualifications or services provided by the financial
institutions, and employees' performance records as well as that
of the financial institution.
TDcEaH

In avoiding misstating or providing misleading statements,

members are encouraged to fully disclose its investment
performance data and must make reasonable efforts to make
sure that it is fair, accurate and complete. It is important that
financial institutions provide credible performance information to
clients/public. If presentations made to clients are brief, the
financial institution must ensure that detailed information shall
be made available upon request.
In complying with the provision against misrepresentation,
members should have adequate policies and procedures
regarding disclosure of performance presentation and
performance measurement that are consistent with regulatory
requirements and the principles of fairness, accuracy and
consistency. Procedures should prevent possible
misrepresentations of past performance or reasonably expected
performance. Historical data related to individual accounts and
composite or group of accounts should be complete, fair, and
accurate. In presenting past performance, the following may be
considered to avoid misrepresentation:
1. Knowledge and sophistication of the audience to whom a
performance presentation is addressed;
2. Including disclosures that would fully explain the
performance results being reported (for example, stating,
when appropriate, that results are simulated when model
results are used, or disclosing whether the performance is
gross of fees, net of fees, or after tax);
3. Maintaining the data and records used to calculate the
performance being presented;
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 4. Where performance of a different type of investment
product is included, stating any material difference.
Where the presentation material contains past performance
information and is intended for use over a period of time,
disclosures should make clear that the information may not be
current and an explanation on where up-to-date past
performance information may be obtained. ETaSDc

Members must avoid spreading misinformation and rumors.

Financial markets are generally responsive to news on related
developments. It is not surprising therefore that gossip and
misinformation emanating from various sources is often relayed
through the market telephone lines and screens. These rumors
can be quoted, or even originate in the financial media.
Members should not relay any information which they know to be
false and should take great care when discussing
unsubstantiated information, which they suspect to be inaccurate
and could be damaging to a third party, be it a corporation or an
individual.
D. Misconduct
Members must not engage in any act involving dishonesty, fraud,
or deceit or commit any act that reflects adversely on their
professional reputation, integrity or competence. Members must
also ensure that their overall conduct and demeanor are
appropriate with respect to the highest standard of
professionalism as adhered to by their institution, and by the
banking industry as a whole.
Professional misconduct can damage the trustworthiness or
competence of an investment professional and can adversely
affect a financial institution's reputation. This includes behavior
that may not be illegal but could negatively affect the employee's
ability to perform his or her responsibilities. For example, abusing
alcohol during business hours can be considered professional
misconduct because it could have a detrimental effect on the
employee's ability to fulfill his or her professional responsibilities.
Members should adopt policies and procedures to prevent
general misconduct:
1. Develop and/or adopt a code of ethics to which every
employee must subscribe and make clear that any personal
behavior that reflects poorly on the individual involved, the
institution as a whole, or the investment industry will not be
tolerated.
2. Disseminate to all employees a list of potential violations
and associated disciplinary sanctions, up to and including
dismissal from the institution.

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 3. Check references of potential employees to ensure that
they are of good character and not ineligible to work in the
financial industry because of past infractions of the law.
aICHEc

In addition, members should have specific policies on the following:

a. Fraud
Attempts at fraud do occur and can be meticulously planned. As
there are several ways in which an institution can be defrauded,
great vigilance is required by management and staff, particularly
so when calls are received on an ordinary telephone line (usually
in principal to principal transactions).
As a preventive measure, the details of all telephone deals which
do not include pre-agreed standard settlement instructions
should be confirmed by email or similar means by the recipient
seeking an answerback to ensure the deal is genuine.
Particular care should be taken in checking authenticity where
the beneficiary is a third party or other than the transaction
counterparty.
In the event of any suspicious circumstances staff must notify
management without delay.
b. Gambling
Making or arranging of bets among market participants is
expressly forbidden. There should be no gambling within the
dealing room of a financial institution.
It is strongly recommended that management have a clearly
defined written policy on the control of this activity.
c. Use of Drugs and Abused Substances
Management should take all reasonable steps to educate
themselves and their staff about possible signs and effects of the
use of drugs including alcohol and other abused substances.
Policies should be developed and clearly announced for dealing
with individuals who are found to be substances abusers, as
judgment of any member dependent on such substances may be
impaired and his ability to function satisfactorily seriously
diminished. A member is also likely to be vulnerable to outside
inducement to conduct business not necessarily in the best
interest of the firm or the market in general. CTDAaE

Thus, drugs and abused substances are in no way permitted

inside the dealing room and, as such, users are also not allowed
to enter the trading room under such influence.
II. Integrity of Capital Markets
The orderly operation of financial markets depends greatly on the
overall level of trust among all market participants. Ethical practices instill a
public trust in the fairness and integrity of capital markets, enhancing their
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 liquidity and efficiency. Financial institutions should therefore practice
ethical standards that promote and maintain a high level of confidence in
market integrity. The principles of transparency, disclosure, and fairness
promote market integrity.
A. Insider Information/Material Nonpublic Information
Members should not, with intent or through negligence, profit or
seek to profit from insider information and material non-public
information that could affect the value of an investment.
Members should likewise not assist anyone with such information
to make a profit for themselves, their firm or their clients.
Disclosure of material non-public information to unrelated parties
and, in some cases, to related parties without consent before it
becomes public is unethical and a breach of confidentiality.
Dealing in financial instruments based on material non-public
information about the issuer of such instruments or the
instruments themselves constitutes 'insider dealing'. "Insider" is
hereby defined as any individual in possession of material non-
public information.
This requires that financial institutions must have in place policies
and procedures to manage material non-public information. This
should include, where appropriate, 'Chinese walls' to restrict the
internal distribution of confidential information to those who need
to know in order to be able to execute orders for customers or for
compliance purposes. Material non-public information is not
always clearly identifiable, thus, employees must be given
sufficient training to either make an informed decision or consult
a supervisor or compliance officer before engaging in
questionable transactions.
Information is considered to be material non-public if it satisfies
any of the following:
1. It has not been generally disclosed to the public and would
likely affect the market price of a security or any financial
instrument after being disseminated to the public and the
lapse of a reasonable time for the market to absorb the
information; HcDaAI

2. It would be considered by a reasonable person important

under the circumstances in determining his course of action
whether to buy, sell or hold a security or any financial
instrument.
Material non-public information may include, but is not limited to,
information on the following:
• Financial results of the company;
• Mergers, acquisitions, tender offers, or joint ventures;
• Changes in assets and/or capital structure;
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 • Innovative products, processes, or discoveries;
• New licenses, patents, registered trademarks, or regulatory
approval/rejection of a product;
• Developments regarding customers or suppliers (e.g., the
acquisition or loss of a contract);
• Changes in management;
• Change in auditor notification or the fact that the issuer may
no longer rely on an auditor's report or qualified opinion;
• Events regarding the issuer's securities (e.g., defaults on
senior securities, calls of securities for redemption,
repurchase plans, stock splits, changes in dividends,
changes to the rights of security holders, public or private
sales of additional securities, and changes in credit ratings);
• Bankruptcies;
• Significant legal disputes;
• Government reports of economic trends (inflation, GDP,
monetary policy, fiscal policy, currency information, etc.);
• Issue of shares by way of public offering, rights, bonus, etc.;
• Orders for large trades before they are executed. AHCaED

In addition to the substance and specificity of the information, the

source or relative reliability of the information also determines
materiality. The less reliable a source, the less likely the
information provided would be considered material. For example,
factual information from a corporate insider regarding a
significant new contract for a company would likely be material,
while an assumption based on speculation by a competitor about
the same contract might be less reliable and, therefore, not
material.
Members must not act on and disclose insider information to
make a profit for themselves, their institution or their clients. The
term "insider" may include, but is not limited to, the following:
• the issuer
• a director or officer (or person performing similar functions)
of, or a person controlling the issuer
• a person whose relationship or former relationship to the
issuer gives or gave him access to material information
about the issuer or the security that is not generally
available to the public
• a government employee, or director, or officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information about
an issuer or a security that is not generally available to the
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 public
• a person who learns such information by a communication
from any of the foregoing insiders.
Members must be particularly aware of information that is
selectively disclosed by corporations to a small group of
investors, analysts, or other market participants. Information that
is made available to analysts remains nonpublic until it is made
available to investors in general. Corporations that disclose
information on a limited basis create the potential for insider
trading violations. However, under the "mosaic theory," members
are free to act on the collection of material public and non-
material non-public information without risking violation.
Information is "non-public" until it has been disseminated or is
available to the marketplace in general (as opposed to a select
group of investors). Dissemination can be defined as "made
known to." For example, a company report of profits that is
posted on the Internet and distributed widely through a press
release or accompanied by a filing has been effectively
disseminated to the marketplace. EcSCHD

An information barrier is the minimum procedure a financial

institution should have in place to protect itself from liability. It
should also consider restrictions or prohibitions on personal
trading by employees and should carefully monitor both
proprietary trading and personal trading by employees. It should
require employees to make periodic reports (to the extent that
such reporting is not already required by securities laws) of their
own transactions and transactions made for the benefit of family
members. Securities should be placed on a restricted list when an
institution has or may have material nonpublic information. The
broad distribution of a restricted list often triggers the sort of
trading the list was developed to avoid. Therefore, a watch list
shown to only the few people responsible for compliance should
be used to monitor transactions in specified securities. The use of
a watch list in combination with a restricted list is an increasingly
common means of ensuring an effective procedure.
Financial institutions should adopt policies and procedures
designed to prevent the inappropriate flow of material, nonpublic
information and to aid in the detection of illegal trading based on
such information. An information barrier commonly referred to as
a "Chinese Wall" is the most widely used approach to prevent the
communication of material nonpublic information within
institutions and avoid the illegal use of insider information. It
restricts the flow of confidential information to those who need to
know the information to perform their jobs effectively. The
minimum elements of such a system include, but are not limited
to, the following:
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 • Substantial control of relevant interdepartmental
communications, preferably through a clearance area
within the institution in either the compliance or legal
department;
• Review of employee trading through the maintenance of
"watch," "restricted," and "rumor" lists;
• Documentation of the procedures designed to limit the flow
of information between departments and of the
enforcement actions taken pursuant to those procedures;
• Heightened review or restriction of proprietary trading while
an institution is in possession of material nonpublic
information.
Any financial institution which assumes more than one function
whether as dealer, broker, adviser or underwriter, or which
engages in market making transactions, shall maintain proper
segregation of those functions within the firm to prevent the flow
of non-public material information among different parts of its
organization, which perform each function. For instance, the
unit/department arranging securities origination may receive
inside information, i.e., the knowledge of the new issue and its
likely impact on existing securities of the issuer or information
provided by the issuer. Inside information gathered by the
origination/deal team should not be disclosed to the other
business units such as sales, trading and research. HCTDIS

In particular, if a member shall become aware of a potential

tender offer before the tender offer has been publicly announced,
such member shall not buy or sell, directly or indirectly, the
securities of the target issuer until the tender offer shall have
been publicly announced. Such buying or selling shall constitute
insider trading.
To the extent possible, financial institutions should consider
physical separation of departments and files to prevent the
communication of sensitive information. For example, the
investment-banking and corporate finance areas of a brokerage
firm should be separated from the sales and research
departments, and a bank's commercial lending department
should be segregated from its trust and research departments.
Other significant areas include sales, execution, research and
back office settlement.
One of the primary objectives of an effective Chinese Wall
procedure is to establish a reporting system in which authorized
people review and approve communications between
departments. The financial institution should have policies and
procedures on sharing information with an end-view of
maintaining the integrity of said information.
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 Written compliance policies and guidelines should be circulated
to all employees of a financial institution. Policies and guidelines
should be used in conjunction with training programs aimed at
enabling employees to recognize material nonpublic information.
Material nonpublic information is not always clearly identifiable.
Employees must therefore be given sufficient training to either
make an informed decision or consult a supervisor or compliance
officer before engaging in questionable transactions.
B. Market Manipulation
Financial institutions must not engage in practices that distort
prices or artificially inflate trading volume with the intent to
mislead market participants.
This standard requires that financial institutions uphold market
integrity by prohibiting market manipulation. Market manipulation
includes practices that distort security prices or trading volume
with the intent to deceive people or entities that rely on
information in the market. Market manipulation harms the
integrity of, and thereby undermines public confidence in capital
markets and adversely affects interests of all investors, by
disrupting the smooth functioning of the markets, distorting
prices, harming the hedging functions of these markets, and
creating an artificial appearance of market activity. TcEaAS

Market manipulation can be related to the following:

1. Transactions that deceive market participants by distorting the
price-setting mechanism of financial instruments. Transaction-
based manipulation includes but is not limited to:
• Transactions that artificially distort prices or volume to give
the impression of activity or price movement in a financial
instrument in order to induce a purchase or sale of the said
instrument.
• Pegs, fixes or stabilize the price of such security unless
otherwise allowed
• Effecting any transaction in such security which involves no
change in the beneficial ownership thereof;
2. The dissemination of false or misleading information.
Information-based manipulation includes, but is not limited to
spreading false rumors to induce trading by others. The standard
prohibits the circulation and dissemination of information that the
price of any security will or is likely to rise or fall because of
manipulative market operations conducted for the purpose of
raising or depressing the price of the security for the purpose of
inducing the purchase or sale of such security. In addition, any
person shall be prohibited from making false or misleading
statement with respect to any material fact, which he knew or
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 had reasonable ground to believe was false or misleading, for the
purpose of inducing the purchase or sale of any security.
For example, dealers must refrain from "pumping up" the price of
a security by issuing misleading positive information or overly
optimistic projections of a security's worth only to later "dump"
ownership in the security once the price of the security, fueled by
the misleading information's effect on other market participants,
reaches an artificially high level.
HTDcCE

III. Duties to Clients

A. Integrity, Prudence and Care
Financial institutions must act with reasonable care and exercise
prudent judgment in their dealings with their clients. Investment
advisors must act for the benefit of their clients and place the
interests of the latter above their own.
Prudence requires caution and discretion. In the context of
advising a client, prudence requires following the investment
parameters set forth in the client's suitability profile.
The first step for financial institutions in fulfilling their duty to
clients is to determine the identity of the "client" to whom the
duty of loyalty is owed. In the context of an investment manager
managing the personal assets of an individual, the client is easily
identified. However, when the member is responsible for the
portfolios of pension plans or trusts, for example, the client is not
the person or entity who hires the member but, rather, the
beneficiaries of the said plan or trust.
Financial institutions should be conscious of its duty of prudence
and care when developing (i.e., asset and security selection) and
implementing (i.e., buying and selling of securities) a client's
investment strategy. If the FI has control or discretion over a
customer's account, it should not "churn" the account, i.e., enter
into transactions with unnecessary frequency having regard to
the customer's agreed investment strategy. An FI should also not
switch a customer between products unnecessarily, considering
what is suitable for the client.
In fulfilling its duty to clients, a member has the duty to seek Best
Execution for every trade. In determining prudence and best
execution, a member should examine whether
securities/investments/assets were exposed to extraordinary
hazards. Prudence addresses the appropriateness of holding
certain securities, while Best Execution addresses the
appropriateness of the methods by which securities are acquired
or disposed. Security selection seeks to add value to client
portfolios by evaluating future prospects; Best Execution seeks to
add value by reducing frictional trading costs. HTSAEa

To provide best execution, an FI must take reasonable care to

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 ascertain the price which is best available for the customer in the
market at the time of the transaction of the kind and size
concerned. It should execute a customer order at a price no less
advantageous to the customer. Although best execution may
mean best available price to the customer, its concept may be
applied in a broader context. Best execution may refer to the
trading process financial institutions apply that seeks to
maximize the value of a client's portfolio within the client's stated
investment objectives and constraints. Value may be maximized
by reducing trading costs including price of security (when
purchasing), brokerage fees, and commissions, and other trade-
related fees and charges. This alternative definition does not
necessarily conflict with existing regulatory definitions. What is
emphasized is the principle behind best execution and the
importance of setting policies and procedures to enhance a
financial institution's ability to maximize the value of a client's
portfolio.
B. Fair Dealing
Financial institutions must deal fairly and objectively with all
clients. A member should act honestly, fairly and in the best
interest of his client and for the integrity of the market. Where a
member advices or acts on behalf of a client, it shall ensure at all
times that any representations or other communications made
and information provided to the client are accurate and not
misleading.
When a financial institution has multiple clients, the potential
exists for it to favor one client over another. This favoritism may
take various forms, from the quality and timing of services
provided to the allocation of investment opportunities. The term
"fair dealing" implies that the member must take care not to
discriminate against any clients. Each client has unique needs,
investment criteria, and investment objective so that not all
investment opportunities are suitable for all clients.
When establishing fair-dealing compliance procedures, financial
institutions should consider the following points, particularly
when giving investment recommendations:
• Limit the number of people involved who are privy to the
fact that investment recommendation is going to be
disseminated.
• Shorten the time frame between decision and
dissemination, and make reasonable effort to limit the
amount of time that elapses between the decision to make
investment recommendations and the time the actual
recommendation is disseminated. DSacAE

• Publish personnel guidelines for pre-dissemination, and

establish guidelines that prohibit personnel who have prior
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 knowledge of an investment recommendation from
discussing or taking any action on the pending
recommendation.
• Establish procedures for dissemination of investment
recommendations so that all clients are treated fairly — that
is, with the goal of informing them at approximately the
same time.
• Develop a set of guiding principles that ensure (1) fairness
to advisory clients, both in priority of execution of orders
and in the allocation of the price obtained in execution on
block orders or trades and (2) timeliness and efficiency in
the execution of orders. With these principles, a financial
institution may consider the following procedures:
- Requiring orders and modifications or cancellations of
orders to be in writing and time stamped;
- Processing and executing orders on a first-in, first-out
basis;
- Developing a policy to address such issues as
calculating execution prices and "partial fills" when
trades are grouped, or blocked, for efficiency
purposes;
- Giving all client accounts participating in a block trade
the same execution price and charging the same
commission;
- When allocating trades for new issues, obtaining
advance indications of interest, allocating securities
by client (rather than portfolio manager), and
providing for a method for calculating allocations.
• Disclose trade allocation procedures. Financial institutions
should disclose to clients and prospective clients how they
select accounts to participate in an order and how they
determine the amount of securities each account will buy or
sell.
C. Client Suitability
Members must consider the needs, circumstances and objectives
of the clients when determining the appropriateness and
suitability of a given investment or course of investment action.
SEHTAC

The responsibilities conferred upon members to gather

information and make a suitability analysis prior to making a
recommendation or taking investment action falls on those
members who provide investment advice in the course of an
advisory relationship with a client. Other members often are
simply executing specific instructions for retail clients when
buying or selling securities, such as shares in mutual funds.
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 These members may not have the opportunity to judge the
suitability of the particular investment for the person or entity. In
cases of unsolicited trade requests that a member knows are
unsuitable for the client, the member should make an effort to
explain to the client why such trade is unsuitable.
When an advisory relationship exists, members must gather
client information at the inception of the relationship. Such
information includes the client's financial circumstances, personal
data (such as age and occupation) that are relevant to
investment decisions, attitudes toward risk, and objectives in
investing. This information should be incorporated into a written
client suitability form that addresses the client's risk tolerance,
return requirements, and all investment constraints (such as time
horizon, liquidity needs and other unique factors and
circumstances).
The effort to determine the needs and circumstances of each
client is not a one-time occurrence. Investment recommendations
or decisions are usually part of an ongoing process that takes into
account the diversity and changing nature of portfolio and client
characteristics. The passage of time is bound to produce changes
that are important with respect to investment objectives. It is
suggested that the client suitability review be updated on an
annual basis.
Suitability review can be done effectively only if the client fully
discloses his complete financial portfolio or condition including
those portions not managed by the member. If clients withhold
such information, the suitability analysis conducted by members
cannot be expected to be complete but must be done based on
the information provided.
A member should put the needs and circumstances of each client
and the client's investment objectives into the client suitability
form. The member should take the following into consideration:
• Client identification — (1) type and nature of clients, (2) the
existence of separate beneficiaries, and (3) approximate
portion of total client assets.
TDEASC

• Investor objectives — (1) return objectives (income, growth

in principal, maintenance of purchasing power) and (2) risk
tolerance (suitability, stability of values).
• Investor constraints — (1) liquidity needs, (2) expected cash
flows (patterns of additions and/or withdrawals), (3)
investable funds (assets and liabilities or other
commitments), (4) time horizon, (5) investor preferences,
prohibitions, circumstances, and unique needs.
D. Diligence and Reasonable Basis
In fulfilling its duties to clients, a financial institution should
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 exercise due skill, care and diligence in its dealings with existing
and potential clients. In particular, when providing advice to a
client, he shall act diligently and ensure that his advice and
recommendations in relation to clients are based on thorough
analysis and take into account available alternatives.
The concept of due diligence can apply to different areas, most
notably on the duty of the financial institution to provide
investment recommendations or take investment actions based
on reasonable research, investigation or analysis of investment
alternatives, including suitability of investments to clients. Part of
this due diligence process includes the diligence to obtain client
information that will aid the financial institution determine
suitability and the diligence in the implementation of its policies
and procedures.
Where the FI holds itself out as giving product recommendation,
it must not give any such recommendation unless it has carried
out a reasonable analysis of a sufficiently large number of
products which are generally available from the market or
conducts the analysis on the basis of criteria which reflect
adequate knowledge of the products generally available from the
market.
The duty of due diligence is intertwined with the duty to maintain
independence and objectivity in providing investment
recommendations or taking investment actions. Financial
institutions should exercise diligence, independence, objectivity
and thoroughness in analyzing investments, making investment
recommendations, and taking investment actions. To achieve
this, financial institutions must have a reasonable and adequate
basis, supported by appropriate research and investigation, for
any investment analysis, recommendation or action.
Where the FI relies on persons/entities when providing the
financial research, the FI should be able to show that it was
reasonable for the FI to rely on the information provided to it in
writing. It should take steps to establish to that the said entity is
competent to provide the information. For instance, if a financial
institution relies on third-party research, it should make
reasonable and diligent efforts to determine whether such
research is sound. SATDHE

E. Disclosure of Information and Communication to Clients/Public

In addition to obtaining information from clients under its
suitability review process, among others, financial institutions are
required to make adequate disclosure of material information in
its dealings with clients. Members should provide clients with
adequate information about the firm particularly the financial
condition of the business upon request. Furthermore, a financial
institution should make adequate disclosure of relevant material
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 information in its dealings with its clients, including information
about risks, needed by the client to make informed decisions.
The financial institution should pay due regard to the information
needs of its clients and communicate the information to them in a
way that is clear, fair and not misleading. It should take
reasonable steps to ensure that the client understands the nature
of the risks inherent in their transactions.
F. Preservation of Confidentiality
Financial institutions must keep information about former,
current, and prospective clients confidential unless:
• The information concerns illegal activities on the part of the
client;
• Disclosure is required by law; and
• The client permits disclosure of the information.
Confidentiality is paramount especially when a member receives
information on the basis of its special ability to conduct a portion
of the client's business or personal affairs and the member
receives information that arises from or is relevant to that portion
of the client's business that is the subject of the special, fiduciary,
or confidential relationship. If disclosure of the information is
required by law (e.g., disclosure of conflicts) or if the information
concerns illegal activities by the client, however, the FI may have
the obligation to report the activities to the appropriate
authorities. SAHIDc

A financial institution should have appropriate policies and

procedures to maintain confidentiality of information received
from clients. When in doubt, an employee should consult with the
financial institution's compliance unit or legal department before
disclosing confidential information about clients.
IV. Conflicts of Interest
A. Disclosure of Conflicts
Members should avoid conflicts of interest and when they cannot
be avoided must make full and fair disclosure of all matters that
could reasonably be expected to impair their independence and
objectivity or interfere with respective duties to their clients,
prospective clients, and their employer.
Members must ensure that such disclosures are prominent, are
delivered in plain language, and communicate the relevant
information effectively.
Disclosure to Clients
Members must prudently maintain their objectivity when
rendering investment advice or taking investment action. They
must take reasonable steps to determine whether a conflict of
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 interest exists and disclose to clients any conflicts when known.
It is the rightful duty of the member to disclose market-making
activities of the institution. Such disclosure would alert clients
that a purchase or sale might be made from or to the institution's
principal account.
When members providing investment services/transactions also
serve as directors, they should be isolated from those making
investment decisions by the use of Chinese walls or similar
restrictions.
Members should disclose any materially beneficial
ownership/interest in a security or other investment that the
member is recommending.
B. Dealing for Personal Account
Management should ensure that adequate safeguards are
established with regards to dealing for personal account, to
prevent conflict of interest or insider dealing in any form. These
safeguards should also reflect the need to preserve
confidentiality with respect to non-public price sensitive
information and to ensure that no action is taken by a member,
which might adversely affect the interests of the institution's
clients.THCSEA

Management should have a clearly defined written policy for

dealing for personal account, which should include full disclosure
of said transactions.
Managers should be aware that a conflict of interest may arise if
traders are permitted to deal for themselves in those
commodities, instruments or products closely related to the ones
in which they deal for their institution and should stipulate clearly
which ones, if any, the members can trade in for their own
account.
C. Priority of Transactions
Investment transactions for clients and employers must have
priority over investment transactions in which a member is the
beneficial owner. Furthermore, a member shall handle orders of
clients fairly and in the order in which they are received.
It is the responsibility of members to give the interests of their
clients and employers priority over their personal financial
interests or the appearance of a conflict of interest with respect
to personal transactions. Client transactions must take
precedence over transactions made on behalf of the member's
institution or personal transactions.
Establish Blackout/Restricted Periods
Investment personnel involved in the investment decision-making
process should establish blackout periods prior to trades for
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 clients so that members cannot take advantage of their
knowledge of client activity by "front-running" client trades.
Individual institutions must decide who within the firm should be
required to comply with the trading restrictions. At a minimum, all
members who are involved in the investment decision-making
process should be subject to the same restricted period.
Reporting Requirements
The best method for monitoring and enforcing procedures
established to eliminate conflicts of interest relating to personal
trading is through reporting requirements, including the
following:
• Pre-clearance procedures. Investment personnel should
clear all personal investments to identify possible conflicts
prior to the execution of personal trades. Pre-clearance
procedures are designed to identify possible conflicts before
a problem arises.EcHTCD

• Disclosure of holdings in which the employee has a

beneficial interest.
• Disclosure by investment personnel to the firm should be
made upon commencement of the employment relationship
and at least annually thereafter.
To address privacy considerations, disclosure of personal
holdings should be handled in a confidential manner by the
institution.
V. Duties to Market Counterparties
A. Knowledge of Trading Conventions
Financial institutions must ensure that only qualified members
are allowed to trade. Members should be trained and
knowledgeable on the standard trading conventions of the
products they are trading, which they are expected to adhere to
at all times.
B. Firmness of Price Quotation and Deals
Members should be guided by the principle of "Dictum Meum
Pactum" translated as "My Word is My Bond". Prices which are
quoted by members should be taken as firm unless otherwise
qualified (e.g. under reference). Members should also honor all
their closed or "done" transactions. ScAIaT

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