Principles of best practice for stock broking industry

Objective and application

The objectives of these principles are to strengthen the ethical behaviour and professional conduct of the officials in the stock broking industry. They apply to all stockbroker firms of the Colombo Stock Exchange (CSE) who are members of the Colombo Stock Brokers Association (CSBA).

A stockbroker firm shall have the meaning as specified in the CSE Stockbroker Rules to include a member or a trading member of the CSE admitted to the membership in terms of the articles of association of the CSE and licensed by the Securities and Exchange Commission of Sri Lanka (SEC) to operate as a stockbroker.

Best practice 1: Professionalism

Compliance with the law

All stockbroker firms who are members of the CSBA shall ensure that all its directors, employees and

agents (hereinafter referred to as ‘Members’) comply with these principles. The directors, employees and agents shall thereby be liable for the acts and omissions carried out by them individually.

Personal responsibility

Members must comply with the standards of the profession notwithstanding pressure from clients, employers, peers, employees or others to compromise those standards. Members are personally responsible and accountable for their conduct, must allow and exercise individual autonomy such as freedom of speech, and must not discriminate against any person because of gender, race or religion.

Malpractices

1. Members shall not indulge in any act with the purpose of;

i. Creating or inducing of false, misleading or artificial appearance of activity in a security or securities.

ii. Unduly or improperly influencing the market price of such security.

iii. Establishing a price which does not reflect the true state of the market in such security.

2. Members shall not execute, buy and sell transactions in a client account without the authority of the client, with the intention of generating commission for the stockbroker firm.

3. Members shall not participate in any insider dealing activities or knowingly assist a person in such conduct. For the purpose of these principles, insider dealing shall have the same meaning as defined in the SEC Act and any subordinate regulations of the SEC.

Commissions

Members must not negotiate broker’s charges unless required by the CSE and duly authorised as specified in the CSE rules.

Best practice 2: Integrity of capital markets

All members shall observe the highest standards of professional conduct, integrity and shall exercise due skill, care and diligence.

Competence of members

A member firm shall ensure that any person it employs to deal with clients on its behalf has been certified by the CSE and that such persons shall comply with other requirements of the CSE rules.

Members shall not take any action to directly solicit induce or encourage employees of other member firms to join such member or any third party or otherwise breach their contracts of employment with such other member organisations.

‘Soliciting’ excludes applications in response to employment or contracting opportunities publicly placed in any media targeting the general public; applications received from recruitment specialists and/or as a result of the applicant directly apply to such member.

In the event employment is offered to an existing/previous employee of another member firm in response to applications received in the above mentioned instances, the employee shall obtain a letter of clearance from the employer. In the absence of such letter of clearance, employment should not be offered to such employees.

Further, if the employee has been previously employed in several member firms, he/she shall obtain such letters of clearance from all such previous employers.

In the letter of clearance the employer shall confirm the following instances.

That the employee;

i) Has no unsettled debtors which are in dispute.

ii) Has not been proven guilty in a disciplinary proceeding or an inquiry held internally by the member firm on negligence/fraud etc., or by the CSE/SEC as specified in its rules.

iii) Has no unsettled client complaints pending settlements to the satisfaction of the member firm or the CSE/SEC in respect of all dealings of client accounts regarding share transactions.

Business of defaulting clients

Members shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his commitments in relation to securities with another member.

Advertising

For the purpose of this rule, ‘advertising’ is defined as it is defined in the CSE rules. As a “communication of information regarding the services provided by a stockbroker firm to the public.”

Members shall therefore ensure that any advertising;

i. Is accurate.

ii. Is not misleading.

iii. Does not contain claims that are not externally verifiable; and does not tend to bring the CSE, other members and the industry in general into disrepute.

Transactions with members

Members shall ensure that sufficient cleared funds are available in the settlement bank account by 0930 hours on the settlement date, to settle payments arising out of transactions carried out by such member based on the settlement schedule issued by the Central Depositary System (CDS).

Cooperation, support and

whistle-blowing

i. The SEC may require members to provide information or records which, in the opinion of the SEC may be relevant to discharge the SEC’s duties. Therefore, members shall ensure that such information and records are accurate and complete and that the member shall not wilfully make, furnish or permit the making or furnishing of any false misleading information, statement or report to the SEC.

ii. Members, when they know of illegal conduct must report that conduct to an appropriate authority in accordance with the law where their disclosure is protected by law. Collectively, members are responsible for the standards of the profession and should report to the SEC breaches of these principles.

iii. Members must not discriminate or take other adverse action against a person who discloses illegal conduct or a breach of these principles.

Best practice 3: Duties to clients

• Members shall act in best interest of clients and the integrity of the market.
• Members shall take all reasonable steps to execute client orders promptly.

Client information

Members shall take all reasonable steps to establish the true and full identity of each of its clients and each client’s financial situation, investment experience and investment objectives.

Members must have appropriate arrangements for handling client complaints.

Fair trading

Members shall act fairly and handle orders of clients fairly and in the order in which they are received. Orders of clients or transactions to be undertaken on behalf of clients shall take priority over orders for the account of the member firm (if the member firm is trading on its own account) or account of an employee of the member firm.

Execution of orders

Members shall execute orders on the best available terms. Members shall send to the client a note confirming the purchase or sale of securities by the end of the trade day. The bought/sold note shall state that the purchase/sale is subject to the Rules of the CSE and the CDS.

Breach of trust

Members shall maintain complete confidentiality of client information. Disclosing of client information is permitted only under the following circumstances;

i. With the prior consent of the client.

ii. If the disclosure is required under any applicable law or under the rules of CSE/CDS.

Investment advice

i. When providing advice to a client; members who deal with clients shall act diligently and carefully.

ii. Members shall disclose to the best of its ability, all circumstances and risks that could reasonably be expected to affect a client’s decision.

iii. If requested, members shall provide all information on security available in the ATS.

iv. Members shall not guarantee that the client will not suffer any loss as a result of carrying out securities transactions with the member for such client.

Client agreements

Members shall enter into a written agreement (client agreement) with each client before services are provided to the client. The contents of the client agreement shall comply with the CSE rules.

Best practice 4: Duties to the employer

Loyalty

• Private work or independent practice should be carried out only with written consent of the employer.
• Members should act for the benefit of their employer and must not engage in any conduct that harms the interest of the employer.
• When members plan to leave their current employer, they shall continue to act in the best interest of the employer and not engage in any activities that would conflict with his duty until their resignation becomes effective.

Activities that may constitute a violation shall include the following;

i. Misappropriation of trade secrets.

ii. Misuse of confidential information.

iii. Solicitation of employer’s clients prior to cessation of employment.

iv. Self-dealing (appropriating for one’s own property a business opportunity of information belonging to one’s employer)

v. Misappropriation of clients or client lists (a departing employee is free to make arrangements to go into a competitive business before terminating the relationship with his/her current employer provided that such arrangements does not breach the employee’s duty of loyalty. However, if the employee has signed a ‘non-compete’ agreement, same shall preclude a departing employee from engaging in certain conducts)  

Additional compensation arrangements

• Members shall obtain written consent from the employer before accepting compensation or other benefits from other third parties for services rendered to the employer. Compliance procedures shall include making an immediate written report to employers specifying any such arrangements and the terms thereof.
• Members must obey the lawful directions of their employer. However in the event members are required to do a conduct by their employer which is inconsistent with these principles, members should then bring to the notice of their employer the members’ obligations under these principles with regard to same.

Best practice 5: Disclosure of conflicts

Members shall avoid any conflict of interest which may arise. If a conflict of interest arises, a member shall ensure equal and fair treatment to its clients by disclosing such conflict of interest or by declining to act or by taking any other appropriate measures. The member shall not enter into a transaction which may conflict with a client’s interest unless the client is informed of such conflict of interests and consents to the transaction.

Members shall have procedures to prevent any conflict of interest between its client’s trading activities, trading on its own account and/or on account of employee trades.