Financial Regulatory Authority

FINANCIAL REGULATORY AUTHORITY

Chairman of the Authority

Board of Directors Decision No. (39) of 2018

Dated 3/4/2018

Regarding the Regulations for Establishing a Research Unit for Licensed Companies

Engaged in Securities Brokerage Activities

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Board of Directors of the Financial Regulatory Authority

Having reviewed Law No. 95 of 1992, issuing the Capital Market Law and its executive regulations;
and Law No. 10 of 2009, regarding the regulation of supervision over markets and non-banking financial instruments;
and Presidential Decree No. 192 of 2009 regarding the Basic Statute of the Financial Regulatory Authority;
and the memorandum from the Central Administration for Establishment and Licensing regarding the conditions and regulations for establishing a research unit for companies licensed to conduct securities brokerage activities;
and the approval of the Authority's Board of Directors in its session held on 3/4/2018.

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Decided

(Article One)

Licensed securities brokerage companies may establish an independent research unit under the supervision of the Managing Director responsible for the company's actual management, and shall be staffed with a sufficient number of employees, not less than three, including the Director responsible for the unit.

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(Article Two)

Conditions to be met by the Unit Director and its employees:

1- Of good conduct and reputation.
2- Possess full legal capacity.
3- Hold a suitable higher education degree appropriate to the nature of their work, or hold specialized professional certifications, including the Chartered Financial Analyst (C.F.A) certification from the Chartered Institute.
4- Be dedicated full-time, and not be employed in any capacity by another company operating in the securities field.

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(Article Three)

Regulations that employees of the research unit must comply with:

1- Comply with the professional code of conduct issued by Board Decision No. (1) of 2017 regarding financial valuation standards, and any technical or professional standards issued by the Authority.
2- Exercise due diligence to verify the accuracy, credibility, and reasonableness of any information obtained by the team for valuation purposes, as well as fully disclose information sources, all within the framework of performing research and study preparation tasks.
3- Maintain the confidentiality of reports and refrain from trading based on them prior to the announcement of their results, as well as any information related to the studied company that comes to their knowledge during the study, the disclosure of which could impact the investment decisions of the general market participants.
4- Maintain complete independence from the entity under study and its participants, and disclose any existing or potential affiliations with the entity preparing the report that could affect the integrity of the derived results.
5- Prohibit the use of valuation bases for the purpose of artificially inflating or deflating valuation results, or issuing any misleading reports, data, information, or biased opinions intentionally. The analyst must present financial analyses, opinions, and recommendations fairly, accurately, and completely.

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(Article Four)

Regulations and conditions to be met by reports issued by the unit

The report issued by the research unit must comply with financial valuation standards and any technical or professional standards issued by the Authority, and the report must include, at a minimum, the following:

1- The date of report preparation, the date used as the basis for determining the fair value of the share, and an estimated validity period for the use of the value stated therein, which shall not exceed three months under any circumstances.
2- Macroeconomic analysis, and sector and industry analysis.
3- A description of the company, its activities, and the key services or products it provides to generate revenues and cash flows.
4- The basis for preparing future estimates or the assumptions used, adhering to the (reasonableness of assumptions standard) within the financial valuation standards issued by Board Decision No. (1) of 2017.
5- A review of the data or information sources used and any restrictions on their use, and in the event of obtaining data or information from the studied company, the analyst is also required to disclose the source of that information in the report.

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(Article Five)

Regulations that brokerage companies must comply with in establishing the research unit:

• The company is committed to establishing internal systems and procedures aimed at mitigating risks and verifying the company's and its employees' compliance with the application of prevailing laws and regulations. This system also aims to verify the establishment of accountability and accounting rules within the company and protect its resources against loss and misuse. For companies requesting to have research units to conduct technical studies related to securities, they must exercise caution and accuracy in all their operations, particularly as follows:

1- Comply with and evaluate internal supervisory procedures to verify their effectiveness, exercise the required professional due diligence, and verify compliance with the financial valuation standards issued by the Authority.
2- Ensure the regulatory frameworks, procedures, and rules necessary to handle market risks associated with reports and research published on securities.
3- Comply with disclosure requirements related to issued reports/studies for transparency purposes, customer protection, and managing potential conflicts of interest.
4- Commit to not publishing any false or misleading information or studies about the market with the intent of manipulating security prices.
5- And execution towards a specific direction.

• The company is prohibited from employing any methods in its operations that involve pressure or deception, specifically:

• Charging any fee or consideration of any kind, or demanding specific actions from company clients when providing services that the company has declared as free.

• Using warning statements related to any securities without justification if it constitutes a form of deception.

• Concealing differences in the activities conducted by studied companies when making comparisons between various securities or the performance of different companies.

• The company is committed to officially informing its clients that reports issued by the research unit are advisory and non-binding, and that the results and recommendations concluded therein are purely advisory and subjective, subject to being correct or incorrect.

• The company is committed, when determining the consideration for services provided, to completely separate the consideration for securities brokerage services from the consideration for services issued by the research unit.

• The company is committed to providing rigorous internal control systems and reviewing them periodically to ensure the neutrality of recommendations issued by the research unit and to detect any conflicts of interest between those conducting the valuations and the results derived from those reports, in order to safeguard the best interests of its clients.

• The company is responsible for the quality of the service level provided by its affiliated research units, and commits to the periodic and continuous development of its employees in a manner that keeps pace with developments in the securities market.

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(Article Six)

Licensed securities brokerage companies that previously obtained the Authority's approval to establish a research unit are committed to regularizing their status in accordance with the provisions of these regulations by no later than 30 September 2018.

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(Article Seven)

This decision shall be enforced from the date of its issuance, and the competent departments are tasked with its implementation within their respective jurisdictions.

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Chairman of the Board of Directors
Dr. Mohamed Omran

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Smart Village, Building 136, B. Giza, Egypt
Postal Code: 12577
Tel.: +202 35345350 - Fax: +202 35370036
info@fra.gov.eg

Smart Village, Building no. B-136, Giza
Postal Code: 12577
Tel.: (00202) 35345350 - Fax.: (00202) 35370036
www.FRA.gov.eg