Circular 92/1 Delegated Agents

Brussels, April 15, 1992.

CIRCULAR TO STOCKBROKING COMPANIES
NO 92/1

Ladies and Gentlemen,

We are pleased to send you attached the circular regarding the administrative and accounting organization and internal control of stockbroking companies that use the services of delegated agents or intervene as depositaries for clients of wealth management companies.

Your attention is drawn to chapters 4 and 5 of the circular, under which it is specified in particular that these provisions will enter into force immediately and that stockbroking companies falling within its scope will submit a complete file to the Intervention Fund by June 30, 1992 at the latest.

We remain at your entire disposal for any information you may wish to obtain and we ask you to accept, Ladies and Gentlemen, the expression of our distinguished sentiments.

Brussels, April 15, 1992.

CIRCULAR RELATING TO THE ADMINISTRATIVE AND ACCOUNTING ORGANIZATION AND INTERNAL CONTROL OF STOCKBROKING COMPANIES THAT RECEIVE ORDERS THROUGH DELEGATED AGENTS OR INTERVENE IN THE CAPACITY OF DEPOSITARIES FOR CLIENTS OF WEALTH MANAGEMENT COMPANIES

1. INTRODUCTION

1.1. Article 3 of the Law of December 4, 1990, relating to financial operations and financial markets, determines that only stockbroking companies and credit institutions mentioned in paragraph 2 of that article, stock and credit institutions not covered by paragraph 2 and subject to the law of a foreign State (under the conditions stipulated in Book II, Title I, Chapter VIII of the aforementioned law) and approved intermediaries in certain markets may intervene as intermediaries on a professional basis, for their own account or for the account of others, in public offerings of securities, transactions with the public on securities, or in public takeover bids.

It follows in particular that the receipt and transmission of client orders are exclusively reserved for intermediaries listed by law.

On the other hand, the law does not address the manner in which their investment services must be offered to the public. Stockbroking companies may therefore develop an organization for this purpose, either by relying exclusively on the services of their own staff, or by using a network of delegated agents, or by combining the two systems.

This circular aims to describe the general framework of relations between a stockbroking company and its delegated agents and to set minimum rules regarding the administrative and accounting organization and internal control that result from it.

1.2. Stockbroking companies are in contact not only directly with clients but also with their representatives. A special category of representatives, wealth managers, has been granted a separate status by the Law of December 4, 1990 and the Royal Decree of August 5, 1991.

This status encompasses a series of provisions establishing particular relations, on the one hand, between the wealth management company and the depositary stockbroking company, and on the other hand, between the clients of the wealth management company and the depositary stockbroking company.

This circular also aims to recall these rules and integrate them into the administrative and accounting organization and internal control procedures of stockbroking companies.

2. DELEGATED AGENTS

2.1. Generalities

Delegated agents are natural or legal persons who, acting on a professional basis but outside the links of an employment contract, have direct contact on behalf and for the account of a stockbroking company with its clients.

Any person who, in their capacity as an independent but on behalf and for the account of a stockbroking company, solicits a clientele, receives their orders, transmits them to the stockbroking company and/or intervenes in the settlement procedure of these orders with regard to clients (liquidation in cash and securities) meets this definition (1).

A person who merely brings the parties together, without having a power of representation, is not considered a delegated agent.

2.2. Characteristics and conditions

2.2.1. Generalities

In its operations with clients, the delegated agent directly engages the stockbroking company. The latter is therefore responsible for the acts performed by the delegated agent within the framework of their contract and within the limits of their powers.

Clients whose transactions are effected through a delegated agent are or become clients of the stockbroking company. They conclude a written contract with the stockbroking company in which the rights and obligations of each are determined, and they have a securities account and a cash account.

2.2.2. Exclusivity of the represented company.

The delegated agent may represent only one stockbroking company.

2.2.3. Incompatibilities

• General Incompatibility
  The delegated agent may represent the stockbroking company only for transactions that it itself is authorized to perform by virtue of its approval and legal status.

• Particular Incompatibilities
  Foreign exchange and deposit broking companies, wealth management companies, and investment advisory firms cannot be delegated agents of a stockbroking company, due in particular to a rule of principle incompatibility inherent in their status (see the Royal Decree of November 25, 1991 relating to foreign exchange and deposit broking as well as the Royal Decree of August 5, 1991 relating to wealth management and investment advice) (1).

The delegated agent of a stockbroking company will not be bound by an employment contract with the stockbroking company it represents. Persons performing operational functions with a delegated agent cannot exercise them in the represented stockbroking company.

The delegated agent informs the stockbroking company of its other activities. The latter is required to oppose the continuation of activities that would be in contradiction with the principles of this circular.

The stockbroking company must, in the contract linking it to its delegated agent, reserve the right to perform controls regarding compliance with incompatibility rules (see 2.3.2.).

2.2.4. Information of clients regarding the status of the delegated agent.

Clients of a stockbroking company served by a delegated agent must be informed by the stockbroking company of the extent of the powers of this delegated agent as well as the nature of their interventions. This information will be transmitted in writing to clients.

General information concerning the stockbroking company and the delegated agent, publicity, client contracts, and account opening agreements, as well as correspondence and documents relating to operations within the competence of the delegated agent, are prepared on stockbroking company letterhead.

The delegated agent must, in concert with the stockbroking company, use the latter's commercial logo. It may not engage in publicity unless it has obtained express authorization from the stockbroking company in this specific case.

2.2.5. The stockbroking company must conclude an agreement with the delegated agent before the latter is authorized to receive and transmit client orders. This agreement will necessarily include the clauses mentioned in point 2.3.2 below.

2.3. Contract between the stockbroking company and the delegated agent.

2.3.1. Generalities

The respective rights and obligations of the stockbroking company and the delegated agent are the subject of a written agreement.

Without prejudice to the independent status of the delegated agent, this contract includes a series of provisions intended to ensure the safety and reliability of operations effected through its intermediary.

2.3.2. Content of the contract:

• a limited description of the nature and type of authorized operations;
• an obligation on the part of the delegated agent to transmit to the stockbroking company, according to established procedures, the entirety of received orders; prohibition on the part of the delegated agent to group orders from clients concerning the same security and to transmit them as such to the stockbroking company for execution; prohibition for the delegated agent to execute orders themselves;
• an obligation for the delegated agent to respect commercial directives (including advertising order) and to apply all internal administrative and accounting procedures prescribed by the stockbroking company, inter alia regarding the transmission of administrative and accounting documents as well as cash and securities;
• an obligation to respect professional rules applicable to stockbroking companies, notably concerning insider dealing, transparency, particular mechanisms (tax), money laundering, etc.;
• the delegated agent may not hold a power of attorney (both for management and for acts of disposition) on client accounts nor be their representative;
• the delegated agent may not, under any circumstances, keep in their own name cash or securities belonging to clients;
• the remuneration of the delegated agent's services is expressly specified. It may, if applicable, be based on the products realized through their intermediary but may not present the character of a brokerage rebate (see art. 10 bis of the Ministerial Decree of February 4, 1991 fixing the brokerage rates applicable to transactions in securities, as amended by the Ministerial Decree of October 1, 1991);
• the delegated agent may not accept any remuneration emanating from clients benefiting from their services nor charge them fees on their own initiative; the delegated agent may not grant reductions in brokerage or commissions to their clients;
• the delegated agent must agree to submit to any control, both internal and external (Auditor, control authorities), on all that relates to operations effected: these controls will bear notably on the respect of internal control rules and administrative procedures in force and on the separation between the activity exercised under the contract and other authorized activities;
• it is incumbent on the delegated agent to ensure that their collaborators have the necessary instructions regarding procedures to follow, obligations, and prohibitions to respect;
• the delegated agent may not in turn designate delegated agents;
• the contract provides for the possibility of terminating relations with the delegated agent without delay, without prejudice to the granting of possible indemnity under common law.

2.4. Internal control procedures

2.4.1. Stockbroking company - delegated agent

The stockbroking company must ensure that operations effected via a delegated agent proceed in conformity with the procedures it has established.

The following points require particular attention:

• the stockbroking company provides the delegated agent with a procedure manual describing how operations must be treated. This description will include among other things the provisions governing the relations of the stockbroking company and its clientele:
  • signing of a contract with the client whose original is kept at the head office of the stockbroking company;
  • opening of a cash account and a securities account and conservation of originals by the stockbroking company;
  • treatment reserved for passing clients;
  • direct sending of statements and periodic account extracts to clients;
  • remarks concerning account extracts are addressed by the client to the stockbroking company and not to the delegated agent;
• the stockbroking company must provide the delegated agent with pre-numbered documents on letterhead of the company (for example, transaction slips, receipts, order slips, etc.).
• the delegated agent or their substitute must meet the requirements of honorability, solvency, experience, and qualification established by the stockbroking company. In the event that this delegated agent is a legal entity, the aforementioned requirements will apply to the managers of this company, it being understood that the requirement of solvency will also apply to the company itself;
• the delegated agent must receive, just like the staff of the stockbroking company, adequate professional training and be regularly updated on new developments appearing in the sector;
• the stockbroking company assigns a person or group of persons to the control of the regularity of operations effected by the delegated agent and the strict application of obligations and procedures incumbent upon them. Frequent controls (on-site) are instituted.

2.4.2. Stockbroking company - clients

Clients served by a delegated agent must be treated and followed by the stockbroking company in the same manner as its other clients.

2.5. Instructions relating to the administrative and accounting organization of the stockbroking company

The stockbroking company must be able to identify in its administration and accounting the clients who are served by a specific delegated agent.

The accounting system notably allows for the following distinctions:

• possibility of grouping clients by delegated agent in the client ledger (for example, cash account numbers are assigned a code referring to a specific delegated agent);
• the accounting of off-balance sheet rights and commitments, and more particularly securities accounting, must allow for gathering rights and commitments in securities with regard to clients by delegated agent (for example, securities account numbers are assigned a code referring to a specific delegated agent); securities in transit with the delegated agent must also be identifiable as such (see CIF circular no 91/7);
• the concerned accounts of classes 7 (brokerage and commission accounts) and 6 (third-party remuneration accounts) of the stockbroking company's accounting plan must be subdivided in such a manner that the amount of products realized through their intermediary as well as the amount of remuneration allocated to them can be isolated by delegated agent.

3. WEALTH MANAGEMENT COMPANIES

3.1. Generalities

Below are recalled for reference some legal and regulatory provisions relating to the case where wealth management activity is exercised by an independent wealth management company (which is neither a stockbroking company nor a credit institution) whose clients have securities and cash kept with a stockbroking company. This recall will be followed by certain instructions regarding internal control and the administrative and accounting organization of stockbroking companies intervening as depositaries.

3.2. Legal and regulatory provisions

3.2.1. Relations between the wealth management company and the stockbroking company.

The Law of December 4, 1990 prescribes in its article 165, paragraph 2, that independent wealth management companies may not keep the cash and securities they manage, but that these must be deposited with a stockbroking company or a credit institution.

The Royal Decree of August 5, 1991 specifies the manner in which wealth management companies and the depositaries in question must proceed.

The wealth management company and the depositary stockbroking company must conclude a written agreement providing notably:

• the obligation for the depositary to immediately inform the client and the wealth management company of the execution of any operation, and to send them the resulting cash account status;
• that only the client and their representatives, excluding the wealth management company, may withdraw assets or securities from the depositary stockbroking company; the wealth management company may not deduct due commissions from the client's cash account except by respecting the conditions provided in the contract concluded with the client.

When the wealth manager or the client terminates the wealth management agreement, the wealth manager must notify the depositary by registered letter or with acknowledgment of receipt.

3.2.2. Relations between the depositary stockbroking company and the client of the wealth management company

The depositary stockbroking company must separately conclude a written agreement with the client of the wealth management company that regulates their respective rights and obligations.

The client of the wealth management company has a cash account and a securities account opened in their name with the depositary stockbroking company.

3.3. Internal control procedures

The stockbroking company takes the necessary measures so that the legal and regulatory provisions mentioned in point 3.2 above, which relate to the intervention of the stockbroking company in its capacity as depositary, are strictly followed and incorporated into the internal control procedures of the stockbroking company (notably regarding the opening and operation of accounts, execution, and settlement of operations).

3.4. Instructions relating to the administrative and accounting organization of the stockbroking company

The depositary stockbroking company must be able to identify as such in its administration and accounting the clients of a wealth management company.

This applies especially to the following points:

• possibility of grouping clients by wealth management company in the client ledger (for example, cash and securities account numbers are assigned a code referring to a specific wealth management company);
• the accounting of off-balance sheet rights and commitments, and more particularly securities accounting, must allow for gathering rights and commitments with regard to clients by wealth management company (for example, securities account numbers are assigned a code referring to a specific wealth management company);
• the concerned accounts of classes 7 (brokerage and commission accounts) and 6 (third-party remuneration accounts) of the stockbroking company's accounting plan must be subdivided in such a manner that the amount of products realized through their intermediary and, on the other hand, the amount of rebates or commissions allocated to them can be isolated by wealth management company.

4. COMMUNICATIONS TO THE CIF

4.1. Information from stockbroking companies

Stockbroking companies are requested to communicate to the Intervention Fund by June 30, 1992 a file comprising:

• the identity and curriculum vitae of each delegated agent with whom the stockbroking company works (identity and curriculum vitae of administrators if it is a legal entity, in which case the statutes must also be communicated);
• the statutes and approval decree of wealth management companies with which the stockbroking company works;
• a copy of the contracts that the stockbroking company has concluded or will conclude with delegated agents as well as the general documentation mentioned in point 2.2.4;
• a copy of the contracts that the depositary stockbroking company has concluded or will conclude with wealth management companies and of contracts concluded or to be concluded by the depositary stockbroking company with clients of wealth management companies;
• a description of measures of an administrative and accounting character and in matters of internal control, taken or to be taken with regard to delegated agents and wealth management companies.

4.2. Follow-up

Stockbroking companies are requested to inform the Intervention Fund without delay of the conclusion of an agreement with a delegated agent or a wealth management company as well as of substantial modifications made to these agreements. The same applies in the event of termination of these agreements.

5. ENTRY INTO FORCE

This circular enters into force immediately. Existing agreements are adapted taking into account the instructions developed in this circular.

(1) Order givers, qualified brokers designated as attachés, etc., are notably included.

(1) Your attention is drawn to the circular of the Banking Commission of July 28, 1987, under which delegated agents of credit institutions are required to effect with the institution they represent all their banking operations, including transactions in securities.