Circular 92/1 Delegated Agents

Brussels, April 15, 1992.

CIRCULAR TO STOCK EXCHANGE COMPANIES
NO 92/1

Ladies and Gentlemen,

We are pleased to enclose the circular regarding the administrative and accounting organization and internal control of stock exchange companies that use the services of delegated agents or act as depositaries for clients of wealth management companies.

Your attention is drawn to chapters 4 and 5 of the circular, which specify in particular that these provisions will enter into force immediately and that stock exchange companies falling within its scope must 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 please accept, Ladies and Gentlemen, the expression of our distinguished sentiments.

Brussels, April 15, 1992.

CIRCULAR RELATIVE TO THE ADMINISTRATIVE AND ACCOUNTING ORGANIZATION AND INTERNAL CONTROL OF STOCK EXCHANGE COMPANIES THAT RECEIVE ORDERS THROUGH DELEGATED AGENTS OR ACT AS 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 stock exchange 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 specify how their investment services must be offered to the public. Stock exchange companies may therefore develop an organization for this purpose, either by relying exclusively on their own staff, 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 stock exchange 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. Stock exchange companies are in direct contact not only with clients but also with their representatives. A special category of representatives, wealth managers, has been given a separate status by the Law of December 4, 1990, and the Royal Decree of August 5, 1991.

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

This circular also aims to recall these rules and integrate them into the administrative and accounting organization and internal control procedures of stock exchange 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 of and for the account of a stock exchange company with its clients.

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

(1) Order brokers, qualified exchange agents acting as attachés, etc., are notably included.

Clients whose transactions are carried out through a delegated agent are or become clients of the stock exchange company. They conclude a written contract with the stock exchange 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 stock exchange company.

2.2.3. Incompatibilities

• General Incompatibility
  The delegated agent may represent the stock exchange company only for transactions that the company itself is authorized to perform pursuant to its approval and legal status.

• Particular Incompatibilities
  Foreign exchange and deposit brokerage companies, wealth management companies, and investment advisory firms cannot be delegated agents of a stock exchange 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 brokerage, as well as the Royal Decree of August 5, 1991, relating to wealth management and investment advice) (1).

The delegated agent of a stock exchange company shall not be bound by an employment contract with the stock exchange company it represents. Persons performing operational functions with a delegated agent may not perform them in the represented stock exchange company.

The delegated agent informs the stock exchange company of their other activities. The latter is required to oppose the continuation of activities that would contradict the principles of this circular.

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

The stock exchange 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 stock exchange company served by a delegated agent must be informed by the stock exchange 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 stock exchange 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 stock exchange company letterhead.

The delegated agent must, in concert with the stock exchange company, use the latter's commercial logo. They may not engage in publicity unless it has received express authorization from the stock exchange company.

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

2.3. Contract between the stock exchange company and the delegated agent.

2.3.1. Generalities

The respective rights and obligations of the stock exchange 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 carried out through their involvement.

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 stock exchange company, according to established procedures, the entirety of orders received; prohibition on the part of the delegated agent to group orders from clients concerning the same security and transmit them as such to the stock exchange company for execution; prohibition for the delegated agent to execute orders themselves;
• an obligation for the delegated agent to respect commercial directives (including advertising) and to apply all internal administrative and accounting procedures prescribed by the stock exchange company, including regarding the transmission of administrative and accounting documents as well as cash and securities;
• an obligation to respect professional rules applicable to stock exchange companies, particularly regarding insider dealing, transparency, specific mechanisms (tax), money laundering, etc.;
• the delegated agent may not hold a power of attorney (for management or disposal acts) over client accounts nor act as their representative;
• the delegated agent may not, under any circumstances, keep in their own name cash or securities belonging to clients;
• the remuneration for the delegated agent's services is explicitly specified. It may, if applicable, be based on the products generated through their involvement but may not have the character of a brokerage rebate (see Art. 10 bis of the Ministerial Decree of February 4, 1991, fixing the rates of brokerage 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, supervisory authorities), regarding all operations carried out; these controls will notably cover compliance with internal control rules and administrative procedures in force and the separation between the activity exercised under the contract and other authorized activities;
• it is incumbent on the delegated agent to ensure that their staff 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 prohibits the possibility of terminating relations with the delegated agent without notice, without prejudice to the possible granting of an indemnity under common law.

2.4. Internal Control Procedures

2.4.1. Stock Exchange Company - Delegated Agent

The stock exchange company must ensure that operations carried out via a delegated agent proceed in conformity with the procedures it has established.

The following points require particular attention:

• The stock exchange 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 stock exchange company with its clientele:

  • signing a contract with the client, the original of which is kept at the head office of the stock exchange company;
  • opening a cash account and a securities account, with originals kept by the stock exchange 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 stock exchange company and not to the delegated agent;
  • the stock exchange company must provide the delegated agent with pre-numbered documents on letterhead (e.g., transaction records, receipts, order slips, etc.).

• The delegated agent or their substitute must meet the requirements of honorability, solvency, experience, and qualification established by the stock exchange company. In the case where this delegated agent is a legal entity, the aforementioned requirements will apply to the managers of this company, it being understood that the solvency requirement will also apply to the company itself;

• The delegated agent must receive, just like the staff of the stock exchange company, adequate professional training and be regularly updated on new developments appearing in the sector;

• The stock exchange company assigns a person or group of persons to control the regularity of operations carried out by the delegated agent and the strict application of the obligations and procedures incumbent upon them. Frequent (on-site) controls are instituted.

2.4.2. Stock Exchange Company - Clients

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

2.5. Instructions regarding the administrative and accounting organization of the stock exchange company

The stock exchange 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 for off-balance sheet rights and obligations, and more specifically securities accounting, must allow for the aggregation of rights and obligations 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 stock exchange company's accounting plan must be subdivided in such a way that the amount of products generated through their involvement and the amount of remuneration allocated to them can be isolated by delegated agent.

3. WEALTH MANAGEMENT COMPANIES

3.1. Generalities

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

3.2. Legal and Regulatory Provisions

3.2.1. Relations between the wealth management company and the stock exchange 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 these must be deposited with a stock exchange 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 stock exchange company must conclude a written agreement providing in particular:

• 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 balance;
• that only the client and their representatives, excluding the wealth management company, may withdraw assets or securities from the depositary stock exchange company; the wealth management company may only deduct due commissions from the client's cash account in compliance with 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 stock exchange company and the client of the wealth management company.

The depositary stock exchange company must separately conclude a written agreement with the client of the wealth management company regulating 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 stock exchange company.

3.3. Internal Control Procedures

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

3.4. Instructions regarding the administrative and accounting organization of the stock exchange company

The depositary stock exchange 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 for off-balance sheet rights and obligations, and more specifically securities accounting, must allow for the aggregation of rights and obligations 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 stock exchange company's accounting plan must be subdivided in such a way that the amount of products generated through their involvement and 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 stock exchange companies

Stock exchange 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 stock exchange 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 stock exchange company works;
• a copy of the contracts that the stock exchange 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 stock exchange company has concluded or will conclude with wealth management companies and of contracts concluded or to be concluded by the depositary stock exchange company with clients of wealth management companies;
• a description of administrative and accounting measures and internal control measures taken or to be taken regarding delegated agents and wealth management companies.

4.2. Follow-up

Stock exchange 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 case 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.