Stock / Equities Investment / Custodian Agreement

Client / Brokerage / Fund Management / Custodian Agreement

The following should be considered when drafting a client/brokerage / fund management/custodian agreement for a financial institution:

1. Client communication

In communicating with clients, financial intermediaries must not attempt to exclude or limit any general legal duties unless there are reasonable grounds. It must also not attempt to exclude or limit any obligations or liabilities it may have to clients under the regulatory system. Communication with clients must be clear, fair, and not misleading. Electronic communication is also acceptable.

Financial intermediaries must provide clients with detailed business terms as the basis for conducting designated investment business. Financial intermediaries should be reasonably cautious to ensure that clients have sufficient experience and have issued written warnings stating that clients will lose the protection of professional clients under the regulatory regime.

2. Client's Investment Objectives

Financial intermediaries should consider the client's investment objectives, as well as any restrictions on the type of investment the client wishes to invest in; and the market on which the client wishes to execute transactions.

3. Investment management

If a financial intermediary is to be an investment manager, the following should be specified:

(a) the arrangements for giving instructions to the financial intermediary and acknowledging them;

(b) the initial value of the investment portfolio;

(c) the initial composition of the investment portfolio;

4. Transacting for the Client

If a financial intermediary executes any transaction on behalf of the client, the arrangements will be made on how to account to the client. If a financial intermediary will act as principal in a transaction with a client, a statement related to this should be included. In the event of a conflict of interest, financial intermediaries should ensure that clients are treated fairly. If the financial intermediary is also acting as an advisor to the client, a statement should be included explaining the nature of the dual role of the financial intermediary as a client and an advisor.

If a financial intermediary intends to conduct loan activities with or for clients, the following must be specified: the assets to be lent; the type and value of the collateral provided by the borrower, and the manner and amount payable to the client when borrowing.

5. Complaints and Termination

Details on how to lodge a complaint with a financial intermediary and how to complain directly to the regulator should be provided. If the financial intermediary fails to perform its responsibilities or explain the relevant arrangements, the relevant compensation plan arrangements must also be explained to the client.

Details on how to terminate the terms of business, including:

(a) the termination will not affect completed or commenced transactions;

(b) the client may give written notice to the financial intermediary to terminate the terms of business and terminate when the notice becomes effective;

(c) if the financial intermediary has the right to terminate the business terms, it may terminate the business terms by issuing a notice to the client and specifying the notice period;

(d) after any agreed time, or after any agreed event, the terms of business will terminate; and

(e) the manner in which an ongoing transaction is processed upon termination.

6. Discretionary Management

The scope of discretion includes any restrictions on the value of any one investment; the proportion of any portfolio that any one investment or any particular type of investment may constitute; or no such limitation. The frequency of any periodic statements, whether the statement includes performance metrics, and if so, on what basis. The basis of asset value in a portfolio.

7. Remuneration

The financial intermediary should provide details of any service payments made by the client to the financial intermediary, including the basis for calculations, how to pay and receive payments where appropriate; how often to pay; and in transactions performed by the financial intermediary with or for clients, except or in lieu of fees, whether a financial intermediary can charge any other amount.

If a financial intermediary is engaged in a designated investment business with or for clients, the FI must disclose in writing before conducting that business the basis or amount of its charges for conducting that business and the nature and amount of any other income receivable by it or, to its knowledge, by its associate and attributable to that business.

8. Conflict of interest

When a financial intermediary discloses an interest to a client, it should:

(1) disclose any significant interests or conflicts of interest that the client has or may have before giving advice or exercising discretion in relation to a transaction, whether that conflict of interest is general or related to a particular transaction; and

(2) be able to prove that he has taken reasonable measures to ensure that the client does not object to such major interests or conflicts of interest.

If a financial intermediary wants to aggregate client orders with its own account orders, market counterparty orders, or other client orders, it must disclose that the effects of the aggregation may be disadvantageous in some cases. Unless the client agrees to the extension, the financial intermediary must allocate the investment within one business day.

The financial intermediary should notify the client in advance or prove that it treats the client fairly if it or any of its partners wishes to execute its own account transaction in any designated investment in the planned transaction.

9. Custodian

Use of custodian and registration of the safe custody investments if these will not be registered in the client's name. The extent of the financial intermediary's liability in the event of a default by a custodian, except that a financial intermediary must accept the same level of responsibility to its client for any nominee company controlled by the financial intermediary or by its affiliated company as for itself and may not disclaim responsibility for losses arising directly from the fraud, wilful default or negligence of the financial intermediary.

Specify how often a statement of custody assets will be sent to the client and the basis on which assets are shown on the statement are valued. Fees and costs for safe custody services to the extent that they are not notified to the client elsewhere. If the financial intermediary intends to pool a safe custody investment with that of one or more clients, notification of its intention to the client with an explanation of the effects of pooling.

If the financial intermediary holds or arranges for another person or financial intermediary to hold a client's safe custody investment overseas, the financial intermediary must notify the client in writing that there may be a different settlement, legal and regulatory requirements in overseas jurisdictions and that there may be different practices for the separate identification of safe custody investments.

If the financial intermediary intends to register or record legal title to a safe custody investment in the name of the financial intermediary, it must either notify the client that:
(1) the safe custody investment will or may be registered or recorded in the financial intermediary's name;
(2) therefore the safe custody investment may not be segregated from the designated investments of the financial intermediary; and

(3) In the case of a financial intermediary bankruptcy, the client's assets may not be well protected from claims by general creditors of the financial intermediary.

10. Client funds

Money is not client money when it becomes properly due and payable to the financial intermediary for the financial intermediary's own account. The circumstances in which it is due and payable will depend on the contractual arrangement between the financial intermediary and the client.

Specify the interest policy of financial intermediaries. The financial intermediary should notify the client in writing whether to pay the interest on the client's money and if so, on what terms and frequency the client's interest should be paid

Does the financial intermediary allow another person to hold or control the client's money? If so, in the case of the client, the client must be notified that the client's money can be transferred to another person. If it is a third-party bank in the same group as the financial intermediary, or funds are to be held overseas, then they should be disclosed to the client.


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