Dubai Financial Services Authority - Conduct of Business Module (COB)
- 1. The DFSA Rulebook Conduct of Business Module COB/VER22/07-13 (COB)
- 2. CONDUCT OF BUSINESS (COB) COB/VER22/07-13 Contents The contents of this module are divided into the following chapters, sections and appendices: 1 INTRODUCTION .................................................................................... 1 1.1 Application ................................................................................................................. 1 2 CLIENT CLASSIFICATION ................................................................... 2 2.1 Application ................................................................................................................. 2 2.2 Overview ................................................................................................................... 2 2.3 Types of Client .......................................................................................................... 3 2.4 Net assets ................................................................................................................. 5 2.5 Analysis ..................................................................................................................... 6 2.6 Record keeping ......................................................................................................... 7 3 CORE RULES – INVESTMENT BUSINESS, ACCEPTING DEPOSITS, PROVIDING CREDIT AND PROVIDING TRUST SERVICES ............... 8 3.1 Application ................................................................................................................. 8 3.2 Communication of information and marketing material ............................................. 8 3.3 Key information and Client Agreement ................................................................... 10 3.4 Suitability ................................................................................................................. 11 3.5 Conflicts of interest .................................................................................................. 12 3.6 Record Keeping ...................................................................................................... 16 4 ADDITIONAL RULES - ACCEPTING DEPOSITS AND PROVIDING CREDIT ................................................................................................ 17 4.1 Application ............................................................................................................... 17 4.2 Accepting Deposits ................................................................................................. 17 4.3 Providing Credit ....................................................................................................... 17 5 ADDITIONAL RULES – PROVIDING TRUST SERVICES .................. 18 5.1 Application ............................................................................................................... 18 5.2 General ................................................................................................................... 18 5.3 Reviews ................................................................................................................... 19 5.4 Professional indemnity insurance cover .................................................................. 19 5.5 Dual control ............................................................................................................. 19 5.6 Internal reporting ..................................................................................................... 19 5.7 Recording of Selection Criteria ............................................................................... 20 5.8 Qualification and experience of Trust Service Provider staff .................................. 20 5.9 Books and records .................................................................................................. 21 5.10 Due diligence .......................................................................................................... 21 5.11 Fitness and Propriety of Persons acting as trustees ............................................... 21 6 ADDITIONAL RULES - INVESTMENT BUSINESS ............................ 23 6.1 Application ............................................................................................................... 23
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CONDUCT OF BUSINESS (COB) 6.2 Personal account transactions ................................................................................ 23 6.3 Investment research and offers of securities .......................................................... 24 6.4 Best execution ......................................................................................................... 28 6.5 Non-market price transactions ................................................................................ 29 6.6 Aggregation and allocation ...................................................................................... 30 6.7 Record keeping – voice and electronic communications ........................................ 31 6.8 Other dealing rules .................................................................................................. 32 6.9 Confirmation notes .................................................................................................. 34 6.10 Periodic statements ................................................................................................. 34 6.11 Client Assets ........................................................................................................... 35 6.12 Client money ........................................................................................................... 37 6.13 Client investments ................................................................................................... 39 6.14 Record keeping ....................................................................................................... 41 7 CORE RULES - INSURANCE ............................................................. 42 7.1 Application ............................................................................................................... 42 7.2 Insurance business and intermediation restrictions ................................................ 42 7.3 Communication of information and marketing material ........................................... 43 7.4 Client’s duty of disclosure ....................................................................................... 43 7.5 Authorised Firm’s duty of disclosure ....................................................................... 44 7.6 Disclosure of costs and remuneration ..................................................................... 45 7.7 Information about the proposed insurance .............................................................. 45 7.8 Suitability ................................................................................................................. 46 7.9 Managing conflicts of interest .................................................................................. 47 7.10 Placement of Insurance .......................................................................................... 47 7.11 Providing an ongoing service .................................................................................. 48 7.12 Insurance monies .................................................................................................... 49 8 SPECIFIC RULES – OPERATING A CREDIT RATING AGENCY ..... 53 8.1 Application ............................................................................................................... 53 8.2 Additional Principles for Credit Rating Agencies ..................................................... 53 8.3 Quality of the rating process ................................................................................... 54 8.4 Integrity of the credit rating process ........................................................................ 58 8.5 Conflicts of interest and independence ................................................................... 59 8.6 Independence of Rating Analysts and other Employees ........................................ 62 8.7 Transparency and disclosure .................................................................................. 63 8.8 Disclosure and presentation of Credit Ratings ........................................................ 65 8.9 Confidential information .......................................................................................... 66 8.10 Record keeping ....................................................................................................... 67 9 ADDITIONAL RULES: OPERATING AN ALTERNATIVE TRADING SYSTEM ............................................................................................. 69 9.1 Application and interpretation .................................................................................. 69 9.2 Main requirements relating to trading on the facility ................................................ 69 9.3 Member access criteria ........................................................................................... 72 9.4 Investment criteria ................................................................................................... 73 9.5 Technology resources ............................................................................................. 75 9.6 Proper Markets ........................................................................................................ 77 9.7 Specific requirements applicable to Persons operating an OTF ............................. 85 COB/VER22/07-13
- 4. CONDUCT OF BUSINESS (COB) 10 CUSTODY PROVIDERS ACTING AS A CENTRAL SECURITIES DEPOSITORY (“CSD”) ....................................................................... 86 10.1 Application and interpretation .................................................................................. 86 10.2 Additional requirements for CSDs ........................................................................... 86 APP1 RECORDS OF ORDERS AND TRANSACTIONS ............................... 88 A1.1 Minimum contents of transaction records ............................................................... 88 APP2 KEY INFORMATION AND CLIENT AGREEMENT ............................. 89 A2.1 Key Information and content of the Client Agreement ............................................ 89 APP3 CONFIRMATION OF TRANSACTIONS .............................................. 92 A3.1 Content of confirmation notes ................................................................................. 92 APP4 PERIODIC STATEMENTS ................................................................... 94 A4.1 Content of periodic statements: investment management ...................................... 94 APP5 CLIENT MONEY PROVISIONS ........................................................... 96 A5.1 Application ............................................................................................................... 96 A5.2 General requirements ............................................................................................. 96 A5.3 Payment of client money into client accounts ......................................................... 96 A5.4 Client accounts ........................................................................................................ 97 A5.5 Exceptions to holding client money in client accounts ............................................ 98 A5.6 Appointment of a third party agent .......................................................................... 99 A5.7 Payment of client money to a third party agent ....................................................... 99 A5.8 Payment of client money from client accounts ...................................................... 100 A5.9 Client disclosure .................................................................................................... 101 A5.10 Client reporting ...................................................................................................... 102 A5.11 Reconciliation ........................................................................................................ 102 A5.12 Auditor’s reporting requirements ........................................................................... 104 A5.13 Client money distribution rules .............................................................................. 104 A5.14 Failure to comply with this appendix ..................................................................... 105 APP6 SAFE CUSTODY PROVISIONS ........................................ 106 A6.1 Application ............................................................................................................. 106 A6.2 General requirements ........................................................................................... 106 A6.3 Recording, registration and holding requirements ................................................ 106 A6.4 Client accounts in relation to Client Investments................................................... 106 A6.5 Holding or arranging custody with third party agents ............................................ 108 A6.6 Safe custody agreements with third party agents ................................................. 108 A6.7 Client disclosure .................................................................................................... 109 A6.8 Client reporting ...................................................................................................... 110 A6.9 Reconciliation ........................................................................................................ 110 A6.10 Auditor’s reporting requirements ........................................................................... 111 COB/VER22/07-13
- 5. CONDUCT OF BUSINESS (COB) 1 COB/VER22/07-13 1 INTRODUCTION 1.1 Application 1.1.1 This module (COB) applies to every Authorised Firm with respect to the carrying on, in or from the DIFC, of any: (a) Financial Service; or (b) activity which is carried on, or held out as being carried on, in connection with or for the purposes of such a Financial Service; except to the extent that a provision of COB provides for a narrower application. 1.1.2 COB does not apply to a Representative Office. Guidance An Authorised Firm may be able to rely on the Transitional Rules in chapter 10 of GEN for the purposes of complying with some of the provisions in this module. The Rules enable Authorised Firms to make a smooth transition to the new regime that came into force 1 July 2008 under rule-making instrument No. 56, following the DFSA’s “Key Policy Review” outlined in Consultation Paper 52. Examples of the provisions to which the Transitional Rules apply are the Client classification (Rule 2.3.3(1)), consent and notifications to be treated as a Market Counterparty (Rule 2.3.4), statements required to be included in marketing material (Rule 3.2.4(1)(c)) and requirements for Client Agreement and key information (Rule 3.2.2(1)(b)).
- 6. CONDUCT OF BUSINESS (COB) 2 COB/VER22/07-13 2 CLIENT CLASSIFICATION 2.1 Application 2.1.1 (1) This chapter applies, subject to (3) and (4), to an Authorised Firm, carrying on or intending to carry on any Financial Service with or for a Person. (2) For the purposes of this chapter, a Person includes a Fund or trust, even if it does not have a separate legal personality. (3) This chapter applies to a Credit Rating Agency only if and to the extent that it intends to carry on, or carries on, a Financial Service other than Operating a Credit Rating Agency. (4) This chapter does not apply to an Authorised ISPV. 2.2 Overview Guidance 1. This chapter describes the manner in which an Authorised Firm classifies and treats its Clients. The modules of the Rulebook may apply to an Authorised Firm differently depending on whether the Person with or for whom it is carrying on Financial Services is, or is to be treated as, a Retail Client, Professional Client, or Market Counterparty. 2. An Authorised Firm may choose to provide Financial Services and products to both Retail Clients and Professional Clients. In these circumstances, the Authorised Firm must determine the appropriate classification of its Clients. As a consequence of the analysis under Rule 2.3.2, it may be that a Client is: a. a Retail Client; b. a Professional Client; or c. a Professional Client in relation to certain services and products and a Retail Client in relation to other services and products. 3. An Authorised Firm may choose to treat all Persons with whom it deals as Retail Clients. In these circumstances, Rule 2.3.1(2)(a) provides that the Authorised Firm is not required to undertake the determination in Rule 2.3.1(1). 4. An Authorised Firm may choose to deal only with Professional Clients provided the Authorised Firm is able to classify those Persons as such. See Rule 2.3.2. In such case a Person who is classified as a Professional Client in relation to any Financial Service or product offered by the Authorised Firm cannot be a Client of the Authorised Firm in relation to other Financial Services or products, in relation to which he does not have the necessary expertise. 5. A firm may treat as a Market Counterparty a Professional Client referred to in Rule 2.3.2(2), provided that in respect of some of those Persons, the firm must obtain their prior written consent before treating them as a Market counterparty. The others only require notification by the firm of the classification as a Market Counterparty. See Rule 2.3.4. Treatment as a Market Counterparty means that, for example, Rules relating to Client Agreements, suitability, inducements, best execution, aggregation and allocation do not apply to such Clients.