In addressing the challenges brought about by the global economic downturn, the Foreign Equities Division commences a variety of awareness programs to prevent investor fraud and maintain transparency in the industry and provide for better transparency. The first line of defense is a regulatory policy to improve disclosure to investors about offshoot and unregistered prearranged financial products. Such regulatory enhancement endeavor authorized the formulation of a better investor education initiative and a control center for dispute resolution, including rulings to govern such authorization of financial instruments accessible by the investing public.
The regulatory enhancements are a variety of policies designed to shield all unregistered prearranged products usually supplied to the public. Where providers request authorization in such types of unregistered prearranged products that are recent to the market, the Foreign Equities Division evaluates these on a case to case basis and, where necessary, consults with regulatory committees, which is composed of representatives of market participants and other stakeholders with diverse knowledge and expertise.
The Foreign Equities Division will hold industry consultations and issue supplementary guidance on requirements for these types of prearranged products. The typical types of currency-connected and interest rate-driven products issued by investment firms would be considered in the scope of the policy. Also, registered prearranged investment instruments would maintain to be subject to the regulatory policies but will not be required to obtain authorization.
The extensive assumption behind this initiative is that the investment life-cycle requires several parties, each holding out certain accountabilities for the investment that is ultimately placed. Providers of such products are required to prepare brief and clearly comprehensible summation of their financial products, forming part of the offer documentation. Such documentation will be developed to assist investors in clearly understanding the products being considered.
The Foreign Equities Division intends for documentation for such products to be brief, easily comprehensible and uniform to make possible assessment between financial instruments. In essence, this will compose part of the offer documentation and will have equal bearing and value as the prospectus, though it will be restricted to only a number of pages in extent so as to emphasize and assist in the investors immediately recognizing the key features and risks of the offering.
The Foreign Equities Division is sensitive to some investment schemes already utilizing a particular form of documentation that addresses regulatory requirements. Since a majority of such funds are easily accessible, the Foreign Equities Division accepts these documentary counterparts provided that such will offer significantly the same details as required under the policy, in the format and presentation suitable for the information dissemination purpose.
Offering intermediaries publicly usually get enticements from providers that intend for their line up to be better sold. While such reward system for salespeople is deemed acceptable, this business set up creates a likely conflict of interest between the provider and the purchaser. The Foreign Equities Division hence requires that intermediaries divulge at the pre-sale phase of the engagement any commissions, fees or other benefits they would earn from the purchase of a product. By being informed of the rewards or benefits to be received by the selling intermediaries offers better transparency and keeps the investor well informed of important details in making investment decision.
The Foreign Equities Division is implementing a grace period for select derivative products that would take a short period, shortly after engaging an investment with which investors might change minds and leave the transaction. However, to avoid possible misuse of the process, investors will be required to pay appropriate fees attached to such transaction option, comprising of administrative fees, applicable opportunity costs and any rejection in primary market value of the product during such grace period. The Foreign Equities Division requires that the grace period be implemented only to longer-term products with no ready secondary market. This is due to the types of products where a grace period might be of most benefit as an investor awareness initiative. Where products already have an active and liquid secondary market, such as mutual funds, investors could leave the investment transaction if they eventually change minds.
Another regulatory requirement pertains to investor reporting. As part of the client relationship procedures, intermediaries are required to request each client's understanding of derivatives and differentiate those with such understanding as clients with derivative awareness. Moreover, the more advanced investors’ establishment will be evaluated to determine whether or not the testing criteria for qualifying as a professional investor should be reviewed and enhanced.
This regulatory policy provides various alternatives by which investors may be considered as having understanding of derivatives. First, they may have undergone training or attended courses on derivative products. Second, they may have prior trading experience in derivative products, or, third, they may have work experience related to derivative products.
As already being implemented, if an investor is not attributed as a client with derivative know-how, the intermediary could not promote any unregistered derivative products to such a client under any situation. When clients who do not have derivative understanding intends to buy an unregistered prearranged product on their own initiative, the intermediary should caution them about the anticipated engagement and offer suitable advisory to them, such as evaluation of appropriateness of the engagement, taking into account the client’s personal situation such as gross portfolio, asset focus and experience with a particular market or asset class. The caution and interactions with the client should be documented. On the other hand, intermediaries are not required to request information about a client understands of derivatives if no services with regard to unregistered prearranged products are assumed to be offered to that client.
As for business and enterprise worth, the Foreign Equities Division deems that it is beneficial for investors evaluating the productivity of a prearranged product if they were supplied with consistent information about the customary market value of their investments. As such, the policy requires that providers or their representatives make available analytical valuations of prearranged products on a day-to-day basis throughout their terms. Such analytical valuations will be defined in good commitment, on an independent basis, and must be reasonable and satisfactory.
The Foreign Equities Division similarly implements that, except for prearranged financial products with a short term, providers must provide liquidity by way of making solid price references for the prearranged product accessible to investors regularly. The Foreign Equities Division ensures that the revised policy does not represent product or merit regulation, where the regulator assesses the benefits of an investment product before it is marketed.
The Foreign Equities Division does not suppose that the regulator should become the sole moderator of the reliability or appropriateness of a product. In an extreme case, product regulation could be unhelpful to market advancement because the regulator may alternate its own partialities for those of investors. Limiting authorizations of products to those regulated appropriate for all types of investors would result in a better selection of products accessible to investors.
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