Best Practices for Distribution
 










III. Representations And Disclosures
  1. Communication

    In discussions with clients:

    1. Record all telephone conversations. The sales person must ensure that he gets all the relevant details down clearly.
    2. Distinguish between facts and recommendation or opinion. Exaggeration or unreasonably upbeat assessments must be avoided.
    3. Ensure that all sales literature sent to a customer will contain the relevant disclaimers etc. and must be fair, balanced, accurate and truthful. These manuals, prospectuses, etc. should be free from any alterations, markings, etc. made by the sales person that may unduly influence the decision of the prospective client in investing in such a product. Such disclaimers should be prominently printed. In transactions involving publicly offered securities, make every effort to provide the prospectus to the client. Preliminary (or "red herring") and final prospectuses and selling materials for publicly offered securities must comply with all regulatory disclosure requirements, specifically Securities and Exchange Commission RSA Rules 3-3 and 8(a)(10)-1.
    4. Distinguish between announced figures or events and estimates, forecasts and projections.
    5. Do not guarantee or promise a return on future events that will or will not occur.
    6. Use clear and unambiguous language when negotiating transactions.
    7. Clearly state and disclose to its client on "without recourse" transactions that it does not guaranty the payment of the securities being sold; that the securities are being sold on an outright and without recourse basis; and that the sole investment risk is with the client.

  2. Appropriateness and Suitability

    1. Understand and ensure that the counterparty is aware of all the risks being marketed:

      1. The leverage
      2. Regulatory, legal and accounting aspects
      3. Embedded optionality, if any
      4. Credit risk
      5. Call / Put features, if any
      6. Correlation between markets
      7. Price risk
      8. Market risk


    2. From the customer to the sales person

      1. Listen to what the customer that one deals with is (or sometimes even is not) saying to make sure that the customer understands the product and the product suits the investment or risk parameters of the customer.
      2. Be particularly sensitive to conversations that may constitute a customer complaint. Refer all serious complaints to the appropriate party.


    3. Others

      1. Use your judgement to determine the information to be provided to enable the client to understand the product and its risk, which may include risk disclosure statements or similar documents. In the event the instrument being dealt with is part of a private placement or a public offer, it is preferable that at minimum, the client be provided with the information memorandum or prospectus and the terms of the offer or the term sheet.
      2. Satisfy yourself that the transaction is consistent with the objectives expressed by the client.
      3. Retain a copy of any document sent to the client or any important notices, correspondences, sensitivity analyses, in writing, for future reference in the event of a dispute.
      4. In case of a conversation or a meeting with the client or the appropriateness of a product was discussed, sales personnel should retain a note of the discussion or the meeting.


    Large corporations, or even institutional customers, do sue on the grounds that the financial intermediary sold them an unsuitable, overly sophisticated product that they did not understand. It therefore becomes even more critical that institutional customers involved in the purchase of privately placed or publicly offered instruments be provided with the appropriate prospectuses or information memoranda relating to the placement or offer. As a proactive step, the financial intermediary should first determine the target market of its products considering the known parameters of its clients.

  3. Arms Length Relationship with Counterparties and Risk Disclosure

    Sales personnel must exercise care at all times when dealing with clients, writing to clients and holding discussions with clients so as not to cast doubts upon the precise relationship that the financial intermediary has with the counterparty and consequently what the responsibility of the financial intermediary's dealers and sales personnel is towards the counterparty. Care must be exercised even when discussing the counterparty relationship and counterparty deals internally within the financial intermediary while outside the presence of the counterparty in order to avoid misinterpretation internally.

    Counterparties should be made aware that, unless specifically confirmed otherwise in writing to them, all dealings, negotiations and conversations with counterparties by financial intermediary personnel are conducted solely on the basis of and in the capacity of an arm's length principal counterparty basis and not in any form of advisory or fiduciary capacity. Where there are no doubts as to the expectations of a counterparty, financial intermediary personnel must inquire whether any advice, recommendations or risk analysis is being sought from the financial intermediary.

  4. Disclosure of Financial Intermediary's Relationship with Parties Involved in a Placement or Offer

    Full transparency must be exercised with the client in discussing not only the features of the product but likewise in disclosing any interlocking shareholdings, directors, officers and/or related interests between and among the parties and/or related interests to a placement or offer, most especially between the issuer and the financial intermediary. This will allow the client to view the transaction in the appropriate context and make an informed judgement on whether or not the placement or offer is being made under terms at least as favorable to the client as terms available from unaffiliated parties.

  5. Disclaimer Clauses

    The offer of securities, especially in the case of a public offer, is governed by numerous regulations which differ from one country to another. The breach of these securities regulations could result in serious adverse consequences not only to the issuer and/or its management but likewise to the financial intermediary and/or its management. These consequences refer not only to the penalties attaching to the violation at hand, but also to the ability of the issuer and/or the financial intermediary to undertake future similar transactions both from the regulatory and reputational perspective. Since investors from various jurisdictions are likely to have access to these securities, especially those offered publicly, various tax and exchange control regulations apply to these investors. Furthermore, investors usually rely heavily on the contents of an information memorandum or prospectus in arriving at investment decisions. Hence, in order to protect the issuer and/or the underwriter or placement agent or the financial intermediary from potential liabilities, legal or otherwise, it is necessary that an offer's main selling document such as the information memorandum or prospectus or any other selling material include disclaimers, as follows:

    1. The information memoranda or prospectuses distributed to clients must state the date of the document to clearly indicate that the information regarding the issuer's business, industry and operating environment contained in the document is true and correct as of the said date. This will clearly indicate that events and information subsequent to the stated date are not contained in the document. The client must therefore rely on other sources of information in the event continuing updated information of this nature is required.
    2. Preliminary prospectuses for publicly offered securities need to carry the following mandatory Securities and Exchange Commission disclaimer required in RSA Rule 8(a)(10)-1: " A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date. An indication of interest in response hereto involves no obligation or commitment of any kind. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy."
    3. It is desirable that an information memorandum or any other selling materials for a private placement, but necessary in the case of a prospectus for a public offer, include statements in the first two pages of the document clearly indicating (as applicable) that:

      1. prospective investors in the placement or offer are advised to be aware of certain investment and risk considerations in connection with an investment in the offer contained in a specific section of the said document.
      2. unless otherwise stated, the information contained in the document has been supplied by the issuer which accepts full responsibility for the accuracy of the information and confirms, after having made all reasonable inquiries, that to the best of its knowledge and belief, there are no other material facts, the omission of which would make any statement in the document misleading in any material respect;
      3. neither the delivery of the document nor any sale made thereunder shall, under any circumstances, create any implication that the information contained in the document is correct as of any time subsequent to the date of the said document;
      4. no salesperson or other person has been authorized by the issuer or its underwriter or placing agent to issue any advertisement or to give any information or make any representation in connection with the placement or offer other than those contained in the document and, if issued, given or made, such advertisement, information or representation must not be relied upon as having been authorized by the issuer or its underwriter or placing agent;
      5. the prospectus for the public offer does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make any such offer or solicitation;
      6. each investor in the publicly offered security must comply with all applicable laws and regulations in force in the jurisdiction in which it purchases, offers or sells such securities and must obtain the necessary consent, approval or permission for its purchase, offer or sale of such securities under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchase, offer or sale, and neither the issuer nor the underwriter shall have responsibility therefor;
      7. foreign investors interested in subscribing to a domestically-registered public offer should inform themselves as to the applicable legal requirements under the laws and regulations of the countries of their nationality, residence or domicile and as to any relevant tax or foreign exchange control laws and regulations which may affect them.


  6. Sensitivity Analysis

    If a specific product requires a presentation to the customer of a sensitivity analysis and/ or if a customer requests for a sensitivity analysis of any other product being offered for investment, the sales personnel must be prepared to make the presentation of the sensitivity analysis of the investment with the appropriate presentation materials. The sensitivity analysis should be simple, easily understandable, devoid of any ambiguous statement, and should merely present a mathematical formula and computation of the value and/or financial risk of the transaction if specific scenarios happen in the future, such as, currency price movements, securities price movements, inflation, and such other factors which could materially or not materially affect the value of the investment. The presentation of the sensitivity analysis must always be accompanied by an appropriate disclaimer as to the certainly of the specific scenarios presented and the certainty of the investment return.

  7. Role of the Financial Intermediary

    In dealing with the client, it is necessary for the financial intermediary and its sales personnel to clearly disclose to the client the financial intermediary's specific role in the transaction so that the client is able to place the intermediary's participation in the proper context. The financial intermediary should disclose whether it is acting as broker, dealer or agent. Each specific role has specific implications for the client. If the intermediary is acting as a broker, then he is merely matching up a seller of instruments with a buyer. If the intermediary is acting as a dealer, then it is selling the client instruments which the intermediary has previously bought for its own account or will be part of their risk position. If the intermediary is acting as agent, then it is usually acting for and in behalf of the issuer, in which case the intermediary's primary concern is the attainment of the issuer's objectives. While potential conflict of interest is not assumed, i. e., as dealer the financial intermediary may have adverse information regarding the issuer of the securities, or as agent the financial intermediary is perhaps more loyal to its principal, the client is nevertheless informed of the financial intermediaries' capacity in order that the client is able to make a better assessment of the investment transaction and act and respond accordingly.
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