Code of Ethics

Governing Financial Market Activities

In the Philippines
 Bangko Sentral ng Plipinas
OFFICE OF THE DEPUTY GOVERNOR
SUPERVIsIONAND EXAMINATION SECTOR
CIRCULAR LETTER NO, CL-2010-013
To : AllBanks and Non-Bank Financial Institutions
Subject : Code of Ethics Governing Financial Market Activities in the
Philippines

Towards the end of improving financial market integrity, the Bangko

Sentral ng Pilipinas (BSP) hereby informs all banks, their subsidiaries and
affiliates, and other financial institutions supervised by BSP the development of
"The Code of Ethics Governing Financial Market Activities in the Phiippines"
(Code) by the Money Market Association of the Philippines (MART). Acopy of
the Code is attached as Annex A for your reference.

The Code provides a set of principles and standards for market conduct
of financial market participants, such as banks, brokerage firns and other
financial institutions. It aims to guide market participants in determining the
nature of their responsibilities to one another, clients and the market and in
decision-making when faced with ethical situations. The observance of these
principles and guidelines seek to promote greater professionalism in the market.
The Code is anchored on the belief that high ethical standards are critical in
maintaining the public's trust in the fairness of financial markets, and allowing
markets to function efficienty.
The Code is generally principles-based which can be applied as a
minimum standard in trading across financialproduct markets. The Code covers
the following topics: Professionalism, Integrity of Capital Markets, Duties to
Clients, Conflicts of Interest, and Duties to Market Counterparties. The BSP
believes that the Code may be a basis or part of the binding market conventions
governing orderly conduct / operations of the market, which is one of the
components in order to recognize an over-the-counter market as an organized
market.

For information and guidance.

AESTOR AESPENILLA R.
Deputy Govemor
February 2010

PANANALAPING MATATAG, BANSANG PANATAG

A. Mabini St.,Malate 1004, Manila, Phillppines Trunkline (632) 524-70-11 URLWWw.bsp.gov.ph e-mail: [email protected]
 Table of Contents

Inroduction 3

I. Profcssionalisn 4
A. Knowledge of the Law 4
B. Independence and Objectivity 5
C. Misreprescntation 5
D. Misconduct.

II. Integriry of Capiral Markets

A. Insider Information/Material
Nonpublic Information 9
B. Market Manipulation 14

IIl. Duties ro Clients n 15

A. Integrity, Prudence and Care 15
B Fair Dealing 16
C. Client Suitability 17
D. Diligence and Reasonable Basis - 18
E. Disclosureof Information and Communication to
Clients/Public 19
F. Prescrvation of Confidentiality 20

IV. Conflicts of lnterest 20

A. Disclosure of Conlicts 20
B. Dealing for Personal Account 21
C. Priority of Transactions 21

Duties to Market Counterparties - 22

A. Knowledg of Trading Conventions 22
B. Firmness of Pricc Quotations and Deals 22

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INTRODUCTION

The Moncy Market Association of the Philippines (MART) has compiled this set of
guidelines for the "Code of Ethics Governing Financial Marker Activiries in the
Philippines" to provide a reference for banks, brokerage firms and other financial
institutions in seting high ethical standards and professional excellence for market
practitioners. This is anchored on the belief that high cthical standards are critical in
maintaining the public's trust in the fairness of financial markets, and allowing markets to
function efficiently.
The Code was designed to be generally principles-based which can be applied as a
minimum standard in trading across financial product markets. It is aimed to guide
members in decision-making when faced with ethical siuations; and determining the
nature of their responsibilities to one another, to clients and the market.
The Code of Ethics of the following associations were used to sieve the common thread of
trading and selling principles: ACI Philippines, Bankers Association of the Philippines
(BAP), Investrnent House Association of the Phils (lHAP) and MART. We also used as a
reference the CFA Institute (Chartered Financial Analysts) Code of Ethics and Standards
of Professional Conduct. The Appendices provide copies of the abovementioned codes
used as areference.

It is to be made clear, however, that the Code does not inchude trading conventions, and
hence would not supercede the Trading Conventions of the different associations
pertinent to their specific product markets.
It is important then that all market practitioners observe the guiding principles embodied
in this Code to continue to promote greater professionalism in our treasury markets.

NOTE:

For the purpose of the Code, the term "financial institutions" is used to represent banks,
quasi-banks, thrift banks, investment houses, and brokerage firms which are members of
the abovementioned associations. The terin "members" is used to represent employees of
the financial institutions engaged in the following banking activitics, namely, money
market, foreign cxchange, fixed-income securities, derivatives and underwriting.

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CODE OF ETHICS GOVERNING FINANCIAL MARKET ACTIVITIES
NTHE PHILIPPNES
Professionalism

A. Knowlcdge of the Law

Financial instiutions should employ the resources and procedures needed

for the proper performance of its business activities. It is therefore cssential
that financial institutions employ or appoint persons who are qualified to
conduct business with its clients and counterparties. As they are
responsible for the actions and conduct of its dealerS and related personnel,
the financial institutions should ensure that its members have the authority,
as well as the knowledge of and training on the laws governing the products
and markets they are dealing with.

Members must understarnd and comply with all applicable lawS, rules and
regulatiorns of any government, regulatory organization, or professional
association governing their activities. Members must not knowingly
participate nor assist in any iolation of such laws, rules, or regulations.

More specifically, members should comply with the regulatory tequirements

issued by he Bangko Sentral ng Pilipinas (BSP) and the Securities and
Exchange Commission (SEC), anong others, which are relevant to the
banks' trading activities in the money markets, foreign exchange, fixed
income securities and derivatives, as well as in the underwriting business.
To acquire and maintain knowBedge and understanding of the applicable
laws, rules, and regulations, members should:

1. Stay informed. The financial institutions should establish a procedure

by which members are regularly informed about the changes in the
relevant laws, rules and regulations. In many instances, the banks'
compliance department can provide such information in the form of
memoranda distributed to the members. The members should also be
abreast of current i_sues and developments in the products and markets
they are trading. One way of keeping current is participating in in-house
as well as external training courses,such as attending industry fora.

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 2. Review procedures, The financial institutions should revicw written
compliance procedures on a regular basis to ensure that the proccdures
reflect current law and provide guidance to members what is permissible
conduct under thelaw,

3. Maintain current files. The financial instilutio1s shoulcd

maintain
readily accessible current reference copics of rclevant rules and
regulations.
B. Independence and Objectivity
Members must use reasonable carc and judgment to achieve and maintain
independence and objectivity in their professional activities. Altlhough gifts
or entertainment can be offercd in the normal course of business, members
must not offer, solicit, nor accent any gift, entertainment, benefit or
compensation that rcasonably could be expected to compromise their own
independencc and objectivity.
It is therefore important that the members disclose to management the gifts
or benefics received. Financial institutions should establish clear policies
and guidelines on when and how entertainment and gifts are to be uscd,
supervised and monitored. At the minimum, the policies should require
disclosure of details of the gifts and entertainment, with said disclosure to
be submittcd, preferably on a monthly basis, to the Compliance Officcr and
to the Board of Directors or its equivalent committee, of the member's
financial instítution.
The financial institution's corporate culture should fully support
independence and olbjectivity. Given the symbiotic telationship between
different busincss functions, say research and investment banking, one
method of protecting objectivity is building a "firewall" or "Chinese wall"
between thesc two functions. A key elenent of an enhanced firewall is
scparate reporting structures for personnel within twO different business
functions. This topic of "Chinese wall" will be discusscd in more detail
under Section Il. Integrity of Capital Markets, Part A. Use of Insider
Information/Material Non-Public lnformation.
C. Misrepresentation

A misrepresentation is any untrue statement or omission of a fact or any

statement that is otherwise false or misleading.

Members tmust not knowingly make any misreprescntations relating to

investiment analysis, recommendations, actions and other professional
activities. Members must not knowingly misreprcsent nor give a false
 impression in oral representations, advertising (whether in the press or
through brochures), electronic communications, or written materials
(whether publicly disseminated or not) and should not issue misleading
statements abour the performance of the financial institution. In this
context, "knowingly" means representatives of the financial institution
either know or should have known that the misrepresentation was being
made.

Financial Institutions should ensure that communications with the public

be done only by members with requisite authority to make public
statements, or to make analysis, ot provide recommendation to the general
public. Communications should not contain prom ises of specific results,
exaggerated or unwarranted claims, or unwarranted superlatives,
unfounded opinions for which there is no basis or forecasts of furure events
which are unwarranted, or which are not clearly labeled as forecasts.
Communication to the public includes disclosure or presentation of the
financial instinution's performance.
Members should consider several factors when determining whether
Communications contain misleading information such as:
1. Overall context in which the statement/s is/are made. A statement
made in one context may be misleading even though such a statement
could be perfecly appropriate in another context. An essential test in
this regard is the balance of rreatment of risks and potentialbenefits.

2. The audience to which the communication is directed. Different levels !

of explanation or detail may be necessary depending on the audience to
which a communication is directed and the ability of the financial
institution given the nature of the media used, to restrict the audience
appropriately. If the statements made in a communication would be
applicable only to a limited audience, or if additional information
might be necessary for other audiences, it should be kept in mind that it
is not always possible to restrict the readership of a particular
communication.

3. The clarity of the communication. A statement or disclosure made in an

unclear manner can result in a failure to understand the statement, or
in a serious misunderstanding. A complex or overly technical
explanation may cause even greater misunderstanding than too scant an
information. Likewise material disclosure relegated to legends or !
footnotes may not generally enhance the reader's understanding of the
communication.

The term communication includes, but is not limited to

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 1. Written material such as research reports, market
letters, ncwspaper
columns, and books.

2. Electronic communications such as Internet communications, Web

pages, chat rooms, and c-mail.

3. Verbal communication such as presentations and telephonc

conversations.

Members must not misrepresent any aspect of its practice, including but not
limited to the qualifications or credentials of its employees, the
qualifications or services provided by the financial institutions, and
employees' performance records as well as that of the financial institution.
In avoiding misstating or providing misleading statements, members are
encouraged to fully disclosc its investment pcrformance data and must
make reasonable efforts to make sure that it is fair, accurate and complete.
It is important that financial instirutions provide credible performance
information to clients/public. If presentations made to clients are brief, the
financial institution must ensure that detailed information shall be made
available upon request.
In complying with the provision against misrepresentation, members should
have adequate policies and procedures regarding disclosure of performancc
presentation and performance measurement that are consistent with
regulatory requirements and the principles of fairness, accuracy and
consistency. Procedures should prevent possible misrepresentations of past
performance or reasonably expected performance. Historical data related to
individual accounts and composite or group of accounts should be
complete, fair, and accurate. In presenting past performance, the following
may be considered to avoid misrepresentation:
1. Knowledge and sophistication of the audience to whom aperformance
presentation is addressed:

2. Including disclosures that would fuly cxplain the performance results

being reported (for example, stating, when appropriate, that results are
simulated when model results are used, or disclosing whether the
performance is grOs of fees, net of fees, or after tax);

3. Maintaining the data and records used to calculate the performance

being presented;

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 4. Where performance of a different rype of investment product is
included, stating any material difference.
Where the presentation material contains past performancc information
and is intended for use over a period of time, disclosures should make clear
that the information may not be current and an explanation on where up
todate past performance information may be obtained

Members must avoid spreading misinformation and rumors. Financial

markets are generally responsive to news on related developments. It is not
Surprising therefore that gossip and misinformation emanating from various
sources is often relayed through the market telcphone lines and screens.
Thesc rumors can be quoted, or even originate in the financial media.
Members should not relay any information which they know to be false and
should take great care when discussing unsubstantiated information, which
they suspect to be inaccurate and could be damaging to athird party, be it a
corporation or an individual.

D. Misconduct

MemberS must not engage in any act involving dishonesty, fraud, or deceit
or commit any act that reflects adversely on their professional reputation,
integrity or competence. Members must also ensure that their overall
conduct and demeanor are appropriate with respect to the highest standard
of professionalism as adhered to by their institution, and by the banking
industry as a whole.
Professional misconduct can damage the trustworthiness or competence of
an investment professional and can adversely affect a financial institution's
reputation. This includes behavior that may not be illegal but could
negatively affect the employee's abilityto perform his or her responsibilities.
For example, abusing alcohol during business hours can be considered
professional misconduct because it could have a detrimental effect on the
employee's ability to fulfill his or her professional responsibilities.
Members should adopt policies and procedures to prevent general
misconduct:

1. Develop and/or adopt a code of ethics to which every employee must

subscribe and make clear that any personal behavior that reflects poorly
on the individual involved, the institution as a whole, or the
investment
industry willnot be tolerated
 2. Disseminate to all employecs a list of potential violations and associated
disciplinary sanctions, up to and including dismissal from the
institution.
3. Check references of potential employces to ensure that they are of
good
character and not ineligible to work in the financial industry because of
past infractions of the law.

In addition, members should have specific policies on the following:

a. Fraud

Attempts at fraud do occur and can be meticulously planned. As there

are scveral ways in which an institution can be defrauded, great
vigilance is required by management and staf, particularly so when
calls arc received on an ordinary telephone line (usually in principal to
principal transactions).
As a preventive measure, the details of all telephone deals which do
not include pre-agreed standard settlement instructions should be
confirmed by email or similar means by the recipient seeking an
answerback to ensure the deal is genuine.
Particular care should be taken in checking authenticity where the
beneficiary is a third party or other than the transaction counterparty.
In the event of any suspicious circumstances staff must
notify
management without delay.
b. Gambling

Making or arranging of bets among market participants is expressly

forbidden. There should be no gambling within the dealing room of a
financial institution.
It is strongly recommended that management have a clearly defined
written policyon thecontrol of this activity.
c. Use of Drugs and Abused Substances

Management should take all reasonable steps to educate themselves and

their staff about possible signs and effects of the use of drugs including
alcohol and other abused substances. Policies should be developed and
clearly announced for dealing with individuals who are found to be
substances abusers, as judgment of any member dependent on such
 substances may be impaited and his abilíty to function satisfactorily
seriously diminished. A member is also likely to be vulnerable to
outside inducement to conduct business not necessarily in the best
interest of the firm or the market in general.

Thus, drugs and abused substances are in no way permitted inside the
dealing room and, as such, users are also not allowed to enter the
trading room under such influence.
IL. Integrity of Capital Markcts

The orderly operation of financial markets depends greatly on the overall level of
trust among all market participants. Ethical practices instill a public trust in the
fairness and integrity of capital markets, enhancing their liquidity and efficiency.
Financial instirutions should therefore practiceethical standards that promote and
maintain a high level of confidence in market integrity. The principles of
transparency, disclosure, and faitness promote market integrity.
A. Insider Information/Material Nonpublic Information
Members should not, with intent or through negligence, profit or seek to
profit from insider information and material non-public information that
could affect the valu of an investment. Members should likewise rnot assist
anyone with such information to make a profit for themselves, their firm or
their clients.

Disclosure of material non-public information to unrelated parties and, in

some cases, to related parties without consent before it becomes public
unerhical and a breach of confidentiality. Dealing in financial instruments
based on material nonpublic information about the issuer of such
instruments or the instruments themselves constitutes 'insider dealing.
"Insider is herebydefined as any individual in possession of material non
public information.
This requires that financial institutions must have in place policies and
procedures to manage material nonpublic information. This should
include, where appropriate, 'Chinese walls to restrict the internal
distribution of confidential information to those who need to know in
order to be able to execute orders for customers or for compliance
purposes. Material nonpublic information is not always clearly identifiable.,
thus, employees must be given sufficient training to either make an
informed decision or consult a supervisor or compliance officer before
engaging in questionable transactions.

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Information is considered to be material non-public if it satisfies anyof the
following:
1. It has not bcen generally discloscd to the public and would likcly affect
the market price of a security or any financial instrument afrer being
disseminated to the public and the lapse of a reasonable time for the
market toabsorb the information;
2. It would be considered by a reasonable person important under the
circumstances in determining his courSe of action whether to buy, sell
or hold a security or any financial instrument.

Materíal non-public information may include, but is not limited to,

information on the following:
Financial results of the company;
Mergers, acquisitions, tender offers, or joint venturcs;
Changes in assets and/or capital structure
Innovative products, proccsses, or discoveries;
New licenses, patents, registered trademarks, regulatory
approval/rejection of a product;
Developments regarding customers or suppliers (e.g., the acquisition or
loss of a contract);
Changes in management;
Change in auditor notification or the fact that the issuer may no longer
rely on an auditor's report or qualified opinion;

Events regarding the issuer's securities (e.g., defaults on senior

securities, calls of securities for redemption, repurchase plans, stock
splits, changes in dividends, changes to the rights of security holders,
public or private sales of additional securities, and changes in credit
ratings);
Bankruptcies;
Significant legal disputes;
Government reports of economic trends (inflation, GDP, monctary
policy, fiscal policy, currency information, etc.);
Issue of shares by wayof pubic offering, rights, bonus, etc;
Orders for large trades before they are executed.

In addition to the substance and specificity of the information, the source

or relative reliability of the information also determines nateriality. The less
reliable a source, the less likely the information provided would be
considered material. For example, factual information from a corporate
insider regarding asignificant new contract for a company would likely be

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material, while an assumption based on speculation by a compctitor about
the same contract might be less reliable and, therefore, not material.

Membersmust not act on and disclose insider information to make a profit

for themselves, thcir institution or their clients. The term "insider" may
include, bur is not limited to, the following:
the issuer
a director or officer (or person performing similar functions) of, or a
person controlling the issuer
a person whose relationship or former relationship to the issuer gives or
gave himn access to material information about the issuer or the security
that is not generally available to the pulblic
agovernment employee, or director, or officer of an exchange, clearing
agency and/or slfregulatory organization who has access to material
information about an issuer or a security that is not generally available
to the public
a person who lcarns such information bya communication from any of
the foregoing insiders.

Members must be particularly aware of information that is selectively

disclosed by corporations to a small group of investors, analysts, or other
market participants. Information that is made available to analysts remains
nonpublic until it is made available to investors in general. Corporations
that disclose information on a limited basis create the potential for insider
trading violations. However, under the "mosaic theory," members are free
to act on the collection of material public and non-material
non-public
information without risking violation.
Information is "nonpublic" until it has been disseminated or is available to
the marketplace in general (as opposed to a select group of investors).
Dissemination can be defined as made known to." For example, a
company report of profits that is posted on the Interner and distributed
widely through a press release or accompanied by a filing has been
effectively disseminated to the marketplace.
An information barrier is the minimum procedure a financial
institution
should have in place to protect itself from liability. It should also consider
restrictions or prohibitions on personal trading by employees and should
carefully monitor both proprietary trading and personal trading by
employees. It should require employees to make periodic reports (to the
extent that such reporting is not already required by securities laws) of their
own transactions and transactions made for the benefit of family members.
Securities should be placed on a restricted list when an institution has or

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may have material nonpublic inlornacion. The broad distribution of a
restricted list often iriggers the sort of trading the list was developed to
avoid. Thcrefore, a warch list showIn to only the few people responsible for
compliance should be used to nonitor transactions in specifivd sccurities.
The usc of a watch list in combination with a restricted list is an
increasinglycommon means of ensuringan effecrive procedure.

Financial institutions should adopt policies and procedures designed to

prevent the inappropriate flow of material, nonpublic information and to
aid in the decection of illegal trading based on such information. An
information barrier commonly referred to as a "Chinesc Wall" is the nost
widely used approach to prevent thc communication of material nonpublic
information within institutions and avoid the illegal use of insider
information. It restricts the flow of confidential information to those who
necd to know the information to perform their jobs cffectively. The
minimum elements of such a system include, but are not limited to, the
following:
Substantial control of relevant interdepartmental communícations,
preferably through a clearance area within the institution in cither the
compliance or legal department;
Review of employec trading through the maintenance of "watch,"
"restricted," and "rumor" lists;
Documentation of the procedures designed to limit the flow of
information between departments and of the enforcement actions taken
pursuant to those procedures;
Hcightened review or restriction of proprietary trading while an
institution is in possession of material nonpublic information.
Any financial institution which assumes more than one function whether as
dealer, broker, adviser or underwriter, or which engages in market making
transactions, shall maintain proper segregation of those functions within
the firm to prevent the flow of non-public material information among
different parts of its orgarnization, which perfotm each function. For
instance, the unit/department arranging securities origination may receive
inside information, i.e. the knowledge of the new issue and its likely impact
on existing securities of the issuer or information provided by the issuer.
Inside information gachered by the origination/deal team should not be
disclosed to the other business units such as sales, trading and rescarch.
In particular, if a member shall become aware of a potential tender offer
before the tender offer has been publicly announced, such member shall
not buy or sell, directly or tndirectly, the securities of the target issuer until
the tender offer shall have been publicly announced. Such buying or selling
shallconstitute insider trading.

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To the extent possible, financial institutions should consider physical
separation of departments and files to prevent the communication of
sensitive information. For example, the investment-banking and corporate
finance areas of abrokerage fim should be separated from the sales and
research departments, and a bank's commercial lending departmcnt should
be scgregated from its trust and research departments. Other significant
arcas include sales, execution, research and back office sertlement.

One of the primary objectives of an efective Chinese Wall procedurc is to

establish a reporting system in which authorized people review and approve
communications berwcen departments. The financial institution should
have policies and procedures on sharing information with an endview of
maintaining the integrity of said information.

Written compliance policics and guidelines should be circulated to all

employces of a financial institution. Policies and guideíines should be used
in conjunction with training programs aimed at enabling employecs to
recognize material nonpublic information. Material nonpublic information
is not always clearly identifiable. Employees must therefore be given
sufficient training to either make an informed decision or consult a
supervisor or compliance officer before engaging in questionable
transactions.

Marker Manipulation

Financial institutions must not engage in practices that distort prices or

artificially inflate trading volume with che intent to mislead marker
participants.

This standard requires that financial institutions uphold market integrity by

prohibiting market manipulation. Market manipulation includes practices
that distort security prices or trading volume with the intent to deceive
people or enities that rely on infornation in the market. Marker
manipulation harms the integrity of, and thereby undermincs public
confidence in capital markets and adversely affects interests of all investors,
by disruping the smooth functioning of the markets, distorting prices,
harming the hedging functions of these markets, and creating an artrificial
appeárance of market activity.

Marker manipulation can be related to the following:

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 |

1. Transactions that deceivc market participants by distorting the price

setting mechanism of financial instruments. Transaction-based
manipulation includes but is not limited to:
Transactions that artificially distort prices or volume to give thc
impression of activity or price movement in a financial instrument
in order to induce a purchase or sale of the said instrument.
Pegs, fixes or stabilize the price of such security unless otherwise
allowed
Effecting any transaction in such security which involvcs no change
in the beneficial ownership thereof;
2. The dissemination of false or misleading information.

Information-based manipulation includes, but is not limited to

spreading false rumors to induce trading by others. The standard
prohibits the circulation and dissemination of information that the
price of any security will or is likely to rise or fall because of
manipulative marker operations conducted for the purpose of raising or
depressing the price of the security for the purpose of inducing the
purchase or sale of such security. In addition, any person shall be
prohibited from making false or misleading statement with respect to
any material fact, which he knew or had reasonable ground to believe
was false or misleading, for the purpose of inducing the purchase or sale
of any security.

For example, dealers must refrain from "pumping up" the price of a
security by issuing misleading positive information or overly optimistic
projections of a security's worth only to later dump" ownership in the
security once the price of the security, fueled by the mislcading
information's effect on other market participants, reaches an artificialy
high level.

III. Duties to Clients

A. Integrity, Prudence and Care

Financial institutions must act with reasonable care and exercise prudent
judgment in their dealings with their clicnts. Investment advisors must act
for the benefit of their clients and place the interests of the latter above
their own.

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Prudence requires caution and discretion. In the context of advising a
client, prudence requires following the investment parameters set forth in
the client's suitability profile.
The first step for financial institutions in fulfilling their duty to clients is to
determine the identity of the "client" to whom the duty of loyalty is owed.
In the context of an investment manager managing the personal assets of an
individual, the client is easily identified. However, when the member is
responsible for the portfolios of pension plans or trusts, for example, the
client is not the person or entity who hires the member but, rather, the
beneficiaries of the said plan or trust.

Financial institutions should be conscious of its duty of prudence and care

when developing (i.e. asset and security selection) and implementing (i.e.
buying and selling of securities) a client's investment strategy. If the FI has
control or discretion over a customer's account, it should not "churn" the
account, iLe. enter into transactions with unnecessary frequency having
regard to the custoner's agreed investment strategy. An FI should also not
switch a customer between products unnecessarily, considering what is
suitable for the client.

In fulfiling its duty to clients, a member has the duty to seek Best
Execution for every trade. In determining prudence and best execution, a
member should examine whether securities/investments/assets were
exposed to extraordinary hazards. Prudence addresses the appropriateness
of holding certain securities, while Best Execution addresses the
appropriateness of the methods by which securities are acquired or
disposed. Security selection seeks to add value to client portfolios by
evaluating future prospects; Best Execution seeks to add value by reducing
frictional trading costs.
To provide best execution, an FI must take reasonable care to ascertain the
price which is best available for the customer in the market at the time of
the transaction of the kind and size concerned. It should execute a
customer order at a price no less advantageous to the customer. Although
best execution may mean best available price to the customer, its concept
may be applied in a broader context. Best execution may refer to the
trading process financial institutions apply that seeks to maximize the value
of a client's portfolio within the client's stated investment objectives and
constraints. Value may be maximized by reducing trading costs including
price of security (when purchasing), brokerage fees, and commissions, and
other trade-related fees and charges. This alternative definition does not
necessarily conflict with existing regulatory definitions. What is emphasized
is the principle behind best execution and the importance of serting policies

16
 and procedures to enhance a financial instituion's ability to maximize the
value of a client's portfolio.
B. Fair Dealing

Financial institutions must deal fairly and objectively with allclients. A

member should act honestly, fairly and in the best interest of his client and
for the integrity of the market. Where a member advices or acts on behalf
of aclient, it shall ensure at all times that any representations or other
communications made and information provided to the client are accurate
and not misleading.

When a financial institution has multiple clients, rhe potential exists for it
to favor one client over another. This favoritisn may take various forms,
from the quality and timing of services provided to the allocation of
investment opportunities. The term "fair dealing" implies that the member
must take care not to discriminatc against any clients. Each client has
unique needs, investment criteria, and investnent objective so that not all
investment opportunities are suitable or all clients:

When establishing fairdealing compliance procedures, financial institutions

should consider the following points, parcicularly when giving ivestment
recommendations:

Limit the number of people involved who are privy to the fact that
investment recommendation is going to be disseminated.
Shorten the time frame between decision and dissemination, and make
reasonable effort to limit the amount of time that elapses betwecn the
decision to make investment recommendations and the time the actual
rccommerndation is disseminated.

Publish personnel guidelines for pre-dissemination, and establish

guidelines that prohibir personnel who have prior knowledge of an
investment recommendation from discussing or taking any action on
the pending recommendation.
Establish procedures for dissemination of investment recommcndations
so that all clients are treatcd fairly - that is, with the goal of informing
them at approximately the same time.

Develop a set of guiding principles that ensure (1) fairness to advisory

clients, both in priority of execution of orders and in the allocation of
the price obtained in execution on block orders or trades and (2)
timeliness and efficiency in the execution of orders. With these

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 principles, a financial institution may consider the following
proccdures:

> Requiring orders and modifications or cancellations of orders to be

in writing and time stamped;
> rocessing and cxecuting orders on a firstin, first-out basis;
> Developing a policy to address such issues as calcularing cxecution
prices and "partial fills" when trades are grouped, or blocked, for
efticiency purposes;
Giving all client accounts participating in a block trade the same
execution price and charging the same commission;
> When allocating rades for new issues, obtaining advance
indications of interest, allocating securities by clien: (rather than
portfolio manager), and providing for a method for calculating
allocations.

Disclose trade allocation procedures. Financial institutions should

disclose co clients and prospective clients how they select accounts to
parricipate in an order and how they derermine the amount of securicies
each account will buy or sell.
C Client Suitability

Members must consider the needs, circumstances and objectives of the

clients when determining the appropriateness and suitability of a given
investment or course of investment action.

The responsibilities conferred upon members to gather information and

make a suitabiity analysis prior to making a recommendation or taking
investment action falls on those members who provide investment advice in
the course of an advisory relationship with a client. Other members ofren
are simply executing specific instructions for retail clients when buying or
selling securities, such as shares in mutual funds. These members may not
have the opportuniy to judge the suitability of the parricular investment for
the person or entity. In cascs of unsolicited trade requests that a member
knows are unsuitable for the client, the member should make an effort to
explain to the client why such trade is unsuitable.

When an advisory rclationship exists, members must gather client

information at the inccption of the relationship. Such information includes
the client's financial circumstances, personal data (such as age and
occupation) that are relevant to investment decisions, attitudes toward risk,
and objectives in investing. This information should be incorporated into a
wTitten client suitability form that addresses the clienr's risk tolerance,

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 return requirements, and all investment constraints (such as tine horizon,
liquidity needs and other unique factors and circumstances).
The effort to determine the needs and circumstances of each client is not a
onctime occurrence. Investment recommendations or decisions are usually
part of an ongoing process that takes into account the diversity and
changing nature of portfolio and client characteristics. The passage of time
is bound to produce changes that are inportant with respect to investment
objectives. It is suggested that the client suitability review be updated on an
annual basis.

Suitability review can be donc effectively only if the client fully discloscs his
complete financial portfolio or condition including those portions not
managed by the member. If clients withhold such information, the
suitability analysis conducted by members cannot be expected to be
complete but must bè done based on the information provided.
A member should put the nceds and circumstances of each client and the
client's investment objectives into the client suitability form. The member
should take the following into consideration:

Client iderntification-(1) type and nature of clients, (2) che existence of

separate beneficiaries, and (3) approximate portion of total client assets.
Investor objectives-1) return objectives (income, growth in principal,
maintenance of purchasing power) and (2) risk rolerance (suitability,
stability of values).

Investor constraints-(1) liquidity needs, (2) expected cash flows

(patterns of additions and/or withdrawals), (3) investable funds (assets
and liabilities or other commiments), (4) time horizon, (5) investor
preferences, prohibitions, circUmstances, and unique needs.
D. Diligence and Reasonable Basis
In fulfilling its duties to clients, a financial institution should exercise due
skill, care and diligence in its dealings with existing and potential clients. In
particular, when providing advice to a client, he shall act diligently and
ensure that his advice and recommendations in relation to clients are based
on thorough analysis and take into account available alternatives.
The concept of due diligence can apply to different arcas, most notably on
the duty of the financial institution to provide investment
recommendations or take investment actions based on teasonable research,
investigation or analysis of investment alternatives, including suitability of
investments to clients Part of this due diligence process includcs the

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 diligence to obtain client information that willaid the financial institurion
determine suitability and the diligence in the implementation of its policies
and procedures.

Where the FI holds itself out as giving product recommendation, it must

not give any such recommendation unless it has carried out a reasonable
analysis of a sufficiently large number of products which are gernerally
available from the market or conducts the analysis on the basis of criteria
which reflect adequate knowledge of the products generally available from
the market.

The duty of due diligence is intertwined with the duty to maintain

independence and objectivity in providing investment rccommendations or
taking investment actions. Financial institutions should exercise diigence,
independence, objectivity and thoroughness in analyzing investments,
making investment recommendations, and taking, investment actions. To
achieve this, financial institutions must have a reasonable and adequate
basis, supported by appropriate research and investigation, for any
investment analysis, recommendation or action.

Where. the FI relies on persons/entities when providing the financial

research, the FI should be able to show that it was reasonable for the FI to
rely on the information provided to it in writing. It should take steps to
establish to that the said entity is competent to provide the information.
For instance, if a financial institution relies on thirdparty research, it
should make reasonable and diligent efforts to determine whether such
research is sound.

E. Disclosure of Information and Communication to Clients/Public

In addition to obtaining information from clients under its suitability

review process, among others, financial institutions are required to make
adequate disclosure of material information in its dealings with clients.
Members should provide clients with adequate information about the firm
particularly the financial condition of the business upon request.
Furthermore, a financial institution should make adequate disclosure of
relevant material information in its dealings with its clients, including
information about risks, necded by the client to make informed decisions.
The firiancial institution should pay due regard to the information nceds of
its clients and communicate the information to them in a way that is clear,
fair and not misleading. It should take reasonable steps to ensure that the
client understands the nature of the risks inherent in their transactions.

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 F Preservation of Confidentiality
Financial institutions must keep information about former, current, and
prospective clients confidential unless:
The information concerns illegal activities on the part of the client;
Disclosure is required by law; and
Theclient permits disclosure of thc informatin.
Confidentiality is paramount especially when a member reccives
information on the basis of its special ability to conduct a portion of the
client's business or personal affairs and the member receives information
that arises from or is relevant to that portion of the client's business chat is
the subject of the special, fiduciary, or confidential relationship.
disclosure of the information is required by law (e.g. disclosure of conflicts)
or if the information concerns illegalactivities by the client, however, the Fl
may have the obligaion to report the activities to the appropriate
authorities.
A financial institution should have appropriate policies and procedures to
maintain confidentiality of information received from clients. When in
doubt, an employee should consult with the financial institution's
compliance unit or legal department before disclosing confidential
information about clients.
IV. Conflicts of Interest

A Disclosurce of Conflicts

Members should avoid conflicts of interest and when they cannot be

avoided must make full and fair disclosure of all matters that could
reasonably be expected to impair their independence anxd objcctivitsy or
interfere with respective duties to thcir clicnts, prospcctive clients, and their
employer.

Mcmbers must ensure that such disclosures are prominent, arc delivercd in
plain languagc, and communicatc the relevant information effcctively.
Disclosure to Clients

Members must prudently maintain their objectívity whcn rendcring

investment advice or taking investment action. They must take rcasonable
steps to determine whether a conflict of interest exists and disclose ro
clientsany conflicts when known,

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 It is the rightful dury of the member to disclose market-making activities of
the institution. Such disclosure would alert clients that apurchase or sale
might be made from or to the institution's principal account.

When members providing investment services/transactions also serve as

directors, they should be isolated froun thosc making investmcnt decisions
by theuse of Chinese walls or similar restrictions.

Members should disclose any materially beneficial ownership/interest in a

security or other investment that the nember is recommending.
B Dealing for Personal Account

Management should ensure that adequate safeguards are establislhed with

regards to dealing for personal account, to prevent conflicr of interest or
insider dealing in any form. These safeguards should also reflect the need
to preserve confidentiality with respect to non-public price sensitive
information and to ensure that no action is taken by a member, which
might adversely affect the interests of the institution's clients.

Management should have a clearly defincd written policy for dealing for
personalaccount, which should include full disclosure of said transactions
Managers should be aware that a conflict of interest may arise if traders are
permitted to deal for themselves in those commodities, instruments or
products closely related to the ones in which they deal for their institution
and should stipulate clearly which ones, if any, the members can trade in
for their own account.

C Priority of Transactions

Investment transactions for clients and employers must have priority over
investment transactions in which a member is the beneficial owner.
Furthermore, a member shall handle orders of clients fairly and in che order
in which they are received.

lt is the responsibility of members to give the interests of their clients and

employers priority over their personal financial interests or the appearance
of a conflict of interest with respect to personal transactions. Client
transactions must take precedence over transactions made on behalf of the
member's institution or personal transactions.

Establish Blackout/Restricted Periods

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 Investinent personncl involved in the investnent decision-making process
should cstablish blackout periods prior to trades for clients so that members
cANnot take advantage of their knowledge of clíent activity by "front
running" client trades.
Individual institutions must decide who within the firm should be required
to comply with the trading restrictions. At a minimum, allmembers who
are involved in the investment decision-making process should be subjcct to
the same restricted period.

Reporting Requirements

The best method for monitoring and enforcing proccdures established ro

eliminate conflicts of interest rclating to personal trading is through
reporting recquirements, including the following:

Pre-clearance procedures. Investment personnel should clear all

personal investments to identifypOssible conflicts prior to the execution
of personal trades. Preclearance procedures are designed to identify
possible conflicts before a problem arises.

Disclosure of holdings in which the employce has abencficial interest.

Disclosure by investnent personncl to the firm should be made upon
commencement of the employment relationship and at lcast annually
thereafter.

To address privacy considerations, disclosure of personal holdings should

be handled in aconfidential manner by the institution.
V. Duties to Market Counterparties

A Knowledge of Trading Conventions

Financial institution_ must ensure that only qualified members arc allowed
to trade. Members should be trained and knowledgeable on the standard
trading conventions of the products chey are trading, which they are
expected to adhere to at all times.

B. Firmness of Price Quotation and Deals

Members should be guided by the principle of "Dictum Meum Pactum"

translated as "My Word is My Bond". Prices which are quoted by members

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should be taken as firm unless otherwise qualified (e.g. under reference).
Members should also honor all their closed or "done" transactions.

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