1 COMPLIANCE FUNCTION AT MARKET INTERMEDIARIES FINAL REPORT A REPORT OF THE TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS MARCH 2006 2 Preamble The IOSCO Technical Committee Standing (TC) published for public consultation in April 2005 a Consultation Report on Compliance Function at Market Intermediaries.1 The Consultation Report set out a number of supplementary principles with measures for implementation to assist market intermediaries to increase the effectiveness of their compliance function. Following the receipt of comments by the public, the IOSCO Technical Committee Standing Committee on the Regulation of Market Intermediaries revised the Consultation Report and the IOSCO Technical Committee approved the final Report during its February 2006 meeting. 1 Available at: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD198.pdf. 3Key terms In this report, the following terms are used with the following meaning: Compliance function: The term “compliance function” is used as a generic reference to refer to the range of roles and responsibilities for carrying out specific compliance activities and responsibilities. Governing authority: The term “governing authority” is used to refer to, for example, the board of directors, the general partner of a partnership, the supervisory board in jurisdictions that have a dual board structure, and the board of auditors. In some countries, the board of directors has the main, if not exclusive, function of supervising the executive body (e.g. senior management, general management) so as to ensure that the latter fulfils its tasks. For this reason, in some cases, it is known as a supervisory board. This means that the board has no executive functions. In other countries, by contrast, the board has a broader competence in that it lays down the general framework for the management of a firm. Furthermore, in some countries, there is an additional statutory body which audits the directors’ execution of their duties. Senior management: The term “Senior management” means the persons who direct the business of the market intermediary. Reporting / Notification: The term “Reporting” is used to refer to reporting within a market intermediary. The term “Notification” refers to reporting externally to third parties, such as regulators. See topics 1 and 2 for discussion on reporting obligations and topic 6 for discussion on notification obligations. Policies and procedures: The term “policies and procedures” is used in a general sense to include, among other things, procedures for supervision and procedures on required and prohibited activities. Some market intermediaries have different sets of policies and procedures for different purposes or for different users. For example, some intermediaries may have one set of policies and procedures that outline guidelines with respect to required and prohibited actions under the regulatory framework, a second set that outlines the supervisory structure for the business units, and a third set that describes the activities of the compliance function. 4 I. Introduction The purpose of this paper is to review existing IOSCO principles and establish broad supplementary principles in the area of compliance. Compliance is intrinsic to the operations of market intermediaries because they must have systems or processes in place to help ensure that they are complying with all applicable laws, codes of conduct and standards of good practice in order to protect investors and to reduce their risk of legal or regulatory sanctions, financial loss, or reputational damage.2 Market intermediaries should conduct themselves in a way that protects the interests of their clients and helps to preserve the integrity of the markets.3 They must comply with all regulatory frameworks in which they operate. Compliance with securities laws, regulations and rules4 (referred in this paper as “securities regulatory requirements”) is part of the essential foundation of fair and orderly markets as well as investor protection. It is equally important, however, that firms develop a business “culture” that values and promotes not only compliance with the “letter of the law,” but also a high ethical and investor protection standard. Market intermediaries have become more innovative on how they structure their businesses in order to maximize profits and provide different services to their clients. For example, there has been unbundling of services to clients, partnering with other