QUESTIONNAIRE. C:\RR-II\ques - mkt conduct intermediaries (SVS).doc1

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1 QUESTIONNAIRE Market conduct guidelines for intermediaries in EMC jurisdictions including matters to be addressed in mandates or agreements between intermediaries and their clients. This survey stems from the meeting of the IOSCO EMC working group 3 (Regulation of Market Intermediaries) meeting held in New Delhi, India on 22 nd November During its meeting the EMC approved the recommendation by WG3 that a mandate relating to: "Market conduct guidelines for intermediaries in EMC jurisdictions including matters to be addressed in mandates or agreements between intermediaries and their clients" be pursued in the form of a survey. C:\RR-II\ques - mkt conduct intermediaries (SVS).doc1

2 SURVEY / ASSESSMENT FORM Market conduct guidelines for intermediaries in EMC jurisdictions including matters to be addressed in mandates or agreements between intermediaries and their clients YOUR COUNTRY: CHILE YOUR REGULATORY BODIES NAME: Superintendencia de Valores y Seguros (SVS) The objectives of market conduct guidelines for intermediaries in EMC jurisdictions should be aimed at the achievement of the three core objectives of securities regulation: (a) The protection of investors; (b) Ensuring that markets are fair, efficient and transparent; and (c) The reduction of systemic risk. Securities regulators should co-operate to ensure better regulation of financial or capital markets by exchanging information on their respective experiences and establishing standards that promote the core objectives, an exercise that will be achieved in part with this survey. As a result of the combination of technology and innovation, market intermediaries can now develop various types of platforms and proprietary electronic communication systems, which allow them to provide their services to many unseen clients. These services were traditionally only provided by organisations on a face to face basis (Now clients may never meet the intermediary that services them). This technology and innovation also allows these modern intermediaries and their systems to operate across jurisdictional borders. This paper will first identify and discuss in Part A the general framework for the oversight of market conduct guidelines for intermediaries in EMC jurisdictions. Part B will look more closely at the matters to be addressed in mandates or agreements between intermediaries and their clients. It is important to note that in order to determine whether a particular element of the oversight guidance is appropriate, the regulator should take into consideration the following factors: The nature of the market and its participants, the degree of integration with other markets, The growth of internationalisation, and The impact of technology. Generally the regulator will use a variety of techniques. Also, the regulator should periodically review the effectiveness of the techniques it is using and assess whether any changes need to be implemented. The level of regulation, and application of the framework may also depend upon market characteristics including the structure of the market, users, rights of access, types of products traded, the ability of the market authorities to fulfil their self-regulatory role, and the powers and authority granted by law. In terms of a general framework, the elements of effective oversight consist of the following: Identifying the appropriate regulatory objectives. Establishing mechanisms, which will achieve those objectives. Monitoring whether the objectives are being achieved. Taking enforcement or other corrective action when there is a violation or lack of compliance with requirements. Regulators in all markets acknowledge that investors want fair, honest and orderly markets. Thus, the integrity of the markets is an important matter of public interest and regulators should take actions that promote these objectives of fair and efficient capital markets. The IOSCO Principles expand upon these

3 objectives to develop the following more detailed principles regarding orderly and transparent markets, prohibition of unfair trading practices, identification and management of risks, and effective clearing and settlement. There should be ongoing regulatory supervision of intermediaries and their communication systems, which should aim to ensure that the integrity of intermediating for clients is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. Orderly markets are important because they are the basis of stable and efficient functioning markets and promote confidence in the system. Note: Please attach supporting documentation and relevant explanations in response to all questions where possible. A. Market conduct guidelines for intermediaries in EMC jurisdictions 1. Are intermediaries regulated in your jurisdiction? [Please explain what qualifies as an intermediary in your jurisdiction if applicable] Yes. Individuals or corporate entities that are dedicated to securities brokerage operations are securities intermediaries. Intermediaries who act as members of a stock exchange are called stockbrokers and those who operate outside of an exchange are called securities broker/dealers. Notwithstanding the provisions established in special laws and in the following article, no one may act as a stockbroker or securities broker/dealer without being previously registered in the registries the SVS shall maintain for this purpose If the answer to (1) above is, state the nature and extent of this regulation in terms of the following subject areas: (2.1) What type of intermediaries do you regulate (e.g. Those that fulfil certain functions only - Please describe), The SVS regulates both types of intermediaries defined in the Chilean Securities Market Law, as defined in the previous question. (2.2) Are intermediaries registered (Please explain how and with whom)? No one may act as a stockbroker or securities broker/dealer without being previously registered in the registries the SVS shall maintain for this purpose. However, banks and finance companies shall not be obliged to register in the Stockbrokers and Securities Broker/Dealers Registry in order to carry out trading functions in accordance with the powers conferred upon them by the General Banking Law. Nevertheless, they shall be subject to all the other provisions of this law with regard to their activities as such. To be eligible for registration in the Stockbrokers and Securities Broker/Dealers Registry, the interested parties shall demonstrate the following to the SVS satisfaction: a) That they are adults; 1 Article 24 of the Chilean Securities Market Law (Law Nº18,045) C:\RR-II\ques - mkt conduct intermediaries (SVS).doc3

4 b) They are high school graduates, or have completed equivalent accredited studies; c) They have an office that has been instituted to engage in the activities of a securities broker; d) They permanently maintain a net capital requirement of 6,000 U.F. 4 to perform the function of a stockbroker or securities broker/ dealer. Notwithstanding the above, in order to carry out the operations indicated in the second subparagraph of article 24 of this law, they shall maintain a net capital requirement of 14,000 U.F.; e) They establish guarantees in the form and in the amounts established in this law; f) Their registration in the Stockbrokers and Securities Broker/Dealers Registry has not been cancelled. g) They have not been convicted of the crimes established in this law, of the economic crime referred to in Statutory Decree Nº280, of 1974, and in general of crimes that merit penal servitude; h) They have not been declared bankrupt, and i) Any other requirement determined by the SVS by general norms. (2.3) How are these intermediaries regulated (By a self-regulatory body or by the regulator)? Please describe the regulatory structure and the type of criteria these intermediaries must fulfil. The intermediaries are regulated directly by the Chilean securities regulator (the SVS). The Securities Market Law defines intermediaries as natural persons or corporations who engage in the business of securities trading. As long as they comply with the technical regulations and financial reserve requirements established by the Law and by the SVS, these persons may also buy and sell securities on their own account, with the intent to transfer rights upon the same. It should be noted that intermediaries must undertake this activity as their exclusive line of business, maintain a net capital requirement, and be registered with the SVS. 3. Do you believe that your market conduct guidelines for intermediaries are adequate? [Please explain] Yes, because they comply with the Objective and Principles of Securities Regulation set by IOSCO. 4. Do you believe there are areas in which your market conduct guidelines for intermediaries can be improved? [Please explain] There is a lot to do in the area of globalization. For example, today overseas intermediaries cannot participate directly in the Chilean market. By the same token, Chilean intermediaries are not allowed to participate directly in other markets of the World. 5. If your answer to (4) above is, are you in the process of improving your market conduct guidelines for intermediaries? At this time, the SVS is not tackling the globalization process for intermediaries yet. 6. If your answer to (5) above is, what type of timetable do you expect to complete these changes? Not applicable yet. 7. In terms of the following outline for market conduct guidelines for intermediaries, 4 U.F. is an abbreviation for unidad de fomento, a monetary index used in Chile for business purposes that is tied to a basket of leading prices. At October 24, 2000, 1 U.F. equals $15, Chilean pesos or US$27.20 approx.

5 indicate which are applicable in your jurisdiction [Explanatory comment is welcome]: No GUIDELINE 7.1 Does an intermediary when receiving documents of title or cash from or on behalf of a client, immediately issue a signed and dated receipt setting out the purpose for which each respective document has been lodged and containing a description of the securities sufficient to identify them. 7.2 Is a financial intermediary prohibited from directly or indirectly doing any of the following- (a) Sell any investments owned by the financial intermediary to any client; (b) Buy for own account any investments owned by a client; (c) Exercise voting rights on behalf of clients to gain control of a listed company, directly or indirectly, except where such voting rights are exercised to protect the interests of the clients on whose behalf the investments are held or on the instructions of such clients. 7.3 Is a financial intermediary required to at all times, observe high standards of integrity and fair dealing in managing investments on behalf of clients and at all times, act in the best interests of the clients. 7.4 Is a financial intermediary expected to at all times act with due skill, care, diligence and good faith? 7.5 Is a financial intermediary required at all times to observe high standards of market conduct and provide the client with sufficient particulars regarding market practices and the risks inherent in the different markets and products? 7.6 Is a financial intermediary required to obtain from the client reasonable information about the circumstances and investment objectives of the client necessary to enable the financial intermediary to fulfil his, her or its duties toward that client? 7.7 Is a financial intermediary required to take all reasonable steps to give the client, in a comprehensible and timely way, any reasonable information required by that client relating to the investments of that client? 7.8 Is a financial intermediary required to avoid any conflict between the interest of the financial intermediary and the interest of the client? Where a conflict of interest does arise, is fair treatment of the client ensured by requiring that the intermediary adequately disclose details of such conflict to the client while maintaining the confidentiality of other clients or the financial intermediary declines to act for that client? Is a financial intermediary required not to place the interests of that financial intermediary above those of the client? APPLICABLE ( OR NO) (a) (b) (c) 7.9 Is a financial intermediary required to disclose to the client C:\RR-II\ques - mkt conduct intermediaries (SVS).doc5

6 all fees and other charges, whether direct or indirect, relating to the management of the investments of that client and also disclose all material consequential benefits received as a result of the investments of that client? Is a financial intermediary required to explain to the client how fees and other charges are calculated and charged in sufficient detail to enable the client to understand the method of calculation? 7.10 Is a financial intermediary required to, with regard to investments in listed securities, only deal directly through a member of an exchange? 7.11 Is a financial intermediary prohibited by means of any statement, promise, forecast or by any other action which such financial intermediary knows to be misleading or which is likely to be misleading from- (a) Inducing the client to enter into an agreement with the financial intermediary to manage investments; or (b) Inducing the client to enter into any other agreement relating to securities? 7.12 Is a financial intermediary required to ensure that the staff of the financial intermediary are properly trained? 7.13 Is a financial intermediary required to maintain, in one of the official languages if applicable, accounting records on a continual basis so that records are at all times up to date or can be brought up to date within seven days or such longer period as the Regulator may allow? 7.14 Is a financial intermediary required to preserve the above mentioned accounting records in a safe place for a period of at least five years from the date of the last entry therein? 7.15 Is a fin ancial intermediary required to appoint an independent auditor to conduct an annual audit of the financial statements and to report whether the financial statements fairly present the financial position of the financial intermediary as at the date of such statements and the results of the operations and cash flow information for the period then ended, in accordance with generally accepted accounting practice and to obtain the information required? 7.16 Is a financial intermediary required to within three months after the financial year end of an financial intermediary, the financial intermediary shall furnish the Regulator with- (a) Audited financial statements; and (b) A report by the auditor in the form required? 7.17 Is a financial intermediary required to furnish the Regulator with such information concerning the shareholders, directors, members, partners or senior employees and authorized representatives of the financial intermediary, or any other information, as the Regulator may from time to time require? 7.18 Is a financial intermediary required to within three months after the financial year end of an financial intermediary, an financial intermediary shall furnish the Regulator with a compliance report, in the form required, signed by the compliance officer or the auditor, as the case may be? (a) (b) (a) (b)

7 7.19 Despite the completion and signing of the compliance report by the compliance officer or auditor, as the case may be, does the financial intermediary remain fully responsible for ensuring compliance with the appropriate legislation? 7.20 Are the assets of a financial intermediary (excluding goodwill) required at all times to exceed the liabilities (excluding loans subordinated in favour of all other creditors) of such financial intermediary? 7.21 When a financial intermediary ceases to conduct business, its business is wound up or liquidated, or its approval is withdrawn by the Regulator, is the auditor of the financial intermediary required within 45 days after the date of such ceasing, dissolution, liquidation or withdrawal, as the case may be, to furnish a report to the Regulator confirming that all cash and documents of title relating to assets and a final statement of account have been delivered to the various clients? If a financial intermediary is for some or other reason unable to comply fully with this condition, is the report required to contain full particulars concerning the documents which have not been delivered, full reasons therefore, as well as a plan with dates on which compliance will take place? B. Matters to be addressed in mandates or agreements between intermediaries and their clients. 1. Do intermediaries require mandates or agreements between intermediaries and their clients in your jurisdiction? 2. If your answer to (1) above is, are there any guidelines pertaining to these mandates or agreements between intermediaries and their clients? 3. In terms of the following guideline for the content of mandates or agreements between intermediaries and their clients, indicate which are implemented in your jurisdiction [Explanatory comment is welcome]: GUIDELINE When acting as an intermediary on behalf of a client, is the intermediary required to enter into a written mandate with the client. Is this written mandate required to record the arrangements made between the parties, and is it required to - (a) State the investment objectives of the client; APPLICABLE ( OR NO) C:\RR-II\ques - mkt conduct intermediaries (SVS).doc7

8 (b) (c) (d) (e) (f) (g) Stipulate in whose name investments held from time to time by the financial intermediary on behalf of the client are to be registered and whether it is to be registered in the name of - (i) The client or the nominee company nominated by the client; (ii) The nominee company of the financial intermediary or a nominee company within the group of companies of which the financial intermediary forms part; (iii) The nominee company of a member, in the case of an financial intermediary who deals through a member; or (iv) A nominee company of any depository institution or central securities depository. Stipulate the trust account or other bank account (opened in the name of the client) in which the financial intermediary shall deposit and where applicable, from which the financial intermediary shall withdraw, moneys received in connection with the management of investments; Stipulate, where applicable, at which intervals any cash accruals (including dividends and interest) or other corporate actions which the financial intermediary receives on behalf of the client, shall be paid or transferred to the client; Stipulate the basis on which, the manner in which and the intervals at which the client will remunerate the financial intermediary for management of investments on his or her behalf; for the purposes of this provision it shall be deemed that the basis of the remuneration has not been stipulated if the remuneration must be calculated with reference to a source outside the mandate or if it is placed within the discretion of any person; Empower either party to the mandate to terminate the mandate after notice in writing of not more than a limited number calendar days; and Stipulate if the financial intermediary is authorised to invest in investments outside your jurisdiction and if so, provide a description of - (i) The conditions in terms of which the investments will take place; (ii) The manner in which such investments may be made; (iii) The risk profile pertaining to such investments, with particular reference to the currency risk; (iv) The countries in which the investments may be made; (v) The exchange on which the investment are listed if applicable; (vi) The name and address of the foreign intermediary used, if (vii) (viii) applicable; The name and address of the foreign regulator regulating the foreign interm ediary and if such intermediary is approved or registered by such regulator; and The name and address of the foreign regulator regulating the investments. 4. Are there any other requirements that are not covered above also applicable? NO 5. Are the terms of the mandate prescribed by, and required to be approved by, the Regulator. NO, there is a generic mandate that can be used as an example which contains the minimum requirements.

9 6. Is the financial intermediary prohibited from effecting a substantive amendment to the mandate or mandates referred to above, without the financial intermediary having obtained the prior written approval of the Regulator. 7. When a mandate granted to an financial intermediary is terminated, is the intermediary required to immediately return all cash, assets and documents of title to the client and simultaneously provide the client with a detailed final statement of account. If the assets and documents of title are in possession of a custodian or nominee company, is the financial intermediary required to issue an instruction to such custodian or nominee company to return such assets or documents of title to the client? Is the financial intermediary required to indicate on the final statement of account that such instruction has been given? Upon withdrawal by the Regulator of the approval of a financial intermediary, are all mandates required, despite any notice period in terms of the mandate, to automatically be cancelled without prejudice to the rights and obligations of the parties. When a mandate is terminated, the financial intermediary has a maximum of 2 business days to return cash, securities, documents, etc. C:\RR-II\ques - mkt conduct intermediaries (SVS).doc9