STANDARDS FOR INVESTMENT MANAGERS

Fit and Proper criteria for directors and persons Dealing with Clients

01 (1) A Registered Investment Manager shall not appoint an individual as a director or a person dealing with clients for and on its behalf , if such person has been:

(a) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by a regulatory or supervisory authority;

(i) established by law in Sri Lanka or abroad; or

(ii) constituted under law as a commission of inquiry, tribunal or other similar body; or

(iii) by any professional body which in the opinion of the SEC is of an established and credible stature; or

(c) where a commission of an offence by such person has been compounded in terms of Section 51A of the SEC Act during the past 3 years, preceding the date of the appointment; or

(d) found guilty of a capital market offence by a court of law in terms of the SEC Act, or the Securities Law of any other country;

unless the prior approval of the Commission is obtained for such appointment. The Commission on an application made under this provision by a Registered Investment Manager, may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances. 01 (2) (a) A Registered Investment Manager shall not allow an individual to continue as a director or a person dealing with clients, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person dealing with clients has been;

(i) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(ii) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;

a. established by law in Sri Lanka or abroad; or

b. constituted under law as a commission of inquiry, tribunal or other similar body; or

c. by any professional body which in the opinion of the SEC is of an established and credible stature;

(iii) an offence committed by such person has been compounded in terms of Section 51 A of the SEC Act; or

(iv) found guilty of a capital market offence by a court of law in terms of the SEC Act, or the securities law of any other country.

01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person dealing with clients for and on behalf of a Registered Investment Manager may be;

i. for a period of months or for a period of years with a right to reapply at the end of the said period; or

ii. a permanent bar from the industry; or

iii. for a period from acting in a supervisory capacity or from performing a particular duty;

depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deem to be relevant considering the circumstances surrounding the commission of such offence.

Qualifications and Experience

02. Every Director and /or employee of an Investment Manager who are involved in managing client funds shall posses the qualifications and/or experience as set out in (a) or (b) below;

(a)(i)

– Associate of the Institute of Chartered Accountants of Sri Lanka;

– Associate of the Chartered Institute of Management Accountants- UK;

– A degree from an accredited Sri Lankan or foreign university;

– Charter holder of the CFA Institute;

– Associate of the Chartered Association of Certified Accountants;

– Associate of the Chartered Institute of Bankers, UK;

– Associate of the Institute of Bankers of Sri Lanka;

– Diploma in Capital Markets, conducted by the SEC; or

– An equivalent or higher professional and/or academic qualification

and

(ii) experience in the financial/securities market for a minimum period of two years.

(b) Experience in the financial/securities market for a minimum period of seven years. Provided that experience for the specified duration per se will not fulfill the required qualification and the Commission shall consider the nature, scope and intensity of experience in determining its adequacy. An individual who wishes to obtain a registration as a Market Intermediary shall posses the qualifications/experience specified in 2 (a) above.

Requirement for a Minimum Number of Persons Dealing with Clients

03. Every Investment Manager shall ensure that a minimum of two persons possessing qualifications and/or experience set out in 02 above are employed to manage client funds. The SEC may direct an increase in the number of such qualified personnel on account of the volume of business proposed to be undertaken or undertaken by such an Investment Manager.

SEC Sanction Required for other Business

04. An Investment Manager shall not engage in any other business other than that of an Investment Manager unless prior written approval of the Commission is obtained.

Financial Requirements and Infrastructure

05.An Investment Manager shall at all times maintain a minimum Net Capital stipulated by the SEC from time to time.

i. An Investment Manager shall at all times, maintain a minimum Liquid Capital stipulated by the SEC from time to time.

06. An Investment Manager shall ensure that key duties and functions of the front office and back office are clearly segregated to avoid any conflicts of interest.

07. An Investment Manager shall maintain proper systems, processes and human resources suitable and adequate to support the due functioning of its business as an Investment Manager at all times.

Corporate Governance

08. An Investment Manager shall at all time act in the best interest of the clients while establishing and implementing just and fair business practices. 09. All Investment Managers shall adhere to operational standards specified in Schedule 1 of the referred criteria.

Maintenance of Records

10.(a) All Investment Managers shall maintain the following records of clients in its office:

(i) all powers of attorney granted to the Investment Manager by the clients;

(ii) all subsisting agreements entered into by the Investment Manager;

(iii) all agreements entered into by the Investment Manager that have been concluded spanning a period of six years from the date of conclusion pertaining to the identity of all clients, all transactions relating to clients including the bases for investment decisions;

(iv) records to support investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients for a minimum period of six years;

(v) a comprehensive written record of all complaints received from clients and action taken thereon by the Investment Manager representative of the duration of six years reckoned from the date of conclusion of action on such complaint.

(b) An Investment Manager shall have suitable information recording and retrieval systems and maintain such information for inspection by the SEC.

(c) An Investment Manager shall ensure confidentiality of all information relating to clients including such client’s identity and transactions carried out for such client, unless and to the extent such disclosure is required by law.

Segregation of Client Funds

11. An Investment Manager shall ensure:

(a) that the money of each client is maintained in separate bank accounts to enable clear identification of the same;

(b) that the monies and assets held on behalf of the clients are not pooled;

(c) that all monies and assets held for and on behalf of clients are segregated from monies and assets held by the Investment Manager;

(d) that the monies of the clients shall not be utilised except as specifically sanctioned in writing by such clients.

Material Information and Contract

12. All Investment Managers shall provide clients and potential clients with an “Investment Management Services Guide” which shall include accurate and complete information. Without prejudice to the generality of this clause, the Guide shall include inter alia the provisions stated in Schedule 2 of the referred criteria.

13. All Investment Managers shall execute a written contract prior to carrying out any business for and on behalf of a client containing all the terms and conditions agreed to by and between itself and the client and such contract shall not be modified in any way other than in writing. Without prejudice to the generality of this clause it shall inter alia include provisions stated in Schedule 3 of the referred criteria.

14. All Investment Managers shall request for a Power of Attorney from the clients prior to carrying out any business for and on behalf of a client.

Valuation

15.(a) An Investment Manager shall ensure that it has systems that are capable of issuing clients with regular portfolio valuations and notification of all transactions made on behalf of the client.

(b) An Investment Manager shall provide its clients with current and accurate portfolio valuations on a monthly basis.

Financial Reporting and Disclosures

16. An Investment Manager shall provide SEC with information as set out as follows:

a. A ‘Financial Report’ prepared quarterly in conformity with the Sri Lanka Accounting Standards signed by a Director and the Chief Executive Officer pursuant to a Board resolution;

b. A copy of the statement of audited accounts prepared annually in accordance with the Sri Lanka Accounting Standards shall be submitted to the SEC within a period of six months from the close of each financial year;

c. An Investment Manager shall provide the SEC with information in conformity with formats stipulated by the SEC from time to time.

17. All Investment Managers shall immediately notify the SEC of the percentage holdings in it by its parent/owning company(s), subsidiary company(s), associate company(s) and partnership(s) and of shareholders holding more than 20% or more of its equity.

වෙළෙඳ දැන්වීම්

18.An Investment Manager shall ensure that the content in advertisements promoting its services is accurate, materially complete and does not have the capacity to mislead the public.

a. The advertisement shall not guarantee a yield and/or return on investment.

b. Any reference to performance shall only be demonstrated by reference to relevant and published benchmarks.

c. An Investment Manager shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.

d. An Investment manager shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.

Regulatory Compliance and Internal Controls

19.An Investment Manager shall have an internal compliance manual applicable to its directors and employees which sets out adequate compliance procedures and practices to ensure:

i. that the directors and employees of the Investment Manager do not contravene the provisions of the SEC Act, Part V to the Schedule of the SEC Act, the criteria set out herein and any other Rules or Directives issued by the Commission time to time; and

ii. the consistent and fair implementation of its operational procedures and administrative processes.

b. An Investment Manager and its Directors shall be responsible for due compliance with such internal compliance manual.

c. An Investment Manager shall make an Annual Compliance Report signed by a director and the Chief Executive Officer confirming compliance with Part V to the Schedule to the SEC Act, the criteria set out herein and any other Rules or Directives issued by the Commission time to time and forward same to the SEC within 45 days after the closure of each financial year.

Schedule 01 – Criteria on Operational Standards

All Investment Managers shall;

a. ensure that the account opening procedures facilitate Know Your Customer (KYC) guidelines issued by the Financial Intelligence Unit (FIU) of CBSL;

b. exercise diligence and independence in analyzing investments and making investment recommendations and managing investment portfolios and shall establish and maintain procedures that will enable the monitoring of compliance by its employees;

c. Ensure that all investment decisions, recommendations and actions shall be based and supported by appropriate research;

d. maintain an effective complaints handling process;

e. ensure that its relationships or activities create no conflict of interest between itself and its clients. In the event such conflict cannot be avoided there shall be full disclosure thereof to its clients and to the SEC;

f. outsourcing of business shall be based on proper written agreements;

g. shall not guarantee a specific return to a client or compensate clients for any loss made in the respective portfolios, unless attributable to negligence.

Schedule 02 – Investment Manager Services Guide

The Investment Management Services Guide shall inter alia include the following;

a. names of persons authorized by the Investment Manager and approved by the SEC to deal with clients in providing investment advice;

b. dispute resolution mechanisms available to a client;

c. notice of reporting frequency;

d. the Company Profile and the Board of Directors; and

e. such other information which could be reasonably construed as having a bearing on functions carried out by an Investment Manager.

Schedule 03 – Written contract between the Investment Manager and the Client

The written contract between the Investment Manager and the clients shall inter alia include the following;

a. the investment objective;

b. the investment strategy and associated risks;

c. the contract period;

d. the income distribution policy;

e. the maximum leverage level;

f. the exit mechanism(s);

g. the applicable taxes;

h. the parameters within which investments may be carried out and the basis on which performance may be reviewed. Any measure used shall be a relevant published benchmark;

i. the reporting frequency and content thereof; and

j. the fee structure including terms of payment.