On 15 June 2021, Bursa Malaysia Securities Berhad ("Bursa Malaysia") announced amendments to the Rules of Bursa Malaysia Securities ("Rules") and the Directives of Bursa Malaysia Securities ("Directives") to enhance the discretionary trading framework for securities traded on its securities exchange. These amendments will take effect from 30 June 2021.
The following are the main changes to the discretionary trading framework under the amendments to the Rules and the Directives:
New definition of Discretionary Account
The Rules are amended to introduce a new definition of "Discretionary Account", that is, "An account for trades executed by a Participating Organisation on behalf of a Client pursuant to an arrangement where the Client authorises the Participating Organisation to trade on the Client's behalf on a discretionary basis".
Permitted profit sharing or fee arrangement
A Participating Organisation ("PO") or a Dealer's Representative ("DR") may charge a client on either (but not both) of the following bases for the service of operating a Discretionary Account:
- accept a share in the profits from the client's Discretionary Account; or
- charge a fee calculated based on a percentage of the total value of assets or portfolio managed under the client's Discretionary Account.
Additional responsibilities of participants
Additional responsibilities are imposed on a PO, a DR and the Compliance Office ("CO") of the PO under the Directives.
A PO must ensure compliance with the following:
- conduct a readiness audit before it commences discretionary trading;
- obtain prior written authorisation from the client before exercising any discretionary authority and maintain comprehensive records of such authorisation;
- enter into a written agreement with the client which sets out the terms and conditions for the operation of the client's Discretionary Account;
- maintain complete and accurate records of every transaction undertaken under any Discretionary Account, including the details, date and time of the transaction and the name of the DR who executed the transaction;
- at all times act in the best interest of the client when operating a Discretionary Account; and
- ensure that there is no conflict of interest arising from such transactions.
A DR must satisfy the following criteria before operating a Discretionary Account:
- have a minimum of five years' experience in dealing in securities or a minimum of five years' direct experience in fund management; and
- have no adverse findings or enforcement proceedings or actions commenced or taken against him under the Rules and the Directives or the securities laws.
PO and DR
A PO and DR must:
- open a new trading account and a new securities account for discretionary trading for each client;
- ensure that the trading account and securities account are designated as a Discretionary Account, and bear the appropriate account qualifier and description prescribed in the Directives;
- comply with the Securities Commission Malaysia's Guidelines on Market Conduct and Business Practices for Stockbroking Companies and Licensed Representatives and the requirements prescribed by Bursa Malaysia in respect of Discretionary Accounts;
- comply with the
following in operating a Discretionary Account:
- trading is carried out in the designated Discretionary Account;
- trading in a Discretionary Account is confined to securities quoted on the Official List;
- trading in a Discretionary Account must commence with a cash transfer from a client instead of a transfer of securities or other types of collateral in lieu of cash, and must be carried out on a cash upfront basis; and
- funds in a client's Discretionary Account must be identifiable from the funds in the client's non-Discretionary Account, if the funds are maintained in the same trust account.
The responsibilities of a CO have been modified and are as follows:
- ensure compliance with the Rules and the Directives;
- review to ensure that prior written authorisation from the client has been obtained;
- review to ensure that the PO has entered into a written agreement with the client which sets out the terms and conditions for the operation of the client's Discretionary Account, including adequate and accurate disclosure of the risks involved;
- ensure that each discretionary order must be identified as a discretionary order at the time of the entry;
- review the trades done in a Discretionary Account regularly;
- review to ensure that the PO has at all times acted in the best interest of the client in operating a Discretionary Account;
- review to ensure that all discretionary trades are executed within the proper discretionary authority granted to the PO and that such trades are properly recorded;
- review to ensure that complete and accurate documentation is maintained for every transaction undertaken under any Discretionary Account; and
- review the Discretionary Account transactions to ensure that there is no conflict of interest in the execution of client trades and proprietary trades.
The main enhancements to the discretionary trading framework lie in the introduction of clear obligations to be complied with by a PO and a DR under the Directives in relation to the operation of Discretionary Accounts. The introduction of the profit sharing or fee arrangements are to be welcomed.
Originally published 18 June 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.