REGULATIONS ON INVESTMENT ADVISERS By Dr Charles Asembri

OUTLINE WHO IS AN INVESTMENT ADVISER WHY REGULATE INVESTMENT ADVISERS WHAT DOES REGULATION ENTAIL

WHO IS AN INVESTMENT ADVISER DEFINITIONS: VARIOUS DEFINITIONS OF AN INVESTMENT ADVISER Any person who, for compensation (a flat fee or percentage of assets managed), offers investment advice. This definition includes a person who issues written reports or analyses for compensation.

Definitions (cont’d) 2) An individual or organization that manages and makes day-to-day investment decisions regarding the purchase or sale of securities. Also called a Portfolio Manager. 3) A firm or individual who is compensated for providing advice to investors about the value of securities or the advisability of buying and selling securities.

Definitions (cont’d) 4) Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

Definitions (cont’d) 5) The Maldives Securities Act defines an investment adviser as: A person or persons who- 1) carries on the business of advising others concerning securities; or 2) as part of a regular business issues or publishes analysis or reports concerning securities; or 3) pursuant to a contract or arrangement with a client, undertakes on behalf of the client the management of a portfolio of securities for the purpose of investment.

WHO CAN BE LICENSED The Maldives Securities Act provides that: a) No person shall act as an investment adviser or hold himself out to be an investment adviser unless he is the holder of an investment adviser’s license issued under the Act. b) An investment adviser’s license shall be granted to a company provided it is a company registered under the Companies Act, or an individual provided that person is over the age of 18 years.

Licensing (cont’d) Generally, companies which are licensed as investment advisers are required to obtain license for the individuals or persons who actually provide the advice. These individuals are licensed as investment adviser’s representatives. Provisions of Sections 38, 60(a) and 60(c) of the Securities Act will allow for the licensing of such investment adviser’s representatives.

WHO IS AN INVESTMENT ADVISER REPRESENTATIVE An investment adviser representative is defined as “a person, in the direct employment of, or acting for or by arrangement with an investment adviser, who performs for the investment adviser any of the functions of an investment adviser (other than work ordinarily performed by accountants, clerks or cashiers) whether his remuneration is by way of salary, commission or otherwise and includes a director or officer of a body corporate who performs for the body corporate any of the said functions”.

WHY REGULATE INVESTMENT ADVISERS As intermediaries in the securities industry, investment advisers must meet certain minimum initial and ongoing requirements in order to ensure integrity and investor confidence in the securities industry. In short, their regulation is necessary in order to protect investors. The Capital Market Development Authority (CMDA) is empowered by the Securities Act to regulate these intermediaries.

WHAT DOES REGULATION ENTAIL 1) LICENSING AND RENEWAL 2) ONGOING SURVEILLANCE AND MONITORING OF COMPLIANCE 3) ENFORCEMENT

WHAT DOES REGULATION ENTAIL 1) LICENSING AND RENEWAL Requirements include: Competency (Professional/academic) Fit and Proper criteria Capital adequacy Payment of Fees

What does regulation entail (cont’d) 2) ONGOING SURVEILLANCE AND MIONITORING OF COMPLIANCE WITH RULES/REGULATIONS Areas covered: Conduct of Business Capital Requirements How regulated: Inspections (on-site, off-site) Investigations of complaints or infractions Periodic Reporting

What does regulation entail (cont’d) 3) ENFORCEMENT Apply Sanctions Penalties as provided in Act/Regulations.

1. LICENSING PARTICULARS OF APPLICANT to be provided, including: Name and location of principal place of business; Range of services provided Bankers, auditors Shareholding structure; Particulars & qualifications of directors and officers Statement to confirm that neither the applicant nor any of its directors has been declared bankrupt, has been convicted on fraud charges, has had a previous license revoked or suspended, etc

LICENSING (CONT’D) b) CAPITAL REQUIREMENTS An applicant is required to have and maintain a stipulated minimum capital. This is to ensure that the investment adviser has the financial capacity to provide the services. c) FEES An applicant is required to pay some fees to the regulator for the processing/approval of the application.

2. SURVEILLANCE AND MONITORING OF COMPLIANCE Regulator undertakes ongoing surveillance and monitoring Areas to monitor are: Conduct of securities business Capital requirements

Conduct of securities business, include the following: 1) Maintenance of a register of interests (i.e. a register of securities in which the investment adviser has an interest (under Chapter VI of Securities Act. 2) Keeping of books and records (eg receipt and disbursement books, bank statements, written communication received or sent to clients relating to advice or recommendations, powers of attorney and other evidence of discretionary authority granted by any client, circulars and advertisements distributed to clients.

Conduct of securities business (cont’d) 3) Ensuring that investment adviser does not engage in fraudulent acts, or does not engage in activity that conflicts with a client’s interest. 4) Segregation and handling of clients’ accounts and assets where investment adviser has custody or possession of clients’ funds or securities

Conduct of securities business (cont’d) 5) Disclosure of information to clients regarding services provided, fees charged, frequency of statements to clients etc. 6) Restrictions on contents of advertisements by investment advisers 7) Compliance with a prescribed Code of Ethics

B. CAPITAL/FINC’L REQUIREMENTS Maintenance of a stipulated minimum capital by investment adviser. Submission of Audited Financial Statements periodically.

3. ENFORCEMENT Enforcement of Sanctions / Penalties for Violations of the Law as stipulated in the Securities Act and the Regulations on Investment Advisers

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