[GA, passed] - Client Money Segregation for Brokers

Client Money Segregation for Brokers
Category: Regulation | Area of Effect: Consumer Protection
Proposed by: Simone Republic | Onsite Topic​

The World Assembly (WA),

Noting the protection accorded to bank depositors under GAR 625 through the Deposit Insurance Fund (DIF);

Noting that the same treatment is not accorded to money held by clients in their securities broker accounts, and seeking to rectify this deficiency;

The WA hereby enacts as follows:

1. Definitions.
   • "Authority" means a government entity designated by a WA state to enforce and interpret this resolution.
   • "Bank" means, for convenience, banks plus similar institutions such as credit unions.
   • "Broker" means any entity duly authorized by a WA state to trade financial instruments on behalf of a client.
   • "Client" means a customer of a broker.
   • "Client money" means money held or received for a client by a broker as part of the ordinary course of business of that broker, such as the proceeds from a trade in a financial instrument, excluding "encumbered money".
   • "Encumbered money" means money held in encumbered accounts opened by a client and used as collateral for loans from a broker.
   • "Own account money" means the capital of the broker, regardless of whether such capital is tiered, such as bonds or common stock.
2. Segregation of client money.
   • A broker has fiduciary duty to a client and to client money. This includes mitigating counterparty risk on client money.
   • Client money must be segregated at all times from own account money.
   • Commingling client money with own account money shall be a criminal offence in all WA states.
3. Client account.
   • A broker must set up at least one bank account to hold client money ("client money account") which is segregated from own account money.
   • A client money account, even if it is opened in the name of the broker, must be clearly acknowledged by the bank where the account is opened as an account for client money.
   • The said bank account must be eligible for deposit insurance in accordance with the laws of that WA state or extant WA resolutions.
   • Money belonging to one client can only be aggregated with money belonging to other clients with the explicit written consent of the said client.
   • Interest earned on deposits held in a client money account belongs to the client.
   • Client money can only be held in a bank affiliated to the broker with the explicit written consent of the client.
4. Aggregation by size.
   • A client may request, and the broker must arrange, for that client's funds to be held in a bank account under the name of that client, and not be aggregated with money belonging to another client.
   • This set up must be adopted if it results in increased deposit insurance coverage for the client.
   • The protection of client money under clause 3 of this resolution still applies to such accounts.
5. Tripartite access.
   • Any tripartite agreements concerning client accounts shall be regulated by the authority.
   • If a broker defaults, all clients shall have the absolute right to directly access the funds held in client accounts without the intervention of the broker.
   • Any administrators appointed to govern the affairs of a broker in default shall have a duty to facilitate such access.
6. Direct deposit insurance.
   • A broker may arrange to directly insure deposits held on its accounts with a deposit insurer in the state, subject to that state's laws, the discretion of the authority (as well as any authority governing deposit insurance schemes), and extant WA resolutions, provided the broker is regulated for such matters as if it is regulated as any other institution insured by the deposit insurer.
   • The protection of client money under clause 3 of this resolution still applies to such accounts.
7. Encumbered cash.
   • Each broker must maintain separate accounts for encumbered money versus client money for the same client.
   • If a client borrows money from a broker, they must be warned in writing in advance that such funds are not deemed client money and that the client's claim on the money may be subordinated if the broker defaults. Such warnings shall also be repeating on each drawdown.
   • If a client has excess cash in an encumbered money account not used as collateral, a broker must regularly sweep any money from an encumbered account to a client money account.
8. Jurisdiction.
   • Each WA state may designate one or more entities as the authority depending on the governance structure of that state. Terms not defined herein shall be defined by the said authority.
   • Clause 2(c) (and any penalties for violations) shall be subject to due process and to the legal process of that WA state.

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• Vote For if you want the Delegate to vote For the resolution.
• Vote Against if you want the Delegate to vote Against the resolution.
• Vote Abstain if you want the Delegate to abstain from voting on this resolution.
• Vote Present if you are personally abstaining from this vote.

Comfed:

Present, no idea what any of this entails really but if Simone wrote it and Kenmoria likes it it's probably doing something right.

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