The Thai SEC announces new guidelines for market intermediaries to follow when taking debt issuers to the road
As part of its continued effort to improve the quality of DCM-related products available in the market after it implemented new rules on debt offerings earlier this year, the Thai SEC sets out new guidelines for market intermediaries (i.e. brokers, dealers, and underwriters) to follow.1 The guidelines cover three main areas: (1) the market intermediary's policies on its services, organization structure, and human resources; (2) product screening procedures; and (3) HR development.
The guidelines are also a safe harbor for market intermediaries, as it is set out in the guidelines that a market intermediary that can demonstrate its compliance with the guidelines is to be deemed by the Thai SEC to have complied with the regulation regarding business standards for securities companies and derivatives business operators.2 The guidelines will come into effect on 1 October 2018.
The devil is always in the detail. While the guidelines provide detailed requirements on various aspects of operations regarding the origination process of market intermediaries, there are still several actions that are implicitly introduced in the guidelines that we think market intermediaries should be considering, as set out below.
Separating business units
Repeated in both the notification and the guidelines is the separation of the business unit that performs the product screening function, from the sales unit. The guidelines hint that the product screening unit is one that contacts issuers, while the sales unit contacts investors. The separation must be clear from top to bottom in the organization. That is, there must be separate management for each unit, and they must be independent from each other. The personnel of each unit must be separated as well. The organization chart should be one of the first things to start with. When looking at the organization chart, an intermediary must be able to demonstrate that these units are under separate chains of command.
Setting up policies and procedures
It is the responsibility of the board of directors and management of each market intermediary to make sure that policies and procedures are in place regarding the business operation, and these must be in writing. The policies and procedures include, among other things:
- Policies on (i) origination and sales and (ii) customer intake. These policies must require that approval from the board of directors or a subcommittee delegated by the board be obtained before the provision of services.
- Product screening procedures. The procedures must set out information required for the analysis, as well as the requirement for presenting the analysis to the board of directors or delegated subcommittee or management, for approval. A market intermediary must also prepare a product screening procedural manual and keep it updated.
Details of the policies and procedures described in the guidelines are similar to activities that are typically carried out during a due diligence exercise (both financial and legal, as well as technical due diligence). The guidelines seem to suggest that the market intermediary must carry out a management interview and do a site visit on an issuer, as well as hold a bring-down due diligence session, in addition to its study of information that is available to the public.
As complying with the guidelines will eventually be a safe harbor for market intermediaries to satisfy the conditions set out in the regulation regarding business standards for securities companies and derivatives business operators, being able to show evidence of that compliance will help market intermediaries get through difficult times a lot easier. Market intermediaries should consider, among other things:
- Keeping issuers' information obtained during the product screening process, in written or electronic form. The confidentiality obligations (of both the issuer and the market intermediary) must be taken into account, and the market intermediary must have in place proper information and cyber security measures.
- Obtaining issuers' acknowledgement and consent in writing. Certain aspects of the guidelines are requirements that the market intermediary provide sufficient information and education for, or perform certain activities with, the issuers. Without written evidence, it is difficult to prove that these have been done. The market intermediary should then request that the issuer acknowledge or give its consent right after the former has completed the process. This practice should also be applied to the HR development module, whereby the market intermediary must provide continued education to its personnel regarding the product screening (i.e. it should have its employees sign an
acknowledgement that it has provided the continued education and training).
1 The Guideline Notification No. Nor Por. 1/2561 regarding guidelines on selecting, analyzing, and disclosing information of debt issuers (product screening) for securities companies that are debt instrument brokers, dealers, or underwriters, dated 27 June 2018
2 The Notification of the Capital Market Supervisory Board No. Tor Thor. 35/2556 regarding standard conduct of business, management arrangement, operating systems, and providing services to clients of securities companies and derivatives intermediaries, dated 6 September 2013 (as amended), and the Notification of the Office of the Securities and Exchange Commission No. Sor Thor. 35/2557 regarding rules in detail on communication with, and providing services to, clients of securities companies and derivatives intermediaries, dated 10 November 2014 (as amended).