On 22 April 2019, the Office of the Securities and Exchange Commission (“SEC”) issued two notifications1 that will pave the way for new business models for Thai securities brokers and derivatives agents (“Brokers”) without the need to obtain a private fund management license. From 16 May 2019, the SEC will allow Brokers to offer “portfolio advisory with execution” and “program trading” services (“New Brokerage Services”) — which are viewed by the SEC as incidental to Brokers’ securities brokerage/derivatives agency services — without a private fund management license. Among the stated objectives for this license exemption is to provide retail investors with opportunities to benefit from algorithm-based trading (with program trading) and to better rely on their Broker’s ability to time the market in executing trades according to a pre-authorized investment plan.2
1. Portfolio advisory with execution
Replacing the so-called “discretionary account” services introduced in late December 2016,3 the SEC will continue to allow Brokers to exercise limited discretion in making investments that fall within an exhaustive list of investment universe mandated by their clients. The entire workflow is now called “portfolio advisory with execution” which comprises advisory and execution services. The advisory part aims to construct an “investment allocation plan” for each client to select based on advice given by a Broker. The client needs to confirm a list4 of securities and/or derivatives within the investment allocation plan (each, “Selected Product”) in which the client authorizes the Broker to execute trades on their behalf in the execution phase. Before execution, Brokers will need to inform their clients of the appropriate price range and estimated investment allocation for each Selected Product.5 The list of Selected Products must align with the Broker’s house view (discussed below).
2. Program trading
Program trading refers to automated execution of trades based on a set of pre-authorized investment parameters. Similar to portfolio advisory with execution, program trading is comprised of advisory and execution services. As the product of the advisory part of the services, trading strategies will need to incorporate investment parameters that broadly reflect clients’ risk profile and investment objectives6 and later dictate how trades will be executed by the Broker’s algorithm. Each client needs to confirm their investment parameters before execution can commence. To qualify as program trading under this exemption scheme, there must be no human intervention in the execution part of the services.7
3. Key requirements
In providing the New Brokerage Services, the SEC sets out a number of requirements for Brokers, in part to raise the operational standards for these services. In this section, we summarize some key requirements under the new regulation below. Note that the SEC has granted a grace period until 15 May 2020 — one year from the date on which the new regulation takes effect — for compliance with these requirements.8
(a) House view
Incorporating the SEC’s stated objective,9 those wishing to offer the New Brokerage Services will have to put in place efficient mechanisms or procedures for forming a “house view” — essentially high-level investment directions representing a particular firm’s stance on what investment allocation plans/trading strategies the firm believes are appropriate for its clients and how specific investments will be chosen under each plan/ strategy. Reflecting a firm’s view, a house view needs to be approved by the most senior officer in the firm’s capital markets department and at least reviewed by a licensed investment professional.10 A firm’s house view will serve as a broad investment universe within which all investment allocation plans and trading strategies advised to clients must be formed. Clients may make specific requests for investments outside of a house view, but the firm must make sure that the clients are fully aware of the risks associated with such deviation from its house view and document such clients’ risk acknowledgement.
(b) Client suitability
Client investment profile (including risk tolerance) must be updated regularly.11 It is important to keep in mind that investment allocation plan/ trading strategy must be appropriate in light of client investment profile — and changes thereof.
Brokers must make available to clients the performance measurement in respect of their portfolio advisory with execution and program trading services against an appropriate benchmark that is a total return index (or if unavailable, a hurdle rate).12
(d) Written service agreement
Brokers will be required to document the services agreement with each client, setting out among others the terms and scope of services, client’s rights and procedures for order placement and addressing unexpected service disruptions.13 Upon a significant change, the affected agreements must be promptly reviewed and updated.14
(e) Account segregation
A client’s account for the New Brokerage Services must be segregated from other accounts.15
It is important to keep in mind that these new SEC regulations only exempt Brokers from a private fund management license in respect of the New Brokerage Services, which is limited in terms of scope of activities and business models. With limited text and details made available in the regulations as of now, we will keep you updated of any further developments.
1. SEC Notification No. GorNor. 7/2562 re: Prescribing Broker’s Services that are Excepted from the Definitions of Private Fund Management Business and Derivatives Fund Management Business and SEC Notification No. SorThor. 33/2562 re: Rules on Contacting and Servicing Customers for Securities and Derivatives Business Operators (No. 6) amending the SEC Notification No. 35/2557 regarding the same (the “Client Servicing Rules”).
2. See SEC Hearing Document No. OrNorThor. 9/2562 published on 12 February 2019, § I.
3. See SEC Notification No. SorThor. 51/2562 Rules on Contacting and Servicing Customers for Securities
4. Investments outside such a list can be made in case of fund switching upon certain events.
5. Client Servicing Rules, § 41/9 (6).
6. Client Servicing Rules, § 41/6 (1).
7. Client Servicing Rules, §§ 41/3 and 41/9 (2).
8. Client Servicing Rules, §§ 3 and 4.
9. SEC Hearing Document No. OrNorThor. 9/2562 published on 12 February 2019.
10. This is restricted to the following: (a) fund manager and investment analyst as defined under the Capital Market Supervisory Board notification on capital market professionals (excluding those licensed by virtue of being a manager (or equivalent title) heading the company’s department doing work relating to investment or capital market); and (b) investment supervisor under the laws governing life insurance business.
11. Client Servicing Rules, § 41/6 (2).
12. Client Servicing Rules, § 41/7.
13. Client Servicing Rules, § 41/9 (3).
14. Client Servicing Rules, § 41/5.
15. Client Servicing Rules, § 41/9 (4).