GUIDELINES ON

COMPLIANCE FUNCTION FOR

FUND MANAGEMENT COMPANIES

Issued: 15 March 2005

1st Updated/Effective: 23 May 2011
2nd Updated/Effective: 16 April 2012

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CONTENTS
PAGE
Chapter 1
INTRODUCTION 3

Chapter 2
DEFINITIONS AND INTERPRETATION 4

Chapter 3
CORE PRINCIPLES 6

Chapter 4
KEY RESPONSIBILITIES 8

Chapter 5
ORGANISATION AND MANAGEMENT 12

Chapter 6
DISCLOSURE AND CONDUCT 15

Chapter 7
DEALING WITH CLIENTS 18

Chapter 8
MARKETING, ADVERTISING AND PROMOTIONAL MATERIALS 20

Chapter 9
PORTFOLIO MANAGEMENT 22

Chapter 10
SAFEGUARDING CLIENTS’ ASSETS 26

Chapter 11
PROPRIETARY TRADING 29

Chapter 12
RECORD KEEPING 30

Chapter 13
ANTI-MONEY LAUNDERING 31

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Chapter 1

INTRODUCTION

1.01 The Guidelines on Compliance Function for Fund Management Companies is issued
by the SC pursuant to section 377 of the Capital Markets and Services Act 2007
(CMSA). These guidelines set out requirements to be complied with by any person
intending to establish or carry out fund management activities in Malaysia.

1.02 These guidelines will replace the following guidelines:

(a) Guidelines on Compliance Function for Fund Managers; and

(b) Guidelines on Reporting requirements for Fund Managers.

1.03 These guidelines are aimed at ensuring that there are controls and compliance
established towards ensuring investor protection and market confidence. In
addition, these guidelines are also drawn up to ensure that fund management
activities are carried out in compliance with regulatory requirements.

1.04 The SC may exempt where it deems appropriate or, upon application, grant
exemptions or variations from compliance with any requirement in these
guidelines.

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Chapter 2

DEFINITIONS AND INTERPRETATION

2.01 In these guidelines, the following words have the following meanings, unless the
context otherwise requires:

AMLATFA means the Anti-Money Laundering and Anti-Terrorist Financing

Act 2001;

Assets means all monies (including cash and bank deposits) or other
property received or retained by, or deposited with a holder of a
Capital Markets Services Licence (CMSL) in the course of its
business for which the CMSL holder is liable to account to its
clients, and any monies received or property deposited with or
held by a custodian;

associated person has the meaning as provided for in section 3 of the CMSA;

auditor has the meaning as provided for in section 2 of the CMSA;

client has the meaning as provided for in section 2 of the CMSA;

CMSL means the Capital Markets Service Licence;

CMSRL means the Capital Markets Service Representative Licence;

CMSA means the Capital Markets and Services Act 2007;

custodian means an institution within the meaning of section 121 of the

CMSA;

dealer means a CMSL holder carrying on the business of dealing in

securities;

employees means persons employed by a fund management company

including persons that are on secondment as well as the fund
management company’s representative, who is licensed under
the CMSA to carry on the business of fund management;

fund management means a CMSL holder carrying on the business of fund

company management as defined in Part 2 of Schedule 2 of the CMSA;

related corporation has the meaning as provided for in section 2 of the CMSA;

relatives means spouse and children;

representatives has the meaning as provided for in Section 2 of the CMSA;

SC means the Securities Commission Malaysia;

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statement of means the summary position of portfolio which includes
account revenues earned and expenses incurred as well as movement of
cash and investment activities in a stated period.

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Chapter 3

CORE PRINCIPLES

3.01 The SC is actively promoting a culture of compliance, professionalism, ethical

standards and responsible conduct among fund management companies and their
representatives and employees.

3.02 A fund management company must ensure compliance with the following core
principles:

Core Principles
1. Integrity A fund management company must conduct its
business with integrity.

2. Skill, care and diligence A fund management company must conduct its
business with due care, skill, and diligence.

3. Acting in clients’ interests A fund management company must always act in the
interest of its clients and must not jeopardise or
prejudice clients’ interests.

4. Supervision and control A fund management company must take reasonable

care to organise and control its affairs responsibly and
effectively, with adequate risk management and
supervisory system.

5. Adequate resources A fund management company must maintain adequate

financial, human and other resources which
commensurate with its business.

6. Business conduct A fund management company must conduct its

business in a manner that promotes a fair and orderly
market.

7. Client asset protection A fund management company must ensure that clients’
assets are safeguarded at all times and must not make
improper use of clients’ assets.

8. Communication with A fund management company must provide relevant

investors and clients information to investors and its clients in a manner that
is fair, accurate and timely.

9. Conflict of interest A fund management company must manage conflict of

interest fairly, both between itself, its employees and
clients, and between a client and another client.

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 10. Compliance culture The Board of Directors of a fund management company
must ensure proper policies and procedures are in place
to ensure a sound compliance framework which
safeguards clients’ interests.

11. Dealing with the SC A fund management company must deal with the SC in
an open and co-operative manner.

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Chapter 4

KEY RESPONSIBILITIES

The Board’s responsibilities

4.01 These guidelines place the responsibility for compliance with all laws, regulations
and guidelines on the Board of Directors.

4.02 At all times, the Board of Directors must ensure–

(a) only licensed persons can carry out regulated activities;

(b) at least one director is a CMSRL holder;

(c) the fund management company complies with the 11 core principles as set
out in Chapter 3 and the securities laws, regulations and all relevant
guidelines;

(d) the fund management company–

(i) establishes, maintains and implements an effective internal control

framework to prevent and detect abusive or inappropriate
investment practices or conflicts of interest between proprietary
transactions, employees’ transactions, and clients’ transactions;

(ii) conducts at least yearly review on the effectiveness of its internal

control framework; and

(iii) reports to the shareholders of any findings from the review as

specified in the above (d)(ii);

(e) written policies and procedures are in place to–

(i) enable full disclosure of clients’ accounting records and assets to the
clients;

(ii) provide clear line of reporting, authorisation and proper segregation

of functions with a view to manage conflicts of interest that may
arise in the course of doing its business;

(iii) prevent any flow of price sensitive information between the

different areas of operations of the organisation;

(iv) prevent unauthorised or fraudulent transactions;

(v) prevent front running, churning or any other market misconduct by

directors or employees;

(vi) preserve confidentiality of clients’ information; and

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 (vii) mitigate the risk arising from a situation where an individual is in
control of all aspect pertaining to a single transaction;

(f) the fund management company has a written business continuity plan in
place;

(g) policies and procedures affecting the staff responsibilities are effectively
communicated;

(h) competent persons are appointed to supervise and manage the fund
management company and that such persons are always subject to
oversight of the Board;

(i) that the fund management company always has adequate financial, human
and other resources which commensurate with its business;

(j) the fund management company establishes and maintains proper system of
record keeping relating to-

(i) fund management company’s information; and

(ii) clients’ information;

(k) one or more compliance officers are appointed, who–

(i) have the qualifications and experience as stipulated in the Licensing

Handbook;

(ii) have the necessary authority, resources and support to administer

independently and effectively, the implementation of the fund
management company’s compliance policies and procedures; and

(iii) must not perform any other duties that may compromise or conflict
with the compliance officer’s responsibilities;

(l) all non-compliance matters raised by the compliance officer or the

compliance committee (where such committee has been established) are
properly addressed; and

(m) clients’ assets are safeguarded and clients receive information as specified
in these guidelines.

4.03 The requirements set out in the above paragraph 4.02 (e) (ii) and (iii) must also be
taken into account where the fund management company is part of a group of
companies.

Compliance officer’s responsibilities

4.04 A compliance officer’s responsibility include–

(a) acting as a liaison person with the SC;

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 (b) establishing and maintaining a comprehensive compliance manual;

(c) establishing, maintaining and administering the implementation of policies

and procedures to–

(i) ensure compliance with securities laws, regulations and relevant

guidelines; and

(ii) detect and prevent breaches of securities laws, regulations and

relevant guidelines;

(d) reviewing and updating the compliance policies and procedures in line with
changes in the laws, regulations and guidelines;

(e) keeping abreast of changes to securities laws, regulations and relevant

guidelines, and relevant industry developments, and ensure timely
dissemination of information pertaining to such changes and developments
within the fund management company;

(f) co-ordinating the fund management company’s compliance efforts including

disseminating compliance manuals, policies and procedures and any other
compliance related information within the company;

(g) establishing a compliance programme and carrying out an annual review of

the said programme;

(h) monitoring that only licensed persons conduct the activities stipulated in
paragraph 5.16;

(i) working closely with the Board and senior management personnel on all
compliance matters and liaising with other departments/divisions to
discharge the duties and functions effectively;

(j) assisting in training and educating staff members on compliance matters;

(k) reviewing reports to ensure that clients’ portfolios are managed in

accordance with agreed mandate;

(l) monitoring that account opening procedures are strictly adhered to, which
includes–

(i) obtaining the necessary information of the client;

(ii) being satisfied that the client has the authority or approval to enter
into an investment management agreement (IMA); and

(iii) ensuring that a written IMA is executed;

(m) ensuring that processes and procedures are in place to deal with clients’
complaints in a fair, timely and effective manner;

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 (n) reporting directly to the Board and compliance committee (where such
committee has been established) and furnishing them at least on quarterly
basis, with a written report which includes–

(i) any material changes or recommendations made in respect of those

changes to the fund management company’s compliance policies
and procedures;

(ii) listing out all breaches of securities laws, regulations, relevant

guidelines and steps taken to remedy and prevent such breaches
from recurring; and

(iii) listing out all clients’ complaints;

(o) submitting in a timely and accurate manner any information that is required
by the SC, including the following:

(i) monthly reporting of assets under management (which is an extract

of the Form A) within seven working days at the end of each month
excluding June and December;

(ii) annual submission of Compliance And Risk Supervision Self-

Assessment Questionnaire (CRS) within 14 working days at the end
of 30 June each year; and

(iii) semi-annual submission of-

a) Compliance Report; and

b) Form A

within 14 working days at the end of 30 June and 31 December

each year;

(p) extending to the SC information as specified in the above n(ii); and

(q) where a fund management company manages a Shariah mandate, the

compliance officer must ensure compliance with requirements stipulated in
the Guidelines on Islamic Fund Management and any relevant SC
regulations.

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Chapter 5

ORGANISATION AND MANAGEMENT

Internal audit

5.01 The Board of Directors is encouraged to establish an internal audit function to

develop an appropriate internal audit framework that commensurate with the fund
management company’s business.

5.02 The internal audit function may be carried out internally or may be outsourced in
the manner specified in the Guidelines of Outsourcing for Capital Market
Intermediaries (Outsourcing Guidelines).

5.03 Notwithstanding that the fund management company’s internal audit function may
be outsourced, the Board of Directors must ensure that the internal audit
framework includes–

(a) planning, controlling and recording all internal audit work performed;

(b) recording all findings, conclusions and recommendations of the internal

audit work performed; and

(c) producing an internal audit report at the conclusion of each internal audit
work.

5.04 The Board of Directors must review the internal audit report and ensure that all
matters raised in the internal audit report are resolved in a manner that does not
jeopardise or prejudice clients’ interests.

Risk management

5.05 The Board of Directors must establish a risk management framework that
commensurate with the fund management company’s business.

5.06 A fund management company’s risk management framework must include–

(a) continuously identifying, assessing and monitoring the fund management

company’s risks;

(b) managing and monitoring risks assumed by the fund management

company on behalf of its clients; and

(c) mitigation actions to address such risks.

5.07 Where functions are outsourced, a fund management company’s risk management
framework must include–

(a) performing due diligence on the nature, scope and complexity of the
outsourcing to identify key risk areas and risk mitigation strategies;

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 (b) conducting review of its outsourcing arrangement and identifying new risks
which may arise; and

(c) analysing the impact of the outsourcing arrangement on the overall risk
profile of the fund management company, and whether there are adequate
measures and resources in place to mitigate the risks identified.

5.08 A fund management company must conduct at least an annual review of its risk
management framework.

Business continuity plan

5.09 A fund management company’s business continuity plan must–

(a) ensure that the fund management company’s critical operations can
continue to function in the event of any interruptions;

(b) include an annual review and testing to ensure its effectiveness; and

(c) deal with interruptions in any of the fund management company’s

outsourced functions.

5.10 The business continuity plan including the outcome of its annual review and testing
must be reported to the Board of Directors.

Outsourcing

5.11 A fund management company may outsource any of its functions to a service
provider subject to the requirement stipulated in the Outsourcing Guidelines.

5.12 A fund management company must ensure that the service provider has the
capabilities and capacity to efficiently fulfil its duties and responsibilities in respect
of the outsourced function and there must be ongoing monitoring of the service
provider to ensure that the Outsourcing Guidelines are complied with.

Training and education

5.13 A fund management company must ensure that its executive directors and
employees, including the compliance officer and personnel involved in operations
are adequately trained and kept abreast of industry developments.

5.14 Details of all training provided are to be properly maintained by the fund
management company.

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Delegation of fund management function

5.15 A fund management company may delegate its fund management function to
another fund management company.

5.16 Notwithstanding paragraph 5.15, a fund management company must ensure that
the following activities are not delegated:

(a) Soliciting investors to be clients of the fund management company;

(b) Performing risk profiling of clients;

(c) Any interaction and communication with clients of the fund management
company;

(d) Recommending investment policies or investment recommendations to

clients; and

(e) Reporting to clients in respect of the clients’ portfolios under management.

5.17 Where a fund management company delegates its fund management function–

(a) responsibilities and obligations to the clients; and

(b) compliance with obligations and principles provided for in these guidelines,

must remain at all times with the fund management company.

5.18 A fund management company must ensure that the company to which the function
is delegated–

(a) is a CMSL holder carrying on the regulated activity of fund management; or

(b) in the case of a company outside Malaysia, is properly licensed or

authorised by the relevant regulator in its home jurisdiction to carry out
fund management activities; and

(c) has the necessary expertise, systems, procedures and processes to carry
out the function.

5.19 A fund management company must have an arrangement in place to monitor the
conduct and activities of the company to whom the function is delegated.

5.20 A fund management company must provide prior notification to the SC in writing if
it delegates its fund management function to another company and inform the SC
of subsequent changes to the delegation arrangement.

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Chapter 6

DISCLOSURE AND CONDUCT

Disclosure of interests

6.01 A fund management company must establish, maintain and implement written
policies and procedures for the fund management company, its directors,
investment committee members (where such committee has been established) and
employees to disclose all interests or holdings in securities, other assets including
alternative products, and any interests in a special purpose vehicle (SPV)
arrangement.

6.02 All disclosures by the fund management company’s directors, investment

committee members (where such committee has been established) and employees
of their interest as provided in paragraph 6.01 must be made upon joining and at
least annually thereafter or as and when there are changes to their interests or
holdings.

6.03 A fund management company must ensure that clients’ interests are not
superseded by the interests of associated persons related to the-

(i) fund management company;

(ii) directors of the fund management company;

(iii) investment committee members of the fund management company; and

(iv) employees of the fund management company.

6.04 A fund management company must maintain records of disclosures made by the
fund management company, its directors, investment committee members and
employees.

Disclosure by a fund management company

6.05 A fund management company must disclose to clients of its interest or holdings in
securities, other assets including alternative products, and any interests in a SPV
arrangement.

Disclosure and conduct of directors

6.06 A director must disclose to the fund management company of his interests or
holdings in securities, other assets including alternative products, and any interests
in a SPV arrangement, whether directly or indirectly, including through nominees
or relatives.

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6.07 Where the director is an Executive Director, the prior approval of any other
directors, a compliance committee (where such committee has been established)
or compliance officer must be obtained before he carries out his investment.

Disclosure and conduct of Investment Committee members

6.08 Investment committee members (where such committee has been established)
must disclose to the fund management company of their interests or holdings in
securities, other assets including alternative products, and any interests in a SPV
arrangement, whether directly or indirectly, including through nominees or
relatives.

6.09 Members of the investment committee must abstain from meetings where their
presence may cause any conflict or potential conflict of interest.

Disclosure and conduct of employees

6.10 An employee must disclose to the fund management company of his interests or
holdings in securities, other assets including alternative products, and any interests
in a SPV arrangement, whether directly or indirectly, including through nominees
or relatives.

6.11 The prior approval of any director or compliance officer must be obtained by the
employee before he carries out his investment.

Receipt or provision of benefits

6.12 A fund management company must establish, maintain and implement written
policies and procedures including, but not limited to, monetary limits, pertaining to
any acceptance or giving of gifts or any benefits by the fund management
company or its employees.

6.13 A fund management company must not offer or accept any gifts or benefits which
conflicts with the interest of or the duties owed to the clients.

6.14 A fund management company must maintain a register of gifts or benefits received
or given.

Rebates and soft commission arrangements

6.15 A fund management company must not accept or receive, any rebates arising from
transactions or orders on behalf of clients. Any rebates received must be directed
to the account of the relevant clients.

6.16 A fund management company may accept or receive soft commission arising from
transactions or orders on behalf of a client provided that the–

(a) client’s prior consent has been obtained;

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 (b) goods and services are of demonstrable benefit to the client; and

(c) goods and services are in the form of research and advisory services that
assist in the decision-making process relating to the client’s investments.

6.17 A fund management company must disclose to the client details of any soft
commission received as soon as practicable upon accepting or receiving the soft
commission.

6.18 A fund management company must maintain a register of any soft commission
accepted or received.

6.19 A compliance officer must verify that any soft commission accepted or received by
the fund management company complies with the requirement provided in
paragraph 6.16.

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Chapter 7

DEALING WITH CLIENTS

Fees, charges and other remunerations

7.01 All fees and charges imposed on a client must be fair, reasonable and transparent.

Valuation of clients’ portfolios

7.02 A fund management company must perform at least on monthly basis, valuation of
clients’ portfolios in a manner that is agreed by the clients.

Statements and reports to clients

7.03 A fund management company must provide a statement relating to a client’s

portfolio directly to each client, at least on monthly basis. The statement must,
among others, include the following information:

(a) A statement of account showing the client’s actual portfolio position; and

(b) Fees and charges payable by the client.

7.04 A fund management company must provide, at least on quarterly basis, reports to
its clients on the following:

(a) The performance of each client’s portfolio against appropriate benchmarks;

(b) Any changes in risk (if any) which will affect the client’s investments; and

(c) Any impact on the client’s capital and earning of the client’s investment
arising from the change in risk as specified in (b) above.

Confidentiality

7.05 A fund management company must establish, maintain and implement written
policies and procedures to maintain confidentiality of clients’ records and
information which includes policy relating to access by a service provider or a sub-
contractor (as the case may be) and measures against access by employees
managing proprietary accounts.

7.06 Any clients’ information must not be disclosed to a third party or an unauthorised
person, unless clients’ prior consent has been obtained or where there is a legal or
regulatory requirement to disclose such information.

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Complaints by clients

7.07 A fund management company must establish, maintain, and implement written
policies and procedures to ensure that–

(a) complaints from its clients are handled in a timely and appropriate manner;
and

(b) clients’ complaints are satisfactorily resolved.

7.08 A fund management company must maintain a register of complaints received and
any actions taken, and ensure that the compliance officer has a copy of the
register.

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Chapter 8

MARKETING, ADVERTISING AND PROMOTIONAL MATERIALS

Representation by fund management company

8.01 A fund management company must ensure that any representations, including in
the form of electronic communication made to clients are conducted with due care,
skill and diligence to enable the clients to make balanced and informed decisions.

Information about the fund management company

8.02 A fund management company must–

(a) provide clients with adequate information about the fund management
company’s shareholding, business address, relevant conditions or
restrictions under which its business is conducted, key personnel and
persons with whom clients may have contact, and subsequent changes
made thereafter;

(b) inform the clients of any significant changes to the organisation that could
affect clients’ interests; and

(c) provide any other relevant information required by the clients.

Advertisements and promotional materials

8.03 A fund management company must ensure that information disclosed or contained
in marketing, advertising and promotional materials is fair, accurate and timely and
such information must include the following:

(a) Risks of investments;

(b) Unique features, characteristics of investments and the nature of

underlying assets (if any);

(c) Any conflict of interest that may arise from investments; and

(d) Policies in handling conflict of interest stated in the above (c) to enable the
clients to make an assessment of whether such conflicts are managed and
not detrimental to the clients’ interest.

8.04 Where the marketing, advertising and promotional materials contain any
statements on the fund management company’s performance, where possible, the
fund management company should ensure such statements are independently
verified.

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8.05 In the event the marketing, advertising and promotional materials contain any
statements on compliance with an independent performance presentation
standard, a fund management company must ensure that the statements are
verified by an independent actuarial, financial or statistical reporting service
provider.

8.06 A fund management company must disclose to its clients the source of such
verification in the marketing, advertising and promotional materials. Where no
such verification has been obtained, the same must also be disclosed to its clients.

8.07 A fund management company must ensure that any statements made as to the
future investment performance mentioned in the marketing, advertising and
promotional materials, are adequately supported.

8.08 Where any marketing, advertisements and promotional materials quotes an

investment performance, a fund management company must ensure that the
period for which the performance quoted is–

(a) clearly stated;

(b) for a period of at least one year or more; and

(c) not based on selection of a preferential period.

8.09 All marketing, advertising and promotional materials must be reviewed by the
compliance officer prior to issuance.

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Chapter 9

PORTFOLIO MANAGEMENT

Investment within clients’ mandates

9.01 A fund management company must have reasonable and adequate basis in setting
the investment policy, making investment recommendation or carrying out any
transactions for a client.

9.02 Implementation of each client’s investment policy or investment recommendation

can only be made after the fund management company–

(a) establishes and understands each client’s risk profile, investment

objectives, limitations, restrictions and instructions;

(b) provides each client with complete and accurate information of investments
including any unique features, characteristics of investments and the nature
of underlying assets (if any), to enable the client to make an informed
investment decision;

(c) obtains the client’s prior approval;

(d) explains to the client of general and specific investment risks including but
not limited to pricing, liquidity and any rights, obligations and attribution of
ownership under the investment policy or investment recommendation;

(e) establishes and documents the client’s ability and willingness to accept the
risks identified in the above (d); and

(f) has made the necessary arrangement to allow the fund management
company to have the relevant investment information for monitoring
purposes.

9.03 A fund management company must not recommend or invest in any investment
products including alternative products where the fund management company
does not understand its structure, pricing mechanism and nature of underlying
assets (if any) of such products.

9.04 Where SPV or similar structures are used to pool clients’ investments, a fund
management company must ensure that such arrangement is structured in
accordance with the Guidelines on Wholesale Funds.

9.05 A fund management company must review a client’s investment policy under
discretionary mandate at least annually or whenever circumstances require
changes to be made.

9.06 A fund management company must ensure that the investment policy, investment
recommendations and transactions carried out are in accordance with the clients’

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 mandates, and sufficient assets are available in the clients’ accounts to carry out
such transactions.

9.07 A fund management company must maintain proper records of clients’ details and
other relevant information including supporting documents for investment policy
and investment recommendation.

Research

9.08 A fund management company must establish, maintain and implement written
policies and procedures to ensure its research is independent and impartial in
order to provide a reasonable and adequate basis for making investment decisions
and taking investment action.

Investment management agreement

9.09 A fund management company must ensure that its client has adequate authority
and capacity to enter into an agreement for the management of assets.

9.10 A fund management company must ensure that it enters into a written IMA with
each client before providing any fund management services, or transacting on
behalf of a client.

9.11 A fund management company must ensure that the written agreement includes–

(a) clients’ risk profiles and investment objectives including any investment
limitations, restrictions or instructions;

(b) notification of any significant changes to the investment policy or

investment recommendation;

(c) clear authorisation from the clients for discretionary mandate;

(d) scope of services that will be provided by the fund management company
including frequency of written statements and reports relating to the
clients’ portfolios;

(e) fees and charges to be paid by the clients or any other remuneration
received by the fund management company from any other person in
relation to services provided to the clients;

(f) details of custodial arrangement;

(g) basis of valuation to be used for any type of investments products;

(h) terms and conditions relating to soft commission, where applicable;

(i) liability of fund management company where there is a breach of the IMA;

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 (j) conditions for alteration and termination to the IMA and its implications
thereof in respect of settlement, repayment obligations and surrender of
documentation; and

(k) details of delegation of the fund management company’s function (if any).

9.12 A fund management company must ensure that the written agreement as provided
for in paragraph 9.11 must be in accordance to the requirements of the law and
these guidelines.

Order allocation

9.13 A fund management company must establish, maintain and implement written
policies and procedures to ensure fair and equitable allocation of orders among
clients.

9.14 Where a fund management company uses block trades, allocation of securities
should be conducted on a pro-rata basis and using an average price.

9.15 Where a fund management company undertakes proprietary trading, the selection
method in determining the securities to be transacted for the fund management
company’s proprietary account and the clients’ accounts must be disclosed to
clients.

9.16 The fund management company must ensure that trades are not directed to
benefit its proprietary account or any preferential clients.

9.17 A fund management company must ensure that the amount of commission or
management fee earned from any particular clients or transaction must not be the
determining factor in the allocation of orders.

Best execution

9.18 A fund management company must establish, maintain and implement written
policies and procedures to ensure best execution of trades for its clients.

9.19 Prior to executing any investments for a client, a fund management company must
ensure that–

(a) the investment transaction is carried out in accordance with the client’s
mandate and within limits prescribed in the IMA; and

(b) the relevant account has sufficient assets to meet the obligations of the
transaction.

9.20 A fund management company must ensure that the use of any dealer or financial
institution for the execution of its trades must not exceed 50% of the total
dealings in value in any one financial year.

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9.21 Investment transactions carried out on behalf of a related corporation must be at
arm’s length and consistent with best execution standards.

Cross-trades

9.22 A fund management company must have in place written policies and procedures
governing cross trades between clients’ accounts.

9.23 Subject to paragraph 9.24, cross trades can only be undertaken provided that the–

(a) sale and purchase decisions are in the best interest of both clients;

(b) transactions are executed through a dealer or a financial institution on an

arm’s length and fair value basis;

(c) reason for such transactions is documented prior to execution of the

trades;

(d) cross trade transaction is identified in both clients’ statement of accounts;

and

(e) prior consent from clients has been obtained in documented form.

9.24 Cross-trades between–

(a) employee of the fund management company and the clients; or

(b) the fund management company for its proprietary trading and its clients,

are prohibited.

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Chapter 10

SAFEGUARDING CLIENTS’ ASSETS

General

10.01 Assets of a fund management company and its clients must be properly identified
and separately maintained in a trust account.

10.02 A fund management company must make adequate arrangements to safeguard

clients’ ownership rights on all clients’ assets and ensure that the client assets are
properly accounted for at all times.

10.03 A fund management company must ensure that clients’ assets are properly
safeguarded from conversion or inappropriate use by its employees.

10.04 Where a fund management company receives instruction to withdraw assets from
a client’s account, such assets must be delivered directly to that client and not to a
third party.

10.05 A fund management company must promptly notify all clients in writing of its
intention to cease its business and ensure proper arrangements are in place for the
safekeeping of clients’ assets. Where a fund management company is being
wound up, it must comply with regulatory requirements stipulated in the CMSA.

Appointment of a custodian

10.06 A fund management company must appoint a custodian to maintain a trust

account for its clients’ assets to ensure that clients’ assets are properly
safeguarded.

10.07 Only persons who are listed in section 121 of the CMSA can be appointed as a
custodian and a fund management company must not act as the custodian for the
clients’ assets.

10.08 Where the custodian is appointed directly by the client, a fund management
company must notify the clients of the requirements relating to custodial
arrangement.

Custodial arrangement

10.09 In appointing a custodian, a fund management company must–

(a) obtain clients’ prior written consent for the appointment of the custodian;

(b) notify the clients in writing of the custodian’s details, sub-custodian’s details
(if any) and any changes made to the custodial arrangements thereafter;

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 (c) notify the clients that assets received or held outside Malaysia are subject
to regulations of the foreign jurisdiction and may not be subject to the
same protection as that conferred on client assets received or held in
Malaysia;

(d) provide the custodian with sufficient client identification documents;

(e) ensure that clients’ assets are segregated in the custodian’s books to
enable attribution and repatriation of the assets to the respective clients;

(f) ensure that the trust account maintained by the custodian reflects that the
assets belong to the clients of a fund management company;

(g) require the custodian to ensure that all proceeds and revenue generated
from investments are credited into the relevant clients’ accounts
immediately;

(h) ensure that the custodian has sufficient control in place to safeguard
clients’ assets from conversion or inappropriate use by its employees;

(i) notify the affected clients promptly and make proper arrangements to safe
keep clients’ assets prior to termination of any custodial agreements; and

(j) perform at least an annual evaluation of the appointed custodian and its
services to ensure that the custodian has carried out its responsibilities with
due care, skill and diligence.

10.10 The assessment referred to under paragraph 10.09(j) should include–

(a) performance of custodial services by the custodian;

(b) arrangements that the custodian has in place in custodising clients’ assets;

(c) adverse changes in the prevailing market conditions of the country that a
custodian outside Malaysia is operating from, which may impact the
undertaking of custodial function; and

(d) custodian’s compliance with Chapter 10 of these guidelines.

10.11 A fund management company must ensure that its written agreement with a
custodian stipulates that the custodian–

(a) maintains records that would enable identification of assets to respective

clients;

(b) conducts reconciliation of clients’ accounts on daily basis against third-party

records;

(c) delivers clients’ statement, which includes client’s portfolio position and
transactions during the period, at least on a quarterly basis, directly to the
respective clients;

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 (d) verifies any instructions to transfer assets and notifies the client of such
transfer of assets; and

(e) exercises due care to effect transfer in any apparent conflict-of-interest

situation.

10.12 Where a custodian sub-delegates its custodial role, the fund management
company must ensure that–

(a) the sub-custodian is licensed or authorised to provide custodian services in

their respective jurisdiction; and

(b) such sub-delegation will not affect the custodian in carrying its obligations
as provided for in paragraph 10.11.

Trust account

10.13 All clients’ trust accounts must carry the name of custodian or the name of fund
management company (may be abbreviated but must be sufficiently distinctive) or
both; and unique identifier of client which include–

(a) full name of client; or

(b) identity card number; or

(c) passport number; or

(d) company number if the client is a company; or

(e) any unique identifiable and verifiable code.

10.14 Where the trust account is maintained under an omnibus structure, a fund
management company must ensure that–

(a) co-mingling of assets at custodian or the issuer of assets level is confined

to clients of the same fund management company;

(b) in terms of naming conventions as provided for in paragraph 10.13, ‘clients’

account’ or ‘clients’ trust account’ is maintained in substitution of the
unique identifier of client; and

(c) such arrangement will not affect the custodian in carrying its obligations as
provided for in paragraph 10.11.

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Chapter 11

PROPRIETARY TRADING

Proprietary transactions

11.01 In order to avoid conflict of interest between the fund management company’s
proprietary transactions and clients’ transactions, it must–

(a) establish information barriers or firewalls; and

(b) closely supervise internal communication to prevent flow of information.

11.02 A fund management company must ensure that the CMSRL holder conducting its
proprietary transactions does not manage clients’ assets.

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Chapter 12

RECORD KEEPING

Accuracy of records

12.01 A fund management company must ensure that records are accurate, properly
secured and retained.

12.02 A fund management company must immediately carry out reconciliation of its
records against third party records to ensure accuracy of records.

12.03 A fund management company must maintain comprehensive records of its–

(a) proprietary trading and accounting records; and

(b) clients’ accounts and transactions.

12.04 A fund management company must ensure that the internal audit and compliance
officers have access to such records at all times.

12.05 A fund management company must authorise its external auditor to obtain
statements and confirmation from custodians on the accounts that contain clients’
assets.

12.06 A fund management company must prepare and maintain its financial statements
in accordance with approved accounting standards.

Retention of records

12.07 A fund management company must take reasonable care to retain adequate
records of all matters including all transactions, dealings, accounting records and
compliance review in accordance with the requirements of the law and these
guidelines.

12.08 A compliance officer must ensure that the fund management company maintains
and keeps such records in an easily accessible place for at least seven years after
the last transaction was executed. A fund management company is encouraged to
maintain phone recordings, for at least two years.

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Chapter 13

ANTI-MONEY LAUNDERING

13.01 A fund management company must establish, maintain and implement written
policies and procedures consistent with the principles set out in the AMLATFA and
Guidelines on Prevention of Money Laundering & Terrorism Financing for Capital
Market Intermediaries (AML Guidelines).

13.02 A fund management company must ensure that its employees are well informed
and are adequately trained in matters covered in the AMLATFA and AML
Guidelines.

13.03 A fund management company must implement specific procedures for customer
identification, retention of records on financial transactions, relevant documents,
and reporting of suspicious transactions.

13.04 A fund management company must obtain satisfactory evidence of the clients’
identity, and have effective procedures for verifying the clients, which must
include–

(a) establishing the clients’ full and true identity, including the identity of the
actual beneficiaries, where appropriate;

(b) verifying the identification given, where required; and

(c) establishing, where appropriate, the clients’ financial position, investment

experience, and investment objectives.

13.05 A fund management company must ensure that the business is conducted in
conformity with high ethical standards, and accounts are opened in accordance
with relevant business conduct and best business practices including the “know-
your-client” rule.

13.06 A fund management company must exercise good judgement and take necessary
precaution to refrain from taking any investment action for a client that fails to
provide evidence of his identity and where there is a good reason to believe that
transactions may be associated with money-laundering activities.

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