UAE Financial Rules and Regulations Edition 4, June 2023 PDF

SCA & CISI UAE Financial Rules and Regulations Edition 4, June 2023 This workbook relates to syllabus version 4.0 and will cover exams from 10 September 2023 to 20 May 2025 Welcome to The UAE Financial Rules and Regulations study material created by the Chartered Institute for Securities & Investment and in association with Securities and Commodities Authority Training Centre. Published by: Chartered Institute for Securities & Investment © Chartered Institute for Securities & Investment 2023 20 Fenchurch Street, London EC3M 3BY, United Kingdom Tel: +44 20 7645 0600 Fax: +44 20 7645 0601 Email: [email protected] www.cisi.org/qualifications This workbook edition has been reviewed by Jamal Sawalha. This is an educational workbook only and the Chartered Institute for Securities & Investment accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Warning: any unauthorised act in relation to all or any part of the material in this publication may result in both a civil claim for damages and criminal prosecution. A learning map, which contains the full syllabus, appears at the end of this workbook. The syllabus can also be viewed on cisi.org and is also available by contacting the Customer Support Centre on +44 20 7645 0777. Please note that the examination is based upon the syllabus. The questions contained in this workbook are designed as an aid to revision of different areas of the syllabus and to help you consolidate your learning chapter by chapter. Workbook version: 4.2 (December 2023) ii Important – Keep Informed on Changes to this Workbook and Examination Dates Changes in industry practice, economic conditions, legislation/regulations, technology and various other factors mean that practitioners must ensure that their knowledge is up to date. At the time of publication, the content of this workbook is approved as suitable for examinations taken during the period specified. However, changes affecting the industry may either prompt or postpone the publication of an updated version. It should be noted that the current version of a workbook will always supersede the content of those issued previously. Keep informed on the publication of new workbooks and any changes to examination dates by regularly checking the CISI’s website: cisi.org/candidateupdate Learning and Professional Development with the CISI The Chartered Institute for Securities & Investment is the leading professional body for those who work in, or aspire to work in, the investment sector, and we are passionately committed to enhancing knowledge, skills and integrity – the three pillars of professionalism at the heart of our Chartered body. CISI examinations are used extensively by firms to meet the requirements of government regulators. Besides the regulators in the UK, where the CISI head office is based, CISI examinations are recognised by a wide range of governments and their regulators, from Singapore to Dubai and the US. Around 50,000 examinations are taken each year, and it is compulsory for candidates to use CISI workbooks to prepare for CISI examinations so that they have the best chance of success. Our workbooks are normally revised every year by experts who themselves work in the industry and also by our Accredited Training Partners, who offer training and elearning to help prepare candidates for the examinations. Information for candidates is also posted on a special area of our website: cisi.org/candidateupdate. This workbook not only provides a thorough preparation for the examination it refers to, it is also a valuable desktop reference for practitioners, and studying from it counts towards your Continuing Professional Development (CPD). Mock examination papers, for most of our titles, will be made available on our website, as an additional revision tool. CISI examination candidates are automatically registered, without additional charge, as student members for one year (should they not be members of the CISI already), and this enables you to use a vast range of online resources, including CISI TV, free of any additional charge. The CISI has more than 40,000 members, and nearly half of them have already completed relevant qualifications and transferred to a core membership grade. You will find more information about the next steps for this at the end of this workbook. iii Foreword On January 29, 2000 HH UAE President issued a federal decree to set up a jurisdictional authority in the UAE’s capital, which was called ‘Securities & Commodities Authority’ (SCA). The Authority enjoys a legal entity, financial and administrative independence with the control and executive powers necessary for it to discharge its tasks in line with the provisions of the SCA 2000 law and the regulations issued in implementation thereof, noting that the authority reports to the minister of Economy. SCA’s mission is to ensure compliance with the best international practices and standards in order to protect investment in the capital markets and consolidate the stability of the national economy. By continuously upgrading the supervisory legislation to be implemented in an integrated framework, SCA ensures transparency, integrity and justice in the operation of the markets, as well as the development of investor awareness in the UAE. The CISI is a leading professional body for the securities and investment industry in the UK and a growing number of major financial centres around the world. The CISI set a range of vocational qualifications ranging from International Introduction to Investments to Operational Risk and Investment Management. CISI examinations are used extensively by firms to meet the requirements of the UK regulator, the FSA, and are increasingly being recognised by international regulators. CISI has a significant voice in the industry, standing for professionalism, excellence and the promotion of trust and integrity. This official learning manual ensures that candidates gain a comprehensive understanding of the assigned examination content. The material is written and updated by industry specialists and reviewed by senior figures in the financial services industry, whilst quality is assured through a rigorous editorial system of practitioner panels and boards. The SCA is delighted to have an Agreement on Training and Qualification Services with the CISI to deliver a series of prescribed examinations to appropriate market practitioners. This learning manual not only provides a thorough preparation for the appropriate examination, but is also a valuable desktop reference point. Dr. Maryam Buti Al Suwaidi Chief Executive Officer Securities & Commodities Authority iv 11Q/ 36P The Regulatory Infrastructure............................ 1 1 14Q / 20P Licensed Bodies.................................... 37 2 15Q / 24P Investment Funds................................... 57 3 14Q/ 42P Markets.......................................... 81 4 14Q /20P Anti-Money Laundering and Combating the Financing of Terrorism... 123 5 10Q/ 25P Client Protection.................................... 143 6 11Q/ 31P Trading.......................................... 169 7 11Q/ 24P Dubai Financial Market (DFM)............................ 201 8 Glossary.................................................... 225 Multiple Choice Questions..................................... 231 Syllabus Learning Map........................................ 269 It is estimated that this workbook will require approximately 100 hours of study time. v vi Chapter One The Regulatory Infrastructure Introduction 3 1. Federal Law of No. 4 of 2000 3 2. Securities & Commodities Authority (SCA) 10 3. SCA Resolutions 16 4. Corporate Governance 20 5. Codes of Conduct 26 6. Licence Categories and Requirements 28 7. Accounting System Controls 33 This syllabus area will provide approximately 11 of the 100 examination questions 2 The Regulatory Infrastructure Introduction 1 This chapter introduces the regulatory infrastructure established by Federal Law No. 4 that created the Securities & Commodities Authority (SCA). It then covers the SCA’s functions and powers, including the requirements relating to membership and the need for securities and commodities markets in the United Arab Emirates (UAE) to be licensed by the SCA. After briefly considering corporate governance and the Chartered Institute for Securities & Investment’s (CISI’s) Code of Conduct, the chapter concludes with considerations of the various categories of licence provided to firms by the SCA. 1. Federal Law of No. 4 of 2000 1.1 The Securities & Commodities Authority (SCA) Learning Objective 1.1.1 Understand the functions of the Securities & Commodities Authority (SCA) (Federal Law No. 4 of 2000 Part 1, Chapter 1–3, Articles 1–19): incorporation of SCA; organs of the SCA and its membership; SCA’s financial affairs The SCA of the UAE was established by Federal Law No. 4 of 2000. It was incorporated as a public authority in Abu Dhabi, the State’s capital. The SCA is a separate legal personality with financial and administrative independence, which has the supervisory and executive powers necessary to perform its functions. It reports to the Cabinet of Ministers. The SCA’s purpose is based on achieving the following objectives: 1. To provide the opportunity to invest savings and funds in securities and commodities in a manner that: ensures the interest of the national economy, secures the integrity and accuracy of transactions 3 ensures prices are determined by means of supply and demand, and protects investors by establishing the bases for sound and just dealings between market participants. 2. To develop investment awareness by conducting research and reporting the findings and recommendations. 3. To ensure financial and economic stability. The SCA is not permitted to: enter into commercial activities have private interests of its own in any undertaking, or own or issue securities. The SCA may establish branches or offices to carry out the functions of supervision and control over the securities and commodities markets licensed in the UAE. Under Article 4 of Federal Law No. 4 of 2000, the SCA has been given the following powers to enable it to meet its objectives: 1. To propose regulations concerning: a. functioning of the SCA b. licensing and monitoring of the markets, and c. acceptance, listing, and cancelling or suspending the listing of any securities or commodities from being traded in the markets. All these regulations are to be issued by resolution of the Cabinet of Ministers. 2. In consultation and coordination with the markets licensed in the State, create regulations concerning: a. functioning of the market b. brokers and the regulating of their functions c. trading, clearance, settlement, transfer of ownership and custody of securities d. membership of the market e. disclosure and transparency, and f. arbitration in disputes arising from trading in securities and commodities. 3. To form specialist technical committees, and to specify the scope of their work and their remuneration. 4. To maintain contact with international markets in order to obtain and exchange information and know-how, and to join relevant Arab and international organisations and federations. 5. To perform all other acts which assist in achieving the Authority’s objectives or the exercise of its powers in accordance with the law. 1.1.1 The Organs of the SCA and their Competencies The SCA is managed by a board of directors, and the board is based on a resolution from the Cabinet of Ministers. The resolution of the Cabinet of Ministers determines the chairman of the board, the remunerations of the board members, the mechanism for holding meetings and taking decisions. The period in office – with the exception of the chief executive, SCA board members are appointed for four years, renewable once. In the event of a member stepping down prior to the end of that member’s term, a successor will be appointed for the remaining period of the original term. 4 The Regulatory Infrastructure Ownership of securities – upon joining the board, every member has to declare to the SCA the 1 securities owned by themselves, their spouse and minor children as well as any holdings with any broker. In addition, any changes in these holdings during their period in office need to be declared within one week after they are made aware of the change. All declarations need to be made in writing. Immediate termination of membership – members have to forfeit their membership in the following events: Conviction of an offence of dishonour or breach of trust. Bankruptcy. Failure to attend three consecutive meetings without an acceptable excuse. Validity of board meetings – board meetings are deemed valid if they are attended by the majority of the members. The chairman, or their deputy has to be in attendance. Resolutions – passed by a majority of the votes of the members present at the meeting. In the event the vote is undecided (ie, for and against have the same number of votes), the person chairing the meeting has the deciding vote. 1.1.2 Responsibilities of the Board of Directors 1. Ensure that the regulations of Article 4 of Federal Law No. 4 of 2000 and subsequent amendments are applied. 2. Collect notifications and complaints relating to the activities of the markets or brokers and take appropriate action within the provisions of the Law and the regulations issued. 3. Ensure markets and brokers submit balance sheets, profit and loss accounts, and annual financial statements audited by an accredited auditor, within one month following the end of the financial year. 4. Ensure markets have adequate disclosure rules in place related to any substantial developments that occur in relation to the companies listed on that market and that these rules are adhered to. 5. Ensure transparency and disclosure as prescribed in the Law and the resolutions implementing it. 6. Issue and maintain resolutions concerning membership of the markets as well as concerning trading in securities and commodities in accordance with the provisions of the Law and the regulations issued pursuant thereto. 7. Undertake all other acts which assist the board in achieving the objectives of the SCA. On a six-monthly basis, the board reports on the markets’ activities to the Cabinet of Ministers. The SCA is supported by the necessary administrative functions headed up by a full-time chief executive with the rank of undersecretary and a deputy with the rank of assistant under secretary. Both are appointed pursuant to a federal decree upon the proposal of the board. All regulations applicable to SCA employees equally apply to the chief executive and their deputy. 5 1.1.3 The SCA’s Financial Affairs The chief executive prepares the annual budget which is approved by the board. The fiscal year runs from the first of January until the end of December each year. The SCA’s sources of income consist of the following: 1. Annual funds allotted by the federal government. 2. Income which accrues under the regulations from the following: a. Listing fees and annual fees levied on the companies and the brokers in the markets. b. Fees levied on trading, and fees for the services rendered by the markets. c. Fines levied on brokers and companies whose securities are listed for trading, and any other fines. The SCA is required to keep regular books of account in order to monitor its operations and reflect its true financial position in accordance with the accounting rules and regulations of the State. The SCA has one or more auditors from among the statutory accountants entered on the roll of practising auditors. An annual board resolution is passed for the appointment of the auditors, and the determination of their fees. 6 The Regulatory Infrastructure 1.2 The Markets 1 Learning Objective 1.1.2 Understand the establishment and administration of the securities and commodities market Federal Law No.4 of 2000 enabled the establishment of markets for trading in securities and commodities in the UAE. Each market has to take the form of a local public establishment or a public joint-stock company licensed by the SCA. Markets have to be reciprocally and electronically linked at State level. Markets in the form of local public establishments, have to be administered by a board of directors, which is constituted in accordance with a resolution by the local competent authority. None of the members of the market’s board may be on the board of directors of a public joint-stock company or a financial broker. In addition, like the SCA members of the board, any member of the board of a market must step down in the event of: conviction of: offence of dishonour, and breach of trust declared bankrupt, or failure to attend three consecutive meetings without an acceptable excuse. For markets in the form of a public joint-stock company, the board of directors has to be elected in accordance with the provisions of the Commercial Companies Law and its internal regulations. Ownership of securities – the market’s chairman, board members, general manager and deputy must declare the securities owned by themselves, their spouses and minor children as well as any holdings with any broker. In addition, any changes in these holdings during the period in office need to be declared within one week after the individual is made aware of the change. All declarations need to be made in writing. The market’s board of directors is responsible for, and has to be sufficiently competent, to the following: 1. Appoint the market’s general manager and deputy. 2. Establish the organisational structure and annexes, the internal regulations and all administrative rules and instructions. 3. Monitor the trading transactions in securities and commodities on a daily basis to ensure justice between transacting parties. 4. Present reports and data to the SCA and issue the necessary press releases to ensure transparency of information and disclosure. Like the SCA, the markets are financed from the following sources: 1. Listing fees and annual fees levied on companies and brokers in the market. 2. Fees levied on trading and for the services rendered by the market. 3. Any fines levied on brokers or companies whose securities are listed for trading. 7 The markets are required to keep records of all transactions in securities listed on the market. Any transactions in listed securities outside the market need to be reported to the market by the company in accordance with the rules in force issued by the board of that market. Transactions in securities listed on the market not recorded according to these provisions and the regulations and resolutions issued are null and void. 1.3 Clearing, Settlement, Transfer of Ownership and Custody Learning Objective 1.1.3 Understand the application of Federal Law No. 4 of 2000 (Part 2, Chapter 3–4, Articles 30–32) to: clearing; settlement; transfer of ownership; custody Federal Law No. 4 also includes a number of further provisions under the headings of ‘Clearing, Settlement, Transfer of Ownership and Custody’ and ‘Supervision and Inspection Procedures’. These are as follows: Securities Price Information – all securities and commodities prices need to be displayed in accordance with the market’s regulations. Ownership transfer – transfer of ownership of securities, the registration thereof and custody agreements have to be in accordance with the market’s regulations. The issuer of securities is required to carry out its part of the procedures for transfer of ownership without delay. Suspending of trading – the market’s board may resolve to temporarily suspend all trading in the market, the trading in shares of a company, or transactions in any securities. In order to suspend trading, the majority of the members of the board must be present. The board can decide to suspend trading in exceptional circumstances or when circumstances arise that threaten the proper and regular working of the market. Suspending or reinstating rules or regulations – the market’s board may resolve to freeze, suspend or bring back into force any rules or regulations relating to the market or any of its operations. In order to do so, the majority of the board must be present. Sanctions – the SCA board has the right to impose sanctions on a market when it fails to pay any amounts due to the SCA. The sanctions are ranked in the following order: 1. Warning – a warning can be given to the market explicitly stating which financial requirement has been violated. 2. Notice to rectify – the SCA can serve a notice to the market to rectify the cause of the violation within 30 days of the date of the notice. 3. Penalty – the SCA can levy a penalty for delay of payment and when determining the penalty, a part-month shall be considered as a full month. 4. Suspension – the SCA may temporarily suspend a market from operation in the event until the fees are paid. Alternatively, the matter may be brought before the board to decide on any other course of action. 8 The Regulatory Infrastructure 1.4 Disclosure and Transparency 1 Learning Objective 1.1.4 Understand the application of Federal Law No. 4 of 2000 (Part 2, Chapter 5, Articles 33–39) to Disclosure and Transparency: board’s powers; price sensitive information; dealings by the chairman, directors and staff; inside information The board may require any person, natural or juristic, that has a connection with activities in securities, to publicly or privately disclose these activities, and to submit any information related to their activity. As part of its duties, the board may order any necessary investigation to be conducted associated with the implementation of the law and the subsequent resolutions thereto. Companies whose securities are listed need to immediately make any price sensitive information available to the market. The board of directors of the market has the right to publish the information provided in the local press and other media as appropriate. In order to ensure transaction integrity and investor confidence, listed companies need to provide any explanatory information relating to their activities and circumstances on request. Falsifying information in order to manipulate the market value of securities and the investor’s decision making process is not permitted. Equally not permitted is the use of insider information in purchase and sale transactions for personal gain. Any transactions executed that are in breach with these provisions are null and void. Any employee of a listed company, including the chairman, members of the board and the general manager are allowed to buy or sell shares in the company either direct or via a broker, under the following conditions: Approval of the transaction by the board of directors. Disclosure of the transaction, including details of the quantity, price and other details required to the market. Any transaction by employees not approved or disclosed are null and void. In addition, the spreading of rumours related to the purchase and sale of transactions in not permitted, and transactions associated with this are null and void. 9 2. Securities & Commodities Authority (SCA) 2.1 The Functioning of the Securities & Commodities Authority Learning Objective 1.2.1 Understand the regulations as to the functioning of the Securities & Commodities Authority (Cabinet of Ministers Resolution 2000–13 dated 3 July 2000): public authority; objectives and powers; organs of SCA and their competencies; administration; and finances 2.1.1 Public Authority, Objectives and Powers As seen in section 1, the SCA is a public authority with a separate legal personality, financial and administrative independence, and the supervisory and executive powers necessary to perform its functions. Its objectives have already been outlined and include the requirement to provide a suitable climate for the investment of savings and funds in securities and commodities in a manner that serves the interest of the national economy, secures integrity of transactions and protects investors. On its website, the SCA lays out its mission: ‘To safeguard the rights of investors, promote sound practices, and create an environment attractive to capital, using innovative systems.’ It also articulates its five strategic goals: 1. To enhance the legislative framework necessary for the development of UAE-based capital markets. 2. To safeguard the rights of financial market investors. 3. To promote transparency and corporate governance practices. 4. To ensure the provision of all administrative services in line with the transparency, efficiency and quality standards. 5. To foster a culture of innovation in an institutional workplace. In achieving its objectives, the SCA has a range of powers, including defining regulations, supervising and monitoring of the markets, the licensing of markets and brokers, and authorising securities and commodities to be listed for trading in the market. In addition, the SCA has the power to remove brokers from the registers of licensed brokers. 2.1.2 Organs of the SCA and their Competencies The organisational structure of the SCA is composed of: 1. a board of directors, and 2. an administrative system. 10 The Regulatory Infrastructure To perform its duties, the SCA may seek the assistance from suitable third parties. 1 The SCA’s affairs and conduct of business are governed by its board in accordance with the provisions of the Law and regulations. In particular, the board is required to: 1. Collect information and complaints relating to the market or brokers and take the appropriate decisions based on the information received. This includes initiating investigations and imposing penalties in accordance with the provisions of the Law and the regulations. 2. Approve the SCA’s annual budget. 3. Appoint one or more auditors for the SCA and determine their fees. The auditors have to be chosen from the statutory auditors listed as practising auditors. 4. Temporarily suspend trading in the securities market, in the shares of any of the listed companies, or in any other securities, upon the occurrence of exceptional circumstances or circumstances threatening the proper and regular working of the market. 5. Freeze, suspend or reinstate rules and regulations relating to the market and its operations. 6. Ensure that any natural or juristic persons that has a connection with activities in securities, publicly discloses information related to their activities. 7. Set and amend scales for salaries, increments, allowances, bonuses, privileges and any other entitlements of employees in the SCA. 8. Define regulations for the SCA’s employees. 9. Issue resolutions required for the implementation of the Law. 2.1.3 Administration The chairman of the board is the head of the SCA. The chairman, or their deputy, represents the SCA to third parties and before the courts. The chairman, or their deputy, invites the board to meet, presides over the meetings, directs the discussion, and issues the resolutions appointing experts, consultants and office holders of the special and the first grades, terminating their services with the Authority and all other matters in connection with them. The board delegates any of its competences to its chairman, and the chairman of the board may delegate any of their competences to their deputy or to any member of the board or to the chief executive, provided that the delegation is specific and in writing. The deputy chairman shall, as a matter of course, take the place of the chairman in their absence, when they are unable to perform their duties or when their post becomes vacant. The board shall convene, at least once every two months, or more often when required, on the chairman’s invitation. The invitation shall be sent to the members, in writing, in sufficient time prior to the date of the meeting, accompanied by the agenda. The board shall also meet upon request by at least four members. In case of an emergency, the invitation may be sent by any means of communication. A meeting of the board is valid if attended by the majority of its members, including the chairman or their deputy. Resolutions are passed by a majority of the votes of those present. In the event the vote is equal, the chairman or their deputy has the deciding vote. Voting by proxy or by letter is not permitted. 11 The chairman directs the proceedings, maintains order, oversees the process of voting when resolutions are being passed, and announces the results thereof. The deputy shall take the place of the chairman in their absence. In exceptional cases where quick decisions need to be taken, and it is impossible to hold a meeting of the board, the chairman may take the requisite decision. They will need to present their decision to the board at the earliest opportunity for a final resolution. The board may affirm, amend or revoke the decision. The board may form permanent or interim committees and determine their competencies. The committee is formed from members of the board. The board and its committees may invite any expert outside party to attend a meeting on a specific issue. They are invited for their experience and knowledge, but they do not have a vote in the deliberations. The board may form advisory and other committees as required and in particular in the following areas: 1. Proposing of ways and means to develop the working of the market. 2. Evolving and determining of the regulations necessary to combat fraud, deception and influence on the working of the market. 3. Determining of all requirements relating to publication, disclosure and transparency. The board specifies how committees are created and how they exercise their competencies. The minutes of each board meeting are approved by the board and signed by the chairman and the minute taker. The resolutions passed and the names of those present and those absent with and without excuse are recorded in the minutes. They shall be entered in a special register for that particular purpose. 12 The Regulatory Infrastructure The SCA is supported by an administrative function headed by a chief executive appointed by the board. 1 The chief executive reports to the chairman of the board. They, or anyone acting on their behalf in their absence, is responsible for the appointment, termination, promotion of employees of the second grade and below as well as the awarding of bonuses and all other matters in connection with personnel issues. The SCA’s employees are subject to their own regulations, issued by the board, in which their salaries, increments, allowances, bonuses, privileges and any other entitlements are specified. The chairman of the board defines the SCA’s organisational structure and internal regulations, including the competencies of the departments and the sections therein. The administrative system comprises a number of departments, under the direction of a manager appointed by the board on the nomination of its chairman. Among such departments are: Technical Office Strategy & Future Department Legal Affairs Department Government Communications & International Affairs Department Enforcement Department IT Department Financial & Administrative Affairs Department Human Resources, and for Market Operations: Licensing Department Issuance and Registration Department Market Supervision Department, and Supervision & Compliance Department. 2.1.4 Finances The SCA’s fiscal year commences on 1 January and runs until the end of December each year. It is the responsibility of the chief executive to prepare the draft budget and submit it to the board for approval at least one month before the commencement of the new fiscal year. The approved budget is then issued as an annex to the general budget of the State. The chief executive is also required to prepare the SCA’s final accounts, within the 90 days following the end of the fiscal year, and present them to the board, supported by the auditor’s report. The auditor may, at any time, have sight of the SCA’s records and financial documents. The auditor may request any information deemed necessary to ascertain the SCA’s assets and liabilities. If the auditor is prevented from performing their duties, or is not able to carry them out fully, this will be documented in a report to be submitted to the board. The SCA is required to keep regular books of account in order to monitor its operations and reflect its true financial position in accordance with the bases of accounting employed in the State. 13 2.2 Market Licensing and Supervision Learning Objective 1.2.2 Understand the regulations as to market licensing and supervision (Cabinet of Ministers Resolution 2000–11 dated 3 July 2000): conditions; applications; board’s powers No market may undertake the activity of trading in securities and commodities in the State unless licensed by the SCA. 2.2.1 Conditions For the granting of a licence in any market, the following conditions need to be met: 1. It is in the form of a public institution or a public company. 2. It occupies an appropriate building fitted out with the technical equipment necessary to conduct its activity electronically. 3. It is electronically linked with the State’s other markets so as to give effect to a common trading system between the markets. 2.2.2 Applications Market licence applications shall be submitted to the Authority in the prescribed format, supported by the following documents: The local resolution establishing the market. A statement of the names of the members of the market’s board of directors, with, from each of them, the following information: 1. An acknowledgment, signed by the member stating therein that they are not a member of the board of directors of a public joint-stock company, and that they are not a partner in, or a representative of, a financial brokerage company. 2. A written declaration made by them to the SCA as to the securities owned by them or by their spouse and minor children, and also the holdings of their spouse and minor children with any broker. 3. An undertaking by them to declare, in writing, to the SCA any change occurring in what they have previously declared regarding securities owned by them or by their spouse and minor children or via a broker within one week, at most, from the date they become aware of the change. A statement in the name of the market’s director general and their deputy, with accompanying submission from both of them, of the following: 1. A written declaration made by them to the SCA as to the securities owned by them or by their spouse and minor children and also their holdings and the holdings of their spouse and minor children with any broker. 2. An undertaking by them to declare, in writing, to the SCA any change occurring in what they have previously declared as to the securities owned by them or by their spouse and minor children, and also as to their holdings and the holdings of their spouse and minor children with any broker, within one week, at most, from the date they become aware of the change. 14 The Regulatory Infrastructure The organisational structure of the market and a statement of its specialist technical and 1 administrative organs. The internal regulations of the market which indicate the manner of appointing its director general and their powers, the procedure for calling meetings of the board of directors of the market, the place, quorum and validity of meetings and passing of resolutions. The electronic registration system for trading, deposit, clearing, and settlement operations and the capacity for electronic linking with the other markets in the State. The SCA will examine the licence application within a period not exceeding 15 days from the date of submission of the application. If the application is complete, a recommendation shall be made as to the placing of it before the board to take a decision thereon; if not, the concerned parties shall be notified of the necessity of completing the application within a period not exceeding 15 days from the date of notification. 2.2.3 Board’s Powers The board shall take a decision on the application within a period not exceeding 30 days from the date the complete application was placed before it. The board may, before determining the application, request any particulars it deems necessary in order to make its decision. The concerned parties will then be notified of the board’s decision within a period not exceeding one week from the date it was issued. If the decision of the SCA is to reject a licence application, it must state reasons. The applicant for the licence shall have the right to re-submit the application when the reasons no longer exist. The SCA may, in coordination with the markets, conduct inspections and investigations necessary to ensure that the legal regulations are being applied. It will first define the scope of the investigation, and designate the person to conduct it on its behalf. The SCA may also receive information and complaints made relating to either a market or broker activity, conduct the necessary investigation, require any person to submit a written statement as to the circumstances and factors relating to the contravention which is the subject of the information or complaint, and take appropriate decisions. The inspection team appointed by the SCA may enter the market and brokers’ offices during working hours, have sight of records and documents, and require that it be provided with any document or information it deems necessary to perform its task. During the course of investigation, the SCA may order the party under investigation not to dispose of the securities in their possession and to refrain from withdrawing any funds or securities deposited with another party. Investigation and inspection are confidential. The market shall provide balance sheet, profit and loss account and annual financial statements certified by an auditor entered on the roll of practising auditors within one month from the end of its financial year. These reports, and any other information, will be provided to the SCA as it requests them. 15 The SCA may adjudicate upon appeals submitted to it against decisions of the board of directors of the market relating to the imposing of penalties by way of warning and monetary fine. The board may resolve, by a majority of its members present, temporarily to halt trading in the securities market, or the shares of any company, or transactions in any securities, upon the occurrence of exceptional circumstances or that which threatens the proper and regular working of that market. The board may also resolve, by a majority of its members present, to freeze, suspend or bring back into force any rules or regulations relating to the market or any of its operations. 3. SCA Resolutions 3.1 Regulations for Securities and Commodities Markets Learning Objective 1.3.1 Know the regulations that apply to a securities and commodities market licensed in the UAE (Regulations as to the functioning of the market SCA regulation 2001–3 dated 29 April 2001): general provisions; establishment and management; membership; trading; finances 3.1.1 General Provisions No market is permitted to conduct the activity of trading in the State unless licensed by the SCA. Each market is required to be established by a resolution by the competent local authority, and to be managed by a board of directors constituted by resolution of such authority, provided that none of its members is a member of the board of directors of a public joint-stock company or of a broker. Each market must have a director general and a deputy to the director general, assisted by a sufficient number of officers and administrative staff. Before granting a licence to any market, the following conditions must be satisfied: 1. It is in the form of a public institution or a public company. 2. It occupies an appropriate building equipped with the technology necessary for its activity to be conducted electronically. 3. The market applying for the licence has its system linked electronically with the other markets in the State, so that there is set in place a common trading system among the markets. The market is required to make the arrangements necessary to secure the proper performance of the electronic data processing system and the system for recovery of the data saved in it in case of system failure. Each market operates under the supervision and control of the SCA. The SCA may, in coordination with the markets where required, conduct inspections and investigations necessary to ascertain the application of the Law and regulations, provided that the scope of any investigation is specified and the person conducting it is designated by the SCA. 16 The Regulatory Infrastructure Markets are required to enter in their records all transactions effected in listed securities. Any transaction 1 in securities listed in the market is null and void unless entered in accordance with the provisions of the Law and the regulations. Unless proved to the contrary, entries registered in the market’s records, whether entered manually or electronically, and any documents issued by the market, are deemed legal evidence of the trading in, and ownership of, the securities on the date of such records or documents. In the event of a dispute between transacting parties in the market in the field of securities and commodities, the parties can choose to enter into arbitration. If this route is chosen, then the arbitration regulations issued by the SCA are applied. 3.1.2 Establishment and Management The members of the market’s board of directors, its director general and their deputy are subject to the constraints and conditions stated in the provisions of the law and related regulations. The market’s internal regulations are required to specify the procedure for calling its board of directors to meet, the place of the meeting, the quorum for the validity of the meeting, the passing of resolutions and the remuneration of the members. The market’s board of directors must be sufficiently competent to deal with the market’s affairs and to take, within the limits of general policy, the steps necessary to achieve the objectives for which it has been established. In particular, the board of directors must have the competence to: 1. appoint the market’s director general and his deputy, and to determine their powers 2. establish the market’s organisational structure, the internal regulations and all administrative rules and instructions 3. draw up the necessary proposals in relation to the amending of the regulations issued pursuant to the provisions of the Law, and to present them to the SCA 4. monitor trading transactions in securities and commodities, so as to ensure justice between transacting parties 5. present reports and data to the SCA and to issue the press releases necessary to secure transparency and disclosure 6. approve the annual balance sheet of the market’s income and expenditure 7. levy penalties on brokers pursuant to the provisions of the law, and to recommend to the SCA the removal of them from the register of licensed brokers 8. consult with the SCA in respect of the fees charged in implementing the provisions of the Law and related regulations 9. handle applications for the entering of brokers and the listing of securities in the market, and 10. deal with any other matters to ensure the proper and regular working of the market. The market’s board of directors may delegate some of its powers to the market’s director general or their deputy. 17 To achieve the objectives of the market, the board of directors may exercise the following powers: a. To establish specialist technical organs for the market to perform its tasks, including: i. trading, clearing and settlement ii. monitoring of prices iii. monitoring and investigation iv. research and studies v. financial and administrative organs. b. To work to develop, train and render qualified the necessary cadres in accordance with the most modern technical and administrative methods. c. To form permanent or interim specialist committees. 3.1.3 Membership Membership of the market is obligatory for the following entities: 1. Brokers licensed in accordance with the law. 2. Joint-stock companies whose securities are listed in the market. 3. Any other entity whose securities are listed in the market. Each market is required to prepare a membership register in which members are entered. The SCA requires to be notified within one week of a member being entered on the market’s register. Members of the market are subject to the instructions of the market, the provisions of the Law and the related regulations. 18 The Regulatory Infrastructure The members of the market who have paid the registration and renewal fees constitute its General 1 Assembly. Each member has one vote in the meetings of this assembly. Its meetings will be attended by a representative of the SCA as an observer. The General Assembly is required to be competent to monitor general conditions in the market, and to suggest ways to enhance efficiency therein or eliminate impediments to its working. Its views on these matters are submitted to the SCA through the market’s board of directors. The market’s board of directors, in coordination with the SCA, lay down the rules and procedures as to how notice is given of meetings of the General Assembly and how resolutions are passed, as to the powers given to it and the duties placed upon it, and as to all administrative and financial matters relating to the General Assembly. The market’s board of directors is required to, with the approval of the SCA, lay down a code of professional conduct which shall be applied to brokers, and provisions for monitoring them. The brokers must be subject to a regime of inspection on a periodical basis or upon request by a concerned party. The inspection shall be conducted in coordination with the management of the market as appropriate. 3.1.4 Trading Trading in securities must be carried out on the floor of the market at least five working days in the week, excluding official holidays. Trading must be carried out for at least two hours in the day. Each market must advise the SCA of the days and hours of work it approves. The markets may, after obtaining the Authority’s consent, vary such days and hours. The market must provide an electronic trading system which ensures the following: 1. The automatic stopping of purchase orders which exceed the limits of the broker’s bank guarantee or reach the limit of a special order referred to below. 2. The enabling of all companies and entities whose securities are listed in the market, and their registrars, to view the register of their own shares. With the exception of trading relating to special orders, trading in the market must be carried out through an electronic trading system made available by the market and in accordance with the provisions as to trading in the Law and its regulations and instructions. A special order is defined as any order approved in advance by the market for a securities transaction in excess of 80% of the amount of the broker’s bank guarantee. The market defines the opening hours for the trading floor and the clearing operations, the rules as to admittance, and the instructions to be observed by those present. The market is required to allocate a single number to each investor, and also assign one trading account with any broker account. A trading account may, however, be opened in the names of two or more investors. Furthermore, with the approval of the SCA, the market may assign more than one number to an investor where required and trade through an ‘omnibus’ account that includes more than one investor. 19 Clearing and settlement operations in the market must be carried out on the basis of delivery against payment of the price. The market’s board of directors may specify the interval between the effecting of a trading transaction and the completion of settlement, provided that this will not be more than two working days after the trade date. The director general of the market may cancel an executed transaction after a written request from the two brokers to the transaction is submitted to them. His consent to such cancellation will be conditional upon there being serious reasons justifying the cancellation and on the feasibility to reverse the transaction. 3.1.5 Finances Each market is financed from the following sources: 1. Listing fees and annual fees levied on listed companies and on entities whose securities are listed, or on brokers. 2. Fees levied on trading, and fees for the services rendered by the market. 3. Any fines levied on brokers, or on companies or entities whose securities are listed for trading. The market’s fiscal year shall commence on the first of January and run until the last day of December of the same year. The market is required to provide the SCA with the balance sheet, the income and expenditure account, and the annual financial statements audited by an accredited auditor, within one month from the end of its financial year. 4. Corporate Governance Corporate governance is all about the way corporate entities are run. Broadly, it is the set of regulations, criteria and procedures that ensure discipline in managing companies. This is achieved by determining responsibilities and obligations of the directors and executive management of a company, taking into consideration the protection of shareholders’ rights and other stakeholders’ interests. The OECD Principles of Corporate Governance define it as: ‘a set of relationships between management, board, shareholders and stakeholders providing structure through which the objectives of the company are set’. In early 2020, the chairman of the Securities and Commodities Authority issued Board Resolution No. 03 of 2020 which adopted the Corporate Governance Guide for Public Joint-Stock Companies. This resolution introduced new corporate governance rules for public joint-stock companies in line with international best practice with the aim of promoting accountability, fairness and transparency. 20 The Regulatory Infrastructure 4.1 The Corporate Governance Guide for Joint-Stock Companies 1 Learning Objective 1.4.1 Know the terms of the joint-stock companies governance guide: the main pillars (introduction), guide principles and objectives (Article 2); responsibilities (Article 4) 4.1.1 The Pillars of the Guide The Corporate Governance Guide provides the framework necessary for regulating the affairs of public joint-stock companies. The Securities and Commodities Authority supervises the guide in its capacity as the regulator of listed companies. The guide is formulated in a simple and clear way, focused on guiding companies by providing a set of controls and rules that ensure institutional discipline in company relations and management. The main pillars of corporate governance according to the guide are accountability, fairness, disclosure, transparency and responsibility. The guide’s framework complies with the international best practice in terms of defining the responsibilities and duties of the members of the board of directors and executive management. It also serves to protect the rights of shareholders and other stakeholders, and it should contribute towards improving corporate sustainability. Guide Principles and Objectives The guide is based on the following principles of corporate governance: Accountability towards all shareholders and stakeholders, directing the board to develop strategy, supervise, guide and control the way the company operates. Equity – ensuring fair treatment for all shareholders, including minority shareholders, and protecting their rights. Transparency and disclosure – the company must ensure that accurate and timely disclosures are made of all material matters, including its financial affairs, performance, ownership of its shares and governance in an accessible manner to all interested parties. Responsibility – the company must recognise the rights of other stakeholders in accordance with laws and regulations, and encourage cooperation between the company and stakeholders in establishing sustainable and solvent companies. The objective of the guide is to develop an effective legal and regulatory framework to regulate the company affairs, and aims in particular to achieve the following: Develop a framework to address and protect rights of all stakeholders. Determine the responsibilities of the board and the executives administering the company. Strengthen the role of the board and its committees and developing their capabilities to enhance company decision-making. Ensure transparency, neutrality and equity in the capital market, its transactions and working environment, and enhance its disclosure. 21 Provide effective and balanced processes and procedures for dealing with conflicts of interests. Strengthen mechanisms of accountability and control for the administration of the company and its employees. Ensure the application of effective mechanisms for risk management, internal controls and procedures of the company. Support the efficiency of the audit of the company and its instruments. Raise the awareness of companies in relation to the concept of professional behaviour and encourage ethical behaviour. Ensure that the company applies an investor relations policy that supports regular, effective and fair communication with shareholders. 4.1.2 Responsibilities for Implementation Article (4) of the Corporate Governance Guide makes it clear that the board of directors takes the primary responsibility for the implementation of the guide. It states that the board is responsible for the implementation of the principles and rules of corporate governance, monitoring the company’s adherence to those principles and rules and making any necessary amendments. The company must maintain the documents which will evidence the way the company is governed, including all minutes, documents, reports and other papers as necessary. These should be held at the company’s headquarters for a period not less than ten years, including minutes of the general assemblies, board meetings and those of its committees. In the case of a judicial lawsuit (filed or to be filed against the company) or a continuous claim or investigation related to these minutes, documents, reports and other papers, the company must maintain such documents until the end of the lawsuit, claim or continuing investigation. 4.2 Gifts, Conflicts and Related Party Transactions Learning Objective 1.4.2 Know the regulations regarding: gifts (Article 30); conflicts of interest (Articles 32 & 33); related parties (Articles 34–39) In order to avoid even the appearance of a conflict of interest between a board member and the company, the Corporate Governance Guide includes provisions in relation to gifts, conflicts of interests generally and transactions with related parties. The rationale and requirements are detailed below. 4.2.1 Gifts A board member accepting gifts from persons or authorities may lead to a conflict of interest or the impression of a conflict. So, where the party giving the gift does so in circumstances where it may be concluded that it was intended to influence, or may influence the board member in the performance of tasks on behalf of the company, the Corporate Governance Guide says it should not be accepted. This does not prevent accepting objects of symbolic or real value of AED 500 or less, or entertainment of symbolic or simple value which is not related to any special transaction or activity of the company. 22 The Regulatory Infrastructure 4.2.2 Conflict of Interests Management 1 If a board member has a joint interest or a conflict of interest with the company in a deal or transaction submitted to the board for a resolution, that board member must inform the board and record the same in the minutes. Furthermore, the board member should not participate in the voting on the decision relating to the deal or transaction. If a board member fails to inform the board in accordance with the above, the company or any of its shareholders may resort to the competent court to invalidate the contract or order the member who acted in contravention of these provisions to return to the company any profit or benefit obtained as a result of entering into this contract. If it is not entirely clear that there is a conflict of interest, the board member who is the subject of the potential conflict, should disclose these circumstances to the chairman or designee, who decides whether or not there is a conflict of interest. The company must maintain a register of conflicts of interests in which the cases are recorded together with the measures taken. The board secretary should record the conflict of interest in the related board minutes. In conflict cases, the remaining board members must consider whether it is appropriate for the board member involved in the conflict issue to participate in discussing that item or not. If they decide that it is not appropriate for the member to participate, they may ask the board member to leave the meeting room during the discussions. The board member is not allowed to use personal influence on the issue whether in or outside the meeting. The board member should not vote on the decision. 4.2.3 Insiders Register In a similar way to conflicts management, the company’s board is expected to issue written rules regarding the transactions of the board members and its employees, collectively referred to as ‘insiders’, in securities issued by the company, the parent company, its subsidiaries or related companies. They are also expected to assign a department of the company, an internal committee, a special committee, or whoever the company deems it suitable to: 1. Prepare a special and complete register for all insiders, including persons who may be considered as temporary insiders who have the right to access the company’s internal information prior to publication. The register must also include prior and subsequent disclosures of insiders. 2. Manage, follow up and supervise the transactions of the insiders and maintain details in the register. 3. Notify the SCA and the market of an updated list of insiders at the beginning of each fiscal year and any amendments thereto during the fiscal year. 4. Submit a copy of the Insiders Register to the SCA on request. 5. Comply with any other requirements specified by the SCA. 23 4.2.4 Transactions with Related Parties The Corporate Governance Guide defines a ‘related party’ as the chairman and other members of the company board, plus members of the senior executive management of the company, employees of the company, and the companies in which any of these persons holds 30% or more of its capital, as well as subsidiaries or sister companies or affiliate companies. Deals done between a company and related parties (related party transactions) need to be handled carefully to ensure nothing untoward occurs. So, the Corporate Governance Guide specifies that a company must not enter into transactions with related parties without the consent of the board – in cases where the value of the transaction does not exceed 5% of the company’s capital – and also without the approval of the general assembly where the 5% percentage threshold is met or exceeded. Furthermore, for larger transactions that exceed 5% of the issued capital, the transaction must be evaluated by an assessor accredited by the SCA. Unsurprisingly, the related party who has an interest in the transaction must not participate in voting on the terms of the decision taken by the board or the general assembly in respect of that transaction. In the event of any significant change to the terms of the transaction after approval, another approval must be obtained from the board or the general assembly, as the case may be. Again, where the transaction exceeds 5% of the issued capital, it must be evaluated again and its conditions reviewed before its conclusion by an assessor accredited by the SCA at the company’s expense. The related party and complicit board members may be liable for damages to the company if transactions with the related parties are concluded in contravention of these requirements, or is otherwise proven to be unfair or involves a conflict of interests and incurs damages to the shareholders. 24 The Regulatory Infrastructure Transactions that fall under the company’s normal business and do not grant a board member any 1 preferential conditions are not considered transactions with related parties. However, the board member involved in the transaction should disclose such transactions to the board, and the remaining board members should review whether it is appropriate for the board member involved in the transaction to participate in the discussion of the item in the board meeting. 4.2.5 Related Parties Record The company must maintain a register for related parties where the names of such parties shall be recorded together with their transactions, the details and actions taken in relation thereto. The company must provide documents of the transactions with related parties and the nature of those transactions, volume, and details of each transaction, and inform the shareholders of such transactions in the general assembly. 4.2.6 Company Disclosure of Related Parties’ Transactions In cases of entering into transactions with related parties, the chairman must provide the SCA with a notice which includes the data and information of the related party, the details of the deal or transaction, the nature and the benefit of the involvement of the related party in the deal, together with a written confirmation that the terms of the transaction or the deal with the related party are fair, reasonable, and in favour of the company’s shareholders. 4.2.7 Related Party Disclosures Before entering into a transaction between a related party and the company, the parent company, or an affiliate company, the related party must disclose, in a written letter addressed to the board, the nature of the transaction, conditions and all substantial information about the related party’s share or its stake in the two contracting companies and the related party’s interest or benefit, which the board is required to immediately disclose to the SCA and the market. The details of the transaction must also be listed in the annual financial statements submitted to the general assembly, and published on the website of the market and the company. 4.2.8 Access to Transactions Concluded with Related Parties If a company enters into transactions with related parties, a shareholder who owns 5% or more of the company’s shares is entitled to the following: 1. Review the company records and any documents relating to those transactions. 2. File a lawsuit before the competent court regarding the transactions concluded with related parties to compel the parties of the transaction to provide all information and documents relating to those transactions, whether directly to prove the facts set out in the case or relevant to it or to lead to the discovery of information that will help in the detection of the facts. 3. If it is proven to the competent civil court that the transaction is unfair or involves a conflict of interests and causes harm to the rest of the shareholders, the court may cancel the transaction and oblige the related party to render the profit or benefit gained to the company, in addition to compensation if harm is proven against the company. 25 5. Codes of Conduct Learning Objective 1.5.1 Know the CISI Code of Conduct The Chartered Institute for Securities & Investment (CISI) has its own code of conduct. Membership of the CISI requires members to meet the standards set out within the Institute’s principles. These words are from the introduction: ‘Professionals within the securities and investment industry owe important duties to their clients, the market, the industry and society at large. Where these duties are set out in law, or in regulation, the professional must always comply with the requirements in an open and transparent manner. Membership of the Chartered Institute for Securities & Investment requires members to meet the standards set out within the Institute’s Principles. These Principles impose an obligation on members to act in a way beyond mere compliance.’ They set out clearly the expectations upon members of the industry ‘to act in a way beyond mere compliance’. In other words, members of the CISI must understand the obligation upon them to act with integrity in all aspects of their work and their professional relationships. So, where these duties are set out in law or regulation, members of the CISI should comply with the requirements in both letter and spirit. Members of CISI are also required to meet the standards set out within the CISI’s Principles, which impose an obligation on members to act at all times not only in compliance with the rules, but also to support the underlying purpose and values of the Institute. Each Principle specifies the duties owed by members to one or more stakeholders who may be impacted by their actions. There may be situations where professionals are faced with making a decision where the correct course of action is not immediately obvious. In addition to referring to the Code, consideration of the following could help to decide the right course of action. Clear & Honest – have I told no lies or ‘half-truths’ to any party involved in my reaching my decision? Impartial & Open – is everyone affected by my action or decision aware of the consequences? Straightforward & Transparent – have I made sure that my action or decision will not result in any party being unknowingly disadvantaged or unduly advantaged? Informed & Fair – have I considered the interests of my potential stakeholders and not been misleading when making my decision? 26 The Regulatory Infrastructure Principles Stakeholders 1 Personal Accountability – to strive to uphold the highest levels of Self, Clients, personal and professional standards at all times, acting with integrity, Regulators, honesty, due skill, care and diligence to avoid any acts, either in 1. Colleagues, Market person, in a remote working environment or digitally which may Participants, Firm, damage the reputation of your organisation, your professional body or Profession, Society the financial services profession. Client Focus – to strive to uphold the highest levels of personal and professional standards at all times, acting with integrity, honesty, due skill, care and diligence to avoid any acts, either in person, in a remote 2. Clients working environment or digitally which may damage the reputation of your organisation, your professional body or the financial services profession. Conflict of Interest – being alert to and actively manage fairly and effectively any personal or other conflicts of interest, obeying Clients, Market 3. legislation and complying with regulations to the best of your ability, Participants, ensuring you are open and cooperative with all your regulators, Regulators challenging and reporting unlawful or unethical behaviour. Respect for Market Partners – to treat all counterparties and business partners with respect, to observe proper standards of market integrity, Clients, Market 4. good practice, conduct and confidentiality required to maintain the Participants highest level of mutual trust. Professional Development – to strive continually for professional Profession, Clients, 5. excellence, committing to Continuous Professional Development Colleagues (CPD) and promoting and supporting the development of others. Aware of Capabilities – to decline to act on any matter about which you are not competent or qualified unless you have access to such Clients, Profession, 6. advice or assistance to carry out the work in a professional manner, Market Participants taking into account the nature of the individual mandates given by your customers and counterparties. Society, Colleagues, Respect Others and the Environment – to treat everyone fairly and Clients, Regulators, with respect, supporting opportunity for all, embracing diversity and 7. Market Participants, inclusion and ensuring that the environmental impact of your work is Profession, considered. Professional Body Speak Up & Listen Up – to be active in speaking up and encouraging others to do so by listening up, promoting a safe environment for all 8. Society, Colleagues and recognising the responsibilities you have to the communities in which you operate. 27 It is useful to note that the SCA lists its values on its website, and that these values express similar expectations of conduct to the CISI: SCA Values 1. Fairness and Integrity 2. Partnerships and Cooperation 3. Transparency 4. Creativity 6. Licence Categories and Requirements The SCA issued Decision No 13 in 2021 which defined various categories of financial activities which required a licence, alongside related requirements for each. This section provides details of the five categories introduced, the key functions for each and certain additional details. As well as the firms requiring an SCA licence to operate, regulatory approval from the SCA is necessary for certain roles within the firms, as detailed in the following subsections. The specified financial activities can only be practised after obtaining a licence and none of the main functions or approved jobs can be undertaken without the prior approval of the SCA. 6.1 Category 1 – Dealing in Securities Learning Objective 1.6.1 Know the licensing requirements for dealing in securities: capital requirements (Annex 1), main functions of the licence category (Annex 1), financial activities with the category (Annex 1), approved jobs for each activity (Annex 1) The first category is dealing in securities, and firms must be either legal persons incorporated within the State, or branches of a foreign company. In either case the firm must satisfy a capital requirement of not less than AED 30 million in paid up capital. The main functions (professional roles) the SCA expects within the firms are: 1. Category Manager or Official 2. Compliance Officer 3. Risk Management Officer 28 The Regulatory Infrastructure The financial activities included within ‘dealing in securities’ and the related approved jobs are: 1 Financial Activities Approved jobs for the activity/activities Trading and clearing broker Trading manager Trading broker in global markets Operations manager Broker for trading non‐exchange traded Broker representative derivative contracts and currencies in the spot market Trading broker Broker representative Securities dealer Trading manager 6.2 Category 2 – Dealing in Investment Learning Objective 1.6.2 Know licensing requirements for dealing in investment: capital requirements (Annex 1), main functions of the licence category (Annex 1), financial activities with the category (Annex 1), approved jobs for each activity (Annex 1) The second category is dealing in investment, and firms must either be legal persons incorporated within the State, or a branch of a foreign company, with the exception of the investment management activity of an investment fund and the management of securities portfolios. For the latter, the legal firm is required to be a joint‐stock company established within the State. The paid‐up capital for firms in this second category must not be less than AED 50 million. The main functions (professional roles) the SCA expects for the second category are as follows: 1. Category Manager or Official 2. Compliance Officer 3. Risk Management Officer 4. Investment Operations Manager The financial activities included within ‘dealing in investment’ and the related approved jobs are: Financial Activities Approved jobs for the activity/activities Managing investment funds’ investments Fund Investment Manager or Portfolio Manager Principal Financial Analyst Managing securities portfolios Financial Analyst Administrative services for investment funds N/A 29 6.3 Category 3 – Custody, Clearing and Recording Learning Objective 1.6.3 Know licensing requirements for custody, clearing and recording: capital requirements (Annex 1), main functions of the licence category (Annex 1), financial activities with the category (Annex 1) The third category is custody, clearing and recording, and firms must be joint stock companies established within the State operating in the field of securities, or banks or branches of foreign banks licensed by the UAE Central Bank. The legal form for the public clearing activity may also be a brokerage firm – a trading and clearing member – or a foreign clearing member licensed at its headquarters to practise public clearing, provided that it is subject to a regulatory authority similar to the Authority and has obtained the approval of the relevant authority in accordance with the Commercial Companies Law. The activity of acting as a depository bank or depository bank agent is limited to banks or foreign bank branches licensed by the UAE Central Bank. Any capital market institution can practice the activity of registrar of private joint‐stock companies. The paid‐up capital for the third category is not less than AED 50 million. The main functions (professional roles) the SCA expects for the third category are: 1. Category Manager or Official 2. Compliance Officer 3. Risk Management Officer 4. Operations Manager (not required for firms only acting as registrar of private joint‐stock companies) The financial activities included within ‘custody, clearing and recording’ are: Financial Activities Safe custody General clearing Covered warrants issuer Depository bank for depository receipts Depository bank agent for depository receipts Registrar of private joint stock companies 30 The Regulatory Infrastructure 6.4 Category 4 – Credit Rating Agencies 1 Learning Objective 1.6.4 Know licensing requirements for credit rating agencies: capital requirements (Annex 1), main functions of the licence category (Annex 1) The fourth category is credit rating agencies, and firms must either be: a legal person incorporated within the State or branch of a foreign company in accordance with the Commercial Companies Law, or a body licensed to work in one of the financial free zones in the State, provided that it adheres to the following: 1. Provisions of the Companies Law related to the conduct of business by free-zone companies within the State. 2. Carries out the activity through its headquarters in the financial free zone or within the state. 3. Submits proof of agreement with the regulatory authority in the financial free zone on the following: a. The implementation of the legislations issued by the Authority when practising credit rating activity in the State. b. Restricting the legal jurisdiction related to any dispute that arises based on the licence issued by the Authority to the courts of the State, excluding the courts of the financial free zone, provided that its agreements with its clients shall include evidence to this effect. c. The approval of the regulatory authority in the financial free zone to enable the Authority to carry out its regulatory and supervisory role without any restriction or condition on business related to the licence issued by the Authority. The paid‐up capital requirement for the fourth category is not less than AED 5 million. The main functions (professional roles) the SCA expects for the fourth category are as follows: 1. Category Manager or Official 2. Compliance Officer 3. Credit Rating Analyst 4. Credit Rating Analysis Official Note that the credit rating analyst and the credit rating analysis official may be accredited by the Authority, or registered and approved by a regulatory authority similar to the Authority. 31 6.5 Category 5 – Ranking and Advice Learning Objective 1.6.5 Know licensing requirements for ranking and advice: main functions of the licence category (Annex 1), financial activities with the category (Annex 1), approved jobs for each activity (Annex 1) The fifth category is ranking and advice, and can be performed by a body licensed by the Authority for another category, or a branch of a foreign company licensed by a regulatory authority similar to the Authority, or a bank or foreign bank branch licensed by the Central Bank of the UAE. There is no capital requirement for ranking and advice. The main functions (professional roles) the SCA expects within the firms providing ‘ranking and advice’ are: 1. Category Manager or Official 2. Compliance Officer 3. Risk Management Officer The financial activities included within ‘ranking and advice’ and the related approved jobs are: Financial Activities Approved jobs for the activity/activities Financial Consulting Financial Analyst Financial Consultant (Issue Manager) Financial Analyst Listing Consultant Financial Analyst Definition N/A Promotion Promotion Manager 32 The Regulatory Infrastructure 7. Accounting System Controls 1 Learning Objective 1.7.1 Know the obligations of licensed bodies regarding accounting system controls (Annex 2) Firms licensed for the first category – dealing in securities - must provide an electronic accounting system for managing the accounts of both the licensed firm and its clients. This electronic accounting system is referred to as a ‘Unified Centralised Back Office System’. The system must meet - at a minimum ‐ the following technical conditions: 1. A password and separate powers that suit the functional tasks of each user of the system. 2. An Archive Audit Trail Log feature for the following: a. Entries movements and financial movements. b. Powers movements. c. Traffic monitoring of entry and exit processes from the system. 3. Separation of the tasks of entering and posting. 4. Setting times of the server device for the back office system according to the local time of the country. 5. Maintaining back-up copies of the back office system on a daily basis (‘incremental back-up’) and on a monthly basis (‘full back-up’) on storage media away from the back office system server kept for at least ten years. 6. Creating an automatic serial number (‘auto generated number’) when registering the entry that is not adjustable, and includes automatically recording the date and local time that can only be modified in exceptional cases. 7. Printing reports that include the entries for which the date or time has been modified, indicating the automatic date and time of those entries. 8. The ability to print daily reports, and convert those reports into PDF and Excel format, in particular the following reports: a. A statement of each of the clients’ securities balances. b. The client’s account statement including all the movements that take place on the account with the company in terms of buying, selling, receiving, disbursing, registering, transferring ownership and other movements. c. The multi‐level trial balance. d. Analytical data for the items of the trial balance, in particular bank statements of accounts, and a statement of the client’s debit and credit balances. e. A statement of the clients’ zero balances. f. Cheque movement statement (collected, cancelled, and bounced). g. A statement of the terms of receivables related to clients in compliance with the minimum requirements of the Authority. h. Financial position. i. Income statement. 9. The possibility of implementing the following requirements, at a minimum: a. Posting the entries at the end of the day, preventing the amendment of the entries after posting. b. Show the commission separately in the client’s account statement. 33 c. Uploading the data of transactions executed in the markets in real time to the accounting system, in order to control clients’ cash and paper balances through real‐time settlement by linking the accounting system to the client’s order management system (OMS). The licensed body that uses the accounting system must do the following: 1. Keep an updated copy of the User Manual for the accounting system. 2. Provide continuous technical support for the accounting system to ensure that all technical problems that may occur are addressed. 3. Notify the Authority immediately in the event of any sudden malfunctions in the accounting system, indicating the expected period of its continuation, and provide the Authority with a technical report from the system manufacturer, stating the reasons for the malfunction. 4. Notify the Authority in the event of a change in the accounting system used, with an accompanying explanation of the reasons for the change. 34 The Regulatory Infrastructure End of Chapter Questions 1 Think of an answer for each question and refer to the appropriate section for confirmation. 1. What are the objectives of the SCA? Answer reference: Section 1.1 2. With exception of the chief executive, how long is the period that SCA board members hold the role when appointed? Answer reference: Section 1.1.1 3. How often should the board of directors report on the markets’ activities to the Cabinet of Ministers? Answer reference: Section 1.1.2 4. Where does the funding for the SCA come from? Answer reference: Section 1.1.3 5. What is the aim of the disclosure and transparency rules? Answer reference: Section 1.4 6. What are the powers of the SCA? Answer reference: Section 2.1.1 7. What documents need to accompany an application from a market? Answer reference: Section 2.2.2 8. How quickly does the board decide on an application from a market? Answer reference: Section 2.2.3 9. What conditions must be satisfied before a market is granted a licence by the SCA? Answer reference: Section 3.1.1 10. How is a special order defined in terms of trading? Answer reference: Section 3.1.4 11. List four of the aims of the Corporate Governance Guide. Answer reference: Section 4.1.1 12. Who has the responsibility of ensuring the implementation of the Corporate Governance Guide? Answer reference: Section 4.1.2 13. What should the Insiders Register include in relation to temporary insiders? Answer reference: Section 4.2.3 14. What is the obligation imposed on members of the CISI to uphold alongside the rules in relation to compliance? Answer reference: Section 5 35 15. Name the stakeholders under Principle 7 - Respect Others and the Environment? Answer reference: Section 5 16. List the five SCA licence categories. Answer reference: Section 6 17. How do the capital adequacy requirements differ between the five licence categories? Answer reference: Section 6 18. What are the two functions that are required in all of the five licence categories? Answer reference: Section 6 19. What are the main functions that are expected in a firm provided with a first category licence ‘dealing in securities’? Answer reference: Section 6.1 20. What is the term used for the accounting system that must be in place for firms providing licence category 1 services (dealing in securities). Answer reference: Section 7 36 Chapter Two Licensed Bodies Introduction 39 1. General Provisions 39 2. Licensing Financial Activities 44 3. Further Licence Applicant Requirements 47 This syllabus area will provide approximately 14 of the 100 examination questions 38 Licensed Bodies Introduction This chapter draws on the Securities and Commodities Authority (the SCA or the Authority) Decision No. 13 2 of 2021 titled ‘Regulations Manual of the Financial Activities and Status Regularisation Mechanisms’. This decision lays down various obligations and expectations for firms applying to be licensed bodies – to gain a licence from the Authority to perform one or more of the financial activities that were detailed at the conclusion of Chapter 1. 1. General Provisions 1.1 Legal Status, Place of Business and Close Ties Learning Objective 2.1.1 Know the obligations of licensed bodies in relation to: disclosure of legal status (Article 8); state of emergency (Article 9); place of business (Article 10); close ties (Article 11) The disclosure of a licensed body’s legal status, including the fact that it is licensed by the Authority, is important. It enables those that might suffer from perceived or actual misbehaviour at the hands of a licensed firm to raise their concerns with the regulator. The decision’s requirements include that each licensed body discloses its legal status by adhering to the following: 1. Disclosing to third parties that it is licensed by the Authority and is subject to the Authority’s control and supervision, alongside the licence category and the financial activity it conducts. 2. Including a letterhead in all its documents and work papers to the effect that it is a body licensed by the Authority, along with its licence number and addresses. This must be included whether it is delivered by hand, fax or email, or published or delivered by any other electronic means (such as on the firm’s website). This requirement applies to any communications with the Authority or clients, including client agreements and other documents. 39 3. Refraining from setting any condition that exempts or limits the responsibilities arising from practising its financial activity. Any condition, including an exemption or limitation from responsibility, will be null and void unless there is a force majeure or a state of emergency. 4. Refraining from using, utilising, or copying the Authority’s logo for any reason. If there is a desire to use the Authority’s logo for a specific reason, written permission is required. Article 9 of the decision provides some common-sense provisions to cover emergencies such as fire, electricity interruption, or loss of connections. The decision specifies that, in the case of an emergency that is out of the licensed firm’s control and cannot be avoided after taking reasonable steps and procedures, the firm is not required to adhere to the normal disclosure of legal status. However, the licensed body must notify the Authority immediately after knowing about any case of emergency and indicate its expected effects and the procedures that have been taken or suggested to be taken to deal with this case, and the way to manage or treat this as soon as possible in order to mitigate the probable losses for the body and its clients. The SCA’s decision also puts requirements on a licensed firm’s place of business. The head office of the licensed body must be within the geographic boundaries of the State, unless the firm has obtained the ap

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