8.3.1. Meaning of Client Investments

A Client Investment is an Investment held by an Authorised Firm on behalf of a Client in the course of, or in connection with, the carrying on of Investment Business by the Authorised Firm.

8.3.2. Exceptions to the Client Investments Rules

The Client Investments Rules do not apply to Client Investments held as Collateral in accordance with the provisions of this COB 8.3.2. Before an Authorised Firm holds Collateral from a Client it must disclose to that Client:

• (a) the terms governing the arrangement under which the Collateral will be held, including any rights which the Authorised Firm may have to realise the Collateral and the terms governing the termination of the arrangement;
• (b) if applicable, that the Collateral will not be registered in that Client’s own name;
• (c) if applicable, that the Authorised Firm proposes to return to the Client Collateral other than the original Collateral, or original type of Collateral; and
• (d) that in the event of the insolvency, winding up or other Distribution Event stipulated by the AFSA, any excess Collateral will be sold and the resulting Client Money shall be distributed in accordance with the Client Money Distribution Rules. An Authorised Firm must take reasonable steps to ensure that the Collateral is properly safeguarded. Before an Authorised Firm deposits a Client’s Collateral with a Third Party Account Provider it must notify the Third Party Account Provider that:
• (a) the Collateral does not belong to the Authorised Firm and must be held by the Third Party Account Provider in a segregated Client Investment Account in a name that clearly identifies it as belonging to the Authorised Firm’s Clients; and
• (b) the Third Party Account Provider is not entitled to claim any lien or right of retention or sale over the Collateral except to cover the obligations owed to the third party which gave rise to that deposit, pledge, charge or security arrangement or any charges relating to the administration or safekeeping of the Collateral. Notwithstanding that the Client Investments Rules do not apply to Collateral held by an Authorised Firm in accordance with this COB 8.3.2, the Authorised Firm must carry out appropriate due diligence in relation to the Third Party Account Provider to at least the standards specified in COB 8.3.7. An Authorised Firm must withdraw the Collateral from the third party where the Collateral is not being properly safeguarded unless the Client has indicated otherwise in writing.

8.3.3. Safeguarding Client Investments

An Authorised Firm which holds Client Investments must have systems and controls in place to ensure the proper safeguarding of Client Investments.

An Authorised Firm which Provides Custody or holds Client Investments must ensure that Client Investments are recorded, registered and held in an appropriate manner to safeguard and control such property.

8.3.4. Client Investment Accounts

A Client Investment Account is an account which:

• (a) is held with a Third Party Account Provider or by an Authorised Firm which is authorised under its Licence to Provide Custody;
• (b) is established for the purpose of holding Client Investments;
• (c) when held by a Third Party Account Provider, is maintained in the name of the Authorised Firm or a Nominee Company controlled by the Authorised Firm; and
• (d) includes the words 'Client Account' in its title.

8.3.5. Registration and recording of Client Investments

An Authorised Firm which Provides Custody or holds Client Investments must register or record all Client Investments in the name of:

• (a) the Client;
• (b) a Nominee Company that is controlled by the Authorised Firm; or
• (c) the Authorised Firm where, due to the nature of the law or market practice, it is not feasible to do otherwise.

Save as provided in (c) above, an Authorised Firm which Provides Custody or holds or controls Client Investments must record, register and hold Client Investments separately from its own Investments.

8.3.6. Registration and recording of Client Investments

An Authorised Firm may record, register or hold a Client Investment in:

• (a) a Client Investment Account solely for that Client; or
• (b) a Client Investment Account containing the pooled Investments of more than one Client.

8.3.7. Holding Client Investments with Third Party Account Providers

An Authorised Firm may only hold a Client Investment with a Third Party Account Provider where it has:

• (a) undertaken appropriate due diligence on the Third Party Account Provider and concluded on reasonable grounds that the Third Party Account Provider is suitable to hold those Client Investments; and
• (b) confirmed that the laws and regulations of both:

(i) the jurisdiction in which the Client Investments will be held; and

(ii) the jurisdiction in which the relevant Bank or Regulated Financial Institution is legally established (if different), recognise that Client Investments belong beneficially to the Client and will not be available to satisfy any debts of the Bank or Regulated Financial Institution.

8.3.8. Due diligence on Third Party Account Providers

When undertaking due diligence on a Third Party Account Provider, an Authorised Firm should have regard to the following:

• (a) the following characteristics of the Third Party Account Provider:

(i) its expertise and market reputation;

(ii) its credit rating;

(iii) its capital and financial resources;

(iv) the value of the Client Investments held, as a proportion of its overall capital and deposits;

(v) the extent to which the Client Investments would be protected under a deposit guarantee protection scheme;

(vi) where such information is available, the level of risk in the investment and loan activities undertaken by it or members of its Group;

(vii) its use of agents and service providers; and

(viii) the financial position of its Group; and

• (b) (without prejudice to the obligation under (a) above) any legal requirements or market practices in the jurisdiction in which it is located (including the insolvency regime in that jurisdiction) which may adversely affect the protections available in respect of any Client Investments placed with the Third Party Account Provider. When assessing the suitability of the Third Party Account Provider, the Authorised Firm must ensure that the Third Party Account Provider will provide protections equivalent to the protections conferred by the Client Investments Rules. An Authorised Firm must have systems and controls in place to ensure that the Third Party Account Provider remains suitable to hold Client Investments for its Segregated Clients. This includes undertaking appropriate due diligence, in the manner described above, on an ongoing basis. An Authorised Firm must be able to demonstrate to the AIFC's satisfaction the grounds upon which the Authorised Firm considers the Third Party Account Provider to be suitable to hold Client Investments.

8.3.9. Entering into written agreements with Third Party Account Providers

Before an Authorised Firm passes, or permits to be passed, Client Investments to a Third Party Account Provider, it must enter into a written agreement with the Third Party Account Provider under which the Third Party Account Provider agrees that:

• (a) it shall keep the Client Investments separately from assets belonging to the Third Party Account Provider;
• (b) all Investments standing to the credit of the account are held by the Authorised Firm as agent and that the Third Party Account Provider is not entitled to combine the account with any other account or to exercise any charge, mortgage, lien, right of set-off or counterclaim against Investments in that account in respect of any sum owed to it on any other account of the Authorised Firm;
• (c) the title of the account is, or will be, sufficient to distinguish that account from any account containing Investments that belong to the Authorised Firm or the Third Party Account Provider; and
• (d) it shall provide a written statement on at least a monthly basis identifying all of the Client Investments that it holds for the Authorised Firm.

8.3.10. Contents of agreements with Third Party Account Providers

The written agreement between the Authorised Firm and the Third Party Provider must also address the following:

• (a) the procedures for the passing of instructions to or by the Authorised Firm;
• (b) the procedures for dealing with dividends, interest payments and other entitlements accruing to the Client in connection with the Client Investments that are held by the Third Party Account Provider; and
• (c) the extent to which the Third Party Account Provider is liable in the event of loss of a Client Investment caused by the acts or omissions of the Third Party Account Provider or any agent of the Third Party Account Provider.

8.3.11. Use of Client Investments for the purposes of the Authorised Firm or another Person

An Authorised Firm must not use a Client Investment for its own purpose or that of another Person without the prior written permission of the relevant Client. An Authorised Firm which intends to use a Client Investment for its own purpose or that of another Person, must have systems and controls in place to ensure that:

• (a) it obtains the prior written permission of the relevant Client to the use of the Client Investment;
• (b) adequate records are maintained to protect Client Investments which are applied as collateral or used for stock lending activities;
• (c) the equivalent Investments are returned to the Client Investment Account of the Client; and
• (d) the Client is not disadvantaged by the use of its Client Investments.

8.3.12. Procedures relating to Client Investment Accounts

An Authorised Firm must have procedures for ensuring that Client Investments are promptly identified and held in accordance with the provisions of this COB 8.3.

8.3.13. Client disclosure

An Authorised Firm that holds Client Investments belonging to a Segregated Client must disclose the following information to the Client:

• (a) that the Client is subject to the protections conferred by the Client Investments Rules;
• (b) the arrangements for recording and registering Client Investments, claiming and receiving dividends and other entitlements and interest and the giving and receiving instructions relating to those Client Investments (including, if applicable, a statement that the Authorised Firm intends to mix the Client Investments of the Client with those of other Clients);
• (c) whether the Client Investments of that Client may be held by a third party on behalf of the Authorised Firm, and if so, what degree of responsibility the Authorised Firm has for any acts or omissions of the third party; and what the likely consequences are for the Client of the insolvency of the third party;
• (d) if applicable, that the Client Investments may be held in a jurisdiction outside the AIFC and the market practices, insolvency and legal regime applicable in that jurisdiction may differ from the regime applicable in the AIFC;
• (e) details of any rights which the Authorised Firm may have to realise Client Investments held on behalf of the Client in satisfaction of a default by the Client or otherwise; and
• (f) the method and frequency upon which the Authorised Firm will report to the Client in relation to its Client Investments.

8.3.14. Client reporting

(1)In relation to each Client for whom it receives or holds Client Investments, an Authorised Firm must provide at least once a year a statement of the Client Investments unless such a statement has been provided in a periodic statement in accordance with (2) or COB 9.

(2)An Authorised Person which Provides Custody for safeguarding and administering Digital Assets belonging to a Retail Client must send a statement to its Retail Clients at least monthly. The statement must include the list, description and amount of each Digital Asset held by the Authorised Person as at the date of reporting.

8.3.15. Record keeping

An Authorised Firm must maintain records:

• (a) which enable the Authorised Firm to demonstrate compliance with the Client Investments Rules; and
• (b) which enable the Authorised Firm at any time and without delay to distinguish Client Investments held for one Client from those held for another Client and from the Authorised Firm's own assets; and
• (c) of all agreements entered into with Third Party Account Providers pursuant to COB 8.3.7 and any instructions given by the Authorised Firm to the Third Party Account Provider under the terms of such agreements. Records must be kept for a minimum of six years.

8.3.16. Reconciliations

An Authorised Firm must:

(a)     at least once every calendar month, reconcile its records of Client Accounts held with Third Party Account Providers with monthly statements received from those Third Party Account Providers;

(b)     at least every six months, count all Client Investments physically held by the Authorised Firm, or its Nominee Company, and reconcile the result of that count to the records of the Authorised Firm; and

(c)      at least every six months, reconcile individual Client ledger balances with      the Authorised Firm’s records of Client Investment balances held in Client Accounts.

An Authorised Firm must ensure that the process of reconciliation does not give rise to a conflict of interest.

Where Authorised Persons Provide Custody for safeguarding and administering Digital Assets belonging to another Person, all reconciliations required under COB 8.3.16 shall be conducted at least every week.

8.3.17. Review of reconciliation

When performing reconciliations in accordance with COB 8.3.16, an Authorised Firm should:

1. (a) maintain a clear separation of duties to ensure that an employee with responsibility for operating Client Accounts, or an employee that has the authority to make payments, does not perform the reconciliations; and
2. (b) ensure that the reconciliations are reviewed by a member of the Authorised Firm who has adequate seniority. The member in question must provide a written statement confirming the reconciliation has been undertaken in accordance with the requirements of COB 8.3.16.

Guidance: Material discrepancies The Authorised Firm should notify the AFSA where there has been a material discrepancy with the reconciliation which has not been rectified. A material discrepancy includes discrepancies which have the cumulative effect of being material, such as longstanding discrepancies.