Kuwait Rules and Regulations (Level 3)

Correct: Under the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 in the Philippines, the issuance of a Commencement Order typically includes a Stay or Suspension Order. This legal mechanism halts all actions to enforce claims against the debtor, which effectively suspends the servicing of interest and principal payments. The custodian’s role during this period is to track the legal developments and ensure the client’s claims are properly documented within the rehabilitation plan.

Incorrect: The strategy of relying on the SEC Philippines to settle interest from a protection fund is incorrect because such funds are generally not designed to cover corporate credit defaults. Suggesting that the PSE would mandate an automatic conversion to equity misinterprets the exchange’s authority, as debt-to-equity swaps are usually negotiated within a court-supervised rehabilitation plan rather than being an automatic exchange rule. Opting for the view that a custodian must use its own capital to pay interest is a fundamental misunderstanding of the custodian’s role, as they are not guarantors of the issuer’s credit risk.

Takeaway: In the Philippines, an issuer default or rehabilitation filing typically leads to a legal suspension of all debt servicing payments pending court proceedings.

Correct: The Securities Regulation Code (SRC) of the Philippines is built on the principle of full and fair disclosure. By requiring registration, the SEC ensures that the public has access to all material facts necessary to make an informed investment decision. Furthermore, the SRC provides the legal basis to prohibit and penalize deceit, misrepresentation, and other fraudulent schemes that undermine market integrity.

Incorrect: The strategy of guaranteeing profitability or providing indemnity is incorrect because the SEC does not protect investors from market losses or business failure. Focusing on price controls or restricting share transferability misrepresents the regulatory framework, which prioritizes market transparency over direct price manipulation. Choosing to eliminate all market risk or limiting issuance to government-linked entities is inaccurate as the SRC facilitates private capital formation while requiring disclosure of risks rather than their removal.

Takeaway: The Philippine Securities Regulation Code protects investors through mandatory disclosure of material information and the prohibition of fraudulent market activities.

Correct: A qualified intermediary in the Philippines context serves to bridge the gap between foreign investors and the Bureau of Internal Revenue by verifying eligibility for tax treaty benefits. By maintaining proper documentation like Tax Residency Certificates, the intermediary ensures that the correct, often lower, withholding tax rate is applied at the source, thereby protecting the investor’s yield and ensuring regulatory compliance.

Correct: Reconciliation is a critical control stage where the firm ensures that the actual assets or cash received from an external source, such as the Philippine Depository & Trust Corp (PDTC), match the internal records and the sum of all individual client entitlements. This process identifies discrepancies, prevents over or under-allocation, and fulfills the firm’s fiduciary responsibility to safeguard client assets as required under the Securities Regulation Code.

Incorrect: Focusing only on the dissemination of market announcements describes the notification stage, which occurs much earlier in the life cycle to inform participants of the event details. The strategy of gathering and validating tax residency documentation is part of the event data collection and validation phase, ensuring that the correct net amounts are calculated before payment. Opting to describe the final movement of funds refers to the payment and settlement stage, which is the actual distribution of the entitlement rather than the verification of the figures.

Takeaway: Reconciliation ensures the integrity of asset servicing by matching external receipts with internal records to guarantee accurate client allocations.

Correct: In a voluntary corporate action such as a debt exchange, the ‘no action’ approach means the investor chooses not to participate in the offer. Operationally, the default for voluntary events is that if no instruction is received by the deadline, the investor retains their original position under the original terms and conditions. No proactive communication or SWIFT instruction is generally required to maintain the status quo.

Incorrect: The strategy of requiring a formal ‘Decline’ instruction through the depository system is incorrect because voluntary events are designed so that silence is treated as non-participation. Suggesting that a notice must be filed with the SEC Philippines incorrectly applies regulatory filing requirements to a standard investment decision. Opting for a process where positions are moved to restricted sub-accounts until an affidavit is provided describes an unnecessary administrative burden that does not align with standard Philippine market practices for voluntary debt servicing.

Takeaway: For voluntary debt exchanges, taking ‘no action’ allows the investor to retain original security terms without requiring a formal instruction or notification.

Correct: Under the Revised Corporation Code and SEC Philippines guidelines, a corporate entity must provide a Secretary’s Certificate (attesting to a board resolution) or a formal Letter of Representation. This document proves that the person signing the proxy form or attending the meeting has been duly authorized by the Board of Directors to act on the corporation’s behalf.

Incorrect: Presenting the Articles of Incorporation and By-Laws is insufficient because these documents only prove the legal existence of the company rather than granting specific voting authority for a particular meeting. While a PDTC certification is useful for confirming shareholdings on the record date, it does not serve as a proxy instrument or a legal authorization for a representative. The strategy of submitting an Omnibus Sworn Statement is incorrect as this document is typically used for government procurement or specific SEC filings and does not replace the formal proxy authorization process required for stockholders’ meetings.

Takeaway: Corporate shareholders in the Philippines must provide a Secretary’s Certificate or Letter of Representation to formally authorize proxy voting representatives for meetings.

Correct: The pay date is the final stage of the distribution lifecycle where the economic benefit is actually realized by the investor. In the Philippines, the Securities Regulation Code and PSE guidelines ensure that the paying agent distributes the cash or securities to the accounts of the entitled shareholders on this specific date. For the custodian, this is the date the cash is received and reconciled, allowing the client to utilize the liquidity for further transactions.

Incorrect: Identifying the pay date as the owner-finalization point is incorrect because that process occurs on the record date, which establishes who is eligible to receive the dividend. Equating the pay date with the start of ‘ex-dividend’ trading is a mistake, as the price adjustment and the removal of the dividend right from the share price happen on the ex-date. Suggesting the pay date is a tax filing deadline is inaccurate, as tax reclaims or withholdings follow different regulatory timelines set by the Bureau of Internal Revenue rather than the event payment date.

Takeaway: The pay date is the critical milestone where the corporate action entitlement is converted into actual liquid assets for the investor.

Correct: Under the Securities Regulation Code in the Philippines, a tender offer provides minority shareholders an opportunity to exit at a fair price. If a shareholder chooses ‘No Action,’ they retain their shares. However, if the acquirer reaches the threshold required to take the company private, the remaining minority shareholders will hold unlisted shares, which are much harder to value and trade compared to shares on the Philippine Stock Exchange.

Incorrect: The strategy of assuming that ownership is automatically transferred at a simple majority threshold ignores the specific legal procedures required for a squeeze-out under Philippine law. Focusing only on the loss of dividends or voting rights is incorrect because these fundamental shareholder rights remain intact as long as the shares are held. Opting for the idea that the exchange imposes financial penalties for non-participation mischaracterizes a voluntary investment decision as a regulatory violation.

Takeaway: Choosing ‘No Action’ in a tender offer preserves ownership but exposes the investor to liquidity risks if the company is delisted from the exchange.

Correct: Under the Securities Regulation Code, the transition from a restricted private placement to an unrestricted line is only complete once the SEC Philippines declares the registration effective. The custodian must verify this legal status and update the security’s ISIN to the unrestricted version to ensure it can be settled on the public exchange.

Incorrect: Allowing public trading immediately after the filing is premature because the SEC Philippines must first declare the registration statement effective. The strategy of maintaining a restricted account designation is incorrect as it contradicts the purpose of an unrestricted line. Opting to issue a new certificate that retains original restrictions fails to recognize the legal change in the security’s status.

Takeaway: Transitioning from restricted to unrestricted lines requires verifying SEC registration effectiveness and updating security identifiers for public trading.

Correct: In the Philippines, deduction at source (withholding tax) means the payor of the income, such as the corporation or its paying agent, is responsible for deducting the required final tax from the gross amount before the investor receives it. This ensures that the Bureau of Internal Revenue (BIR) receives the tax directly from the source, and the investor is credited only with the net amount, satisfying their tax liability for that specific distribution.

Incorrect: The strategy of requiring investors to self-file for these distributions is incorrect because final withholding taxes are designed to remove the collection burden from the individual. Relying on a threshold set by the Securities and Exchange Commission (SEC) Philippines is a misconception, as tax rates and collection methods are governed by the National Internal Revenue Code and the BIR, not the SEC. Describing the process as a voluntary mechanism for client convenience fails to recognize that withholding is a mandatory legal obligation for the entity distributing the income.

Takeaway: Deduction at source requires the payor to withhold and remit taxes to the BIR before the investor receives the net entitlement.

Correct: Event data collection and validation, often referred to as data scrubbing, is the critical stage where the custodian compares information from multiple sources to ensure the announcement details are accurate before communicating them to clients.

Incorrect: The strategy of moving directly to election processing is premature because clients cannot provide instructions until they have been formally notified of the validated event details. Focusing on payment and settlement is incorrect as this represents the final stage of the life cycle where the actual entitlement is credited to the account. Relying on final reconciliation at this point is misplaced because reconciliation is a post-event control measure used to verify that actual receipts match expected entitlements after the pay date.

Takeaway: Data validation must precede client notification to ensure the accuracy of corporate action details and prevent processing errors or financial losses.

Correct: Under the Revised Corporation Code of the Philippines, stockholders may vote in person or by proxy in all meetings. For the proxy to be valid, it must be in writing, signed by the stockholder, and filed with the corporate secretary within the timeframe specified in the company’s bylaws prior to the scheduled meeting.

Incorrect: Requiring mandatory notarization for all special resolutions is incorrect as the Revised Corporation Code primarily requires the instrument to be in writing and signed. The strategy of assuming a ten-year validity period is a violation of the law, which stipulates that no proxy shall be valid for a period longer than five years at any one time. Opting to restrict proxy appointments only to board members or solicitors is an incorrect application of the law, as stockholders generally have the right to appoint any person of their choosing as their proxy representative.

Takeaway: In the Philippines, proxies must be written, signed, and filed with the corporate secretary, with a maximum validity of five years.

Correct: A special cum designation is a specific market condition where a security continues to trade with the entitlement (cum-dividend) even after the date it would normally have gone ex-dividend. In the Philippines market, when the PSE or relevant regulatory framework applies this designation, the buyer of the security is legally entitled to the corporate action benefit, overriding the standard ex-date logic to ensure market fairness during late announcements or specific corporate events.

Incorrect: The strategy of assuming the seller retains the benefit fails to recognize that the special cum status is a specific regulatory exception designed to override the standard ex-date rule. Simply conducting a manual claim process is unnecessary and incorrect because the entitlement is handled through the standard clearing and settlement infrastructure under the special designation. The approach of suggesting the entitlement is forfeited is inaccurate as corporate action benefits are legally owed to a specific holder and are not absorbed by the issuer due to trading schedule adjustments.

Takeaway: Special cum trading ensures the buyer receives a corporate action benefit even when the trade occurs after the standard ex-date.

Correct: The receiving agent is appointed by the issuer to handle the administrative processing of a corporate action, specifically the collection, validation, and reconciliation of acceptance forms and securities from shareholders to ensure they meet the offer’s requirements.

Incorrect: Assigning these tasks to a calculation agent is incorrect as that role focuses on determining interest rates or complex payment amounts rather than document intake. The strategy of involving the PSE compliance committee is misplaced because they provide regulatory oversight rather than administrative processing for specific corporate events. Opting for an independent lead appraiser is wrong because their role is to provide a fairness opinion or valuation of the shares rather than managing the logistics of the tender process.

Takeaway: The receiving agent serves as the administrative hub for collecting and validating shareholder instructions and documentation during corporate actions.

Correct: The MENO (Meeting Notice) message is the standard SWIFT format used to announce the details of a shareholder meeting, including the agenda and logistics.

Incorrect: Focusing on the MENT message is incorrect because that message specifically details the number of shares eligible for voting rather than the meeting’s agenda. Using the MEIN message is inappropriate as it represents the client’s voting instructions sent to the custodian. Relying on the MEIS message is also wrong because it serves only to provide the status of a previously submitted instruction.

Takeaway: The MENO message is the standard SWIFT notification used to inform clients of the details and agenda of a stockholders’ meeting.

Correct: Under fiduciary principles and the Securities Regulation Code, a custodian must act to safeguard the client’s assets and ensure they do not lose value due to inaction. In the case of a mandatory event with options where the client is unresponsive, the custodian is expected to follow the issuer’s default option. This ensures that the client receives an entitlement rather than losing the opportunity entirely, while the custodian maintains a record of all attempts to contact the client.

Incorrect: The strategy of taking no action is incorrect because it leads to the loss of the entitlement, which constitutes a failure in the duty of care and safeguarding. Opting for a cash-only choice based solely on liquidity ignores the specific terms of the corporate action and may not be the most beneficial outcome for the client. Relying on an internal investment committee to make a choice based on the bank’s own research introduces a conflict of interest and moves beyond the scope of a custodian’s administrative fiduciary duties.

Takeaway: Fiduciaries must execute issuer default options for unresponsive clients to prevent the loss of entitlements and maintain asset value.

Correct: A scrip dividend is a mandatory event with options where the issuer offers shareholders the choice of receiving new shares instead of a cash dividend, which allows the company to retain cash. A dividend reinvestment plan (DRIP) is a facility where the cash dividend is used to acquire shares, often through a plan administrator who may purchase the shares on the secondary market or from the company’s authorized but unissued stock.

Incorrect: Characterizing scrip as a mandatory action without options is incorrect because scrip dividends are defined by the shareholder’s right to choose between cash and shares. The strategy of requiring individual board resolutions for each DRIP participant is operationally false as these plans are governed by a general framework rather than individual approvals. Claiming that scrip dividends require the cancellation of shares confuses the process with a reverse stock split or consolidation. Opting to describe DRIPs as having no effect on equity structure is misleading because if the DRIP involves the issuance of new shares, it increases the total paid-in capital of the firm.

Takeaway: Scrip dividends offer a choice of new shares or cash, while DRIPs reinvest cash dividends into existing or new shares.

Correct: When an issuer defaults in the Philippines, the regular servicing of interest and principal is suspended. The rights of the bondholders are then managed according to the trust indenture, usually through a trustee who represents the collective interests of the creditors in legal proceedings under the Financial Rehabilitation and Insolvency Act (FRIA).

Incorrect: The strategy of expecting the Philippine Stock Exchange to guarantee corporate interest is incorrect as the exchange does not provide credit enhancement for private issuers. Opting for the view that the Securities and Exchange Commission reclassifies private debt as sovereign debt is a misunderstanding of regulatory powers and fiscal responsibility. Relying on a mandatory five-day liquidation of assets is inaccurate because asset disposal is subject to complex legal priorities and court-supervised insolvency frameworks rather than an automatic immediate payout.

Takeaway: Upon issuer default, interest servicing ceases and bondholder recovery is managed through legal restructuring or liquidation processes led by a trustee.

Correct: Proxy voting agents support institutional investors by centralizing information from multiple issuers, offering research to assist in governance decisions, and ensuring that instructions reach the corporate secretary or registrar within the prescribed periods. This ensures that the investor’s voting rights are exercised accurately and in accordance with their internal governance policies.

Incorrect: Granting full discretionary authority to change voting policies without consultation violates the fundamental agency relationship and the investor’s fiduciary oversight. The suggestion that an agent guarantees financial performance is a misunderstanding of the service, as they provide administrative and analytical support rather than investment guarantees. Relying on an agent to replace internal record-keeping obligations is a regulatory failure, as the SEC Philippines requires the fund manager to maintain their own books and records regarding fiduciary actions.

Takeaway: Proxy voting agents provide administrative and analytical support to help institutional investors execute their governance rights efficiently and accurately across multiple holdings.

Correct: PhilPaSSplus is the Real-Time Gross Settlement (RTGS) system owned and operated by the Bangko Sentral ng Pilipinas (BSP). It provides for the immediate and final settlement of high-value interbank transactions, ensuring that cash entitlements from corporate actions are settled with central bank money, which eliminates settlement risk.

Correct: In accordance with the FCA’s Collective Investment Schemes sourcebook (COLL), transactions in authorised funds must be carried out on a forward pricing basis. This ensures that neither the investor nor the fund is disadvantaged by knowing the price before the deal is struck. When an instruction is received by the AFM, whether directly or via an intermediary platform, it must be processed at the next available valuation point.

Incorrect: The strategy of requiring a physical wet-ink signature for every transaction is incorrect as the FCA allows for electronic and telephone instructions to facilitate efficient dealing. Opting for backward pricing, or using a previous day’s valuation, is generally prohibited under UK regulations to prevent market timing and ensure fair treatment of all unitholders. Focusing on a mandatory 24-hour settlement period is inaccurate because settlement cycles for UK authorised funds are typically defined in the prospectus and usually follow a T+3 or T+4 timeframe.

Takeaway: UK authorised funds must use forward pricing for all investor transactions to ensure fairness and prevent market timing abuses within the scheme.

Correct: In the UK, when electronic payment methods like BACS are unavailable, the AFM typically issues a cheque to the holder’s registered address. Under COLL and standard trust law principles, the AFM is responsible for ensuring the distribution reaches the holder. If a cheque remains uncashed, it is treated as an unclaimed distribution, and the AFM must maintain records of these liabilities, which generally remain valid for six years before they can be forfeited back to the scheme.

Incorrect: The strategy of retaining funds in the capital account is incorrect because distributions are income liabilities and must be accounted for separately from the scheme’s capital. Choosing to automatically reinvest the income into new units without the investor’s prior election or a specific provision in the prospectus would breach the terms of the income share class. Opting to transfer funds immediately to a dormant assets scheme is inappropriate as there are strict statutory timeframes, usually six years, that must pass before distributions are considered truly dormant or forfeited.

Takeaway: AFMs must distribute income via cheque if electronic details are missing and track unclaimed payments as liabilities for six years.

Correct: Under the FCA’s COLL sourcebook, the AFM has the discretion to agree to an in specie transaction provided they are satisfied that the arrangements will not result in any material prejudice to the interests of the other unit or shareholders in the scheme. The Depositary must also be satisfied that the selection of assets is unlikely to disadvantage the remaining investors.

Incorrect: Seeking individual approval from the Financial Conduct Authority for every transaction is not a requirement, as the regulator delegates this operational discretion to the AFM and Depositary. Insisting on an exact pro-rata slice of every security is a common method to ensure fairness, but it is not a rigid regulatory mandate as long as the overall selection is fair. Enforcing a mandatory thirty-day cooling-off period is not a feature of the settlement process for in specie redemptions under UK regulatory frameworks.

Takeaway: The AFM must ensure in specie transactions do not materially prejudice the interests of the remaining shareholders in the scheme.

Correct: In accordance with the FCA’s COLL rules, an AFM is required to pay the proceeds of a redemption to the investor within the timeframe specified in the scheme’s prospectus. For most authorised funds, this standard settlement period is four business days (T+4) following the valuation point at which the deal was priced.

Incorrect: The strategy of mandating same-day CHAPS settlement for all retail redemptions is not a regulatory requirement and would be operationally unfeasible for most standard collective investment schemes. Suggesting that an AFM can unilaterally delay settlement for thirty days due to the nature of transferable securities contradicts the requirement to adhere to the specific redemption terms and timeframes set out in the prospectus. Opting to restrict settlement exclusively to physical cheques is an outdated practice that does not reflect modern electronic payment standards and is not a regulatory mandate for fraud prevention.

Takeaway: AFMs must settle redemption proceeds within the timeframe defined in the prospectus, usually within four business days of the valuation point.

Correct: Under the FCA’s COLL sourcebook, the AFM is legally required to manage the scheme property with a prudent spread of risk. This involves balancing diversification to mitigate investment risk with the necessity of maintaining sufficient liquidity to ensure that the fund can meet its obligations to unitholders, specifically the redemption of units, under both normal and stressed market conditions.

Incorrect: The strategy of increasing exposure to unapproved securities beyond regulatory limits ignores the strict 10% cap for UCITS and fails the requirement for a prudent spread of risk. Relying solely on borrowing to meet redemptions is incorrect as borrowing is generally restricted to 10% of the scheme property and must be temporary in nature. Choosing to concentrate the portfolio into a few assets violates the fundamental principle of diversification and the specific concentration limits set out in the COLL rules for retail schemes.

Takeaway: AFMs must maintain a prudent spread of risk while ensuring the portfolio’s liquidity aligns with its redemption obligations to investors.

Correct: Under the COLL sourcebook, the AFM is responsible for maintaining the register of holders for an OEIC at a UK location notified to the FCA, and it must be open to inspection by any person during business hours.

Incorrect: The approach of placing the register with the Depositary is incorrect because the AFM, not the Depositary, is legally responsible for maintaining shareholder records. Relying on strict confidentiality and limiting access to regulators and auditors ignores the statutory right of inspection provided under UK fund regulations. The strategy of filing the register with Companies House is inaccurate as OEICs are registered and regulated by the FCA, and their registers are not filed with the Registrar of Companies.

Takeaway: The AFM must maintain the register at a notified UK location and permit inspection during business hours.

Correct: In the UK, equalisation is an accounting mechanism used to ensure that the amount of income distributed to existing holders is not diluted by new investors. When an investor buys units, the price includes the income accumulated since the last distribution. The equalisation payment returns this ‘purchased income’ to the investor. For tax purposes, this is treated as a return of capital rather than taxable income, and the investor must deduct this amount from the book cost of their investment for future Capital Gains Tax calculations.

Incorrect: The strategy of linking equalisation to a dilution levy is incorrect because a dilution levy relates to the costs of buying or selling underlying assets, not the distribution of income. Focusing on management charges is a misunderstanding of fund accounting, as these expenses are deducted from the fund’s total income rather than being returned to specific investors via equalisation. Choosing to view equalisation as a tool for NAV stability or administrative cost recovery is inaccurate because equalisation specifically addresses the equitable distribution of income among holders regardless of their entry date.

Takeaway: Equalisation returns the income portion of the purchase price to new investors as a non-taxable capital payment to prevent income dilution.

Correct: In accordance with the Money Laundering Regulations and FCA expectations, firms must adopt a risk-based approach. The starting point for this is a business-wide risk assessment (BWRA), which allows the AFM to identify, understand, and mitigate the specific risks associated with its customers, jurisdictions, products, and delivery channels. This assessment informs the proportionality of the subsequent due diligence and monitoring controls.

Incorrect: The strategy of relying solely on intermediaries is flawed because the AFM retains ultimate regulatory responsibility for ensuring its AML systems are effective. Opting for a blanket restriction on non-UK bank accounts is a disproportionate measure that fails to address the requirement for a nuanced, risk-based assessment of individual threats. Focusing only on retrospective annual audits is insufficient as it represents a reactive approach rather than the proactive, ongoing monitoring required by the UK regulatory framework.

Takeaway: A UK AFM must establish a risk-based framework for preventing financial crime, starting with a comprehensive business-wide risk assessment.

Correct: Under the COLL sourcebook, units purchased during an accounting period are classified as Group 2 units. The first distribution for these units includes an equalisation element, which is the portion of the purchase price that represented accrued income at the time of trade. This ensures that the investor is not taxed on income they did not actually earn while holding the units.

Correct: In the United Kingdom, when a shareholder dies, the ownership of the shares passes by operation of law to their legal personal representatives. To update the register of shareholders, the AFM must be provided with formal legal evidence of the representatives’ authority, which is typically a Grant of Probate or Letters of Administration. This ensures the AFM is dealing with the individuals legally entitled to manage the deceased’s assets.

Incorrect: Relying solely on a death certificate and a letter of indemnity is insufficient because these documents do not provide the statutory proof of authority required to deal with the estate’s assets. The strategy of forcing a mandatory redemption is incorrect as executors have the legal right to retain the shares or transfer them to beneficiaries rather than being forced to sell. Choosing to use a Stock Transfer Form signed by a financial intermediary is invalid because an intermediary does not have the legal capacity to transfer assets from a deceased person’s estate.

Takeaway: Transfers by operation of law require formal legal documentation, such as a Grant of Probate, to verify the authority of executors or administrators.