SwedSec's Licensing Programme Syllabus and Proficiency Requirements Version 14 1 January 2009
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Table of contents Introduction .................................................................................................................................. 4 Background to proficiency requirements .............................................................................. 4 Purpose, target group and basis of proficiency requirements .............................................. 4 Scope and relevance of knowledge and minimum requirements ......................................... 5 Proficiency requirements in operation .................................................................................. 5 Proficiency requirements in brief .......................................................................................... 6 Amendments or additions to proficiency requirements ....................................................... 6 Formulation of proficiency requirements ............................................................................. 6 Setting of examination questions based on proficiency requirements ................................ 7 Cognitive levels ...................................................................................................................... 7 Section 1 – Financial instruments ................................................................................................. 9 Types of saving, financial instruments and asset management ............................................ 9 Derivatives and stock loans ................................................................................................. 11 Insurance and pension savings and insurance broking ....................................................... 11 Risks, risk management, return and risk‐adjusted return ................................................... 12 Alternative investment strategies ....................................................................................... 13 Tax issues ............................................................................................................................. 13 Section 2 – Trading and administration ...................................................................................... 14 Share issue management ..................................................................................................... 14 Account management, clearing and settlement ................................................................. 15 Securities information and prospectuses ............................................................................ 15 Depository management and subsequent transaction reporting ....................................... 16 Trading in financial instruments .......................................................................................... 16 Stock exchange and marketplace activities ......................................................................... 17 Section 3 ‐ Financial economics .................................................................................................. 19 Economic concepts .............................................................................................................. 19 Basic conditions of capital markets ..................................................................................... 20 The time value of capital and the “price of capital” ............................................................ 20
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Financial statistics ................................................................................................................ 20 Basic valuation of stock, bonds and derivative instruments ............................................... 21 Concepts of risk and return ................................................................................................. 21 Definition of market index ................................................................................................... 22 Basic portfolio and capital market theories ......................................................................... 22 Effects of national and international diversification ........................................................... 23 Effective portfolios ............................................................................................................... 23 Evaluation of portfolios and funds ...................................................................................... 24 Behavioural finance ............................................................................................................. 24 Section 4 ‐ Ethics and standards ................................................................................................. 26 Ethics and morals ................................................................................................................. 26 Standard setting in the securities market ............................................................................ 27 Conflicts of interest etc. ....................................................................................................... 28 Bribery and corruption ......................................................................................................... 30 Money laundering and terrorist financing ........................................................................... 30 Market abuse ....................................................................................................................... 31 Reporting obligation and keeping a logbook ....................................................................... 32 Basic client protection rules ................................................................................................ 33 Section 5 – Rules and regulations in the securities market ........................................................ 35 Securities business ............................................................................................................... 35 Investment Funds Act .......................................................................................................... 36 Flagging, bid and compulsory redemption .......................................................................... 36 Complaint management ...................................................................................................... 37 Agreements .......................................................................................................................... 37 Basic rules on pledging ........................................................................................................ 38 Questions concerning civil law and family law .................................................................... 38 Company law – Corporate law ............................................................................................. 41 Deposit guarantee and investor protection ........................................................................ 41
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Introduction Background to proficiency requirements SwedSec’s purpose – by licensing employees in the Swedish securities market – is to create and maintain public confidence in the securities sector. A prerequisite for such confidence is that staff working in the sector have adequate knowledge and competence to carry out their duties. The licensing requirement covers various categories of employees with various functions and roles in firms affiliated to SwedSec. With regard to maintaining public confidence in the sector, staff providing skilled financial advice to clients or managing clients’ financial instruments have a unique position. Such staff have been given considerable trust and responsibility by the client and their advice or management has a direct impact on clients’ financial situation. They also have direct contact with clients and are therefore often the institution’s – and indirectly the sector’s – face towards the client.
Purpose, target group and basis of proficiency requirements This document sets out to define the knowledge required by a SwedSec licence holder. Apart from staff providing skilled financial advice to clients or managing clients’ financial instruments, a number of other categories of employees are covered by the licensing requirement. These include compliance officers for Swedish securities business and employees with responsibility for trading on behalf of clients, trading on own account, back office, asset management, stock analysis and corporate finance. (The regulations on who is covered by the licensing requirement are to be found in Chapter 2 of SwedSec’s Licensing Rules and Regulations.) In the previous section, it was mentioned that staff providing skilled financial advice to clients or managing clients’ financial instruments have a unique position with regard to maintaining public confidence in the sector. Accordingly, the proficiency requirements have primarily been determined on the basis of the knowledge that should be required of these professional categories.
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Scope and relevance of knowledge and minimum requirements It is possible that different employees – depending on their function and professional role – within the target group may have different ideas about which parts of the proficiency requirements are most relevant and important. However, the proficiency requirements constitute a basic level of knowledge, which all licence holders in the above target group must have, irrespective of function and role. This does not, of course, preclude that an employee’s function and role may mean that the employee needs deeper and/or further knowledge over and above that covered by these proficiency requirements. Consequently, equally high formal requirements are made on all licence holders in all sections. Examinees must achieve at least 50 per cent correct answers in each section. In addition to a minimum 50 per cent in each section, the examinee must achieve an overall score of 70 per cent correct answers in the examination. These minimum requirements together mean that an examinee who is very competent in one or more sections and consequently achieves a high overall score in the examination can to some extent compensate for deficiencies in other sections. Consequently, the examination’s requirements take account of the fact that all examinees are not, and are thus neither required to be, specialists in all five sections.
Proficiency requirements in operation These requirements are divided into sections (subject areas), subsections, and checkpoints. A checkpoint specifies what a licence holder is expected to master within a given, relatively small field of knowledge. Every single item in a candidate's examination paper is thus directly linked to such a checkpoint in this document. The proficiency requirements are intended to function as a support when developing a relevant syllabus and also to serve as a basis when setting exam questions. In addition, they are designed to give an overview of what is expected of a licence holder. It is the task and responsibility of professional training providers to accurately interpret the proficiency requirements and work out a detailed training programme based on this interpretation.
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Proficiency requirements in brief A licensed financial advisor possesses documented proficiency in existing types of financial instruments, their most important features, characteristics, and risks. A licence holder is also familiar with the framework within which financial instruments are registered, managed and sold as well as the legal regime governing these instruments. He or she is also familiar with the institutional framework within which, for instance, stock exchanges and clearing organisations work. Finally, a licence holder has a relevant knowledge of the existing rules of professional conduct and soundness that apply to the securities market.
Amendments or additions to proficiency requirements Minor adjustments, e.g. changes in the text, will be found at regular intervals on SwedSec's website (www.swedsec.se). Major changes, for instance a change in the position of checkpoints between sections (subsections), will, however, take place on a biannual basis (1 January and 1 July). Amendments or additions to the proficiency requirements shall be made on SwedSec's website directly after such a decision has been made. It is the responsibility of each and every professional training provider to be constantly aware of the latest version.
Formulation of proficiency requirements The proficiency requirements are, as previously stated, divided into sections (subject areas), subsections and checkpoints. The five sections included are: 1. 2. 3. 4. 5.
Financial instruments Administration of financial instruments Financial economics Ethics and standards Rules and regulations in the securities market
For each tabular checkpoint there is, under a separate heading, a specially defined Cognitive level. The meaning of this term is explained in more detail under the heading Cognitive levels.
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Setting of examination questions based on proficiency requirements An examination paper consists of 20 standardised questions from each section. The examination thus comprises a total of 100 standard questions. All standard questions have been subject to a thorough quality check with regard to fact, quality, and language. In addition, all questions have been trialled and analysed using statistical methods. This is done by including five as yet not approved questions from each section, the answers to which will not have an effect on the final result. The candidates' answers to these five questions will therefore not be included in the final score, but will be stored for statistical analysis. The examinees are not in a position to form an opinion on which questions are standard and which are being trialled. The candidate thus answers 125 questions in total, of which 100 will decide the outcome.
To pass the licensing examination a candidate is required to have an overall score of at least 70% correct answers and at least 50% correct answers in each section. A candidate who has failed part of the examination may be re-examined on that section provided his or her overall score is at least 70%.
Cognitive levels The cognitive levels have been taken from Bloom's taxonomy (1956). The levels are designed to define the degree of complexity of various questions with reference to a certain checkpoint. Level:
Definition:
Recall (R)
A candidate is required to be aware of and remember concepts, definitions, and facts.
Comprehension (C)
A candidate is required to understand and be able to explain various connections and contexts.
Application (P)
A candidate is required to be able to use, for instance, formulae, rules, laws/acts, and methods.
Analysis (A)
A candidate is required to be able to interpret, assess, relate to and draw conclusions from the knowledge available to him or her.
For each checkpoint there is, on the far right, an “x” defining the cognitive level(s) an examinee must achieve. The first letter of these defined levels is used to refer to each
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specific level, thus R, C, P, or A. The cognitive levels are interrelated and closely connected. If, for instance, a checkpoint refers to the cognitive level of Application, there will be an “x” under Recall, Comprehension, and Application. It is thus assumed that if a candidate can apply a certain piece of knowledge, he or she should also be able to understand it and be aware of it. Detailed information about the cognitive levels is to be found on the website http://www.swedsec.se/kognitiva‐nivaer.
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Section 1 – Financial instruments Section 1 deals with a knowledge of various types of saving, financial instruments and asset management in a broad perspective. A licence holder should possess and use this knowledge as a frame of reference when dealing with clients. In practice, this means a knowledge of concepts and definitions and a basic knowledge of various financial instruments, how they work and how they relate to the securities market. In addition to a factual knowledge, a licence holder is, in certain core areas, also required to have an understanding of savings products as well as the ability to apply his or her knowledge of risk‐adjusted return. Since several of the subsections are interrelated, it is beneficial if study and the acquisition of knowledge can take place in logical order. These subsections are listed in the table below. In order to facilitate a candidate's acquisition of the relevant knowledge, the main features and the subsections that a licence holder must be familiar with are also stated here in more detail.
Types of saving, financial instruments and asset management This subsection deals with a knowledge of various financial instruments, types of saving and asset management. The licence holder must be able to define the various securities on the market, be familiar with the workings of different instruments and how they are likely to affect a client's portfolio. A licence holder is also required to have a working knowledge of the stock market and understand how different management methods affect the client’s return. Moreover, the licence holder should be familiar with how mutual funds are protected in connection with the bankruptcy of the fund manager or custodian, i.e. that fund assets are separated from the fund manager and are never involved in the fund manager’s bankruptcy.
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The licence holder should also be familiar with how mutual funds differ in this respect from other types of saving, such as bonds and pension funds. The licence holder should further be familiar with the various types of fund that have been launched on the market recently, such as exchange‐traded funds (ETFs), 130/30 funds and Socially Responsible Investment funds. The licence holder should also be familiar with how they function in different client situations and the risks associated with the various types of fund, and understand when it may be appropriate for an investor to choose such funds relative to the risk level that the fund involves. Further, the licence holder should be familiar with various types of structured products and derivatives and also be familiar with the differences between various types of exposure, such as certificates, swaps, CDOs, futures etc. The licence holder should moreover be familiar with the counterparty risk associated with the respective instrument and understand the caution required in dealing with this risk. Cognitive level R
C
Bank savings
X
Stocks
X
X
Swedish and foreign depository receipts
X
X
Share index bonds
X
X
Other structured products (certificates etc.)
X
X
Convertible debentures
X
X
Bonds and other interest-bearing instruments
X
X
General knowledge of fund saving and different types of fund relative to investment strategies
X
X
Mutual funds
X
X
Other funds (fixed income funds, mixed funds, hedge funds etc.)
X
X
Some other types of asset management
X
X
P
A
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Derivatives and stock loans This subsection deals with a knowledge of various derivatives and their workings. A licence holder should also know when a client can issue options, the requirements that are imposed by a clearing centre and the agreements that should apply. Stock loans and short selling will also be covered in this subsection. Cognitive level R
C
Stock options
X
X
Warrants
X
X
Index options
X
X
Futures, forwards and similar instruments
X
X
Stock loans and short selling
X
X
P
A
Insurance and pension savings and insurance broking Pension savings have become an increasingly common part of household savings. This subsection deals with different types of pensions, e.g. Premium Pension Savings (PPM), Pension insurance (traditional), Mutual fund insurance (Unit Linked), Individual Pension Savings (IPS), and Endowment insurance. A licence holder is required to be familiar with the differences between the various types of pensions and how they affect a client's savings not only in the short term but also in the long term. Various forms of protection for surviving dependants of pensioners and their taxation are also covered. The insurance broker must have the knowledge and competence for his or her duties. Further provisions on competence requirements are to be found in the Swedish Financial Supervisory Authority’s regulations and general guidance on insurance broking (FFFS 2005:11). Many of the areas of knowledge that the employee should master in accordance with the above regulations are dealt with in other subsections of the licensing examination. This subsection deals with some issues with a specific link to the insurance sector.
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Cognitive level R
C
Premium Pension Savings (PPM)
X
X
Pension insurance (traditional)
X
X
Mutual fund insurance (Unit Linked)
X
X
Individual Pension Savings (IPS)
X
X
Endowment insurance
X
X
Insurance broking and good practice
X
X
Statutes on insurance broking and insurance business, and insurance law
X
X
P
A
Risks, risk management, return and risk‐adjusted return Risks can be defined in a number of different ways. This subsection deals with credit and counterparty risks, company and market risks (e.g. interest, currency and exchange rate risk). Furthermore, liquidity and operational risks are described. A licence holder is required to know the implications of different risks and how they could affect a client's investments. Since risk can be defined in different ways, risk‐adjusted return can also be illustrated using different risk measures. This is an important area of knowledge for the licence holder’s client relations. Cognitive level R
C
Credit and counterparty risks
X
X
Market risks (interest, currency and exchange rate risks)
X
X
Liquidity risks
X
X
Operational risks
X
X
Risk definitions (total risk, market risk)
X
X
Yield and capital growth
X
X
Return relative to risk
X
X
X
Sharpe ratio, Information ratio and Jensen’s alpha as evaluation measures
X
X
X
Interpretation of risk-adjusted return
X
X
X
P
A
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Alternative investment strategies On the capital market, there are products which, as far as returns are concerned, present a somewhat different pattern from those of other, everyday products. Here we find, for instance, unlisted stock, real property, metals or hedge funds. For an investor, and particularly when investing in a portfolio, the inclusion of such products can dramatically change the portfolio's return and risk characteristics. It is important for a licence holder to be familiar with the return and risk characteristics of these investments. Cognitive level R
C
Purpose of alternative investment strategies (AIS)
X
X
AIS, evaluation of
X
X
P
A
Tax issues This subsection deals with a knowledge of the tax effects with reference to market quotations. A licence holder should moreover be familiar with the rules governing taxation of foreign stock. He or she should also be familiar with the most important parts of capital gains taxation. A licence holder should also be aware of which services are VATable and which are non‐VATable. This section also deals with taxation rules with a direct bearing on various types of saving. Finally, this section deals with personal finance issues with special reference to existing tax legislation. Cognitive level R Taxation of Swedish shares and funds Taxation of foreign shares and funds Capital taxation Capital gains taxation VAT issues etc. Personal finances with reference to tax system
C
X
X
X
X
X
X
X
X
X
X
X
X
P
A
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Section 2 – Trading and administration Section 2 deals with a knowledge of the trading and the administration of financial instruments in a broad perspective. A licence holder should possess and use this knowledge as a frame of reference when dealing with clients. In practice, this means a knowledge of concepts and definitions, and a basic knowledge of the trading and the administration of financial instruments, how they work and how they relate to the securities market. In addition to a factual knowledge, a licence holder is, in most subject areas, also required to have an understanding of the whole chain from trading to the administration of financial instruments as well as the ability to apply the regulations under one particular checkpoint.
Share issue management This subsection deals with the question of when a general meeting of shareholders or board can decide on a share issue. The licence holder should also understand the difference between a new share issue and a bonus issue, a split and a reverse split, and how these measures affect the number of shares, the share capital, the share price and the value of the holding. Further, the licence holder should have an understanding of the rules for participating in a new share issue. Finally, the licence holder should have an understanding of the different roles and responsibilities of an advisor, an issuing institution and an account management institution in connection with an issue. Cognitive level R
C
General meeting’s and board’s roles in connection with an issue etc.
X
Difference between various types of issue, new share issue and bonus issue, split and reverse split, redemption, dividends.
X
X
Notice and subscription procedures in connection with an issue
X
X
Various roles of a securities institution in connection with an issue
X
X
P A
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Account management, clearing and settlement This subsection includes a knowledge of existing Swedish clearing organisations: OMX Derivatives Markets (Stockholmsbörsen) and Euroclear Sweden (VPC). The Financial Instruments Registration Act (LKF) forms the basis for VPC’s right to register securities. The licence holder should have a knowledge of the basic rules governing account management and register management. A basic knowledge of the requirements for becoming an account managing institution or clearing organisation is also included. The legal consequences of account management are governed by LKF and the licence holder should have a working knowledge of, for example, acquisition registration. In addition, operations are governed by the Securities Markets Act and the Companies Act. Further, the licence holder must have a knowledge of the various Euroclear Sweden (VPC) systems and the most common types of securities accounts. Finally, this subsection covers trade booking and liquidity management. Cognitive level R
C
Brief overview of Swedish clearing organisations and the criteria for their operations
X
Administration of financial instruments which are dematerialised documents.
X
X
Basic regulations for account management and register management
X
X
Account managing institutions, clearing organisations
X
Legal consequences of account management
X
X
Securities accounts and the securities system
X
X
Trade booking
X
Liquidity management and payments
X
P
A
X
Securities information and prospectuses The Securities Markets Act contains rules on information provision by listed companies. This subsection includes a knowledge of how and when price‐sensitive information and financial information must be published and reported respectively.
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This subsection also includes a knowledge of the most common information systems on the market. Further, the licence holder must know where he or she can find information on issuers and on various instruments. This may, for example, be a question of finding the terms and conditions for an issue or the size of a company dividend. The Financial Instruments Trading Act contains regulations on prospectuses. A licence holder should be familiar with these regulations. Cognitive level R Information duty of listed companies
X
Information on issuers and instruments
X
Overview of rules and regulations regarding prospectuses
X
C
P
A
X
Depository management and subsequent transaction reporting There may be both business and administrative reasons for using a depository. Certain types of securities transactions call for a client to use a depository. A licence holder must know to which transactions these rules apply. A licence holder must furthermore be familiar with the difference between a securities account and a depository. This section also deals with the duties of a trustee when handling, for example, voting list registration and monitoring securities transactions on the market. Finally, this section deals with the reporting of transactions and the rules governing the issuance of transaction notes. Cognitive level R
C
Depository management in practice
X
X
Duties of trustees
X
X
Reporting transactions
X
X
Notices, transaction notes etc.
X
X
P
A
Trading in financial instruments This subsection includes a basic knowledge of the trading rules for Swedish stock exchange members and their reporting obligation to Nasdaq OMX Stockholm (Stockholmsbörsen) and
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other Swedish marketplaces. The licence holder should have a knowledge of how commission transactions and counterparty trading function. A licence holder should understand what the rules on best order execution involve for various markets, investment services and client categories. Moreover, he or she must understand what the rules on client order management involve with regard to time order, aggregation and allocation. Trading in financial instruments is governed by the regulations contained in the Securities Markets Act and the Financial Instruments Trading Act as well as the Swedish Financial Supervisory Authority’s regulations. Moreover, there is self‐regulation through the Swedish Securities Dealers Association’s guidelines for handling transactions relating to shares and share‐related financial instruments. Stock exchange members trading on Nasdaq OMX Stockholm or any of the NOREX exchanges are moreover obliged to comply with the NOREX member rules. The licence holder should be aware of the existence of these agreements and the fact that they contain important, civil law‐based rules of conduct for market participants. Cognitive level R
C
Trading rules and reporting
X
Delivery rules
X
Commission transactions, trading on own account and counterparty trading
X
X
Best order execution
X
X
Order management in general
X
X
Market participants and their relationship to the market
X
P
A
X
Stock exchange and marketplace activities This subsection deals with Swedish stock exchanges and marketplaces, i.e. both regulated markets and Multilateral Trading Facility (MTF) platforms. The largest foreign exchanges and
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marketplaces are also included. The criteria for stock exchange activities and a basic knowledge of the relationship of issuers to Nasdaq OMX Stockholm (Stockholmsbörsen) and other Swedish marketplaces are also covered in this subsection. The licence holder should be familiar with the definition of an MTF platform, who can start and operate such a platform, and who grants a licence for such a platform. He or she should also be familiar with the differences between a regulated market and an MTF platform, and what is required in order that a security can be traded on an MTF platform. Moreover, the licence holder should be familiar with the largest new MTF platforms on which Nordic and European securities will be traded. The licence holder should also have a knowledge of the most common trading and business systems on the Swedish and international markets. Cognitive level R Swedish exchanges and some important foreign exchanges
X
Issuers and their relationship to the marketplace
X
MTF platforms (First North, Chi-X, Turquoise, Burgundy, Nasdaq OMX Europe etc.)
X
Other marketplaces
X
The most common trading and business systems
X
International trading and communication systems
X
C
P
A
X
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Section 3 ‐ Financial economics Section 3 deals with a knowledge of financial economics. A licence holder is required to have an adequate basic knowledge of the subject area, in order to be able to use this knowledge as a frame of reference when dealing with clients. In practice, this means that familiarity with various concepts and definitions as well as a basic knowledge of the valuation of financial products are important areas, which need to be mastered to some extent. At first sight, some of the subsections in this section seem to lack a common denominator. However, there is a common central theme, namely the concepts of return and risk and their mutual interrelationship. Since several of the subsections are interrelated, it is beneficial if study and the acquisition of knowledge can take place in logical order.
Economic concepts The licence holder should have some understanding of how the macroeconomy, i.e. the national economy, affects the microeconomy, i.e. the individual client’s finances, and how this interconnection by extension affects the advisory situation. Further, a licence holder should be familiar with various central macroeconomic concepts and definitions, such as gross national product, current account balance, demand and supply, and monetary policy and fiscal policy, but should also understand how these affect the advice provided to a client. The licence holder should also understand how economic policy measures can be coordinated in a country or in an alliance of several countries, where a specific view of economic activity is prevalent. The licence holder should also understand how this coordination has direct effects on capital markets. The licence holder should also be familiar with these joint bodies (IMF, OECD, ECB etc.) as well as their overall purpose.
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Cognitive level R
C
Basic concepts
X
X
Monetary and exchange rate policy
X
X
Fiscal policy
X
X
P
A
Basic conditions of capital markets One important condition that must be fulfilled if financial markets are to be effective is that the overall method of pricing underlying financial assets should reflect accurately such information as has an effect on prices and the lack of arbitrage opportunities. Cognitive level R Functions of the capital market
X
Effects of arbitrage options, perfect markets
X
Expected or actual return
X
C
P
A
The time value of capital and the “price of capital” The most important function of the capital market is to act as an intermediary between those with a deficit and those with a surplus of capital. Fundamentally, it is thus a matter of “moving” capital forward or backward in time. It is important to understand the factor that influences valuation, i.e. the interest rate, and how it is formulated. Furthermore, it is important to be familiar with concepts such as effective rate, nominal rate, and real interest. Cognitive level R
C
P
Present value and terminal value
X
X
X
Simple and effective interest
X
X
X
Nominal and real rate of interest (return)
X
X
X
A
Financial statistics On the capital market, investment risks are usually defined in terms of variations in investment value. If two investments have the same expected return but different risks, the
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investment involving the lower risk is preferred. This applies to separate investments. This interpretation changes when risk and result characteristics refer to portfolio investment since portfolio co‐variation with other investments affects the risk level of the entire portfolio. According to the capital market theory, there is a linear relationship between expected return and risk. It is therefore important that a licence holder should be familiar with recourse analysis, and also with the interpretation of the above interrelationship. Cognitive level R
C
P
Ratios (arithmetic and geometric mean)
X
X
X
Ratios (variance and standard variation)
X
X
X
Correlation and recourse analysis
X
X
X
A
Basic valuation of stock, bonds and derivative instruments The overall principle with regard to valuation of financial investments is that their value is determined by the cash flow they are expected to yield. This means, in turn, that their future cash flow, such as dividends and coupon rates, must be backdated to “today's rate” for pricing. The licence holder should be familiar with the guiding principles underlying the valuation and change within parameters. Cognitive level R
C
P
X
X
X
X
Yield curve
X
Duration
X
Payment policy
X
P/E ratios
X
Justified market value
X
Options (European, US, call, put)
X
Breakeven charts for options
X
X
X
Valuation concepts
X
X
X
A
Concepts of risk and return According to the portfolio theory, risk is defined in terms of variation in return, i.e. usually in terms of variance or standard variation. According to the capital market theory’s definition
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of risk, however, it is the return on the individual investment compared with the return on the market portfolio that is of interest, since investors are expected to have well‐diversified portfolios. Cognitive level R
C
P
Covariation (correlation)
X
X
Concept of effective portfolios
X
X
X
Markowitz’s portfolio selection
X
X
X
A
Definition of market index The advantage of an index is that it summarises, in a clear and simple way, the return for a market, a country or a region. How an index is constructed and when it should be used is of importance when analysing investments on the capital market. Cognitive level R Weighted and equally weighted indices
X
Yield and asset indices
X
Regional indices
X
C
P
A
Basic portfolio and capital market theories Even though these theories are inherently “heavy”, a licence holder should be familiar with their underlying ideas. The emphasis is thus on application and analysis rather than on purely technical points. Knowledge of characteristics as well as familiarity with the variables that have an effect on the valuation of derivative instruments are an integral part of this subsection.
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Cognitive level R
C
P
Characteristics of covariance in investment returns
X
X
X
Diversification strategies
X
X
X
Concept of effective front
X
X
X
Market portfolio, definition and characteristics
X
X
X
Security Market Line, CAPM
X
X
Market risk (beta value)
X
X
X
Underrated and overrated assets
X
X
X
A
Effects of national and international diversification According to the portfolio theory, a rational investor should spread risks over a variety of alternatives. This can be achieved without loss of expected returns. To achieve diversification, the different alternatives must, however, have some particular distinctive features, which it is important for the licence holder to realise when advising clients. Cognitive level R
C
P
Overall risk
X
X
X
Market risk and unique risk
X
X
X
Effects of national and international diversification
X
X
A
Effective portfolios According to the prevailing view within financial economics, investors are expected to maintain effective portfolios. Deviations from these effective portfolios do not, according to the theory, increase stock value. Investing in effective portfolios is therefore central to portfolio investment.
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Cognitive level R
C
P
Expected return
X
X
X
Expected return and risk
X
X
X
Risk premium
X
X
X
The safe investment alternative
X
X
X
Portfolio market risk (beta value)
X
X
X
Portfolio risk specific (unique) to companies
X
X
X
A
Evaluation of portfolios and funds Returns on investments can, in principle, be said to be influenced by three variables, i.e. direct dependence on market developments (e.g. an index fund), investment professionalism (e.g. a trade savings allocation fund), and pure coincidence. In order for a meaningful evaluation to be carried out, returns must also be seen in the light of investment risks. Risk‐adjusted return will therefore be a keyword in connection with the evaluation of investments. Cognitive level R
C
P
Accepted practice
X
X
X
Measures of risk-adjusted return
X
X
X
Key ratios in fund evaluation
X
X
X
Analysis and interpretation of the concepts of excess return and deviation return
X
X
X
A
Behavioural finance The whole approach in financial economics is based on the assumption that individuals are rational. They make their choices in the light of investment return but also investment risk. If two investments have the same expected return but different risks, investors are thus expected to be rational and choose the alternative with the lowest risk. Studies have shown that departures from rational behaviour do occur. Deviations from the efficient market hypothesis have been mapped and the opportunity for safe arbitrage
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profits has been proven. The licence holder should be familiar with the main concepts of behavioural finance and the occurrence of systematic deviations from rational behaviour. Cognitive level R Definition and effects
C
P
A
X
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Section 4 ‐ Ethics and standards Section 4 deals with a knowledge of the ethics and rules, which in a broader perspective may be said to contribute to maintaining the soundness of the Swedish securities market. A licence holder should be familiar with and be able to apply the basic ethical guidelines in the securities market. A licence holder should be familiar with how standards of various sorts arise and develop. He or she should have a knowledge of and be able to apply the rules on conflicts of interest, employees’ securities transactions, bribery and corruption, money laundering and market abuse. The subsections in this section are relatively self‐contained. However, the common denominator is that the rules, provided they are complied with, may be said to contribute to maintaining the soundness of the securities market and to maintaining public confidence in this market.
Ethics and morals Interest in ethical and moral issues has increased in recent years. Both society in general and the financial market more specifically have become increasingly complex over time. Demands are made on the way in which firms and individuals conduct themselves on the securities market. The rules are becoming more comprehensive and detailed, while there are still areas and situations where it is unclear what is actually “right” or “wrong”. In order to maintain confidence in the securities market and in the firms and individuals working in it, it is important that a licence holder possesses a certain basic knowledge of ethics and morals, as well as a feel for and an interest in how situations and issues that arise should be handled in an ethically defensible manner. In this subsection the licence holder should have a knowledge of the existing basic ethical guidelines in the Swedish securities market, which are issued by trade associations and the
26
Swedish Financial Supervisory Authority. By being familiar with and applying these values and guidelines, it will hopefully be easier for a licence holder to keep a safe distance from prohibited conduct. It is also important for the licence holder to know whom to approach with ethical issues and in doubtful situations. Special interest is therefore devoted to the role and position of the compliance function in the organisation. Cognitive level R
C
P
Basic ethical guidelines in the securities market
X
X
Keeping a safe distance from prohibited conduct
X
X
X
Compliance function and whom to approach with ethical issues and difficult questions of judgement
X
X
X
A
Standard setting in the securities market Operations and the players in the securities market are subject to different types of regulation. Rules are set forth in acts passed by the Riksdag, regulations issued by the Swedish Financial Supervisory Authority, and in certain legal documents issued by the EU. The latter may have a direct effect or need to be actively implemented in Swedish law. The knowledge required concerning the actual content of these rules and regulations may be found elsewhere in the proficiency requirements. Here we deal instead with the actual standard‐setting process and the different relative value of these rules. In order to complement and concretise certain provisions in the above rules and regulations, trade organisations, such as the Swedish Securities Dealers Association, the Swedish Investment Fund Association and the Swedish Securities Council, have through self‐ regulation created rules for their member companies and where appropriate for the employees of the companies concerned. A licence holder should be familiar with these organisations’ respective roles and more important rules. The organisations above include SwedSec, which is dealt with separately. A licence holder should have a knowledge of the firms and individuals covered by SwedSec’s rules, the obligations assumed by the affiliated firms and licence holders, and the sanctions that can
27
be taken against those who violate these rules and regulations. It is also important to be familiar with the practice that is gradually arising on the basis of these rules and regulations. Self‐regulation also arises as a result of the agreements that stock exchange members and listed companies enter into with regulated markets and other marketplaces and with clearing organisations. These agreements are dealt with in the subsection Trading in financial instruments. Cognitive level R Standard setting in the securities market
X
Self-regulating bodies in the securities market
X
SwedSec’s rules and regulations and how these are applied in practice
X
C
P
A
X
Conflicts of interest etc. Historically, there has been a “soundness rule” in the Swedish securities market, which has prescribed that securities business should be conducted in such a way that public confidence in the securities market is maintained, individuals’ capital investments are not unduly jeopardised and the securities business in general can be considered sound. This general regulation is complemented by a large number of more detailed rules. This subsection covers a number of areas of interest which aim to ensure the soundness of the securities business. The licence holder should be familiar with and be able to apply the basic requirement that a securities institution should look after its clients’ interests when providing investment or subsidiary services, that it should act honestly, fairly and professionally, and that it should otherwise act in such a way that public confidence in the securities market is maintained. Furthermore, this subsection deals with the requirements on a securities institution’s organisation, risk management, transparency and internal guidelines, procedures and systems, as well as the question of who is responsible for the fulfilment of these requirements.
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Conflicts of interest arise from time to time in a securities institution and its activities and these must be handled in an appropriate manner. For example, conflicts of interest may arise between the institution’s and the employees’ trading on own account versus the institution’s trading on behalf of clients. The licence holder must be familiar with the rules that apply in conflicts of interest, various practical methods such as Chinese walls that are used to avoid conflicts of interest, as well as how private assignments and other conflict of interest situations that can affect his or her duties should be handled. A licence holder should also be familiar with the fundamentals of the new rules (in FFFS 2007:16) on incentives. All these matters are dealt with in this subsection. The licence holder should also understand the rules (in FFFS 2005:9) on analyses and investment recommendations and on a fair presentation of interests and conflicts of interest in the latter. The licence holder must also be familiar with the background to and the purpose of the rules on looking after clients’ interests and handling conflicts of interest. It is not sufficient to know what is permitted or not; the licence holder must, in order to be able to solve conflict of interest problems that arise in practice, be familiar with the ethical and moral basis for these rules. In this way, the licence holder can more easily act correctly even in the absence of explicit regulations and sections of a law. A licence holder should also be familiar with and be able to apply the rules concerning employees’ own or related party’s securities transactions. These are to be found in both acts and in regulations issued by the Swedish Securities Dealers Association and the Swedish Investment Fund Association. The rules on allotment to employees in case of oversubscription are also dealt with here.
29
Cognitive level R
C
P
Requirement to look after clients’ interests and otherwise act honestly, fairly X and professionally
X
X
Requirements on organisation, risk management, internal guidelines etc.
X
X
X
Rules concerning conflicts of interest and how to handle such conflicts
X
X
X
Analyses and investment recommendations
X
X
Rules on own and related party’s securities and foreign exchange transactions
X
X
Purpose of and background to rules on looking after clients’ interests and handling conflicts of interest
X
A
X
Bribery and corruption In the securities market, clients and other interested parties may offer or be offered gifts, services or other benefits. This is often with the aim of client care and well‐intentioned, but can sometimes assume proportions or occur in such situations as to risk being regarded as bribery and may constitute corruption for the recipient. In order to avoid such situations, the licence holder must be familiar with and be able to apply the rules and the more important practice in this area. A licence holder should also be familiar with the activities conducted by and the guidelines issued by the Anti‐Corruption Institute. Cognitive level
Rules on bribery and corruption
R
C
P
X
X
X
A
Money laundering and terrorist financing Money laundering refers to measures taken to conceal, turn over or legitimise, i.e. “launder”, money received as a result of criminal activity. Terrorist financing refers in the rules and regulations not only to the financing of terrorism but also to other forms of particularly serious crime. A licence holder must be familiar with the rules and regulations in these areas and should be able to apply these rules in practice.
30
The licence holder should also be familiar with the main features of the new rules on money laundering in the EU’s Third Money Laundering Directive, which is expected to come into force in Sweden on 15 March 2009. With reference to these rules, the licence holder should consequently be familiar with the following:
• that the purpose of the rules is being extended to prevent financial operations from being used for terrorist financing,
• that the rules have a risk‐based starting point and the implications of this, and • that the requirements for client knowledge are being strengthened and will be more detailed. The licence holder must also be familiar with the background to and the purpose of the rules. It is not sufficient to know what is permitted or not; the licence holder must, in order to be able to handle actual client meetings, be familiar with the ethical and moral basis for the rules, so as to be able to achieve the right balance between personal integrity and combating crime. Cognitive level
Rules on money laundering and terrorist financing Purpose of and background to the rules
R
C
X
X
P
A
X
Market abuse The Financial Instruments Trading (Market Abuse Penalties) Act deals with both “ordinary” insider trading crimes and such trading and conduct as considered calculated to unduly influence the market price or other securities trading conditions. Further, the rules and regulations deal with the obligation of securities institutions to report transactions, which may be assumed to constitute or be connected with insider trading crimes or undue market manipulation, to the Swedish Financial Supervisory Authority.
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A licence holder should understand the crimes and the conduct as well as the reporting obligation that exists in accordance with the current rules and regulations. Further, a knowledge and understanding is required of the Swedish Financial Supervisory Authority’s and the courts’ more important opinions in this area. Finally, the licence holder should have a basic knowledge of such rules in stock exchange member agreements, mainly Norex Member Rules, as are related to the rules on undue market manipulation, i.e. primarily the rules that orders and deals should reflect the market value and constitute real orders and deals. The licence holder must also be familiar with the background to and the purpose of these rules. It is not sufficient to know what is permitted or not; the licence holder must be familiar with the ethical and moral basis for these rules, in order to be able to handle actual transactions and the reporting obligation and to achieve the right balance in how he or she should act. Cognitive level R
C
Insider trading crimes
X
X
Statutory requirements and stock exchange rules on undue market manipulation
X
X
Obligation to report insider trading crimes and undue market manipulation, and the information ban
X
X
Purpose of and background to the rules
X
P
A
Reporting obligation and keeping a logbook The Act concerning Reporting Obligations for Certain Holdings of Financial Instruments contains rules that stock market companies have a duty to report persons with an insider position in the company to the Swedish Financial Supervisory Authority. Major shareholders also have a duty to report to the register. Persons with such an insider position have a duty to report any shareholdings in the company in which they have an insider position as well as changes in these holdings to the Swedish Financial Supervisory Authority.
32
Further, there are statutory requirements prohibiting certain persons with an insider position from trading in shares and other financial instruments in or related to the company in which they have an insider position within a certain period before an interim report, as well as requirements to keep a logbook of persons with access to insider information. A licence holder should be familiar with and understand the above rules and what they mean in practice. Cognitive level R
C
Reporting obligation regarding persons with an insider position
X
X
Trading ban
X
X
Keeping a logbook
X
X
P
A
Basic client protection rules Client protection rules have recently come increasingly into focus. The licence holder should understand the duty of the institution in various situations, such as in providing advice and in order execution. The licence holder should be able to apply the rules on suitability and appropriateness assessments in the Securities Markets Act. The licence holder should be familiar with and understand the various documentation and proficiency requirements that apply in different situations. He or she should also understand the different client categories in the Securities Markets Act. The licence holder must also be familiar with the background to and the purpose of the rules on providing advice. It is not sufficient to know what you must do; the licence holder must – in order to be able to handle actual client meetings – be familiar with the ethical and moral basis for these rules. Consequently, the licence holder can live up to the clients’ expectations of how a “good” advisor should act.
33
Cognitive level R
C
Importance of consumer legislation in the financial market
X
X
Good advisory practice and duty of care (incl. suitability assessments)
X
X
Duty of care in non-advisory situations, e.g. in order execution (incl. appropriateness assessments)
X
X
Documentation requirements
X
X
Competence requirements
X
Client categories
X
Purpose of and background to the rules
X
P
A
X
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Section 5 – Rules and regulations in the securities market Section 5 deals with a knowledge of the rules and regulations and supervision in the Swedish securities market. A licence holder should have a broad knowledge of the subject and be able to use this knowledge as a frame of reference when dealing with clients. In practice, this means a familiarity with concepts and definitions and a basic knowledge of the various business law rules that govern the securities business as well as a knowledge of certain basic civil law legislation pertaining to the securities market. In addition to a factual knowledge, a licence holder is, in certain key areas, also required to have an understanding of regulation and, in some subsections, the ability to apply existing regulations.
Securities business Trading in securities requires a licence issued by the Swedish Financial Supervisory Authority. A licence holder should be familiar with the various licences covering securities business and other business activities, and which operations can be conducted under the various licences. It is particularly important for a licence holder to be familiar with the rules and circumstances concerning the concept of confidentiality. A licence holder should be able to apply the confidentiality rules in concrete situations. The licence holder should also understand the definition of financial instruments in the Securities Markets Act. Cognitive level R
C
P
X
Operations requiring a licence; various licences and what they cover
X
Prerequisites for a licence to conduct securities business
X
Confidentiality
X
X
Definition of financial instruments
X
X
A
35
Investment Funds Act A licence holder should be familiar with the main concepts of the Investment Funds Act (2004:46) and the prerequisites for obtaining a licence to conduct fund operations. Cognitive level R Investment Funds Act; fund manager – mutual fund company – mutual fund – special-purpose fund –custodian institution
X
Prerequisites for a licence
X
Supervision and sanctions
X
Corporate governance
X
C
P
A
X
Flagging, bid and compulsory redemption A licence holder should understand the regulations on when and how a shareholder should flag a change in shareholdings. The licence holder should also understand the rules on a mandatory bid. Finally, the licence holder should be familiar with the rules on compulsory redemption of minority shareholdings. The licence holder should also understand the rules on a mandatory bid under the Stock Market (Takeover Bids) Act (2006:451). He or she should understand: • •
when the rules are applicable, which shares are concerned and the mandatory bid requirement the obligations of the person making a bid, i.e. what the mandatory bid involves and the obligation to prepare an offer document.
The licence holder should also be familiar with the rules on compulsory redemption of minority shareholdings, i.e. • • •
understand when the rules are applicable and be familiar with the procedure in general; how the price is determined and how to handle a dispute on whether there is a right or liability to redemption or on the size of the redemption sum as well as what advance vesting of title means. 36
Cognitive level
Flagging regulations Mandatory bid Compulsory redemption
R
C
X
X
X
X
X
X
P
A
Complaint management Complaint management is of crucial importance to securities institutions. A licence holder should know how complaint management should be organised in institutions, and how complaints should be handled. Further, a licence holder should be familiar with which organisations and institutions advise on complaint practice and which handle such disputes. Cognitive level R C P A Rectifying mistakes
X X
Handling other client complaints (National Board for Consumer Complaints /ARN/; Consumers' Bank and Finance Agency, enforcement service, and ordinary court of law)
X X
Agreements The Swedish Securities Dealers Association has drawn up standardised agreements and general provisions for banks’ and securities companies’ custody clients. Further, Nasdaq OMX Stockholm (Stockholmsbörsen) has drawn up agreements for trading in standardised options. The sector also has disposition agreements and agreements concerning discretionary asset management and investment consultancy. A licence holder must be familiar with the various agreements, their content and purpose. The Swedish Securities Dealers Association has also drawn up standardised agreements and general provisions for banks’ and securities companies’ trading in financial instruments as well as standardised agreements for securities loans. This subsection includes the various agreements, their content and purpose.
37
Cognitive level R C P A General provisions for custody and account agreements – banks and securities companies
X
Client agreements, integrated trading and clearing account at Nasdaq OMX Stockholm
X
Disposition agreements between client and securities company (regulates the securities company’s right to re-pledge financial instruments)
X
Common agreements in different types of asset management
X
General conditions for trading in financial instruments
X
General conditions for securities loans
X
Basic rules on pledging A licence holder should have a knowledge of basic civil law rules governing pledging and business law pledging rules pertaining to the securities business. In business law, there are differences between banks’ and securities companies’ ability to demand pledges, and a licence holder must be aware of these differences. Cognitive level R
C
Pledging
X
X
Securities institution’s role and the risks in pledging
X
X
P
A
Questions concerning civil law and family law In this section a variety of basic civil law concepts and other terms are covered which a financial advisor could encounter and should therefore know about. Furthermore, a licence holder is required to have some basic knowledge of, for instance, the fundamentals of contract law, powers of attorney, and insolvency law. Within the subject area of family law, a licence holder is required to be familiar with certain basic and essential concepts as well as having a knowledge of the various forms of family law (marriage and cohabitation). This section also covers essential questions concerning inheritance, gifts, and wills.
38
Cognitive level R
C
Basic civil law concepts
X
X
Basic contract law
X
X
Powers of attorney and other types of authority
X
X
Insolvency and bankruptcy
X
Basic family law concepts: Marriage and cohabitation, etc.
X
X
Wills, inheritance, and legal incapacity
X
X
P
A
X
Company law – Corporate law This subsection includes a basic knowledge of the right of association, but with an emphasis on corporate law. The licence holder should know and understand the difference between the various forms of association that occur. Moreover, he or she should be familiar with the share and it legal consequences. This subsection also includes the prerequisites for forming a limited company and the significance of registration with the Swedish Companies Registration Office. Finally, the situation for VPC companies is dealt with, where the share register is handled by a database (VPC) and no physical share certificates are issued. Cognitive level R
C
Difference between various forms of association
X
X
Share and its legal consequences
X
X
Share register and share certificates
X
X
Other legal formalities (e.g. registration with Swedish Companies Registration Office and certificate of incorporation)
X
VPC companies and handling of these
X
Company’s decision-making body
X
P
A
X
Deposit guarantee and investor protection Client deposits in accounts in banks, credit market companies and securities companies with a licence to receive client funds are covered by a deposit guarantee. This guarantee provides
39
account clients with some protection in the event of the bankruptcy of the account‐ managing institution. Correspondingly, there is investor protection, which provides the possibility of compensation for losses of investors’ financial instruments and funds held by securities institutions, fund managers and certain investment companies. A licence holder should be familiar with, understand and be able to apply the rules found in the above rules and regulations. Cognitive level R
C
P
Deposit guarantee
X
X
X
Investor protection
X
X
X
A
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