General

7.01 A Compensation Fund shall be established for the purpose of compensating the investor who has suffered pecuniary loss as a result of or in connection with any default of a Stockbroking Firm.

Interpretation

7.02 In this Chapter, the following words and expressions shall have the meanings hereinafter assigned to them :

(i) "Application for a Declaration of Default" means such form as may be adopted by the Select Committee for completion by the investor in order to obtain a declaration of default of a stockbroking firm;

(ii) "Application for Compensation" means such form as may be adopted by the Council for completion by an investor who wishes to apply for compensation from the Fund;

(iii) "Date of Default" means the date when a stockbroking firm has been declared to be in default pursuant to Bye-law 7.04;

(iv) "Default Notice" means such notice as may be issued by the Exchange announcing the declaration of default;

(v) "Fund" means the Compensation Fund established in virtue of Article 12 of the Statute;

(vi) "Investor" means a person who has entrusted cash or securities to a stockbroking firm in connection with transactions in securities quoted on the Exchange;

Provided, however, that the categories of investors listed hereunder shall not be considered as investors and shall be excluded from claiming against the Compensation Fund. The categories in question are the following :

(a) stockbroking firms, financial intermediaries and investment firms holding an investment services licence under Section 6 of the Investment Services Act, 1994;

(b) credit institutions carrying on the business of banking under the Banking Act 1994;

(c) financial institutions as defined in Section 2 of the Financial Institutions Act, 1994;

(d) insurance undertakings licensed to carry on the business of insurance under the Insurance Business Act (Cap. 290);

(e) Collective Investment Schemes as defined in Section 2 of the Investment Services Act, 1994;

(f) pension or retirement funds;

(g) individuals who manage the funds of the categories of investors mentioned in sub-paragraphs (b), (c), (d), (e), (f) of paragraph (vi) of this Bye-law;

(h) Government and recognised administrative authorities in terms of law;

(I) provincial, regional, local or municipal authorities;

(j) directors and manager of the defaulting stockbroking firm as well as holders of at least 5% of the capital of such firm and members of the external auditing bodies who audit the accounts of such firm; and

(k) other companies in the same group of the defaulting stockbroking firm.

(vii) "Select Committee" means the Select Committee consisting of an advocate with a minimum of twelve years legal practice, a certified public accountant and auditor and a member of the Council, appointed by the Council to determine an Application as laid down in bye-law 7.04.

Claims

7.03 (i) Only an investor may make a claim against the Fund and he shall submit such claim to the General Manager of the Exchange. Such claim shall be confined to loss or misappropriation by a stockbroking firm of cash or securities held by such firm on behalf of the investor in connection with, arising out of, or in contemplation of transactions in securities quoted on the Exchange where :

(a) it is established that an investor has made a claim in writing to his stockbroking firm by registered letter and this has not been satisfied within a maximum period of twelve(12) weeks from submission of the claim;

(b) upon receipt of a claim the General Manager shall ask the claimant to fill in an Application for Declaration of Default. The General Manager shall submit such application to the Council.

(ii) The Council shall cause a copy of the Application for a Declaration of Default to be served on the stockbroking firm at its registered place of business. The respondent shall have a right to answer in writing to the facts alleged in the said application within fifteen (15) days from the date of service of the application and shall cause a copy of such answer to be served on the Council :

Provided that, the Council upon being satisfied that owing to absence from Malta, sickness or other reasonable cause the respondent was prevented from filing an answer within such period, shall extend the period as may be reasonable in the circumstances.

(iii) On expiry of the period aforementioned the Council shall forward the Application to the Select Committee together with any relevant documents.

Declaration of Default

7.04 (i) The Select Committee may, upon an Application for a Declaration of Default by an investor, declare a stockbroking firm to be in default if the firm :

(a) is guilty of any negligent act, error, omission or breach of professional duty; or

(b) is guilty of any dishonest or fraudulent act or omission perpetrated with the manifest intent to cause an investor to sustain a pecuniary loss; or

(c) has suspended payment of monies or outstanding balances due to investor clients as required in terms of Bye-law 4.19.

(ii) Subject to the rules of Natural Justice, the Select Committee shall regulate its procedures in determining a Declaration of Default.

(iii) A Declaration of Default shall be effective as from the day it is given in the decision of the Select Committee which shall therein premise the reasons leading to its deliberation.

(iv) The Select Committee shall convey its deliberations to the Council and the Council shall take the appropriate disciplinary action it deems necessary in terms of the Statute and Bye-law 3.06.

Default Notice

7.05 The General Manager shall post a copy of the Default Notice on the Notice Board of the Exchange forthwith and shall serve such Default Notice on the stockbroking firm in default.

Application for Compensation

7.06 Investors who consider that they may be entitled to make a claim for compensation under these Bye-laws shall complete the Application for Compensation Form and submit it to the Council without delay but not later than four (4) months from the date of issue of the Default Notice. Each Application for Compensation shall be submitted to the select Committee for its deliberations.

Exclusion from Compensation

7.07 (i) A Claim for Compensation shall not be considered if the investor is adequately protected in respect of his loss under any other existing compensation or insurance scheme and the Council may postpone its decision in relation to a claim for compensation until the t amount payable under such other scheme is determined.

(ii) The following may constitute grounds for rejecting an Application for Compensation from an investor, but this list is not intended to be exhaustive :

(a) if the investor has contributed in any way to the financial difficulties of the firm in default; or

(b) if the application is found to contain any inaccuracy or omission, unless this is clearly immaterial or is shown by the investor to be wholly innocent; or

(c) where, in the opinion of the Council, the investor has so conducted himself in his dealings with the stockbroking firm in default, as to be in breach of applicable law or regulations, including these Bye-laws.

Limit of Compensation

7.08 (i) The amount which may be paid out to an investor shall be 80% in respect of all claims which have been made by the investor subject to a maximum of Lm10,000.

Provided that the total compensation paid from the Fund in any one year shall not exceed 50% of the Assets shown in the latest audited Balance Sheet of the Fund.

(ii) Subject to the above limits the Council shall have absolute discretion to determine the amount of any payment which it may make by way of compensation and may authorise that compensation in the form of cash or securities as it may deem necessary.

Reduced or Interim Payments

7.09 (i) Where the Council is satisfied that in principle, compensation is payable but considers that immediate payment in full would not be prudent, having regard to other applications for grant of compensation made or likely to be made or to any uncertainly as to the amount of the investor's overall net claim, it may determine to pay an appropriate lesser sum in final settlement or to make a payment on account.

(ii) A payment on account shall be treated as the payment of a compensation sum and shall not inhibit the Council from making a determination in respect of any balance.

(iii) The Council may also determine to make a payment on account or to pay a lesser sum where the investor has a prospect of recovery in respect of the claim from any third party or through an application for compensation to any other person.

Assignment of Rights

7.10 As a pre-condition to receiving compensation from the Fund under these Bye-laws, the investor seeking compensation shall be required to transfer to the Exchange his claim against the stockbroking firm in default. The investor will be required to subrogate his rights to the Exchange, to the extent that the claim has been satisfied under these Bye-laws. Investors, will therefore, be required to sign such documentation as may be necessary to effect this assignment and to confirm that they have not received any payment from any other scheme or from the stocbkroking firm in default since making the claim and prior to any payment being made to such investor under these Bye-laws.

Powers of the Council

7.11 (i) The Council shall hold, manage and apply the assets of the Fund in accordance with these Bye-laws, although the express powers given do not restrict its general powers of management.

(ii) The assets of the Fund shall be invested from time to time as the Council directs, having regard to the need for prudence.

(iii) The Council may borrow money or otherwise incur indebtedness for the purposes of the Fund, in any way and in any terms it thinks fit, provided that such borrowings do not exceed the net asset value of the Fund.

Revenue of the Fund

7.12 The revenue of the Fund shall consist of :

(a) the contributions which are non-refundable, as determined by the Council from the members of the Exchange;

(b) a yearly percentage of the profit after tax made by the Exchange, as the Council may from time to time determine;

(c) all monies received as income from or the proceeds or sale of any investments of the Fund; and

(d) any other money received by the Council for the purposes of the Fund.

Payments out of the Fund

7.13 The payments out of the Fund shall consist of :

(a) monies as determined and directed by the Council to be paid in settlement of the investor/s justified claims; and

(b) any administrative expenses.

Records

7.14 The Council shall cause proper records to be kept in respect of the transactions of the Fund.

Co-operation with the Council and the Select Committee

7.15 A stockbroking firm shall co-operate with the Council and the Select Committee in making available all information, books and documents and shall otherwise render all such assistance as is necessary or desirable to assist the Select Committee to perform these functions under these Bye-laws.

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