XN000022-1995-10-18 — Page 59

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To the extent that brokers or their staff engaging in 'rat trading' will not be acting in the best interests of their clients as required by the Rules of the Exchange, neither the Government nor the Securities and Futures Commission would condone such practices.

(b) The Securities and Futures Commission and the two exchanges have established rules and codes of conduct which a broker should follow when dealing in transactions either for his own account or for his clients. The objective is to protect the interests of investors and to ensure that the broker conducts his business in a manner which contributes towards the maintenance of a fair and orderly market.

These rules and codes of conduct do not forbid brokers and their staff to match orders with their clients as such. Rather, they spell out clearly the principles and practices which a broker shall follow when carrying on cross trading between clients and between the client and the broker (or staff). Among other things, client orders should receive the best available execution and be given precedence over house orders. Moreover, before entering into such transactions, the broker must disclose to his client the fact that he has a material interest in the transactions and receive the client's consent either orally or in writing. The broker also must take all reasonable steps to ensure fair treatment of the client.

We are aware also that as part of their internal control measures, the better managed brokers have rules requiring orders to be time- stamped so as to provide an audit trail. Indeed, some brokers go to the extent of prohibiting their staff from matching their own orders with those of clients or dealing through other brokers.

End/Wednesday, October 18, 1995