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ARRANGEMENTS FOR MANAGING CONFLICTS OF INTEREST

1. Overview

Section 912A(1)(aa) of the Corporations Act requires that in addition to existing legislation, common law and any fiduciary obligations, Reef Capital Coaching (RCC) must:

have in place adequate arrangements for the management of conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative.

Accordingly, the legislation imposes a direct and specific obligation on RCC to have adequate arrangements to manage its conflicts of interest. This obligation applies equally to retail and wholesale clients.

ASIC Regulatory Guide 181 (RG181) "Licensing: Managing conflicts of interest" defines a conflict of interest as:

"...circumstances where some or all of the interests of people (clients) to whom a licensee (or its representative) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representatives. These include actual, apparent or potential conflicts of interest" (RG181.15).

The Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Clerp 9 Act) i.e. schedule 10 of the Act dealing with conflicts of interest commenced on 1st January 2005 and states (at paragraph 5.599) that there are three main types of conflicts of interest (the following two of which relate to financial services businesses) which will require compliance with the conflicts management obligation.

(i) A conflict within the financial services business. Examples include:

• dealing on behalf of various clients or across different areas of the business, such as between publishing research in a client newsletter and market making.

(ii) A conflict between something within the financial services business and something outside the financial services business. Examples include:

• the licensee lending (as principal) to a particular enterprise whilst at the same time underwriting a public offer for the same enterprise, or

• where the objectivity of research is compromised by the analyst's personal interests or relationships.

Accordingly, conflicts of interest are circumstances where some or all of the interests of a client are inconsistent with, or diverge from, some or all of the interests of RCC or its representatives providing the financial service to the client. This includes actual, apparent and potential conflicts of interest.

Building on RG 181, RG 79 entitled "Research report providers: Improving the quality of investment research", covers various issues that research report providers should take into account in the design, implementation and maintenance of their conflicts management arrangements to improve the quality and reliability of research and to ensure the integrity of our advice is not compromised.

A research report is general advice that:

(a) is in writing;

(b) includes an express or implicit opinion or recommendation about a named or readily identifiable investment product; and

(c) is intended to be, or could reasonably be regarded as being intended to be, broadly distributed (whether directly or indirectly) to clients (whether wholesale or retail) in Australia.

A research report provider is a licensee that provides research reports. Accordingly, RCC is a research report provider.

The key focus of managing conflicts is to ensure our research and recommendations have credibility and integrity and can reasonably be relied upon by our clients.

Licensees whose interests conflict with those of the client are more likely to take advantage of that client in a way that may harm that client and may diminish confidence in the licensee or the market. Accordingly, RCC must look broadly at the client's best interest whether or not it has a legal duty to take those interests into account.

It is also important to remember that the client relationship gives rise to a fiduciary duty in relation to the representative's conduct towards the client. To meet the requirements arising from the fiduciary duty, RCC, its Directors, employees and other representatives have fiduciary duties that include:

• avoid any potential conflicts of interest;
• the duty to use reasonable skill and care;
• the duty to act in the clients' best interest and do the best on behalf of your client;
• disclose any financial interest in the investment or financial product advice to a client; and
• obtain for the client the best terms available in the situation.

A breach of fiduciary obligations can have serious consequences for RCC. These consequences include:

• Rendering any contract between RCC and the client void;
• Preventing the recovery of any fee or charge to which RCC would otherwise be entitled; and
• Exposing RCC to liability in relation to accounting to the client for any profit foregone or any loss sustained.

The Future of Financial Advice ("FOFA") reforms introduce a number of measures to improve the quality of advice to retail clients. These reforms include a statutory best interests duty for providers of personal financial advice and a ban on certain forms of conflicted remuneration in recognition of the fact that conflicts of interest can have a significant, negative impact on the quality of advice that retail investors receive.

RCC provides very limited personal advice and thus, the "best interests duty" does not generally apply. Notwithstanding, as stated above, RCC will take into consideration the client's best interest. In addition, RCC does not receive conflicted remuneration.

2. Structural Arrangements to Manage Conflicts of Interest

The conflicts management obligation does not prohibit conflicts of interest. Rather, RCC acknowledges that it must have adequate arrangements to manage all conflicts of interest affecting its business. Such conflicts management arrangements must be established and maintained and be appropriate to the nature, scale and complexity of the business. RCC uses the following mechanisms to manage conflicts of interest:

• controlling the conflicts of interest;
• disclosing the conflicts of interest; and/or
• avoiding the conflict of interest.

Thus, where conflicts cannot be adequately managed through controls and disclosure, RCC must avoid the conflict i.e. for those conflicts of interest that have such a serious potential impact on RCC or its clients, the only way to adequately manage those conflicts will be to avoid them and refrain from providing the relevant financial service.

RCC currently has five representatives and each is aware of the potential conflicts of interests which exist in the business.

3. Procedures for Identification, Assessment and Evaluation of Potential Conflicts of Interest

The Directors have undertaken a review to identify, assess and evaluate potential conflicts of interest. From the results of this assessment, a conflicts management matrix was developed which is attached (Annexure A).

Should any representative become aware of a situation which they believe constitutes, or may constitute, a conflict of interest, the matter should be discussed with one of the Directors immediately to enable the Directors to assess and evaluate the conflict and implement procedures to control or disclose the conflict or alternatively, make the decision to avoid the conflict.

4. Procedures for Controlling Conflicts of Interest

To control conflicts of interest RCC has:

• identified the conflicts of interest relating to its business;
• assessed and evaluated those conflicts; and
• decided upon, and implemented, an appropriate response to those conflicts.
Conflict management arrangements will be regularly monitored i.e. the Directors, as part of the Compliance Monitoring Program and/or as the business changes, will regularly review RCC's conflicts management arrangements to ensure that they continue to be appropriate.

In addition, an external service provider may be appointed to undertake a review of compliance procedures and measures if considered warranted by the Directors. As part of this review (if performed), the conflicts management arrangements will also be reviewed to confirm they are adequate to identify, assess, evaluate and successfully control conflicts of interest.

(a) Remuneration practices

The remuneration structure of the representatives of RCC has been considered to ensure that RCC has adequate conflict management arrangements in place. Part 7.7 of the Corporations Act generally approaches remuneration issues from a disclosure perspective i.e. remuneration must be fully disclosed in the Financial Services Guide (FSG) or a Statement of Advice (SOA) (where applicable).

Remunerations practices that place the interests of RCC or its representatives in direct and significant conflict with those of its clients (i.e. whereby it may impact upon RCC's ability to provide an efficient, honest and fair provision of financial services) should be avoided (and not merely disclosed). By way of an example, ASIC RG181.38 states that licensees should avoid remuneration structures where advisers are paid exclusively by commission (e.g. no salary or other remuneration is paid) and that the need for robust conflicts management arrangements is likely to be higher where a licensee relies heavily on commission based remuneration.

RCC is remunerated in the following ways:

(i) by way of subscription fee for providing the clients with private web access to review its recommendations;
(ii) by way of course fees to access educational material;
(iii) by way of course fees to attend seminars; and
(iv) sale of educational books, DVDs and eBooks
(v) by way of commission from Interactive Brokers LLC ("IB") when a client, referred to IB by RCC, uses the IB dealing service.
(vi) by way of rebate of administration fee from Aliom Pty Limited for the auto trade facility;
(vii) by way of rebate of a split (60%) in the performance fee (if applicable) from Aliom Pty Limited; and
(viii) by way of an hourly fee for private consultation with Nick Radge
(ix) by way of an hourly fee for trading system coding or on-demand stock analysis.
(x) by way of an hourly fee for articles published on financial institutions websites, specifically E*TRADE.

RCC has minimal conflicts of interest with regard to providing its services and it is controlled by clearly disclosing the remuneration structure in the FSG (and SOA where applicable).

Furthermore, the Directors, as part of the Compliance Monitoring Program, will regularly review (and monitor) representatives to ensure that any advice or recommendations given is based on thorough research and not intended to mislead or deceive.

It is also important to note that client's performance (achieved by the client acting on RCC's recommendations) will be the key factor that will influence the growth potential of RCC i.e. excessive subscription fees will result in RCC's clients' utilising the services of another licensee. Put simply, poor results from the recommendations made will result in dissatisfied clients.

All RCC representatives (who are employees) are remunerated by way of salary and discretionary bonus based upon performance. Authorised Representatives are paid a fee per chart analysis they provide. Accordingly, the control implemented to manage this minimal conflict of interest is to ensure all recommendations are based on thorough and complete research.

(b) Treating clients fairly

RCC must ensure that it treats its clients fairly. RCC provides generic recommendations based on technical analysis undertaken. Accordingly, all clients receive the same advice based on RCC's view. Notwithstanding, RCC has considered the following:

(i) Is RCC providing financial services in a manner that unfairly puts the interests of itself (or its representatives) ahead of its clients?
RCC primarily only provides financial product advice. A client may act on that advice or may not, depending on their own assessment of the recommendation. RCC may assist the client by arranging for them to deal either by referral to IB or Aliom Pty Ltd in the case of the auto trade facility.
RCC only makes recommendations when its technical analysis identifies a trading signal.
Thus, the financial services provided by RCC are not provided in a manner that puts the interests of RCC (or its representatives) ahead of its clients.
(ii) Is RCC providing financial services in a way that unfairly puts the interests of one client ahead of the interests of other clients?
RCC treats all clients the same. All clients accessing RCC's recommendations receive the same advice. Similarly, any advice provided in seminars will be the same for all students. Thus, RCC will not put the interest of one client ahead of another client.
(iii) Is RCC using knowledge about its clients in a way that is likely to advance their own interests without sufficient disclosure to affected clients?

RCC itself does not trade on its own account.

The Directors (and entities associated with the Directors such as their Self Managed Superannuation Fund) and other representatives declare their stock holdings to their clients and update this information within the secure area of their website daily. The information is clearly marked and on the same webpage as the advice being offered. The Directors follow the same trading strategies they advise their clients to use. Therefore, poor advice would result in poor results for the Directors as well as the clients. Thus, the interests of clients and those of RCC's representatives are aligned.

Thus, RCC and its Directors have no conflict with respect to the knowledge they have about whether the client intends to trade based on the advice. Furthermore, in most cases RCC is not aware of the clients' intentions with respect to implementing the advice and does not know if a client acts on the advice.

5. Procedures for Disclosing Conflicts of Interest

Clients must be "adequately informed" about any material conflicts of interest that may affect the provision of financial services to them. Adequate disclosure means providing enough detail in a clear, concise and effective form to allow clients to make an informed decision about how the conflict may affect the service being provided to them. Accordingly, general disclosure is unlikely to satisfy this requirement.

RCC must ensure that disclosure of conflicts of interest:

(i) is timely, prominent, specific and meaningful to the client;
(ii) occurs before or when the financial service is provided (allowing the client a reasonable time to assess its effect); and
(iii) refers to the specific service to which the conflict relates.

ASIC RG181.54 states that when providing financial product advice, disclosures on the following matters will generally be appropriate and should be given at or about the time of providing the advice:

(a) the extent (if any) to which RCC (or any associated person) has a legal or beneficial interest in the financial products that are the subject of the financial product advice;

RCC provides advice which consists of research into listed equities, foreign exchange and derivatives (such as CFD's based on listed equities and futures contracts).

Representatives of RCC (or any associated person) may, at times have a legal or beneficial interest in the financial products that are the subject of the financial product advice if they have invested in that product.

The Directors of RCC (and its other representatives) will disclose if they hold a position that is being recommended on the appropriate webpage of the secure area of the website. This information will be easily found and prominent to clients.

The Director or representative is required to email Trish Radge with the date the disclosure was made and the specific stock (or CFD) they hold. Trish Radge will keep a report identifying the date of purchase, the stock (or CFD) held and the name of the relevant representative together with the date of sale.

Due to the nature of The Chartist's US High Frequency Trading strategy ("HFT") and the fact that it trades approximately 120 trades per month with an average holding period of 3 days, clients will be advised that the Directors (or other representatives) of RCC take all HFT recommendations that are generated, limited only by the size of their trading account and the number of positions currently held. It is important to note that RCC gains credibility with clients for following its own recommendations. RCC's credibility would be severely impacted if clients felt the Directors (or other representatives) were "front running" the clients. The interests of clients and those of RCC's representatives are closely aligned.

(b) the extent (if any) to which RCC (or any associated person) is related to or associated with the issuer or provider of the financial products that are the subject of the financial product advice;

RCC provides advice predominantly in listed equities and also foreign exchange and derivatives (such as CFD's based on listed equities and futures contracts).

In relation to securities, neither RCC (nor any associated person) is related to or associated with the issuer of the security that is the subject of the financial product advice and thus, no conflict arises.

We note that IB are issuers of derivatives products such as CFDs. However, RCC only provide a referral service to IB where clients may choose to open an account with IB to act on the advice they receive from RCC. Thus, no conflict arises.

(c) the extent (if any) to which RCC (or any associated person) is likely to receive financial or other benefits depending on whether the advice is followed.

RCC's remuneration for the financial service it provides is either course fees or a subscription fee to enable the client access to the private website containing the RCC recommendations. RCC may receive commission from IB should a client elect, following a referral by RCC, to use the dealing services of IB.

RCC (or any associated person) does not receive financial or other benefits depending on whether the financial product advice (recommendation) is followed.

In addition to the matters identified in RG181.54, RG 79.158 states research report providers should provide conflicts of interest disclosure to all clients, including generally disclosing:

(i) any material interests RCC has in financial products that are the subject of the report;

As stated above in point (a), representatives of RCC (or any associated person) may, at times have a legal or beneficial interest in the financial products that are the subject of the financial product advice if they have invested in that product.

The Directors of RCC (and its other representatives) will disclose if they hold a position that is being recommended on the appropriate webpage of the secure area of the website. This information will be easily found and prominent to clients.

(ii) any benefits they are likely to receive from the report;

Remuneration structures of the analysts are disclosed in the FSG.

(iii) RCC's relationship (if any) to the product issuer, including any other services it provides to the product issuer;

Refer to point (b) above.

(iv) any help RCC was given by the product issuer;

Not applicable to RCC as all of RCC's research and advice is based on technical analysis only via charting techniques.

(v) the date the research report was written and who took responsibility for it;

Each chart posted to the website specifically identifies the date the chart was prepared and posted to the website and the name of the representative who prepared it.

(vi) the reasons behind the opinions and recommendations in the research report.

Each chart posted to the website specifically describes the opinions and recommendations.
6. Procedures for Avoiding Conflicts of Interest

If a conflict has a serious potential impact upon RCC or its client(s), then that conflict must be managed by avoiding it. In such cases, merely disclosing the conflicts and imposing internal controls will be inadequate.

7. Putting the Interests of Clients First

Representatives have a fundamental duty to put the interests of clients first and should not allow this duty to be influenced by their own interests or those of RCC. It is the responsibility of RCC to comply with the ethical standards against which the integrity and quality of its service shall be judged.

Representatives must therefore be independent and objective and have a reasonable basis, supported by proper due diligence or analysis, for the financial products in which they provide financial advice. The research produced by RCC must be objective, clear, fair and not misleading

It is the responsibility of RCC to adhere to the following standards to ensure RCC's commitment to clients and to promote and protect client confidence and integrity in the financial markets.

The following guidelines have been developed to ensure that RCC and any representative are familiar with their responsibilities and do not allow any possible conflict of interest to affect their service to clients.

(i) Independence

All representatives are expected to be independent and objective observers and must have a reasonable basis, supported by analysis for any recommendations provided to clients.

(ii) Disclosure of Interests

Any reports or other publications and recommendations, will specifically and prominently disclose any interests or potential conflicts of interest of RCC (and its representatives) and in particular, any holdings in the particular financial product to which the recommendation relates.

(iii) Other Disclosure

A report or recommendation must disclose, specifically and prominently a list of definitions of the terms used in the report or recommendation and, if applicable, all risk factors.

RG 79.45 sets out ASIC's expectations that licensees disclose certain information about their research products and services. The RCC website discloses the following information about RCC's research products and services:

(a) Scope and expertise of the research service

RCC clearly communicates the nature and scope of its research service. It includes clearly communicating:

• the scope of the service i.e. recommendations are based on technical analysis via charting techniques; and

• the extent to which RCC is promoting itself (and its representatives) as experts and the basis for this (i.e. summary information about the expertise, qualifications and experience each representative possesses).

(b) Process by which products are selected for coverage and filters applied

RCC clearly communicates how RCC filters the products it covers in its analysis e.g. ASX Chart Research covers the ASX 300 universe.

(c) Research methodology applied

RCC follows a robust methodology in its research and this is transparent in how it is applied i.e. all recommendations are based on technical analysis via charting techniques.

(d) Spread of ratings

Providing information about the spread of ratings is an important accountability and transparency measure for both RCC and users of its services. ASIC expect research report providers to give information about the spread of their ratings (i.e. how many products or what percentage received each type of rating (Buy, sell, hold) during a relevant period). This gives clients another tool to gauge the quality and reliability of RCC's research.

(e) Conflicts management policy

Clients should have enough information to form a realistic view about the potential impact of any conflicts of interest on the quality and objectivity of the research service.

Giving meaningful information about product coverage and filters, methodology and ratings spreads in particular, is critical for clients to conduct a proper assessment of the research service and any limitations that apply to it.

Where research is on-distributed to other licensees (such as ETrade) the research report or article directs end users to the RCC website to enable the end user to access these disclosures.

8. Research Sign-off process

All representatives are fully aware of how RCC filters the products it covers in its analysis. Due to the small size of RCC and the significant level of experience of each of its analysts, there is no formal sign-off process prior to the release of each chart and associated analysis. However, should an analyst wish to provide research outside the broad parameters of the products covered, the analyst will discuss with Nick Radge (Director) who will make the final decision.

Notwithstanding there is no formal sign-off process, research is subject to proper evaluation via a peer review process.

9. Outsourcing

RCC recognises the importance of ensuring the longevity of good reliable relationships with service providers.

Accordingly, RCC has established documented "Outsourcing Procedures" which must be complied with prior to the appointment of an outsourcing partner and provides guidance on the procedures to be followed during the relationship. One of the issues considered prior to the appointment of a service provider includes the determination of whether any conflicts of interest may arise and if so, whether such conflicts can be successfully managed.

Service providers will be required to disclose any possible conflicts of interest during the selection process. Service providers that are considered to be inappropriate will be discarded.

Conflict can arise in many situations. For example, a conflict of interest exists when an employee, or family member, obtains a personal benefit at RCC's expense or contrary to RCC's best interest. While it is impossible to identify every type of relationship, activity or interest which constitutes a potential conflict, there are certain types of conduct which must be avoided or disclosed when encountered (in this regard representatives are referred to paragraph 10 below).

Once a service provider has been approved, a term of the service agreements will be that the service provider immediately notifies RCC if it becomes aware of any conflict or potential conflict that could impact on its ability to provide the services.

All concerns will be reported to the Directors who will determine whether RCC should continue with that service provider or terminate the agreement.

10. Conflicts of Interest Specific to Staff

The importance of employee involvement in outside business, political and community activities is recognised by RCC. Whilst RCC encourages representatives to engage in such activities, it does so on the basis that the activities are legal and they do not interfere with the proper performance of the duties of representatives, nor create a conflict of interest for RCC (or its representatives).

Each representative is expected to avoid or disclose any, activity, investment, interest or association of the representative or members of his/her immediate family which interferes, or appears to interfere, with the representative's ability to exercise proper judgement in the advancement of RCC's business and best interests.

While it is impossible to identify every type of relationship, activity or interest which constitutes a potential conflict, there are certain types of conduct which must be avoided or disclosed when encountered. Examples of potential conflicts which must be avoided or disclosed include:

(a) Ownership by a representative or immediate family member of a substantial financial interest in a business which maintains a relationship with, or is a competitor of, RCC.

(b) Employment or significant affiliation with an organisation which does or seeks significant business with or is a competitor of RCC.

(c) Extension to, or acceptance by, a representative or immediate family member of compensation, loans (other than from an established bank or financial institution under customary terms and rates), gifts of more than token value, or substantial benefits or favours to or from a client or an organisation or individual which does or seeks to do business with, or is a competitor of RCC.

(d) Representation of RCC by a representative in a transaction in which the representative, immediate family member or business associate of the representative has a substantial interest in the transaction.

(e) Disclosure of confidential RCC information. Disclosure may be made to a person who represents, is employed or retained by RCC if such person is required to know such information to properly perform his/her duties.

(f) A representative's use of confidential RCC information for personal profit or advantage, including trading on the recommendations made by RCC without declaring positions to clients.

(g) Competition with RCC by a representative, directly or indirectly, in any purchase, sale or other transaction in which RCC is a party.

Representatives should avoid not only a conflict of interest but also the appearance of a conflict of interest. While there is no absolute test to determine what constitutes a conflict, or the appearance of a conflict, representatives should consider how others could view the activity or interest. As a result, representatives must seek approval from a Director in writing before entering into or continuing the transaction or relationship.

11. Monitoring Compliance with RCC's Policies and Procedures

RCC monitors compliance with this policy to manage conflicts of interest that may influence the integrity of the markets and RCC's ability to provide an efficient, honest and fair provision of financial services.

The Directors will conduct reviews to identify, assess and evaluate conflicts of interest to the business and to ensure that the procedures operating are adequate.

In addition, an external service provider may be appointed to undertake a review of compliance procedures and measures if considered warranted by the Directors. As part of this review (if performed), the conflicts management arrangements will also be reviewed to confirm they are adequate to identify, assess, and evaluate and successfully control conflicts of interest.

Where instances of non-compliance with RCC's conflicts management arrangements are identified, disciplinary action may be instigated against the representative concerned.

12. Record Keeping

RCC will maintain a Register, for at least seven years, which contains records of:

(i) The conflicts identified and action taken;
(ii) Any reports given to RCC about conflicts of interest matters.
Copies of written conflicts of interest disclosures given to clients will be filed in the client's file.

13. Procedures for Ensuring that the Quality of our Service is not Significantly Compromised by the Presence of Conflicts of Interest

RCC provides financial product advice, primarily general advice, in seminars and via a subscription service whereby the client will be able to access and view recommendations.

The quality of the service will not be significantly compromised by the presence of conflicts of interest as RCC will:

(a) manage any conflicts; alternatively
(b) disclose all material conflicts i.e. such disclosures are contained in the FSG and other reports and recommendations (where applicable).

14. Persons Responsible for Implementing, Reviewing and Updating the Conflicts Management Arrangements
The persons responsible for implementing, reviewing and updating the conflicts management arrangements are the Directors.

Conflict management arrangements will be regularly monitored and reviewed i.e. as part of the Compliance Monitoring Program and/or as the business changes. Furthermore, the Directors will regularly review RCC's conflicts management arrangements to ensure that they continue to be appropriate.

In addition, an external service provider may be appointed to undertake a review of compliance procedures and measures if considered warranted by the Directors. As part of this review (if performed), the conflicts management arrangements will also be reviewed to confirm they are adequate to identify, assess, evaluate and successfully control conflicts of interest.

FEBRUARY 2014