2.1 Functional Separation of Group Operations

Where an operator is connected to a company or group of companies in which non-fund management activities are carried out, supervision should seek to confirm that appropriate protective arrangements, including "Chinese walls ", are in place to limit and disclose any conflicts of interest. This may include withholding information which may be of a sensitive nature from another department within the same group and establishing that an operator does not receive information from another part of the same group which may lead to a conflict of interest.

The type of information which could result in a conflict may relate to corporate finance, broking or research. Supervision should seek to confirm that there is an appropriate physical separation of departments, and proper procedures for maintaining the "Chinese wall " as well as containing information which may be sensitive and should not be disclosed to other departments.

2.2 Use of Connected Brokers and Banks

Supervision should seek to ensure that where an operator places CIS transactions through a connected broker, such transactions are carried out at arms' length and transaction execution is consistent with best execution standards. This is particularly important where the CIS uses a principal broker that is connected to the operator.

Supervision should also seek to ensure that where cash forming part of the CIS assets is deposited with a connected person to the operator, interest is received on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term. Similarly if the CIS borrows from a connected person of the operator, supervision should seek to ensure that the interest charged and any fees levied in connection with the loan are no higher than the prevailing commercial rate for a similar loan

2.3 Underwriting and Participation in IPO's

Supervision should seek to establish that an operator's underwriting procedures and arrangements are not detrimental to customers and that all underwriting which is carried out is in the best interest of the CIS.

Supervision of an operator may include determining whether it is appropriate for a CIS to participate in the sub-underwriting of an issue of a security, where such activity is permitted. Sub-underwriting of a security can give rise to a number of risks to a CIS, which include participating in a placement to support an issue which has been organized by a corporate finance company which is part of the same group, or retention of the best underwriting business for itself or another customer, to the detriment of a CIS. Other risks include non receipt of underwriting commission and undue exposure by an operator to a CIS's capital in the case of an unsuccessful issue. It is also possible that a CIS will be exposed to securities which are not consistent with its investment objectives or that underwriting may be used to boost the performance of a well known or a newly authorized fund to the detriment of another. A fund which has not participated in a placing may receive unwanted, unallocated stock which would also be to the detriment of a CIS.

2.4 Personal and House Account Dealing

Supervision should seek to ensure that a CIS operator has procedures in place to ensure that the operator's employees (as appropriate) do not make transactions on their own account, or for the account of the operator itself, that may conflict with the operator's obligations to the CIS.

Such procedures may include requiring a CIS operator and those of its employees with access to relevant information to report personal dealing activity and establishing periods during which employees cannot deal in certain securities which are to be purchased or sold by a CIS. The procedures may be contained in a code of ethics adopted by the operator governing personal dealing activity.