COBS 6. COBS 6. ADDITIONAL RULES — INVESTMENT BUSINESS
COBS 6.1 Application
The Rules in this chapter apply to an Authorised Person when conducting Investment Business. The requirements in this chapter apply to an Authorised Person regardless of the classification of the Client, unless expressly provided otherwise.
COBS 6.2 COBS 6.2 Personal Account Transactions
An Authorised Person must establish and maintain adequate policies and procedures so as to ensure that:(a) an Employee does not undertake a Personal Account Transaction unless:(i) the Authorised Person has, in a written notice, drawn to the attention of the Employee the conditions upon which the Employee may undertake Personal Account Transactions and that the contents of such a notice are made a term of his contract of employment or services;(ii) the Authorised Person has given its written permission to that Employee for that transaction or to transactions generally in Investments of that kind; and(iii) the transaction will not conflict with the Authorised Person's duties to its Clients;(b) it receives prompt notification or is otherwise aware of each Employee's Personal Account Transactions; and(c) if an Employee's Personal Account Transactions are conducted with the Authorised Person, each Employee's account must be clearly identified and distinguishable from other Clients' accounts.
The written notice in Rule 6.2.1(a)(i) must make it explicit that, if an Employee is prohibited from undertaking a Personal Account Transaction, he must not, except in the proper course of his employment:(a) procure another Person to enter into such a Transaction; or(b) communicate any information or opinion to another Person if he knows, or ought to know, that the Person will as a result, enter into such a Transaction or procure some other Person to do so.
Where an Authorised Person has taken reasonable steps to ensure that an Employee will not be involved to any material extent in, or have access to information about, the Authorised Person's Investment Business, then the Authorised Person need not comply with the requirements in Rule 6.2.1 in respect of that Employee.
An Authorised Person must establish and maintain procedures and controls so as to ensure that an Investment Analyst does not undertake a Personal Account Transaction in an Investment if the Investment Analyst is preparing Investment Research:(a) on that Investment or its Issuer; or(b) on a related investment, or its Issuer,
until the Investment Research is published or made available to the Authorised Person's Clients.
COBS 6.3 COBS 6.3 Record Keeping
COBS 6.3.1(a) An Authorised Person must maintain and keep a record of:(i) the written notice setting out the conditions for Personal Account Transactions under Rule 6.2.1(a)(i);(ii) each permission given or denied by the Authorised Person under Rule 6.2.1(a)(ii);(iii) each notification made to it under Rule 6.2.1(b); and(iv) the basis upon which the Authorised Person has ascertained that an Employee will not be involved in to any material extent, or have access to information about, the Authorised Person's Investment Business for the purposes of Rule 6.2.3.(b) The records in Rule 6.3.1(a) must be retained for a minimum of six years from the date of:(i) in Rule 6.3.1(a)(i) and Rule 6.3.1(a)(iv), termination of the employment contract of each Employee;(ii) in Rule 6.3.1(a)(ii), each permission given or denied by the Authorised Person; and(iii) in Rule 6.3.1(a)(iii), each notification made to the Authorised Person.
COBS 6.4 COBS 6.4 Investment Research and Offers of Securities
COBS 6.4.1 COBS 6.4.1 Application(a) This section applies to an Authorised Person preparing or publishing Investment Research.
Guidance1. Investment Research is seen as a significant potential source of conflicts of interest within an Authorised Person and therefore an Authorised Person preparing or publishing investment research is expected to have adequate procedures, systems and controls to manage effectively any conflicts that arise.2. An Authorised Person that prepares and publishes Investment Research must have adequate procedures and controls to ensure:(i) the effective supervision and management of Investment Analysts;(ii) that the actual or potential conflicts of interest are proactively managed in accordance with Rule 3.5;(iii) that the Investment Research issued to Clients is impartial; and3. An Authorised Person's procedures, controls and internal arrangements, which may include Information Barriers, should limit the extent of Investment Analysts' participation in Corporate Finance Business and sales and trading activities, and ensure remuneration structures do not affect their independence.
COBS 6.4.2 COBS 6.4.2 Disclosures in Investment Research(a) When an Authorised Person publishes Investment Research, it must take reasonable steps to ensure that the Investment Research:(i) clearly identifies the types of Clients for whom it is principally intended;(ii) distinguishes fact from opinion or estimates, and includes references to sources of data and any assumptions used;(iii) specifies the date when it was first published;(iv) specifies the period the ratings or recommendations are intended to cover;(v) contains a clear and unambiguous explanation of the rating or recommendation system used;(vi) includes a distribution of the different ratings or recommendations, in percentage terms:(A) for all Investments;(B) for Investments in each sector covered; and(C) for Investments, if any, where the Authorised Person has undertaken Corporate Finance Business with or for the Issuer over the past twelve months; and(vii) if intended for use only by a Professional Client or Market Counterparty, contains a clear warning that it should not be relied upon by or distributed to Retail Clients.(b) An Authorised Person must consider whether it would be appropriate to include a price chart or line graph depicting the performance of the Investment for the period that the Authorised Person has assigned a rating or recommendation for that investment, including any dates on which the ratings were revised.(c) For the purposes of this section, an Authorised Person must take reasonable steps to ensure that when it publishes Investment Research, and in the case where a representative of the Authorised Person makes a public appearance, disclosure is made of the following matters:(i) any financial interest or material interest that the Investment Analyst or a Close Relative of the analyst has, which relates to the Investment;(ii) the reporting lines for Investment Analysts and their remuneration arrangements where such matters give rise to any conflicts of interest which may reasonably be likely to impair the impartiality of the Investment Research;(iii) any shareholding by the Authorised Person or its Associate of 1% or more of the total issued share capital of the Issuer;(iv) if the Authorised Person or its Associate acts as corporate broker for the Issuer;(v) any material shareholding by the Issuer in the Authorised Person;(vi) any Corporate Finance Business undertaken by the Authorised Person with or for the Issuer over the past twelve months, and any future relevant Corporate Finance Business initiatives; and(vii) that the Authorised Person is a Market Maker in the Investment, if that is the case.
GuidanceThe requirements in this Rule 6.4.2 apply to an Authorised Person in addition to other requirements under FSMR and any rules made thereunder. For example, an Authorised Person is required to take reasonable steps to identify actual or potential conflicts of interest and then prevent or manage them under GEN 3.3.21-3.3.24. An Authorised Person must also have adequate procedures and controls when it prepares or publishes Investment Research.
COBS 6.4.3 Restrictions on Publication(a) If an Authorised Person acts as a manager or co-manager of an initial public offering or a secondary offering, it must take reasonable steps to ensure that:(i) it does not publish Investment Research relating to the Investment during a Quiet Period; and(ii) an Investment Analyst from the Authorised Person does not make a public appearance relating to that Investment during a Quiet Period.(b) The same conflicts of interest mentioned in this section do not arise if an Investment Analyst prepares Investment Research solely for an Authorised Person's own use and not for publication. For example, if the research material is prepared solely for the purposes of the Authorised Person's proprietary trading then the use of this information would fall outside the restrictions placed on publications.
COBS 6.4.4 COBS 6.4.4 Restriction on Own Account Transactions(a) An Authorised Person or its Associate must not knowingly execute an Own Account Transaction in an Investment or related Investments, which is the subject of Investment Research, prepared either by the Authorised Person or its Associate, until the Clients for whom the Investment Research was principally intended have had a reasonable opportunity to act upon it.(b) The restriction in Rule 6.4.4(a) does not apply if:(i) the Authorised Person or its Associate is a Market Maker in the relevant Investment;(ii) the Authorised Person or its Associate undertakes an Execution-Only Transaction for a Client; or(iii) it is not expected to materially affect the price of the Investment.
GuidanceThe exceptions in Rule 6.4.4(b) allow an Authorised Person to continue to provide key services to the market and to its Clients even if the Authorised Person would be considered to have knowledge of the timing and content of the Investment Research which is intended for publication to Clients, for example when it is impractical for an Authorised Person to put in place an information barrier because the Authorised Person has few Employees or cannot otherwise separate its functions.
COBS 6.4.5 Offers of Securities
When an Authorised Person carries out a mandate to manage an Offer of Securities, it must implement adequate internal arrangements, in accordance with Rule 3.5, to manage any conflicts of interest that may arise as a result of the Authorised Person's duty to two distinct sets of Clients namely the corporate finance Client and the investment Client. An Authorised Person's primary duty in relation to the pricing of any Offer of or for Securities in the context of Corporate Finance Business is to its corporate finance Client.
COBS 6.4.6 COBS 6.4.6 Disclosure(a) When an Authorised Person accepts a mandate to manage an Offer, it must take reasonable steps to disclose to its corporate finance Client:(i) the process the Authorised Person proposes to adopt in order to determine what recommendations it will make about allocations for the Offer;(ii) details of how the target investor group, to whom it is planned to Offer the Securities, will be identified;(iii) the process through which recommendations are prepared and by whom; and(iv) (if relevant) that it may recommend placing Securities with a Client of the Authorised Person for whom the Authorised Person provides other services, with the Authorised Person's own proprietary book, or with an Associate, and that this represents a potential conflict of interest.
GuidanceIt is the Regulator's expectation that an Authorised Person's procedures to identify and manage conflicts of interest should extend to the allocation process for an offering of Securities.
COBS 6.5 COBS 6.5 Best Execution
COBS 6.5.1 Application(a) The Rules in this section do not apply to an Authorised Person with respect to any Transaction which:(i) it undertakes with a Market Counterparty;(ii) it carries out for the purposes of managing a Fund of which it is the Fund Manager; or(iii) is an Execution-Only Transaction.(b) Where an Authorised Person undertakes an Execution-Only Transaction with or for a Client, the Authorised Person is not relieved from providing best execution in respect of any aspect of that Transaction which lies outside the Client's specific instructions.
COBS 6.5.2 Providing Best Execution(a) When an Authorised Person agrees, or decides in the exercise of its discretion, to Execute any Transaction with or for a Client in an Investment, it must provide best execution.(b) An Authorised Person provides best execution if it takes reasonable care to determine the best execution available for that Investment under the prevailing market conditions and deals at a price and other conditions which are no less advantageous to that Client.
COBS 6.5.3 Requirements
In determining whether an Authorised Person has taken reasonable care to provide the best overall price for a Client in accordance with Rule 6.5.2 the Regulator will have regard to whether an Authorised Person has:(a) discounted any fees and charges previously disclosed to the Client;(b) not taken a Mark-up or Mark-down from the price at which it Executed the Transaction, unless this is disclosed to the Client; and(c) had regard to price competition or the availability of a range of price sources for the execution of its Clients' Transactions. In the case where the Authorised Person has access to prices of different Recognised Investment Exchanges or MTFs or OTFs or its own available proprietary prices, it must Execute the Transaction at the best overall price available having considered other relevant factors.
If another Person is responsible for the execution of a Transaction, an Authorised Person may rely on that Person to provide best execution where that Person has undertaken to provide best execution in accordance with this section.
When determining best execution, an Authorised Person must consider the direct costs and indirect costs and the relevant order type and size, clearing and settlement arrangements and costs, margin costs, third-party fees and timing of a Client's order and its settlement that could affect decisions on when, where and how to trade.
COBS 6.6 COBS 6.6 Non-market Price Transactions
COBS 6.6.1 General Prohibition
Except in relation to:(a) a non-market price Transaction subject to the Rules of a Recognised Investment Exchange; or(b) Fund Investment Managers pursuing a strategy that involves the buying, selling or holding of securities that are not publicly listed or traded or readily saleable, an Authorised Person must not enter into a non-market price Transaction in any capacity, with or for a Client, unless it has taken reasonable steps to ensure that the Transaction is not being entered into by the Client for an improper purpose.
COBS 6.6.2 Definition(a) A non-market price Transaction is a Transaction where the dealing rate or price paid by the Authorised Person or its Client differs from the prevailing market rate or price (after taking into account all costs) to a material extent or the Authorised Person or its Client gives materially more or less in value than it receives in return.(b) Authorised Persons must undertake transactions at the prevailing market price. Failure to do this may result in an Authorised Person participating, whether deliberately or unknowingly, in the concealment of a profit or loss, or in the perpetration of a fraud.
COBS 6.7 COBS 6.7 Aggregation and Allocation
COBS 6.7.1 Application
The Rules in this section do not apply to an Authorised Person with respect to any Transaction which:(a) it undertakes with a Market Counterparty; or(b) it carries out for the purposes of managing a Fund of which it is the Fund Manager.
COBS 6.7.2 Aggregation of Orders
An Authorised Person may aggregate an order for a Client with an order for other Clients or with an order for its own account only where:(a) it is unlikely that the aggregation will operate to the disadvantage of any of the Clients whose Transactions have been aggregated;(b) the Authorised Person has disclosed in writing to the Client that his order may be aggregated and that the effect of the aggregation may operate on some occasions to his disadvantage;(c) the Authorised Person has made a record of the intended basis of allocation and the identity of each Client before the order is effected; and(d) the Authorised Person has in place written standards and policies on aggregation and allocation which are consistently applied and must include the policy that will be adopted when only part of the aggregated order has been filled.
COBS 6.7.3 Allocation of Investments
Where an Authorised Person has aggregated a Client order with an order for other Clients or with an order for its own account, and part or all of the aggregated order has been filled, it must:(a) promptly allocate the Investments concerned;(b) allocate the Investments in accordance with the stated intention;(c) ensure the allocation is done fairly and uniformly by not giving undue preference to itself or to any of those for whom it dealt; and(d) make and maintain a record of:(i) the date and time of the allocation;(ii) the relevant Investments;(iii) the identify of each Client concerned; and(iv) the amount allocated to each Client and to the Authorised Person recorded against the intended allocation as required in Rule 6.7.3(b).
COBS 6.8 COBS 6.8 Record Keeping
COBS 6.8.1 COBS 6.8.1 Record Keeping — Voice and Electronic Communications(a) Subject to Rule 6.8.1(b), an Authorised Person must take reasonable steps to ensure that it makes and retains recordings of voice and electronic communications that are:(i) with a Client or with another Person in relation to a Transaction, including communications relating to the receipt, execution, arrangement of execution of Client orders and passing of related instructions; and(ii) made with, sent from or received on equipment either provided by the Authorised Person to an employee or contractor or use of which by an employee or contractor has been sanctioned or permitted by the Authorised Person.(b) The obligation in Rule 6.8.1(a) does not apply to the following:(i) Corporate Finance Business;(ii) corporate treasury functions;(iii) communications between Fund Managers, or between Fund Managers and Eligible Custodians of the same Fund (when acting in that capacity); and(iv) voice and electronic communications which are not intended to lead to the conclusion of a specific Transaction and are general conversations or communications about market conditions.(c) To comply with Rule 6.8.1(b), an Authorised Person must:(i) be able to demonstrate prompt accessibility of all records;(ii) maintain records in comprehensible form or must be capable of being promptly so reproduced;(iii) make and implement appropriate procedures to prevent unauthorised alteration of its records; and(iv) retain all records of voice or electronic communication for a minimum of two years.(d) The effect of this Rule 6.8.1 is that an Authorised Person may conduct business over a mobile phone or other handheld electronic communication device but only if the Authorised Person is able to record such communications. Further, mere transmission of instructions by front office personnel to back office personnel within an Authorised Person would not ordinarily be subject to this Rule.
GuidanceThe effect of Rule 5.8.1(b)(iv) is to exclude from Rule 5.8.1(a) conversations or communications made by Investment Analysts, retail financial advisers, and persons carrying on back office functions.
COBS 6.8.2 Records of Orders and Transactions(a) When an Authorised Person receives a Client order or in the exercise of its discretion decides upon a Transaction, it must promptly make a record of the information set out in Rule 11.1.1.(b) When an Authorised Person Executes a Transaction, it must promptly make a record of the information set out in Rule 11.1.2.(c) When an Authorised Person passes a Client order to another Person for Execution, it must promptly make a record of the information set out in Rule 11.1.3.(d) An Authorised Person must retain the records required in Rules 6.8.2 for six years from the date on which the order is allocated.
COBS 6.9 COBS 6.9 Other Dealing Rules
COBS 6.9.1 Application
Rule 6.9 does not apply to an Authorised Person with respect to any Transaction which it:(a) undertakes with a Market Counterparty; or(b) carries out for the purposes of managing a Fund of which it is the Fund Manager.
COBS 6.9.2 Churning(a) An Authorised Person must not Execute a Transaction for a Client in its discretion or advise any Client to transact with a frequency or in amounts to the extent that those Transactions have no commercial purpose other than to obtain a benefit from transaction volumes.(b) The onus will be on the Authorised Person to ensure that such Transactions were fair and reasonable at the time they were entered into.
COBS 6.9.3 Timely Execution(a) Once an Authorised Person has agreed or decided to enter into a Transaction for a Client, it must do so as soon as reasonably practical.(b) An Authorised Person may postpone the execution of a Transaction if it has taken reasonable steps to ensure that it is in the best interests of the Client.
COBS 6.9.4 Fairly and in Due Turn
An Authorised Person must deal with Own Account Transactions and Client Transactions fairly and in due turn.
COBS 6.9.5 Averaging of Prices(a) An Authorised Person may execute a series of Transactions on behalf of a Client within the same trading day or within such other period as may be agreed in writing by the Client, to achieve one investment decision or objective, or to meet Transactions which it has aggregated.(b) If the Authorised Person does so, it may determine a uniform price for the Transactions executed during the period, calculated as the weighted average of the various prices of the Transactions in the series.
COBS 6.9.6 Timely Allocation(a) An Authorised Person must ensure that a Transaction it Executes is promptly allocated.(b) The allocation must be:(i) to the account of the Client on whose instructions the Transaction was executed;(ii) in respect of a discretionary Transaction, to the account of the Client or Clients with or for whom the Authorised Person has made and recorded, prior to the Transaction, a decision in principle to execute that Transaction; or(iii) in all other cases, to the account of the Authorised Person.
COBS 6.9.7 Direct Electronic Access
Where an Authorised Person provides a Client (including a Market Counterparty) with direct electronic access to a Recognised Body or MTF, the Authorised Person must:(a) establish and maintain policies, procedures, systems and controls to limit or prevent a Client from placing an order that would result in the Authorised Person exceeding its existing position limits or credit limits; and(b) ensure that such policies, procedures, systems and controls remain appropriate and effective on an on-going basis.
An Authorised Person must undertake on-going monitoring of its systems and controls to ensure that they are operating effectively and as intended and remain appropriate.
COBS 6.10 COBS 6.10 Confirmation Notes
COBS 6.10.1 Application
The Rules in this section do not apply to an Authorised Person with respect to any Transaction which it:(a) undertakes with a Market Counterparty; or(b) carries out for the purposes of managing a Fund of which it is the Fund Manager.
COBS 6.10.2 Sending Confirmation Notes(a) When an Authorised Person Executes a Transaction in an Investment for a Client or with a counterparty, it must ensure a confirmation note is sent to the Client or counterparty as soon as possible and in any case no later than two business days following the date of Execution of the Transaction.(b) Where an Authorised Person has executed a Transaction or series of Transactions in accordance with Rule 6.9.5, the Authorised Person must send a confirmation note relating to those Transactions as soon as possible, but no later than two business days following the last Transaction.(c) The confirmation note must include the details of the Transaction in accordance with Rule 13.1.
COBS 6.10.3 Record Keeping
An Authorised Person must retain a copy of each confirmation note sent to a Client or counterparty and retain it for a minimum of six years from the date of despatch.
COBS 6.11 COBS 6.11 Periodic Statements
COBS 6.11.1 Application
The Rules in this section do not apply to an Authorised Person with respect to any Transaction which it:(a) undertakes with a Market Counterparty; or(b) carries out for the purposes of managing a Collective Investment Fund of which it is the Fund Manager.
COBS 6.11.2 Investment Management and Contingent Liability Investments(a) When an Authorised Person:(i) acts as an Investment Manager for a Client; or(ii) operates a Client's account containing uncovered open positions in a Contingent Liability Investment;it must promptly and at suitable intervals in accordance with Rule 6.11.2(b) provide the Client with a written statement ("a periodic statement") containing the matters referred to in Rule 13.1.(b) For the purposes of Rule 6.11.2, a "suitable interval" is:(i) six-monthly;(ii) monthly, if the Client's portfolio includes an uncovered open position in Contingent Liability Investments; or(iii) at any alternative interval that a Client has on his own initiative agreed with the Authorised Person but in any case at least annually.
COBS 6.11.3 Record Keeping
An Authorised Person must make a copy of any periodic statement provided to a Client and retain it for a minimum of six years from the date on which it was provided.