Dealing and managing

Part

COB Conduct of Business

Chapter

Dealing and managing

Printed on: 13/11/2024

Rulebook at: 01/07/2005

COB 7

Dealing
and managing

COB 7.1

Conflict of interest and material interest

01/12/2004

Application

COB 7.1.1

(1) This section applies to a firm when it is conducting designated investment business with or for a customer.
(2) COB 7.1.4 E (1) do not apply in relation to investment research (see COB 7.3 (Dealing ahead of investment research)).

01/12/2004

Purpose

COB 7.1.2

Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interest fairly. This section aims to ensure that when a firm has, or may have, a conflict of interest between itself and its customer, or between one customer and another customer, the firm pays due regard to the interests of each customer and manages the conflict of interest fairly.

01/12/2004

Fair treatment

COB 7.1.3

If a firm has or may have:

(1) a material interest in a transaction to be entered into with or for a customer; or
(2) a relationship that gives or may give rise to a conflict of interest in relation to a transaction in (1); or
(3) an interest in a transaction that is, or may be, in conflict with the interest of any of the firm's customers; or
(4) customers with conflicting interests in relation to a transaction;

the firm must not knowingly advise, or deal in the exercise of discretion, in relation to that transaction unless it takes reasonable steps to ensure fair treatment for the customer (see COB 2.4.7 G (Attribution of knowledge)).

01/12/2004

COB 7.1.4

(1) For the purposes of COB 7.1.3 R, a firm should manage a conflict of interest by taking reasonable steps in one or more of the following ways:

(a) disclosing an interest to a customer; or
(b) relying on a policy of independence; or
(c) establishing internal arrangements (Chinese walls); or
(d) declining to act for a customer.

(2) Contravention of (1) may be relied on as tending to establish contravention of COB 7.1.3 R.
(3) Compliance of (1) may be relied on as tending to establish compliance with COB 7.1.3 R.

01/12/2004

Disclosing an interest to a customer

COB 7.1.5

The following are examples of material interest or conflicts of interest that a firm should disclose under COB 7.1.4 E (1):

(1) dealing in investments as principal (unless the firm is acting as a market maker);
(2) dealing in investments as agent for more than one party;
(3) a recommendation to buy or sell a designated investment in which one of the firm's customers has given instructions to buy or sell;
(4) a recommendation to buy or sell a designated investment in which the firm has respectively a long or short position;
(5) acting as a broker fund adviser.

01/12/2004

COB 7.1.6

(1) In disclosing an interest to a customer, a firm should:

(a) disclose to the customer, either orally or in writing, any material interest or conflict of interest it has, or may have, whether generally or in relation to a specific transaction, before it advises the customer about the transaction or before it deals on behalf of the customer in the exercise of discretion in relation to the transaction; and
(b) be able to demonstrate that it has taken reasonable steps to ensure that the customer does not object to that material interest or conflict of interest.

(2) Contravention of (1) may be relied on as tending to establish contravention of COB 7.1.3 R.
(3) Compliance of (1) may be relied on as tending to establish compliance with COB 7.1.3 R.

01/12/2004

Relying on a policy of independence

COB 7.1.7

COB 7.1.4 E (1)(b) recognises that a firm may demonstrate that it has taken reasonable steps to ensure fair treatment for its customers by relying on a policy of independence. If a firm relies on a policy of independence, that policy should:

(1) require the relevant employee to disregard any material interest or conflict of interest when advising a customer or dealing for a customer in the exercise of discretion;
(2) be recorded in writing by the firm and made known to the relevant employee;
(3) be disclosed to a private customer stating that the firm may have a material interest or conflict of interest relating to the transaction or service concerned.

01/12/2004

Establishing internal arrangements

COB 7.1.8

A firm may manage a conflict of interest by establishing and maintaining the arrangements set out in COB 2.4 (Chinese walls).

01/12/2001

Declining to act for a customer

COB 7.1.9

If a firm determines that it is unable to manage a conflict of interest using one of the methods described above, it should decline to act on behalf of the customer.

01/12/2001

Broker fund advisers

COB 7.1.10

In addition to COB 7.1.3 R, a broker fund adviser, acting for a private customer, must obtain an acknowledgement from the private customer stating that he understands the nature of the firm's dual role as adviser to the private customer and adviser to the long-term insurer, overseas long-term insurer or operator of the broker fund in question.

01/12/2004

COB 7.1.11

COB 7.1.10 R is particularly relevant when any remuneration receivable by the firm or its associate, for acting in that dual capacity, would be greater than it would otherwise be when the firm is recommending to the customer a life policy or units in a regulated collective investment scheme.

01/12/2004

COB 7.1.12

(1) A broker fund adviser must ensure that it does not effect, personally recommend or arrange (bring about) the issue to a customer of a life policy by a relevant insurance undertaking, under which contributions will be made to the adviser's broker fund, unless the relevant insurance undertaking is contractually responsible to that customer in writing for the acts and omissions of the broker fund adviser or its associate in its role as an adviser to that fund as if they were the acts or omissions of the relevant insurance undertaking and will remain responsible until the earlier of:

(a) the broker fund adviser or its associate ceasing to be the adviser to the fund; and
(b) the termination of the policy.

(2) In (1), a relevant insurance undertaking is an insurance undertaking which does not have permission to effect or carry on long-term insurance business but which is authorised to carry on long-term insurance business in the Bailiwick of Guernsey, the Isle of Man, the Commonwealth of Pennsylvania, the State of Iowa or the Bailiwick of Jersey.
(3) In (1), associate has the extended meaning given to it in the definition of broker fund adviser.
(4) A firm must comply with the requirements in (1) where it effects, personally recommends or arranges (brings about) switching in relation to a broker fund for the customer.

01/12/2004

Product providers with broker funds

COB 7.1.13

A product provider with a broker fund must not enter into a transaction with a customer in respect of a broker fund, unless there is a written agreement in force between it, the broker fund adviser and any other person having responsibility for the management of the broker fund to which the agreement relates, clearly establishing the responsibilities of each party to the agreement, the investment objectives of the broker fund and the policies and strategies that are to be followed to achieve those objectives.

01/03/2003

UCITS management company

COB 7.1.14

In addition to COB 7.1.3 R, a UCITS management company which also manages investments (other than of collective investment schemes) must obtain prior general approval from the client before it invests all or part of the client's portfolio in the units of a UCITS it manages.

13/02/2004

COB 7.2

Churning and switching

01/12/2004

Application

COB 7.2.1

This section applies to a firm that conducts designated investment business with or for a customer.

01/12/2001

Purpose

COB 7.2.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. A firm should therefore not "churn" a customer's account, that is, enter into transactions with unnecessary frequency having regard to the customer's agreed investment strategy. A firm should also not switch a private customer within or between packaged products unnecessarily, having regard to what is suitable for that customer. Firms are reminded that a customer's interests are paramount.

01/12/2001

Restrictions on dealing and switching

COB 7.2.3

A firm must not:

(1) deal, or arrange a deal, in the exercise of discretion for any customer; or
(2) make a personal recommendation to a private customer to deal, or arrange a deal that gives effect to such a recommendation; or
(3) make or arrange a switch within a packaged product or between packaged products, in the exercise of discretion for a private customer; or
(4) make a personal recommendation to a private customer to switch within a packaged product or between packaged products, or make or arrange a switch that gives effect to such a recommendation;

unless the firm has taken reasonable steps to ensure that the deal or switch is in the customer's best interests, both when viewed in isolation and when viewed in the context of earlier transactions.

01/12/2001

COB 7.3

Dealing ahead of investment research

01/12/2004

Application

COB 7.3.1

This section applies to a firm if it, or any of its associates, prepares investment research for publication or distribution to its clients, or intends to publish or distribute investment research to its clients.

01/05/2004

Purpose

COB 7.3.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interests fairly, both between itself and its customers and between a customer and another client. In conjunction with Principle 1 (Integrity), Principle 2 (Due skill, care and diligence) and Principle 5 (High standards of market conduct), they require a firm to manage conflicts of interest which may arise in a way which ensures that all its clients are treated fairly and which ensures that the firm is conducting its business with integrity and according to proper standards of business. This section aims to ensure that a firm pays due regard to the interests of its clients by not undertaking an own account transaction when the firm or its associate publishes investment research, except in very limited circumstances.

01/05/2004

COB 7.3.2A

The FSA regards circumstances in which a firm deals in designated investments that are the subject of investment research which it publishes to clients as a significant potential source of conflicts of interest. The conflicts involved are such that the FSA does not consider that they can be managed adequately by disclosure of their existence.

01/05/2004

COB 7.3.2B

The FSA considers that these conflicts of interest do not arise if equity analysts or others prepare research papers or analyses relating to designated investments solely for a firm's own internal use, for example, in order to inform its decisions about managing its proprietary trading or its strategic direction. The FSA considers that it is inappropriate for an analyst to prepare research papers or analyses which are intended, first for internal use by the firm, and then for later publication to clients.

01/05/2004

Requirement not to undertake own account transactions

COB 7.3.3

If a firm or its associate intends to publish or distribute investment research to clients or prepares investment research for publication or distribution to its clients, unless COB 7.3.4 R applies, the firm must:

(1) not knowingly undertake an own account transaction in the designated investment concerned or any related designated investment; and
(2) (when the intention to publish is that of, or is known to, the firm) take all reasonable steps to ensure that its associates do not knowingly undertake any own account transaction in that designated investment, or any related designated investment;

until the clients for whom the publication was principally intended have had (or are likely to have had) a reasonable opportunity to act upon it.

01/05/2004

COB 7.3.3A

Firms are reminded of the Chinese wall provisions in COB 2.4.6 R (Attribution of knowledge)).

01/09/2002

Exceptions

COB 7.3.4

COB 7.3.3 R does not apply if:

(1) [deleted]
(2) the firm or its associate is a market maker in the designated investment concerned or in a related designated investment and it undertakes the transaction in good faith and in the normal course of market making; or
(3) the firm or its associate deals in order to fulfil an unsolicited customer order.
(4) [deleted]
(5) [deleted]

01/05/2004

COB 7.3.5

The exceptions in COB 7.3.4 R (2) allow a firm to continue to provide key services to the market and to its customers even if the firm would be considered to have knowledge of the timing and content of the investment research which is intended for publication to clients when, for example, it is impracticable for the firm to put in place a Chinese wall because the firm has few employees or cannot otherwise separate its functions.

01/05/2004

COB 7.4

Customer order priority

01/12/2004

Application

COB 7.4.1

This section applies to a firm when executing customer orders in designated investments.

01/12/2001

Purpose

COB 7.4.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and to treat them fairly. Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interest fairly. This section is therefore designed to ensure that a firm acts fairly in executing both own account orders and customer orders and manages any conflict of interest accordingly.

01/12/2001

Dealing fairly and in due turn

COB 7.4.3

A firm must execute customer orders and own account orders in designated investments fairly and in due turn.

01/12/2001

COB 7.4.4

COB 7.4.3 R does not preclude a firm from, for example:

(1) executing:

(a) a prior own account order ahead of a subsequent current customer order in the same designated investment or a related designated investment; or
(b) a current customer order when the person dealing for the customer neither knew nor ought reasonably to have known of an earlier unexecuted current customer order;

(2) postponing execution of a current customer order when the firm has taken reasonable steps to ensure that execution of another customer order ahead of that customer order is likely to improve the terms on which the current customer order is executed (in which case the firm should ensure that the customer whose customer order is being executed ahead of that other customer order is also being treated fairly);
(3) treating the life fund as if it were a customer to the extent that the firm is an insurance company dealing for the account of its life fund;
(4) treating the investment trust or scheme as if it were a customer to the extent that the firm is dealing for the account of an investment trust or a collective investment scheme that is a body corporate, which in either case is in the same group as the firm;
(5) treating an employee (or close relative) of the firm or of its associate, or a trustee acting on his behalf, as if he were a customer; or
(6) treating the firm's occupational pension scheme as a customer to the extent that the firm is dealing for the account of its occupational pension scheme.

01/12/2001

COB 7.4.5

MAR 1.4.26 C (Trading information) clarifies that behaviour based solely on information about another person's intention to deal will not constitute market abuse. Firms are reminded, however, that it may constitute a breach of COB 7.4.3 R.

01/12/2001

COB 7.5

Best execution

01/12/2004

Application

COB 7.5.1

This section applies to a firm when executing a customer order in a designated investment.

01/12/2001

Purpose

COB 7.5.2

Principle 2 (Skill, care and diligence) and Principle 6 (Customers' interests) require a firm to act with due skill, care and diligence and to pay due regard to its customer's interests. This section sets standards for firms when executing current customer orders in designated investments, particularly in the securities and derivatives markets, to obtain for customers the best price available to the firm, given the kind and size of such transactions.

01/12/2001

When best execution is owed

COB 7.5.3

A firm that executes a customer order in a designated investment must provide best execution, unless COB 7.5.4 R applies.

01/12/2001

Exceptions

COB 7.5.4

COB 7.5.3 R does not apply in any of the following circumstances:

(1) the customer order is for:

(a) the purchase of a life policy; or
(b) the purchase of or sale of units in a regulated collective investment scheme from or to the operator of that scheme;

(2) the firm has agreed with an intermediate customer that it need not owe a duty of best execution to him, unless that customer is:

(a) the trustee of an occupational pension scheme or an OPS collective investment scheme; or
(b) the trustee of any other trust for whom, and to the extent that, the firm acts as a permitted third party under COB 11.6 (Delegation to a permitted third party); or

(3) the firm relies on another person to whom it passes a customer order for execution to provide best execution, but only if it has taken reasonable care to ensure that he will do so.

15/11/2001

Providing best execution

COB 7.5.5

To provide best execution, a firm must:

(1) take reasonable care to ascertain the price which is the best available for the customer order in the relevant market at the time for transactions of the kind and size concerned; and
(2) execute the customer order at a price which is no less advantageous to the customer, unless the firm has taken reasonable steps to ensure that it would be in the customer's best interests not to do so.

01/12/2001

COB 7.5.6

(1) In order to take reasonable care under COB 7.5.5 R (1) , a firm:

(a) should disregard any charges and commission made by it or its agents that are disclosed to the customer under COB 5.7 (Disclosure of charges, remuneration and commission);
(b) need not have access to competing exchanges, or to all, or a minimum number of, available price sources; but if a firm can access prices displayed by different exchanges and trading platforms and make a direct and immediate comparison, it should execute the customer order at the best price available to the firm on such exchanges or trading platforms, if this is in the best interests of the customer;
(c) should pass on to the customer the price at which it executes the transaction to meet the customer order;
(d) should not take a mark-up or mark-down from the price at which it executes the customer order; and
(e) that is engaged in programme trading should ensure that it applies the duty of care in COB 7.5.5 R to each individual transaction.

(2) In relation to a customer order for euro priced securities traded on the London Stock Exchange, if the firm has decided to execute in sterling, the firm should take reasonable care to ascertain the best price available in sterling and to deal at a price no less advantageous to the customer.
(3) In relation to a customer order for shares that are traded on SETS, a firm's obligations under COB 7.5.5 R will be satisfied if, subject to COB 7.5.6 E (1)(b), a firm executes the customer order through SETS.
(4) If, in relation to a customer order for securities that are traded on SETS, a firm does not execute the customer order through SETS, the firm should ensure that:

(a) when a customer order is for normal settlement and is within the size currently displayed on SETS, the price obtained at least matches the best bid or offer price available on SETS;
(b) when a customer order is larger than the total of limit orders displayed on the best bid or offer on SETS, but there is sufficient depth overall, the price obtained at least matches the weighted average price of all orders for that security displayed on SETS;
(c) when a customer order is larger than the totality of orders currently displayed on the best bid or offer on SETS, and execution at the weighted average price would be impracticable, it uses due skill and care to ascertain the best available price, having regard to the price of recently executed transactions of a similar size, any prices or quotes available to it, and to prevailing market conditions;
(d) when there are no current bid or offer prices displayed on SETS, it refers to the previous best bid or offer prices, and to the latest published trades in the relevant security, and uses due skill and care to determine the best price in the light of the information available; and
(e) when a customer order is subject to a special condition (for example, non-standard settlement), the price should at least match the price available on SETS, and that any charge and commission in respect of the non-standard element is separately and appropriately disclosed to the customer.

(5) Compliance with (1), (2) and (3) may be relied on as tending to establish compliance with COB 7.5.5 R (1).
(6) Contravention of (1) or (2) may be relied on as tending to establish contravention of COB 7.5.5 R (1).
(7) Compliance with (3) or (4) may be relied upon as tending to establish compliance with COB 7.5.5 R (2).
(8) Contravention of (4) may be relied upon as tending to establish contravention of COB 7.5.5 R (2).

01/12/2001

COB 7.5.7

Disclosure of charges and commission in relation to non-standard settlement under COB 7.5.6 E (4)(e) may be made on a contract or confirmation note, or in a separate written statement to the customer before the transaction is executed. If the issue of a written statement in advance of the transaction is impracticable, the firm may make an oral disclosure to the customer provided it discloses the charges and commission promptly in writing after the transaction is executed.

01/12/2001

COB 7.5.8

An example of a circumstance in which a firm may, under COB 7.5.5 R, execute a customer order at a price which is less advantageous than the best available price is when a firm has a continuing relationship with a customer, and reasonably expects that it will be able to secure compensating advantages for the customer in other transactions that should provide best execution for the customer over a period or a series of transactions. In such cases, the decision would need to be taken and justified in respect of each separate transaction as it arose.

01/12/2001

COB 7.5.9

The evidential provision relating to mark-ups and mark-downs in COB 7.5.6 E (1)(d) does not prevent firms from being remunerated by means of mark-ups or mark-downs provided that such remuneration is disclosed to the customer as required by COB 8.1.15 E (Content of a confirmation of transaction: general requirements).

01/09/2002

COB 7.5.10

Where a customer order is subject to a special condition as envisaged in COB 7.5.6 E (4)(e), the firm should disclose any additional cost involved in satisfying the special condition or in respect of the non-standard element. If, however, it is not possible for the charge to be "unbundled" from the price itself, firms are permitted to deal on a bundled basis subject to the overriding obligation to provide best execution.

01/09/2002

COB 7.6

Timely execution

01/12/2004

Application

COB 7.6.1

This section applies to a firm when it agrees or decides in the exercise of its discretion to execute a current customer order in a designated investment.

01/12/2001

Purpose

COB 7.6.2

In accordance with Principle 2 (Skill, care and diligence) and Principle 6 (Customers' interests), this section requires a firm when it agrees or decides in its discretion to execute a current customer order to do so with due skill, care and diligence and to act in the best interests of customers in selecting the most opportune time to execute the current customer order.

01/12/2001

COB 7.6.3

This section applies only to current customer orders, as opposed to customer orders. A customer order that can be executed immediately is a current customer order. A customer order that is to be executed on fulfilment of a condition, only becomes a current customer order once that condition is satisfied.

01/12/2001

Achieving timely execution

COB 7.6.4

Once a firm has agreed or decided in its discretion to execute a current customer order in a designated investment, it must do so as soon as reasonably practicable unless COB 7.6.5 R applies.

01/12/2001

COB 7.6.5

COB 7.6.4 R does not apply if a firm has taken reasonable steps to ensure that postponing the execution of a current customer order in a designated investment is in the best interests of the customer.

01/12/2001

COB 7.6.6

Examples of situations in which a firm should take particular care to assess the timing of execution of all or part of a current customer order include when:

(1) a firm receives a customer order outside the normal trading hours of the relevant market or trading platform and intends executing that customer order on that market or other trading platform;
(2) a foreseeable improvement in the level of liquidity in the relevant designated investment is likely to enhance the terms on which the firm executes the customer order;
(3) executing the customer order as a series of partial executions over a period of time is likely to improve the terms on which the customer order as a whole is executed.

01/12/2001

COB 7.6.7

A firm may have reasonable grounds for postponing execution of a current customer order in the best interests of the customer. Examples of this may include when the deal is part of an aggregated transaction (see COB 7.7 (Aggregation and allocation)) for:

(1) one or more customers; or
(2) for the firm and one or more customers (including all those who would otherwise have priority over any other person for whom the deal is done);

and the firm has taken reasonable steps to ensure that the deal will not operate to the disadvantage of any of the customers concerned.

01/12/2001

COB 7.6.8

COB 7.12 (Customer order and execution records) contains the requirements for recording customer order and execution details.

01/12/2001

COB 7.7

Aggregation and allocation

01/12/2004

Application

COB 7.7.1

This section applies to a firm when it aggregates a customer order with an own account order, or with an order from a market counterparty, or with another customer order, while conducting designated investment business.

01/12/2001

Purpose

COB 7.7.2

Principle 1 (Integrity) requires a firm to conduct its business with integrity while Principle 6 (Customers' interests) requires that customers are treated fairly. When a firm aggregates and subsequently executes an order for customer, market counterparty and own account transactions collectively, or any combination of them, it should allocate the designated investments concerned fairly to all clients.

01/12/2001

Requirement for recorded standards and procedures

COB 7.7.3

When a firm aggregates a customer order with an own account order, or with an order from a market counterparty, or with another customer order, and subsequently allocates the designated investments concerned, it must do so in accordance with a written policy on allocation that is consistently applied and that fulfils the requirements of this section.

01/12/2001

Aggregation

COB 7.7.4

A firm may not aggregate a customer order with an own account order, or with an order from a market counterparty, or with another customer order, unless:

(1) it is likely that the aggregation will not work to the disadvantage of each of the customers concerned; and
(2) it has disclosed either orally or in writing to each customer concerned, either specifically or in the terms of business, that the effect of aggregation may work on some occasions to its disadvantage.

01/12/2001

Requirement for timely allocation

COB 7.7.5

When a firm has aggregated a customer order with an own account order, or with an order from a market counterparty, or with another customer order, and part or all of the aggregated order has been filled, it must promptly allocate the designated investments concerned.

01/12/2001

COB 7.7.6

(1) To allocate promptly, a firm that has aggregated an order under COB 7.7.4 R should complete the allocation of the designated investments concerned within one business day of the transaction, subject to (2), (3), (4) and (5).
(2) The period in (1) is within five business days if:

(a) only intermediate customers are concerned; and
(b) each of them has agreed to such an extension.

(3) The period in (1) is within three business days if:

(a) the aggregated order relates to one or more ISAs or PEPs; and
(b) the firm can show that it is necessary to execute those transactions in that way in order to serve its customer's best interests.

(4) All transactions in a series of transactions, all of which are executed within the one business day, may be treated as having been executed at the time of the last transaction, so long as a record of the time that each individual transaction was executed is made, such as by means of a time stamp.
(5) If transactions in a series of transactions occur over more than one business day, then the requirement for timely allocation in COB 7.7.5 R (and (1), (2) or (3) as appropriate) will apply separately in relation to each business day in which any such transaction is executed.
(6) Compliance with (1) may be relied on as tending to establish compliance with COB 7.7.5 R.
(7) Contravention of (1) may be relied on as tending to establish contravention of COB 7.7.5 R.

01/12/2001

COB 7.7.7

COB 8.1.3 R (Requirement to confirm transactions) and COB 8.1.5 E (Essential details and prompt despatch) allow for a single confirmation to be sent to each intermediate customer for a series of transactions over a period up to and including five business days.

01/12/2001

COB 7.7.8

If, for any reason, a firm is not able to allocate the designated investments concerned promptly, the reason for the delay should be fully documented and recorded by the firm.

01/12/2001

Requirement for fair allocation

COB 7.7.9

When a firm executes an aggregated order that combines:

(1) a customer order and an own account order; or
(2) a customer order and an order from a market counterparty (other than an associate of the firm); or
(3) a customer order and another customer order;

in the subsequent allocation it must:

(4) not give unfair preference to the firm or to any of those for whom it dealt; and
(5) where (1) applies, give priority to satisfying customer orders, if the aggregate total of all orders cannot be satisfied, unless it can demonstrate on reasonable grounds that without its own participation it would not have been able to execute those orders on such favourable terms, or at all.

01/12/2001

COB 7.7.10

A firm may treat the following as a customer order:

(1) a transaction on the account of the life fund of an insurance company, when the insurance company is in the same group as the firm (or is the firm);
(2) a transaction for the account of an investment trust or a collective investment scheme that is a body corporate in the same group as the firm;
(3) a transaction for the account of an employee (or a close relative) of the firm or of its associate, or a trustee acting on his behalf, but only when the transaction is undertaken on a pre-established and recorded basis;
(4) a transaction for the firm's occupational pension scheme.

01/12/2001

Re-allocation

COB 7.7.11

A firm may undertake a revised allocation of an aggregated order if:

(1) an error is identified in either the intended basis of allocation or the actual allocation, provided that the firm makes a record of the reason for the re-allocation and completes it within one business day of the error being identified; or
(2) the order is only partially executed resulting in an uneconomic allocation to some customers; in such a case the firm must take reasonable steps to ensure that a re-allocation is in the best interests of the customers for whom it has dealt; and
(3) the revised allocation is carried out in accordance with COB 7.7.12 R.

01/12/2001

Price of allocation

COB 7.7.12

When a firm has executed an aggregated order or is undertaking a revised allocation as described in COB 7.7.11 R, then it must allocate that order either at:

(1) the price paid for each designated investment concerned (net of all relevant fees and commissions); or
(2) a volume-weighted average of the prices of a series of transactions.

01/12/2001

COB 7.7.13

The method of calculating the volume-weighted average price of two transactions in the same shares is illustrated as follows: Transaction 1 - 100 shares at 1.00 each Transaction 2 - 400 shares at 2.00 each Volume-weighted average price = [(100x1.00) + (400x2.00)] / 500 = 1.80

01/12/2001

Record keeping requirements

COB 7.7.14

(1) A firm must, on executing an aggregated transaction that includes one or more customer orders, make a record of:

(a) the identity of each client concerned;
(b) whether the transaction is to be transacted in whole or in part for a discretionary managed investment portfolio and, if in part, the relevant proportions.

(2) If a firm aggregates a number of client orders that include one or more customer orders, the firm must make a record of the intended basis of allocation as soon as is practicable.
(3) If a firm aggregates an order for one or more customers and itself, the firm must make a record of the intended basis of allocation before the transaction is executed.

01/12/2001

COB 7.7.15

A firm may choose to show the relevant proportions as the number of shares (or units) for each client together with the aggregate number of shares (or units).

01/12/2001

COB 7.7.16

When allocating an aggregated transaction that includes the execution of one or more customer orders, a firm must make a record of:

(1) the date and time of the allocation;
(2) the relevant designated investment;
(3) the identity of each customer and market counterparty concerned;
(4) the amount allocated to each respective customer, market counterparty and to the firm; and
(5) the agreement with each intermediate customer to extend the allocation period under COB 7.7.6 E (2)(b).

01/12/2001

COB 7.7.17

A firm must make a record of the basis of and reason for any re-allocation made in accordance with COB 7.7.11 R at the time of the re-allocation.

01/12/2001

COB 7.7.18

A firm must retain the records required by COB 7.7 for a period of at least three years from the date on which the order is allocated or re-allocated.

01/12/2001

COB 7.8

Realisation of a private customer's assets

01/12/2004

Application

COB 7.8.1

This section applies to a firm when it:

(1) seeks a right; or
(2) seeks to exercise a right;

to realise a private customer's assets in order to discharge an obligation of that private customer which arises from designated investment business conducted by the firm.

01/12/2001

Purpose

COB 7.8.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section therefore aims to ensure that a firm, where relevant, discloses to a private customer, in the terms of business, that it may exercise remedies involving the realisation of assets.

01/12/2001

Contractual rights to realise a private customer's assets

COB 7.8.3

A firm must not realise a private customer's assets unless it is legally entitled to do so, and it has either:

(1) set out in the terms of business provided to the private customer in accordance with COB 4.2.5 R (Requirement to provide terms of business to a customer) (or a client agreement entered into in accordance with COB 4.2.7 R (Requirement to enter into a client agreement with a private customer)):

(a) the action it may take to realise any assets of the private customer;
(b) the circumstances in which it may do so; and
(c) each asset (if relevant) or type or class of asset over which it may exercise the right; or

(2) given the private customer notice (oral or written) of its intention to exercise its rights at least three business days before it does so.

01/12/2001

COB 7.9

Lending to private customers

01/12/2004

Application

COB 7.9.1

This section applies to a firm when it lends money or grants credit to a private customer or arranges for any other person to do so, in the course of, or in connection with, its designated investment business.

01/12/2001

Purpose

COB 7.9.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section seeks to ensure that a firm lends money or grants credit to a private customer only in appropriate circumstances, and only if the customer has given prior consent in full knowledge of any resulting interest and fees.

01/12/2001

Restrictions on lending to private customers

COB 7.9.3

A firm, subject to the exceptions in COB 7.9.5 R, must not lend money or grant credit to a private customer (or arrange for any other person to do so) in the course of, or in connection with, its designated investment business unless:

(1) the firm has made and recorded an assessment of the private customer's financial standing, based on information disclosed by the private customer;
(2) the firm has taken reasonable steps to ensure that the arrangements for the loan or credit and the amount concerned are suitable, based on the information disclosed by the private customer, for the type of investment agreement proposed or which the private customer is likely to enter into; and
(3) the private customer has given his prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees to be levied in connection with the loan or credit.

01/12/2001

COB 7.9.4

When the provisions of the Consumer Credit Act 1974 apply, the firm should ensure that it has an appropriate licence under that Act and that it complies with all that Act's requirements (details are available from the Office of Fair Trading).

01/12/2001

Exceptions

COB 7.9.5

COB 7.9.3 R does not apply when:

(1) a firm settles a securities transaction of the private customer because he has failed to pay or has paid late; or
(2) a firm covers a margin call made on a private customer for a period of no longer than five business days; or
(3) a long-term insurer lends money or grants credit to a private customer, or arranges for any other person to do so, in connection with a life policy.

20/09/2001

COB 7.9.6

A firm should consider whether the circumstances mentioned in COB 7.9.5 R give rise to any obligations under the client money rules to maintain adequate client money resources.

01/12/2001

Record keeping requirements

COB 7.9.7

A firm must make a record of the information about the private customer's financial standing upon which the assessment required by COB 7.9.3 R (1) was made, including the date on which the information was last updated or checked, and retain the record for three years from the date on which the credit arrangements ceased.

01/12/2001

COB 7.10

Margin requirements

01/12/2004

Application

COB 7.10.1

This section applies to a firm which executes a transaction in a contingent liability investment with or for a private customer, in the course of, or in connection with, its designated investment business.

01/12/2001

Purpose

COB 7.10.2

Principle 3 (Management and control) requires a firm to have adequate risk management systems, while Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section aims to ensure that a firm does not expose itself to unacceptable levels of credit risk while managing its margin requirements. It also aims to ensure that a firm manages a private customer's exposure to contingent liabilities by diligently monitoring the firm's relevant provision of credit.

01/12/2001

Provision of margin by a private customer

COB 7.10.3

(1) A firm must obtain from a private customer any margin payable, whether at the outset or subsequently, by or to the firm, for a transaction in a contingent liability investment.
(2) The minimum margin to be obtained from a private customer in accordance with (1) for an on-exchange transaction in a contingent liability investment is an amount or value equal to the margin requirements of the relevant exchange or clearing house.

01/12/2001

COB 7.10.4

Before conducting a transaction with or for a private customer, a firm should notify the customer of:

(1) the circumstances in which the customer may be required to provide any margin;
(2) the form in which the margin may be provided;
(3) the steps the firm may be required or entitled to take if the customer fails to provide the required margin, in accordance with COB 7.10.5 R, including:

(a) the fact that the customer's failure to provide margin may lead to the firm closing out his position after a time limit specified by the firm;
(b) the circumstances in which the firm will have the right or duty to close out the customer's position; and

(4) the circumstances, other than failure to provide the required margin, that may lead to the firm closing out the customer's position without prior reference to him.

01/12/2001

Failure to meet a margin call

COB 7.10.5

A firm must close out a private customer's open position if that customer fails to meet a margin call made for that position for five business days following the date on which the obligation to meet the call accrues, unless:

(a) the firm has received confirmation from a relevant third party that the private customer has given instructions to pay in full; and
(b) the firm has taken reasonable care to establish that the delay in its receipt is owing to circumstances beyond the private customer's control; or

(2) the firm makes a loan or grants credit to the private customer to enable that customer to pay the full amount of the margin call in accordance with the requirements of COB 7.9.3 R (Restrictions on lending to private customers).

01/12/2001

COB 7.10.6

In COB 7.10.5 R (1)(a) a relevant? third party includes a party connected with the transaction such as a clearing firm.

01/12/2001

COB 7.11

Non-exchange traded securities

01/12/2004

Application

COB 7.11.1

This section applies to a firm that conducts designated investment business with or for a private customer and:

(1) sells to the customer any security that is not traded on a recognised investment exchange, a designated investment exchange or any regulated market; and
(2) holds itself out as a market maker in that security.

01/12/2001

Purpose

COB 7.11.2

This section aims to ensure that a firm deals fairly with a private customer in relation to the sale and subsequent purchase of a non-exchange traded security.

01/12/2001

Requirement for selling non-exchange traded securities to private customers

COB 7.11.3

A firm must:

(1) give written notice to a private customer, no later than the time of sale, that:

(a) a reasonable price for repurchase of the security will be available to the private customer for a period, specified in that notice, that must not be less than three months from the date the notice is given; and
(b) sale by the private customer of the security after the end of that period may be difficult due to the nature and possible illiquidity of the security; and

(2) ensure that a reasonable price is available to the private customer for the duration of the period specified in the notice.

01/12/2001

COB 7.11.4

In establishing a reasonable price a firm should consider factors that are of direct relevance to the particular security, for example that a company has announced (unanticipated) substantially increased profits.

01/12/2001

COB 7.11.5

Factors that the firm took into account when the original sale was done should, if these remain unchanged, be taken into account in the same way when the price is established for the purchase of the security back from the private customer. Firms should take care to ensure that fluctuations in price are not solely or mainly justified by reference to an absence of liquidity, unless this reflects factors that are directly relevant to the particular security.

01/12/2001

COB 7.12

Customer order and execution records

01/12/2004

Application

COB 7.12.1

This section applies to a firm that:

(1) receives (or, in the exercise of its discretion, decides upon) a customer order;
(2) executes a customer order;
(3) passes a customer order to another person for execution; or
(4) in addition to (1), (2) or (3), also executes own account transactions;

in any designated investment other than a life policy.

01/12/2001

Purpose

COB 7.12.2

Principle 3 (Management and control) requires a firm to take reasonable care to organise and control its affairs responsibly and effectively. This section aims to ensure that a firm makes and retains records of customer orders and other transactions in the course of adhering to the customer order execution requirements in COB 7.4 (Customer order priority), COB 7.5 (Best execution) and COB 7.6 (Timely execution).

01/12/2001

Record keeping requirement

COB 7.12.3

A firm must ensure by the establishment and maintenance of appropriate procedures that it promptly records adequate information in relation to the events in COB 7.12.1 R, including any own account transactions.

01/12/2001

COB 7.12.4

(1) When an event in the left-hand column of COB 7.12.6 E occurs, a firm should make a record of the matters set out in the right-hand column that relate to that event.
(2) Compliance with (1) may be relied on as tending to establish compliance with COB 7.12.3 R.
(3) Contravention of (1) may be relied on as tending to establish contravention of COB 7.12.3 R.

01/12/2001

COB 7.12.5

In addition to the information referred to in COB 7.12.4 E, other information that the firm considers prudent should be recorded.

01/09/2002

COB 7.12.6

Minimum contents of customer order and execution records

This table belongs to COB 7.12.3 R

When:

The firm should record:

(1)

a customer order arises

(b)

the date and time of:

(i)

receipt by the firm of the customer order; or

(ii)

the decision by the firm to deal;

(c)

the identity of the employee who received the customer order or made the decision in (b)(i) and (ii);

(d)

(i)

the designated investment concerned; and

(ii)

the number of, or total value of, the designated investment (including any price limit);

(e)

whether the customer order is for a purchase or sale; and

(f)

any other instruction received by the firm from the customer with regard to the execution of the customer order.

(2)

the firm executes a transaction

(a)

the name or other designation and account number of the client (if any) for whom the transaction was executed (unless the transaction was an own account transaction);

(b)

the name of the counterparty, if known to the firm;

(c)

the date and if available, the time of the transaction;

(d)

the identity of the employee executing the transaction;

(e)

(i)

the designated investment concerned; and

(ii)

the number of, or total value of, the designated investment;

(f)

the price and other significant terms (including exchange rate details if relevant); and

(g)

whether the transaction was a purchase or a sale.

(h)

[deleted]

(3)

the firm passes a customer order to another person for execution

(a)

the name of the person instructed;

(b)

the terms of the instruction; and

(c)

the date and time that the instruction was given.

01/09/2002

COB 7.12.7

When a firm aggregates and subsequently allocates a customer order with an own account transaction or with another customer order, the time and price required to be recorded by COB 7.12.6 E and (f) will be determined in accordance with the provisions in COB 7.7.5 R (Requirement for timely allocation) and COB 7.7.12 R (Price of allocation) respectively.

01/12/2001

COB 7.12.8

For the purposes of COB 7.12.3 R, if information is recorded as soon as practicable following receipt or execution, then the FSA will regard it as having been recorded promptly. When information required to be recorded is supplied to the firm by someone else, it should be recorded upon receipt.

01/12/2001

Orders received over the Internet

COB 7.12.9

When a firm gives a customer access to market information, that is updated continuously in line with the relevant market, in conjunction with the ability to place a customer order by relying on such market information, and the customer order is executed automatically upon receipt, the firm should record the price, even if only indicative, which the customer relied on when placing the customer order, as part of the information required to be recorded in accordance with COB 7.12.3 R.

01/12/2001

COB 7.12.10

When a firm provides market information as described in COB 7.12.9 G, and the customer order is submitted over the Internet but is not executed automatically upon receipt, the firm should record the price displayed on the screen at the time the customer order is placed, as part of the information required to be recorded in accordance with COB 7.12.3 R.

01/12/2001

Period of retention

COB 7.12.11

A firm must retain the records referred to in COB 7.12.3 R for a period of at least three years after the date of the event in the left-hand column of COB 7.12.6 E.

01/12/2001

COB 7.13

Personal account dealing

01/12/2004

Application

COB 7.13.1

This section applies to a firm that conducts designated investment business.

01/12/2001

COB 7.13.2

This section has been written in accordance with the FSA's responsibilities under articles 10 and 11 of the Investment Services Directive. These rules also form part of the conditions applied to EEA firms with a UK branch office in the interest of the general good under article 17 of the Investment Services Directive.

01/12/2001

Purpose

COB 7.13.3

Principle 3 (Management and control) requires a firm to take reasonable care to organise and control its affairs responsibly and effectively. Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interest fairly between itself and its customers. This section is designed to ensure that a firm's customers are not disadvantaged by the personal dealings of the firm's employees. Firms will, therefore, need to ensure that appropriate controls and monitoring arrangements are implemented and maintained.

01/12/2001

Restrictions on personal account dealing

COB 7.13.4

A firm must take reasonable steps to ensure that:

(1) a personal account transaction in a designated investment undertaken by any of its employees does not conflict with the firm's duties to its customers under the regulatory system, unless COB 7.13.6 R applies; and
(2) when it permits an employee to undertake a personal account transaction in a designated investment in relation to which the firm conducts designated investment business, or in any related investment, it receives prompt notification of, or is otherwise able to identify, that transaction.

01/03/2003

COB 7.13.5

Firms should note that an employee is defined in the Glossary (for the purposes of this section) as meaning not just an individual who is employed or appointed by a firm but also an individual who is:

(1) an appointed representative of a firm; or
(2) employed or appointed by an appointed representative of a firm, whether under a contract of service or services or otherwise.

So, where a firm has one or more appointed representatives, COB 7.13.4 R will apply to the firm in relation to, for example, employees of its appointed representative in exactly the same way as it would were those individuals employed by the firm itself.

01/12/2001

Exceptions

COB 7.13.6

COB 7.13.4 R does not apply to:

(1) an employee who is a sole trader whose regulated activities consist only of own account transactions; or
(2) an employee, if the firm has taken reasonable steps to determine that the employee will not be involved to any material extent in, or have access to information about, the firm's designated investment business. Firms are reminded that there are further provisions relating to the management and activities of investment analysts in COB 7.16.

01/12/2001

COB 7.13.6A

For the purposes of COB 7.13.6 R (2), the FSA considers that an investment analyst is likely to be involved to a material extent in the firm's designated investment business. Firms are reminded that there are further provisions relating to the management and activities of investment analysts in COB 7.16.

01/05/2004

Reasonable steps

COB 7.13.7

(1) For the purposes of COB 7.13.4 R, a firm's "reasonable steps" should ensure that:

(a) the restrictions, and the basis, if any, upon which its employees may undertake personal account transactions, are set out in a written notice drawn explicitly to the attention of each employee, and that the contents of such a notice are made a term of his contract of employment or contract for services;
(a)A an investment analyst may not undertake a personal account transaction in a designated investment if the investment analyst prepares investment research which is published or distributed to clients:

(i) on that designated investment or its issuer; or
(ii) on a related investment, or its issuer; unless the personal account transaction is:
(iii) not contrary to any published or distributed recommendation for which he is responsible as an employee of the firm, which has not been withdrawn; or
(iv) to realise the cash value of a holding or position, is undertaken in order to meet an obligation of the investment analyst which is not related to any designated investment within (i) or (ii), and is one to which the firm has given its permission in writing;

(b) the written notice in (1)(a) states that, if an employee is precluded from entering into a transaction for his own account, he must not (except in the proper course of his employment):

(i) procure any other person to enter into such a transaction; or
(ii) communicate any information or opinion to any other person if he knows, or ought to know, that the person will, as a result, enter into such a transaction, or counsel or procure some other person to do so; and

(c) procedures are established and maintained by the firm that are appropriate to its business, and that are designed with a view to ensuring that:

(i) each of its employees does not undertake a personal account transaction in a designated investment in relation to which the firm conducts designated investment business, or in any related investment, unless the firm has given its permission in writing to that transaction, or to transactions generally in designated investments of that kind;
(ii) when the firm gives such permission, the requirements in COB 7.13.4 R (1) are complied with.

(2) Compliance with (1) may be relied upon as tending to establish compliance with COB 7.13.4 R.
(3) Contravention of (1) may be relied on as tending to establish contravention of COB 7.13.4 R.

01/05/2004

COB 7.13.8

A firm will be able to identify its employees' personal account transactions under COB 7.13.4 R (2) if it designates its employees' own accounts in a way that enables them to be distinguished from other customers' accounts.

01/12/2001

COB 7.13.9

When an employee undertakes a personal account transaction through a person other than the firm or its associate, a copy of the note confirming details of the transaction issued by that person will be sufficient notification for the purposes of COB 7.13.4 R (1).

01/12/2001

COB 7.13.10

Firms should note that for the purposes of COB 7.13.7 E (1), while they may look to a third party to make the appropriate arrangements to ensure that the "reasonable steps" referred to in that provision are taken, ultimate responsibility for ensuring that such steps are in fact carried out rests with the firm. Therefore a firm, which has entered into arrangements with its appointed representative under which that appointed representative agrees to carry out the steps in COB 7.13.7 E (1)(a) in relation to individuals employed by the appointed representative, remains responsible should the appointed representative fail, for any reason, to carry out the necessary steps. In relation to COB 7.13.7 E (1)(c)(i), it should be noted that all permissions have to be given by the firm itself.

01/05/2004

COB 7.13.10A

(1) Because of the nature of the conflicts of interest that arise, a firm may decide:

(a) that an investment analyst should be prohibited from carrying out any personal account transactions at all; or
(b) that an investment analyst should be prohibited from undertaking a personal account transaction in a designated investment if the investment analyst prepares investment research:

(i) on that designated investment or its issuer; or
(ii) on a related investment, or its issuer; or
(iii) on a designated investment or an issuer which belongs to the same industry or business sector as that designated investment; or

(c) that there should be a prohibition on personal account transactions by investment analysts for a limited time covering a period before and after the intended publication date for investment research.

(2) If a firm does impose a prohibition, it may wish to make clear to the employee whether or not the prohibition extends to the sorts of transaction which the Glossary excludes from the definition of personal account transaction (for example, transactions in units in regulated collective investment schemes, and certain discretionary transactions).

01/12/2004

Record keeping requirements

COB 7.13.11

(1) A firm must make a record of:

(a) the restrictions upon personal account dealing and the basis upon which any permission to deal is made;
(b) each permission given by it under COB 7.13.4 R (2) ;
(c) each notification made to it under COB 7.13.4 R (2) ;
(d) in respect of COB 7.13.6 R (2), the basis upon which the firm has determined that an employee will not be involved in, or have access to information about, the firm's designated investment business; and

retain these records for the minimum period specified in (2), (3) or (4), as the case may be.
(2) In relation to a record under (1)(a), the period is three years from the date that the restrictions or basis were communicated to the employee.
(3) In relation to each permission and notification in (1)(b) and (c), the period is three years from the date that the permission or notification was made.
(4) In relation to a record under (1)(d), the period is three years after the date on which the individual ceases to be an employee.

01/12/2001

COB 7.13.12

A firm's records under COB 7.13.11 R (1) should be sufficiently detailed to identify the position in relation to (1)(a) to (d) for each of its employees. So where the firm gives permission under (1)(b) to a particular employee, as opposed to employees generally, an individual record of that permission is required to be made and retained. However, where the firm's restrictions on personal account dealing are set out in, for example, a standard booklet which is issued to all its employees, it is sufficient for the purposes of (1)(a) for the firm's records to show what global restrictions were in place at any given moment in time and it is not necessary for there to be a record of each booklet that was issued to each employee.

01/12/2001

COB 7.14

Programme trading

01/12/2004

Application

COB 7.14.1

This section applies to a firm when it executes a programme trade that includes one or more designated investments. The term 'programme trade' is used in this section to describe a single transaction or series of transactions executed for the purpose of acquiring or disposing, for a customer, of all or part of a portfolio or a large basket of securities.

01/12/2001

Purpose

COB 7.14.2

Principle 6 (Customers' interests) requires a firm to pay due regard to the interests of its customers and treat them fairly. This section provides guidance on the steps a firm should take when executing a programme trade, either as principal or agent, whenever a customer is involved.

01/12/2001

Programme trading

COB 7.14.3

Before a firm executes a programme trade, it should disclose to its customer whether it will be acting as a principal or agent, unless the customer has given prior notification that no such notice is required. A firm should not subsequently act in a different capacity from that which is disclosed without the prior consent of the customer.

01/12/2001

COB 7.14.4

A firm should ensure that neither it, nor an associate, executes an own account transaction in any designated investment included in a programme trade, unless the firm has notified the customer in advance that it may do this, or can otherwise demonstrate that it has provided fair treatment to the customer concerned.

01/12/2001

COB 7.14.5

COB 7.5.6 E (1)(e) (Providing best execution) provides that a firm should ensure that it applies the duty of care in COB 7.5.5 R (1) (Providing best execution) to each individual transaction executed as part of a programme trade, subject to the exceptions in COB 7.5.4 R (Exceptions).

01/12/2001

COB 7.15

Non-market-price transactions

01/12/2004

Application

COB 7.15.1

This section applies to a firm when it conducts designated investment business with or for a customer.

01/12/2001

Purpose

COB 7.15.2

Principle 1 (Integrity) requires a firm to conduct its business with integrity, whilst Principle 5 (Market conduct) requires a firm to observe proper standards of market conduct. In general, firms should undertake transactions at the prevailing market price. Failure to do this may result in a firm participating, whether deliberately or unknowingly, in the concealment of a profit or loss, or in the perpetration of a fraud. A firm should therefore not enter into a non-market-price transaction unless it has taken reasonable steps to ensure that the transaction is not illegal or otherwise for an improper purpose.

01/12/2001

Non-market-price transactions

COB 7.15.3

Subject to COB 7.15.4 R, a firm must not, as agent or principal, enter into a non-market-price transaction under which it deals in a designated investment with or for a customer, unless it has taken reasonable steps to ensure that the transaction is not being entered into by the customer for an improper purpose.

01/12/2001

COB 7.15.4

COB 7.15.3 R does not apply to a non-market-price transaction if it is subject to the rules of a recognised investment exchange.

01/12/2001

COB 7.15.5

For further guidance, firms are referred to the corresponding provisions on non-market-price transactions set out in MAR 3 (Inter-professional conduct), in particular MAR 3.5.7 E (Non-market-price transactions). Although these provisions apply to a firm's bilateral dealings with a market counterparty, they are also relevant to business conducted with or for customers.

01/12/2001

COB 7.16

Investment research

01/12/2004

Application

COB 7.16.1

This section applies to a firm that prepares investment research for publication or distribution to its clients, or that publishes or distributes investment research to its clients.

01/07/2004

Purpose

COB 7.16.2

The purpose of this section is to amplify relevant Principles, and set out particular steps a firm should take, in relation to investment analysts and investment research. The FSA considers that in this context Principle 1 (Integrity), Principle 2 (Skill, care and diligence), Principle 3 (Management and control), Principle 5 (Market Conduct), Principle 6 (Customers' interests), Principle 7 (Communication with clients) and Principle 8 (Conflicts of interest) are particularly relevant.

01/07/2004

Conflicts of interest in investment research: general

COB 7.16.3

The FSA considers that conflicts of interest are much less likely to arise if investment research is solely for a firm's own internal use, for example to inform its decisions about managing its proprietary trading or its strategic direction. The FSA considers that it is inappropriate for an analyst to prepare research papers or analyses which are intended firstly for internal use for the firm's own advantage, and then for later publication to clients (in circumstances in which it might reasonably be expected to have a material influence on the clients' investment decisions).

01/07/2004

COB 7.16.4

The obligations referred to in COB 7.16.2 G apply to all types of investment research. A firm's senior management is responsible for ensuring that its systems, controls and procedures are robust and adequate to identify and manage the conflicts of interest which arise in relation to investment research or similar publications, and to ensure, as far as practicable, that those arrangements operate effectively. The FSA does not consider that these conflicts of interest can be adequately managed by disclosure alone.

01/07/2004

Policies for managing conflicts of interest: impartial investment research

COB 7.16.5

(1) This rule applies to a firm that publishes or distributes investment research and where either:

(a) the firm holds it out (in whatever terms) as being an impartial assessment of the value or prospects of its subject matter; or
(b) it is reasonable for those to whom the firm has published or distributed it to rely on it as an impartial assessment of the value or the prospects of its subject matter.

(2) If this rule applies, a firm must:

(a) establish and implement a policy, appropriate to the firm, for managing effectively the conflicts of interest which might affect the impartiality of investment research of the type described in (1);
(b) make a record of the policy and retain it until at least three years after it ceases to have effect;
(c) take reasonable steps to ensure that it and its employees comply with the policy;
(d) make available to any person in writing, on request, a copy of the policy (for example, by including it on an appropriate website); and
(e) take reasonable steps to ensure that the policy remains appropriate and effective.

(3) The policy must identify the types of investment research to which it applies, and must make provision for systems, controls and procedures (making clear the extent to which the firm's policy relies on Chinese walls or other information barriers within the firm):

(a) to identify conflicts of interest which might affect the impartiality of the investment research to which the policy relates; and
(b) to manage effectively conflicts of interest, to the extent that they arise or might arise within the firm, in relation to at least the following:

(i) the supervision and management of investment analysts;
(ii) the remuneration structure for investment analysts;
(iii) the extent to which investment analysts may become involved in activities other than the preparation of the investment research;
(iv) the extent to which (if at all) inducements offered by issuers, or others with material interest in the subject matter of investment research, may be accepted by investment analysts or senior employees of the firm;
(v) who may comment on draft investment research before publication, and the process for taking account of their comments;
(vi) the timing and manner of publication and distribution of investment research and of the communication of its substance; and
(vii) what information or disclosures are appropriate to include in the investment research (taking due account of matters required by law).

01/07/2004

COB 7.16.6

(1) Investment research may be held out as impartial in various ways, for example if it is labelled with that term or similar terms like 'independent' or 'objective'. Even without this kind of labelling on the investment research itself, it may still be held out as impartial if, for example, the firm's representatives state that it is so (in writing or orally), or behave in a way that reasonably gives that impression.
(2) The policy a firm makes available under COB 7.16.5 R(2) is likely to be implemented by detailed procedures and operational arrangements. Those detailed procedures and operational arrangements need not be published.

01/07/2004

Policy content: general

COB 7.16.7

Firms should organise the investment research function (including the way in which their investment analysts are supervised and remunerated) in a way which minimises the potential influence of the commercial interests of the firm, its employees, its associates, or its clients, on the impartiality of its investment research.

01/07/2004

COB 7.16.8

A firm's policy under COB 7.16.5 R should be appropriate for its own structure and business. The policy will therefore need to take account of the following factors (further guidance on what an appropriate policy might cover is set out in COB 7.16.9 G to COB 7.16.15 G, not all of which will be relevant to every firm):

(1) the firm's size and organisational structure;
(2) the classification under COB 4.1 of its clients, to whom the investment research is published or distributed, and their experience and expertise;
(3) the nature of the investments in relation to which (or in relation to the issuers of which) the firm publishes or distributes investment research; and
(4) the nature of the business which it conducts with or for its clients and on its own account.

01/12/2004

Policy content: supervision and remuneration of analysts

COB 7.16.9

If an individual (such as someone involved in raising capital for a corporate client) has responsibilities that might reasonably be considered to conflict with the interests of the clients to whom the investment research is published or distributed, it will not usually be appropriate for him to be responsible for:

(1) the day to day supervision or control of an investment analyst;
(2) decisions on the subject matter or content of investment research or the timing of its publication (though it may be appropriate for him to have an opportunity to check the accuracy of the facts relied on in the investment research);
(3) determining the remuneration of an investment analyst.

01/07/2004

COB 7.16.10

(1) An investment analyst's remuneration should be structured so as not to create (or reasonably suggest the creation of) an incentive which is inconsistent with the provision of an impartial assessment of the subject matter of investment research by the analyst.
(2) An investment analyst's remuneration should not be linked to a specific transaction, or to recommendations contained in investment research, but it may be linked to the general profits of the firm.

01/07/2004

Policy content: involvement of analysts in other activities

COB 7.16.11

(1) An investment analyst should not be involved in activities in a way which suggests that he is representing the interests of the firm or a client if this is likely reasonably to appear to be inconsistent with providing an impartial assessment of the value or prospects of the relevant investments.
(2) A firm's policy may allow it to use an investment analyst's knowledge and information to assist it to research corporate finance business opportunities, to provide ideas to sales or trading staff, or to provide information and advice to the firm's investment clients.
(3) It is likely to be inappropriate for the policy to allow the firm to:

(a) use an investment analyst in a marketing capacity (for example in pitches to solicit or obtain corporate finance business from the issuer of a relevant investment), if this would give a reasonable perception of lack of impartiality in his investment research; or
(b) allow an investment analyst to act in a way which reasonably appears to be representing the issuer of a relevant investment, for example, in roadshows relating to issues or allocations of relevant investments.

01/07/2004

Policy content: avoiding inappropriate influences

COB 7.16.12

Firms should put in place arrangements so that investment research sets out impartial views about the value or prospects of the relevant investment or the relevant issuer of the investment analyst or analysts responsible for its content. For example:

(1) the firm should prohibit any of its investment analysts or other employees, from offering or accepting an inducement to provide favourable investment research (COB 2.2.3 R requires the firm itself to take reasonable steps to ensure that such inducements are not offered, given, solicited or accepted);
(2) the firm should not give effective editorial control to someone whose role or commercial interests might reasonably be considered to conflict with the interests of the clients to whom the investment research is to be published or distributed; accordingly, a firm should:

(a) not allow anyone other than an investment analyst (such as a relevant issuer) to approve the content of investment research before publication; and
(b) only allow a person outside the firm (such as a relevant issuer), or any employee other than the investment analyst, to view it before its publication for verification of factual information in the investment research.

01/07/2004

Policy content: means and timing of publication

COB 7.16.13

A firm's policy and procedures should provide for investment research to be published or distributed to its clients in an appropriate manner. For example it will be:

(1) appropriate for a firm to take reasonable steps to ensure that its investment research is published or distributed only through its usual channels, as set out in the policy;
(2) inappropriate for an employee (whether or not an investment analyst) to communicate the substance of any investment research, except as set out in the policy.

01/07/2004

COB 7.16.14

A firm should also consider whether or not other business activities of the firm could create the reasonable perception that its investment research may not be an impartial analysis of the market in or the value or prospects of a relevant investment. Consequently a firm should consider whether its policy should contain any restrictions on the timing of the publication of investment research. For example, a firm might consider whether it should restrict publication of relevant investment research around the time of an investment offering.

01/07/2004

Policy content: disclosures

COB 7.16.15

A firm should consider what information by way of disclosures should accompany the investment research it publishes or distributes.

01/07/2004

COB 7.17

Investment research recommendations: required disclosures

01/07/2005

Application

COB 7.17.1

(1) This section applies to a firm that prepares or disseminates research recommendations.
(2) This section does not apply to the extent that the Investment Recommendation (Media) Regulations 2005 apply to a firm.
(3) If a firm is a media firm subject to equivalent appropriate regulation only COB 7.17.2 G, COB 7.17.3 G, COB 7.17.5 R, COB 7.17.16 R and COB 7.17.17 R apply.

[Note: Articles 2(4), 3(4), 5(5) 2003/125/EC]

01/07/2005

COB 7.17.2

Appropriate regulatory or self-regulatory arrangements are sufficient to meet the condition in COB 7.17.1 R (2). Examples include those listed in regulation 3(5) of the Investment Recommendation (Media) Regulations 2005, that is the Code of Practice issued by the Press Complaints Commission, the Producers' Guidelines issued by the British Broadcasting Corporation, and any code published by the Office of Communications pursuant to section 324 of the Communications Act 2003.

01/07/2005

Purpose

COB 7.17.3

The purpose of this section is to implement the provisions of the Market Abuse Directive about the disclosures to be made in and about research recommendations.

01/07/2005

Use of Chinese walls

COB 7.17.4

The following obligations to disclose information do not require those producing research recommendations to breach effective information barriers put in place to prevent and avoid conflicts of interest.

[Note: Recital 7 2003/125/EC]

01/07/2005

Fair presentation and disclosure

COB 7.17.5

A firm must take reasonable care:

(1) to ensure that a research recommendation produced or disseminated by it is fairly presented; and
(2) to disclose its interests or indicate conflicts of interest concerning relevant investments.

[Note: Article 6(5) Market Abuse Directive]

01/07/2005

Identity of producers of recommendations

COB 7.17.6

(1) A firm must, in a research recommendation produced by it:

(a) disclose clearly and prominently the identity of the person responsible for its production, and in particular:

(i) the name and job title of the individual who prepared the research recommendation; and
(ii) the name of the firm; and

(b) include the relevant status disclosure specified in GEN 4 Annex 1 RR.

(2) The requirements in (1) may be met for non-written research recommendations by referring to a place where the disclosures can be directly and easily accessed by the public, such as an appropriate internet site of the firm.

[Note: Article 2 2003/125/EC]

01/07/2005

General standard for fair presentation of recommendations

COB 7.17.7

(1) A firm must take reasonable care to ensure that:

(a) facts in a research recommendation are clearly distinguished from interpretations, estimates, opinions and other types of non-factual information;
(b) its sources for a research recommendation are reliable or if there is any doubt as to whether a source is reliable, this is clearly indicated;
(c) all projections, forecasts and price targets in a research recommendation are clearly labelled as such and the material assumptions made in producing or using them are indicated; and
(d) the substance of its research recommendations can be substantiated as reasonable, upon request by the FSA.

(2) The requirements in (1) do not apply, in the case of non-written research recommendations, to the extent that they would be disproportionate.
(3) A firm must make and retain sufficient records to disclose the basis of the substantiation required in (1)(d).

[Note: Article 3 2003/125/EC]

01/07/2005

Additional obligations in relation to fair presentation of recommendations

COB 7.17.8

(1) In addition a firm must take reasonable care to ensure that, in a research recommendation, at least:

(a) all substantially material sources are indicated, including, if appropriate, the issuer, and in particular the research recommendation indicates whether the research recommendation has been disclosed to that issuer and amended following this disclosure before its dissemination;
(b) any basis of valuation or methodology used to evaluate a security, a derivative or an issuer, or to set a price target for a security or a derivative, is adequately summarised;
(c) the meaning of any recommendation made, such as "buy", "sell" or "hold", which may include the time horizon of the security or derivative to which the research recommendation relates, is adequately explained and any appropriate risk warning, including a sensitivity analysis of the relevant assumptions, indicated;
(d) reference is made to the planned frequency, if any, of updates of the research recommendation and to any major changes in the coverage policy previously announced;
(e) the date at which the research recommendation was first released for distribution is indicated clearly and prominently, as well as the relevant date and time for any security or derivative price mentioned; and
(f) if the substance of a research recommendation differs from the substance of an earlier research recommendation, concerning the same security, derivative or issuer issued during the 12-month period immediately preceding its release, this change and the date of the earlier research recommendation are indicated clearly and prominently.

(2) If the requirements in (1)(a), (b) or (c) would be disproportionate in relation to the length of the research recommendation, a firm may, instead, make clear and prominent reference in the research recommendation to the place where the required information can be directly and easily accessed by the public (such as a hyperlink to that information on an appropriate internet site of the firm) provided that there has been no change in the methodology or basis of valuation used.
(3) In the case of a non-written research recommendation, the requirements of (1) do not apply to the extent that they would be disproportionate.

[Note: Article 4 2003/125/EC]

01/07/2005

COB 7.17.9

The disclosures required under (1)(e) and (f) may, if the firm so chooses, be made by graphical means (for example by use of a line graph).

01/07/2005

General standard for disclosure of interests and conflicts of interest

COB 7.17.10

(1) A firm must disclose, in a research recommendation:

(a) all of its relationships and circumstances that may reasonably be expected to impair the objectivity of the research recommendation, in particular a significant financial interest in any relevant investment which is the subject of the research recommendation, or a significant conflict of interest with respect to a relevant issuer; and
(b) relationships and circumstances, of the sort referred to in (a), of each legal or natural person working for the firm who was involved in preparing the substance of the research recommendation, including, in particular, for a firm which is an investment firm, disclosure of whether his remuneration is tied to investment banking transactions performed by the firm or any affiliated company.

(2) If the firm is a legal person, the information to be disclosed in accordance with (1) must at least include the following:

(a) any interests or conflicts of interest of the firm or of an affiliated company that are accessible, or reasonably expected to be accessible, to the persons involved in the preparation of the substance of the research recommendation; and
(b) any interests or conflicts of interest of the firm or of affiliated companies known to persons who, although not involved in the preparation of the substance of the research recommendation, had or could reasonably be expected to have access to the substance of the research recommendation prior to its dissemination, other than persons whose only access to the research recommendation is to ensure compliance with relevant regulatory or statutory obligations, including the disclosures required under COB 7.17.

(3) If the disclosures required under (1) and (2) would be disproportionate in relation to the length of the research recommendation distributed, a firm may, instead, make clear and prominent reference in the research recommendation to the place where such disclosures can be directly and easily accessed by the public (such as a hyperlink to the disclosure on an appropriate internet site of the firm).
(4) The requirements in (1) do not apply, in the case of non-written research recommendations, to the extent that they are disproportionate.

[Note: Article 5 2003/125/EC]

01/07/2005

Additional obligations for producers of research recommendations in relation to disclosure of interests or conflicts of interest

COB 7.17.11

(1) A research recommendation produced by a firm must disclose clearly and prominently the following information on its interests and conflicts of interest:

(a) major shareholdings that exist between it or any affiliated company on the one hand and the relevant issuer on the other hand, including at least:

(i) shareholdings exceeding 5 % of the total issued share capital in the relevant issuer held by the firm or any affiliated company, or
(ii) shareholdings exceeding 5 % of the total issued share capital of the firm or any affiliated company held by the relevant issuer;

(b) any other financial interests held by the firm or any affiliated company in relation to the relevant issuer which are significant in relation to the research recommendation;
(c) if applicable, a statement that the firm or any affiliated company is a market maker or liquidity provider in the securities of the relevant issuer or in any related derivatives;
(d) if applicable, a statement that the firm or any affiliated company has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of securities of the relevant issuer or in any related derivatives;
(e) if applicable, a statement that the firm or any affiliated company is party to any other agreement with the relevant issuer relating to the provision of investment banking services, provided that:

(i) this would not entail the disclosure of any confidential commercial information; and
(ii) the agreement has been in effect over the previous 12 months or has given rise during the same period to a payment or to the promise of payment; and

(f) if applicable, a statement that the firm or any affiliated company is party to an agreement with the relevant issuer relating to the production of the research recommendation.

(2) A firm must disclose, in general terms, in the research recommendation the effective organisational and administrative arrangements set up within the firm for the prevention and avoidance of conflicts of interest with respect to research recommendations, including information barriers.
(3) In the case of an investment firm or a credit institution, if a legal or natural person working for the firm who is involved in the preparation of a research recommendation, receives or purchases shares of the relevant issuer prior to a public offering of those shares, the price at which the shares were acquired and the date of acquisition must also be disclosed in the research recommendation.
(4) A firm, which is an investment firm or a credit institution, must publish the following information on a quarterly basis, and must disclose it in its research recommendations:

(a) the proportion of all research recommendations published during the relevant quarter that are "buy", "hold", "sell" or equivalent terms; and
(b) the proportion of relevant investments in each of these categories, issued by issuers to which the firm supplied material investment banking services during the previous 12 months.

(5) If the requirements under (1) to (4) would be disproportionate in relation to the length of the research recommendation, a firm may, instead, make clear and prominent reference in the research recommendation to the place where such disclosure can be directly and easily accessed by the public (such as a hyperlink to the disclosure on an appropriate internet site of the firm, or, if relevant, to the document published under COB 7.16.5 R (2)).
(6) In the case of non-written research recommendations, the requirements of (1) do not apply to the extent that they are disproportionate.

[Note: Article 6 2003/125/EC]

01/07/2005

COB 7.17.12

Nothing in COB 7.17.11 R (1)(a) prevents a firm from choosing to disclose significant shareholdings above a lower threshold (for example, 1%) than is required by COB 7.17.11 R (1)(a).

01/07/2005

COB 7.17.13

COB 7.17.11 R (1)(a) and (b) only requires a firm to aggregate its shareholdings with those of affiliated companies if they act in concert in relation to those shareholdings.

01/07/2005

COB 7.17.14

In relation to companies limited by shares and incorporated in Great Britain, the most meaningful measure of "total issued share capital" is likely to be the concept of "paid up and issued share capital" under the Companies Act 1985.

01/07/2005

COB 7.17.15

The FSA considers that it is important for the proportions published in compliance with COB 7.17.11 R (4) to be consistent and meaningful to the recipients of the research recommendations. Accordingly for non-equity material, the relevant categories should be meaningful to the recipients in terms of the course of action being recommended.

01/07/2005

Identity of disseminators of recommendations

COB 7.17.16

If a firm disseminates a research recommendation produced by a third party, the research recommendation must identify the firm clearly and prominently.

[Note: Article 7 2003/125/EC]

01/07/2005

General standard for dissemination of third party recommendations

COB 7.17.17

(1) If a research recommendation produced by a third party is substantially altered before dissemination by a firm:

(a) the disseminated material must clearly describe that alteration in detail; and
(b) if the substantial alteration consists of a change of the direction of the recommendation (such as changing a "buy" recommendation into a "hold" or "sell" recommendation or vice versa), the requirements laid down in COB 7.17.6 R to COB 7.17.12 G on producers must be met by the firm, to the extent of the substantial alteration.

(2) A firm which disseminates a substantially altered research recommendation must have a formal written policy so that the persons receiving the information may be directed to where they can have access to the identity of the producer of the research recommendation, the research recommendation itself and the disclosure of the producer's interests or conflicts of interest, provided that these elements are publicly available.
(3) If a firm disseminates a summary of a research recommendation produced by a third party, it must:

(a) ensure that the summary is fair, clear and not misleading;
(b) identify the source research recommendation; and
(c) identify where (to the extent that they are publicly available) the third party's disclosures relating to the source research recommendation can be directly and easily accessed by the public.

(4) Paragraphs (1) and (2) do not apply to news reporting on research recommendations produced by a third party where the substance of the research recommendation is not altered.

[Note: Article 8 2003/125/EC]

01/07/2005

Additional obligations for investment firms and credit institutions disseminating third party recommendations

COB 7.17.18

If a firm, which is an investment firm or a credit institution, disseminates a research recommendation produced by a third party:

(1) the relevant status disclosure specified in GEN 4 Annex 1 R for the firm must be clearly and prominently indicated on the disseminated material;
(2) if the producer of the research recommendation has not already disseminated it, the requirements in COB 7.17.11 R must be met by the firm as if it had produced the research recommendation itself; and
(3) if the firm has substantially altered the research recommendation, the requirements laid down in COB 7.17.5 R to COB 7.17.11 R must be met by the firm as if it had produced the research recommendation itself.

[Note: Article 9 2003/125/EC]

01/07/2005

COB Conduct of Business

Dealing and managing

Dealingand managing

Conflict of interest and material interest

Application

Purpose

Fair treatment

Disclosing an interest to a customer

Relying on a policy of independence

Establishing internal arrangements

Declining to act for a customer

Broker fund advisers

Product providers with broker funds

UCITS management company

Churning and switching

Application

Purpose

Restrictions on dealing and switching

Dealing ahead of investment research

Application

Purpose

Requirement not to undertake own account transactions

Exceptions

Customer order priority

Application

Purpose

Dealing fairly and in due turn

Best execution

Application

Purpose

When best execution is owed

Exceptions

Providing best execution

Timely execution

Application

Purpose

Achieving timely execution

Aggregation and allocation

Application

Purpose

Requirement for recorded standards and procedures

Aggregation

Requirement for timely allocation

Requirement for fair allocation

Re-allocation

Price of allocation

Record keeping requirements

Realisation of a private customer's assets

Application

Purpose

Contractual rights to realise a private customer's assets

Lending to private customers

Application

Purpose

Restrictions on lending to private customers

Exceptions

Record keeping requirements

Margin requirements

Application

Purpose

Provision of margin by a private customer

Failure to meet a margin call

Non-exchange traded securities

Application

Purpose

Requirement for selling non-exchange traded securities to private customers

Customer order and execution records

Application

Purpose

Record keeping requirement

Minimum contents of customer order and execution records

This table belongs to COB 7.12.3 R

Orders received over the Internet

Period of retention

Personal account dealing

Application

Purpose

Restrictions on personal account dealing

Exceptions

Reasonable steps

Dealing
and managing