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  2. Point in time
    2007-10-07

COB 7.18 1Use of dealing commission

Application

COB 7.18.1R
  1. (1)

    This section applies to a firm that acts as an investment manager when it executes customer orders that relate to the designated investments specified in (2).

  2. (2)

    The designated investments for the purposes of (1) are:

    1. (a)

      shares; and

    2. (b)
      1. (i)

        warrants;

      2. (ii)

        certificates representing certain securities;

      3. (iii)

        options; and

      4. (iv)

        rights to or interests in investments of the nature referred to in (i) to (iii);

      to the extent that they relate to shares.

Purpose

COB 7.18.2G

Principle 1 (Integrity) requires a firm to conduct its business with integrity. 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 interest fairly, both between itself and its customers and between a customer and another client. The purpose of this section is to ensure that an investment manager's arrangements in relation to dealing commissions are transparent and demonstrate accountability to customers where commissions are spent in acquiring services in addition to execution, and consequently that customers are treated fairly.

Use of dealing commission to purchase goods or services

COB 7.18.3R
  1. (1)

    An investment manager must not execute customer orders under arrangements coming within (2), unless the conditions in (3) are satisfied.

  2. (2)

    The arrangements referred to in (1) are that the investment manager:

    1. (a)

      executes its customer orders through a broker or another person;

    2. (b)

      passes on the brokers or other person's charges (whether commission or otherwise) to its customers; and

    3. (c)

      in return for the charges referred to in (b), receives goods or services in addition to the execution of its customer orders.

  3. (3)

    The conditions referred to in (1) are that the investment manager has reasonable grounds to be satisfied that the goods or services in (2)(c):

    1. (a)
      1. (i)

        are related to the execution of trades on behalf of the investment manager's customers; or

      2. (ii)

        comprise the provision of research; and

    2. (b)

      will reasonably assist the investment manager in the provision of its services to its customers on whose behalf the orders are being executed and do not, and are not likely to, impair compliance with the duty of the investment manager to act in the best interests of its customers.

COB 7.18.4E
  1. (1)

    Where the goods or services relate to the execution of trades, an investment manager should have reasonable grounds to be satisfied that the requirements of COB 7.18.3 R are met if the goods or services are:

    1. (a)

      linked to the arranging and conclusion of a specific investment transaction (or series of related transactions); and

    2. (b)

      provided between the point at which the investment manager makes an investment or trading decision and the point at which the investment transaction (or series of related transactions) is concluded.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COB 7.18.3 R.

COB 7.18.5E
  1. (1)

    Where the goods or services relate to the provision of research, an investment manager will have reasonable grounds to be satisfied that the requirements of COB 7.18.3 R are met if the research:

    1. (a)

      is capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about its customers' portfolios;

    2. (b)

      whatever form its output takes, represents original thought, in the critical and careful consideration and assessment of new and existing facts, and does not merely repeat or repackage what has been presented before;

    3. (c)

      has intellectual rigour and does not merely state what is commonplace or self-evident; and

    4. (d)

      involves analysis or manipulation of data to reach meaningful conclusions.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COB 7.18.3 R.

COB 7.18.6G

An example of goods or services relating to the execution of trades that the FSA does not regard as meeting the requirements of COB 7.18.4 E (1) is post-trade analytics.

COB 7.18.7G

Examples of goods or services that relate to the provision of research that the FSA do not regard as meeting the requirements of COB 7.18.5 E (1) include price feeds or historical price data that have not been analysed or manipulated to reach meaningful conclusions.

COB 7.18.8G

Examples of goods or services that relate to the execution of trades or the provision of research that the FSA does2 not regard as meeting the requirements of either COB 7.18.4 E (1) or COB 7.18.5 E (1) include:

2

(a)

services relating to the valuation or performance measurement of portfolios;

(b)

computer hardware;

(c)

connectivity services such as electronic networks and 2dedicated telephone lines;

(d)

seminar fees;

(e)

subscriptions for publications;

(f)

travel, accommodation or entertainment costs;

(g)

order and execution management systems;2

2

2(ga)

office administrative computer software, such as word processing or accounting programmes;

(h)

membership fees to professional associations;

(i)

purchase or rental of standard office equipment or ancillary facilities;

(j)

employees salaries;

(k)

direct money payments;

(l)

publicly available information; and

(m)

custody services relating to designated investments belonging to, or managed for, customers other than those services that are incidental to the execution of trades.
COB 7.18.9G

The reference to research in COB 7.18.3 R (3)(a)(ii) is not confined to investment research as defined in the Glossary. The FSA's view is that research can include, for example, the goods or services encompassed by investment research, provided that they are directly relevant to and are used to assist in the management of investments on behalf of customers. In addition, any goods or services that relate to the provision of research that the FSA regards as not acceptable under COB 7.18.7 G or COB 7.18.8 G should be viewed as not meeting the requirements of COB 7.18.3 R (3), notwithstanding that their content might qualify as investment research.

COB 7.18.10G

This section applies only to arrangements under which an investment manager receives from brokers or other persons goods or services that relate to the execution of trades or the provision of research. It has no application in relation to execution and research generated internally by an investment manager itself.

COB 7.18.11G

An investment manager should not enter into any arrangements that could compromise its ability to comply with its best execution obligations under COB 7.5 (Best execution).

Prior and periodic disclosure

COB 7.18.12R
  1. (1)

    If an investment manager enters into arrangements for the receipt of goods or services that relate to the execution of trades or the provision of research in accordance with COB 7.18.3 R (Use of dealing commission to purchase goods or services), it must in a timely manner make adequate:

    1. (a)

      prior disclosure; and

    2. (b)

      periodic disclosure;

    to its customers of the arrangements entered into.

  2. (2)

    The adequate disclosure in (1) must include details of the goods or services that relate to the execution of trades and, wherever appropriate, separately identify the details of the goods or services that are attributable to the provision of research.

Making prior and periodic disclosure in a timely manner

COB 7.18.13E
  1. (1)

    For the purposes of COB 7.18.12 R, a firm should make prior and periodic disclosure to its customers in accordance with the requirements of this rule.

  2. (2)

    For a new customer, the firm should make the prior disclosure before it conducts any designated investment business for him.

  3. (3)

    For an existing customer, the firm should make the prior disclosure by the earlier of:

    1. (a)

      1 July 2006; and

    2. (b)

      the date that the firm makes its first periodic disclosure to its customers in accordance with COB 7.18.12 R.

  4. (4)

    A firm will make periodic disclosure to its customers in a timely manner if it is made at least once a year.

  5. (5)

    Compliance with (1) to (4) may be relied upon as tending to establish compliance with COB 7.18.12 R (1).

COB 7.18.14G
  1. (1)

    The prior disclosure required by COB 7.18.12 R (1) should include an adequate disclosure of the firm's policy relating to the receipt of goods or services that relate to the execution of trades or the provision of research in accordance with COB 7.18.3 R (Use of dealing commission to purchase goods or services). The prior disclosure should explain generally why the firm might find it necessary or desirable to use dealing commission to purchase goods or services, bearing in mind the practices in the markets in which it does business on behalf of its customers. While the appropriate method of making such a disclosure is for the firm to decide, this could, for example, be achieved by a change to its terms of business.

  2. (2)

    In assessing the adequacy of disclosures made by an investment manager under COB 7.18.12 R, the FSA will have regard to the extent to which investment managers adopt disclosure standards developed by industry associations such as the Investment Management Association, the National Association of Pension Funds and the London Investment Banking Association.

Prohibition of inducements

COB 7.18.15R

COB 2.2.3 R (Prohibition of inducements) does not apply to an investment manager that complies with the requirements of this section in receiving goods or services in accordance with COB 7.18.3 R (Use of dealing commission to purchase goods or services).

Record keeping

COB 7.18.16R

An investment manager must make a record of each periodic disclosure it makes to its customers in accordance with COB 7.18.12 R and must maintain each such record for at least five years from the date on which it is provided.