COB 7.3 Dealing ahead of investment research
Application
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.2
Purpose
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.2
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.2
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.2
Requirement not to undertake own account transactions
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.21
Firms are reminded of the Chinese wall provisions in COB 2.4.6 R (Attribution of knowledge)).1
Exceptions
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] 1
- (5)
[deleted]2
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.2