COBS 11.6 Use of dealing commission1

1This section deals with the acceptance of certain inducements by investment managers and builds upon the rule on inducements (COBS 2.3.1 R). Investment managers should ensure they comply with both this section and the rule on inducements.

2COBS 11.6.3 R applies to a full-scope UK AIFM that is an internally managed AIF in accordance with the modification in COBS 18.5.4C R.

An example of goods or servicesrelating to the execution of trades that the FCA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) is post-trade analytics.

Examples of goods or services that relate to the provision of research that the FCA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) include price feeds or historical price data that have not been analysed or manipulated to reach meaningful conclusions.

Examples of goods or services that relate to the execution of trades or the provision of research that the FCA does not regard as meeting the requirements of either evidential provisions COBS 11.6.4 E or COBS 11.6.5 E include:

1. (1)

   services relating to the valuation or performance measurement of portfolios;

2. (2)

   computer hardware;

3. (3)

   connectivity services such as electronic networks and dedicated telephone lines;

4. (4)

   seminar fees;

5. (5)

   subscriptions for publications;

6. (6)

   travel, accommodation or entertainment costs;

7. (7)

   order and execution management systems;

8. (8)

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

9. (9)

   membership fees to professional associations;

10. (10)

    purchase or rental of standard office equipment or ancillary facilities;

11. (11)

    employees' salaries;

12. (12)

    direct money payments;

13. (13)

    publicly available information; and

14. (14)

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

The reference to research in the rule on use of dealing commission (COBS 11.6.3 R) is not confined to investment research as defined in the Glossary. The FCA'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 FCA regards as not acceptable under COBS 11.6.6 G or COBS 11.7.6 R should be viewed as not meeting the requirements of COBS 11.6.3R (2), notwithstanding that their content might qualify as investment research.

This section applies only to arrangements under which an investment manager receives from brokers or other persons goods or services that relateto 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.

An investment manager should not enter into any arrangements that could compromise its ability to comply with its best execution obligations (COBS 11.2).

The rule on prior disclosure of goods and services under this section complements the requirements on the disclosure of inducements (COBS 2.3.1 R (2)(b)). Investment managers should ensure they comply with both requirements where relevant.

1. (1)

   The prior disclosure required by this section 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 the rule on use of dealing commission (COBS 11.6.3 R).

2. (2)

   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 in a client agreement.

In assessing the adequacy of prior and periodic disclosures made by an investment manager under this section, the FCA will have regard to the extent to which the investment manager adopts disclosure standards developed by industry associations such as the Investment Management Association, the National Association of Pension Funds and the Association for Financial Markets in Europe.