1This chapter3 applies 3to a firm.3

1. (1)

   [deleted]3

2. (2)

   [deleted]3

In this chapter, provisions marked "EU" apply to a firm which is not a MiFID investment firm3 as if they were rules.

2The section on the use of dealing commission applies to a firm that acts as an investment manager.

The section on personal account dealing applies to the designated investment business of a firm in relation to activities carried on from an establishment in the United Kingdom.

3The section on best execution (COBS 11.2) does not apply to a firm when:

1. (1)

   executing orders: or

2. (2)

   placing orders with other entities for execution: or

3. (3)

   transmitting orders to other entities for execution;

in relation to a spread-bet which is not a financial instrument, where the firm has not made a personal recommendation in relation to that spread-bet.

4The section on best execution (COBS 11.2) does not apply to a firm when, acting in the capacity of operator of a regulated collective investment scheme, it purchases or sells units in that scheme.

A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors.

2A management company must, in relation to each UCITS scheme or EEA UCITS scheme it manages, act in the best interests of the scheme when executing decisions to deal on its behalf in the context of the management of its portfolio, and COBS 11.2.1 R applies in relation to all such decisions.

When executing a client order, a firm must take into account the following criteria for determining the relative importance of the execution factors:

1. (1)

   the characteristics of the client including the categorisation of the client as retail or professional;

2. (2)

   the characteristics of the client order;

3. (3)

   the characteristics of financial instruments that are the subject of that order;

4. (4)

   the characteristics of the execution venues to which that order can be directed; and2

5. (5)

   for a management company, the objectives, investment policy and risks specific to the UCITS scheme or EEA UCITS scheme, as indicated in its prospectus or instrument constituting the fund.32

   3

Where a firm executes an order on behalf of a retail client, the best possible result must be determined in terms of the total consideration, representing the price of the financial instrument and the costs related to execution, which must include all expenses incurred by the client which are directly related to the execution of the order, including execution venue fees, clearing and settlement fees and any other fees paid to third parties involved in the execution of the order.

For the purposes of delivering best execution for a retail client where there is more than one competing venue to execute an order for a financial instrument, in order to assess and compare the results for the client that would be achieved by executing the order on each of the execution venues listed in the firm's order execution policy that is capable of executing that order, the firm's own commissions and costs for executing the order on each of the eligible execution venues must be taken into account in that assessment.

A firm must not structure or charge its commissions in such a way as to discriminate unfairly between execution venues.

A firm must establish and implement effective arrangements for complying with the obligation to take all reasonable steps to obtain the best possible result for its clients. In particular, the firm must establish and implement an order execution policy to allow it to obtain, for its client orders, the best possible result in accordance with that obligation.

The order execution policy must include, in respect of each class of financial instruments, information on the different execution venues where the firm executes its client orders and the factors affecting the choice of execution venue. It must at least include those execution venues that enable the firm to obtain on a consistent basis the best possible result for the execution of client orders.

1. (1)

   Whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction.

[Note: article 21(1) of MiFID]

1. (2)

   A firm satisfies its obligation under this section to take all reasonable steps to obtain the best possible result for a client to the extent that it executes an order, or a specific aspect of an order, following specific instructions from the client relating to the order or the specific aspect of the order.

[Note: article 44(2) of the MiFID implementing Directive]

A firm must provide appropriate information to its clients on its order execution policy.

1. (1)

   A firm must provide a retail client with the following details on its execution policy in good time prior to the provision of the service:

   1. (a)

      an account of the relative importance the firm assigns, in accordance with the execution criteria, to the execution factors, or the process by which the firm determines the relative importance of those factors;

   2. (b)

      a list of the execution venues on which the firm places significant reliance in meeting its obligation to take all reasonable steps to obtain on a consistent basis the best possible result for the execution of client orders;

   3. (c)

      a clear and prominent warning that any specific instructions from a client may prevent the firm from taking the steps that it has designed and implemented in its execution policy to obtain the best possible result for the execution of those orders in respect of the elements covered by those instructions.

2. (2)

   This information must be provided in a durable medium, or by means of a website (where that does not constitute a durable medium) provided that the website conditions are satisfied.

2A management company must make available appropriate information on its execution policy and on any material changes to that policy to the Unitholders of each scheme it manages.

Where the order execution policy provides for the possibility that client orders may be executed outside a regulated market or an MTF, the firm must, in particular, inform its clients about this possibility.

1. (1)

   A firm (other than a management company providing collective portfolio management services for a UCITS scheme or an EEA UCITS scheme) must obtain the prior consent of its clients to the execution policy.2

2. (2)

   In the case of a management company providing collective portfolio management services for an ICVC that is a UCITS scheme, or for an EEA UCITS scheme that is structured as an investment company, the management company must obtain the prior consent of the ICVC or investment company to the execution policy.2

3. (3)

   In the case of a management company that is the ACD of an ICVC that is a UCITS scheme, (2) does not apply where the ACD is the sole director of the ICVC.2

A firm must obtain the prior express consent of its clients before proceeding to execute their orders outside a regulated market or an MTF. The firm may obtain this consent either in the form of a general agreement or in respect of individual transactions.

A firm must monitor the effectiveness of its order execution arrangements and execution policy in order to identify and, where appropriate, correct any deficiencies. In particular, it must assess, on a regular basis, whether the execution venues included in the order execution policy provide for the best possible result for the client or whether it needs to make changes to its execution arrangements. The firm must notify clients of any material changes to their order execution arrangements or execution policy.

1. (1)

   A firm must review annually its execution policy, as well as its order execution arrangements.

2. (2)

   This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for the execution of its client orders on a consistent basis using the venues included in its execution policy.

1. (1)

   A firm other than a management company must be able to demonstrate to its clients, at their request, that it has executed their orders in accordance with its execution policy.

   2
2. (2)

   A management company must be able to demonstrate that it has executed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with its execution policy.2

A firm must, when providing the service of portfolio management or, for a management company, collective portfolio management,2 comply with the obligation to act in accordance with the best interests of its clients when placing orders with other entities for execution that result from decisions by the firm to deal in financial instruments on behalf of its client.

A firm must, when providing the service of reception and transmission of orders, comply with the obligation to act in accordance with the best interests of its clients when transmitting client orders to other entities for execution.

In order to comply with the obligation to act in accordance with the best interests of its clients when it places an order with, or transmits an order to, another entity for execution, a firm must:

[Note: article 45(3) of the MiFID implementing Directive and article 26(1) of the UCITS implementing Directive]2

1. (1)

   take all reasonable steps to obtain the best possible result for its clients taking into account the execution factors. The relative importance of these factors must be determined by reference to the execution criteria and, for retail clients,2 to the requirement to determine the best possible result in terms of the total consideration (see COBS 11.2.7 R).

   A firm satisfies its obligation to act in accordance with the best interests of its clients, and is not required to take the steps mentioned above, to the extent that it follows specific instructions from its client when placing an order with, or transmitting an order to, another entity for execution;

   2

[Note: paragraph 1 and 2 of article 45(4) of the MiFID implementing Directive and article 26(2) first paragraph of the UCITS implementing Directive]2

1. (2)

   establish and implement a policy to enable it to comply with the obligation to take all reasonable steps to obtain the best possible result for its clients. The policy must identify, in respect of each class of instruments, the entities with which the orders are placed or to which the firm transmits orders for execution. The entities identified must have execution arrangements that enable the firm to comply with its obligations under this section or, for a management company, must only enter into arrangements for execution where those arrangements are consistent with the requirements of this section,2 when it places an order with, or transmits an order to, that entity for execution;

[Note: paragraph 1 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph of the UCITS implementing Directive]2

1. (3)

   provide appropriate information to its clients on the policy established in accordance with COBS 11.2.32R (2) or, for a management company, make available to Unitholders appropriate information on that policy and on any material changes to it;2

[Note: paragraph 2 of article 45(5) of the MiFID implementing Directive and article 26(2) second paragraph last sentence of the UCITS implementing Directive]2

1. (4)

   monitor on a regular basis the effectiveness of the policy and, in particular, the execution quality of the entities identified in that policy and, where appropriate, correct any deficiencies; and

[Note: first paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) first paragraph of the UCITS implementing Directive]2

1. (5)

   review the policy annually. This review must also be carried out whenever a material change occurs that affects the firm's ability to continue to obtain the best possible result for its clients.

[Note: second paragraph of article 45(6) of the MiFID implementing Directive and article 26(3) second paragraph of the UCITS implementing Directive]2

2A management company must be able to demonstrate that it has placed orders on behalf of any UCITS scheme or EEA UCITS scheme it manages in accordance with the policy referred to in COBS 11.2.32 R (2).

The provisions applying to a firm which places orders with, or transmits orders to, other entities for execution (see COBS 11.2.30 R to COBS 11.2.33 G) will not apply when the firm which provides the service of portfolio management or collective portfolio management2 and/or service of reception and transmission of orders also executes the orders received or the decisions to deal on behalf of its client's portfolio. In those cases the requirements of this section for firms who execute orders apply (see COBS 11.2.1 R to COBS 11.2.29 R).

1. (1)

   A firm (other than a management company providing collective portfolio management services)1 which is authorised to execute orders on behalf of clients must implement procedures and arrangements which provide for the prompt, fair and expeditious execution of client orders, relative to other orders or the trading interests of the firm.

[Note: paragraph 1 of article 22(1) of MiFID]

1. (2)

   These procedures or arrangements must allow for the execution of otherwise comparable orders in accordance with the time of their reception by the firm.

[Note: paragraph 2 of article 22(1) of MiFID]

1. (3)

   A management company providing collective portfolio management services, must establish and implement procedures and arrangements in respect of all client orders it carries out which provide for the prompt, fair and expeditious execution of portfolio transactions on behalf of the UCITS scheme or EEA UCITS scheme it manages.1

[Note: article 27(1) first paragraph of the UCITS implementing Directive]1

A firm must satisfy the following conditions when carrying out client orders:

1. (1)

   it must ensure that orders executed on behalf of clients are promptly and accurately recorded and allocated;

2. (2)

   it must carry out otherwise comparable orders sequentially and promptly unless the characteristics of the order or prevailing market conditions make this impracticable, or the interests of the client require otherwise; and

3. (3)

   it must inform a retail client about any material difficulty relevant to the proper carrying out of orders promptly upon becoming aware of the difficulty.

Where a firm is responsible for overseeing or arranging the settlement of an executed order or executes the order itself in the course of providing collective portfolio management services,1 it must take all reasonable steps to ensure that any clientfinancial instruments or client funds received in settlement of that executed order are promptly and correctly delivered to the account of the appropriate client.

A firm must not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its relevant persons.

A firm is not permitted to carry out a client order or a transaction for own account in aggregation with another client order unless the following conditions are met:

1. (1)

   it must be unlikely that the aggregation of orders and transactions will work overall to the disadvantage of any client whose order is to be aggregated;

2. (2)

   it must be disclosed to each client whose order is to be aggregated that the effect of aggregation may work to its disadvantage in relation to a particular order;

3. (3)

   an order allocation policy must be established and effectively implemented, providing in sufficiently precise terms for the fair allocation of aggregated orders and transactions, including how the volume and price of orders determines allocations and the treatment of partial executions.

If a firm aggregates a client order with one or more other orders and the aggregated order is partially executed, it must allocate the related trades in accordance with its order allocation policy.

A firm which has aggregated transactions for own account with one or more client orders must not allocate the related trades in a way which is detrimental to a client.

1. (1)

   If a firm aggregates a client order with a transaction for own account and the aggregated order is partially executed, it must allocate the related trades to the client in priority to the firm.

2. (2)

   However, if the firm is able to demonstrate on reasonable grounds that without the combination it would not have been able to carry out the order on such advantageous terms, or at all, it may allocate the transaction for own account proportionally, in accordance with its order allocation policy.

A firm must, as part of its order allocation policy, put in place procedures to prevent the reallocation, in a way that is detrimental to the client, of transactions for own account which are executed in combination with client orders.

Unless a client expressly instructs otherwise, a firm must, in the case of a clientlimit order in respect of shares admitted to trading on a regulated market which is not immediately executed under prevailing market conditions, take measures to facilitate the earliest possible execution of that order by making public immediately that clientlimit order in a manner which is easily accessible to other market participants.

The obligation to make public a limit order will not apply to a limit order that is large in scale compared with normal market size.

This section applies to a firm that acts as an investment manager when it executescustomer orders that relate to:

1. (1)

   shares; and

2. (2)
   1. (a)

      warrants;

   2. (b)

      certificates representing certain securities;

   3. (c)

      options; and

   4. (d)

      rights to or interests in investments of the nature referred to in (a) to (c);

3. to the extent that they relate to shares.

1. (1)

   Subject to (3), an3investment manager must not accept any good or service3in addition to the execution of its customer orders if it:

   33
   1. (a)

      executes its customer orders through a broker or another person;

   2. (b)

      passes on the broker's or other person'scharges to its customers; and

   3. (c)

      is offered that good or service3 in return for the charges referred to in (b).

      3
2. (2)

   [deleted]3

3. (3)

   3The prohibition under (1) does not apply where:

   1. (a)

      the investment manager has reasonable grounds to be satisfied that the good or service received in return for the charges in (1)(b) will reasonably assist the investment manager in the provision of its services to its customers, on whose behalf the relevant customer orders are being executed;

   2. (b)

      the investment manager's receipt of that good or service in return for the charges in (1)(b) does not, and is not likely to, impair compliance with the duty of the investment manager to act in the best interests of its customers; and

   3. (c)

      that good or service either:

      1. (i)

         is directly related to the execution of trades on behalf of the investment manager'scustomers; or

      2. (ii)

         amounts to the provision of substantive research.

An investment manager that enters into arrangements under this section must make adequate prior disclosure to customers concerning the receipt of goods or services that directly relate to the execution of trades or amount to the provision of substantive research3. This prior disclosure should form part of the summary form disclosure under the rule on inducements (COBS 2.3.1 R).

If an investment manager enters into arrangements in accordance with the rule on use of dealing commission (COBS 11.6.3 R), it must in a timely manner make adequate periodic disclosure to its customers of the arrangements entered into.

Adequate prior and periodic disclosure under this section must include details of the goods or services that directly relate to the execution of trades and, wherever appropriate, separately identify the details of the goods or services that are attributable amount to the provision of substantive research3.

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

A firm that conducts designated investment business must establish, implement and maintain adequate arrangements aimed at preventing the following activities in the case of any relevant person who is involved in activities that may give rise to a conflict of interest, or who has access to inside information as defined in the Market Abuse Directive or to other confidential information relating to clients or transactions with or for clients by virtue of an activity carried out by him on behalf of the firm:

1. (1)

   entering into a personal transaction which meets at least one of the following criteria:

   1. (a)

      that person is prohibited from entering into it under the Market Abuse Directive;

   2. (b)

      it involves the misuse or improper disclosure of that confidential information;

   3. (c)

      it conflicts or is likely to conflict with an obligation of the firm to a customer under the regulatory system or any other obligation of the firm under MiFID or the UCITS Directive;2

2. (2)

   advising or procuring, other than in the proper course of his employment or contract for services, any other person to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;

3. (3)

   disclosing, other than in the normal course of his employment or contract for services, any information or opinion to any other person if the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps:

   1. (a)

      to enter into a transaction in designated investments which, if a personal transaction of the relevant person, would be covered by (1) or a relevant provision;

   2. (b)

      to advise or procure another person to enter into such a transaction.

For the purposes of this section, the relevant provisions are:

1. (1)

   the rules on personal transactions undertaken by financial analysts in COBS 12.2.5 R (1) and (2);

2. (2)

   the rule on the misuse of information relating to pending client orders in COBS 11.3.5 R.

The arrangements required under this section must in particular be designed to ensure that:

1. (1)

   each relevant person covered by this section is aware of the restrictions on personal transactions, and of the measures established by the firm in connection with personal transactions and disclosure, in accordance with this section;

2. (2)

   the firm:

   1. (a)

      is informed promptly of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions; or

   2. (b)

      in the case of outsourcing arrangements, ensures that the service provider to which the activity is outsourced maintains a record of personal transactions entered into by any relevant person and provides that information to the firm promptly on request;

3. (3)

   a record is kept of the personal transaction notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction.

This section does not apply to the following kinds of personal transaction:

1. (1)

   personal transactions effected under a discretionary portfolio management service where there is no prior communication in connection with the transaction between the portfolio manager and the relevant person or other person for whose account the transaction is executed;

2. (2)

   personal transactions in units or shares in collective undertakings that comply with the conditions necessary to enjoy the rights conferred by the UCITS Directive or are subject to supervision under the law of an EEA State which requires an equivalent level of risk spreading in their assets, where the relevant person and any other person for whose account the transactions are effected, are not involved in the management of that undertaking;

3. (3)

   personal transactions in life policies.

For the purposes of this section, a person who is not:

1. (1)

   a director, partner or equivalent, manager or appointed representative (or, where applicable, a tied agent) of the firm; or

2. (2)

   a director, partner or equivalent, or manager of any appointed representative (or where applicable, a tied agent) of the firm;

will only be a relevant person to the extent that they are involved in the provision of designated investment business or collective portfolio management services.2

Where successive personal transactions are carried out on behalf of a person in accordance with prior instructions given by that person, the obligations under this section do not apply:

1. (1)

   separately to each successive transaction if those instructions remain in force and unchanged; or

2. (2)

   to the termination or withdrawal of such instructions, provided that any financial instruments which had previously been acquired pursuant to the instructions are not disposed of at the same time as the instructions terminate or are withdrawn.

Obligations under this section do apply in relation to a personal transaction, or the commencement of successive personal transactions, that are carried out on behalf of the same person if those instructions are changed or if new instructions are issued.

1This section applies to a firm:

1. (1)

   which carries out any of the following activities:

   1. (a)

      receiving client orders;

   2. (b)

      executing client orders;

   3. (c)

      arranging for client orders to be executed;

   4. (d)

      carrying out transactions on behalf of the firm, or another person in the firm's group, and which are part of the firm's trading activities or the trading activities of another person in the firm's group;

   5. (e)

      executing orders that result from decisions by the firm to deal on behalf of its client;

   6. (f)

      placing orders with other entities for execution that result from decisions by the firm to deal on behalf of its client;

2. (2)

   to the extent that the activities referred to in (1) relate to:

   1. (a)

      qualifying investments admitted to trading on a prescribed market;

   2. (b)

      qualifying investments in respect of which a request for admission to trading on such a market has been made;

   3. (c)

      investments which are related investments in relation to such qualifying investments.

This section does not apply to the carrying on of the following activities:

1. (1)

   activities carried on between operators, or between operators and depositories, of the same fund3 (when acting in that capacity);

   3
2. (2)

   corporate finance business;

3. (3)

   corporate treasury functions.

This section does not apply to the following firms or persons:

1. (1)

   a service company;

2. (2)

   a non-directive friendly society;

3. (3)

   a non-directive insurer;

4. (4)

   a UCITS qualifier.

This section applies only with respect to a firm's activities carried on from an establishment maintained by the firm in the United Kingdom.

A firm must take reasonable steps to record relevant telephone conversations, and keep a copy of relevant electronic communications, made with, sent from or received on equipment:

1. (1)

   provided by the firm to an employee or contractor; or

2. (2)

   the use of which by an employee or contractor has been sanctioned or permitted by the firm;

to enable that employee or contractor to carry out any of the activities referred to in COBS 11.8.1 R.

2A firm must take reasonable steps to prevent an employee or contractor from making, sending or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the firm is unable to record or copy.

The obligation in COBS 11.8.5 R and COBS 11.8.5A R2does not apply to:

1. (1)

   [deleted]2

   2
2. (2)

   a discretionary investment manager, in respect of telephone conversations or electronic communications made with, sent to or received from a firm which the discretionary investment manager reasonably believes is subject to the recording obligation in COBS 11.8.5 R in respect of that conversation or communication; or

3. (3)

   a discretionary investment manager, in respect of telephone conversations or electronic communications made with, sent to or received from a person who is not subject to the recording obligation in COBS 11.8.5 R, provided that such telephone conversations or electronic communications are made with, sent to or received from such persons on an infrequent basis, and represent a small proportion of the total telephone conversations and electronic communications made, sent or received by the discretionary investment manager to which COBS 11.8.5 R apply.

For the purposes of COBS 11.8.5 R and COBS 11.8.5A R2 a relevant conversation or communication is any one of the following:

1. (1)

   a conversation or communication between an employee or contractor of the firm with a client, or when acting on behalf of a client, with another person, which concludes an agreement by the firm to carry out the activities referred to in COBS 11.8.1 R as principal or as agent;

2. (2)

   a conversation or communication between an employee or contractor of the firm with a professional client or an eligible counterparty, or when acting on behalf of a professional client or an eligible counterparty, with another person, which is carried on with a view to the conclusion of an agreement referred to in (1) above, and whether or not it is part of the same conversation or communication as in (1).

A firm must take reasonable steps to retain all records made by it under COBS 11.8.5 R:

1. (1)

   for a period of at least 6 months from the date the record was created;

2. (2)

   in a medium that allows the storage of the information in a way accessible for future reference by the FCA, and so that the following conditions are met:

   1. (a)

      the FCA must be able to access the records readily;

   2. (b)

      it must be possible for any corrections or other amendments, and the contents of the records prior to such corrections and amendments, to be easily ascertained;

   3. (c)

      it must not be possible for the records to be otherwise manipulated or altered.