COBS 12.2 Investment research
Application
This section applies to a firm which produces, or arranges for the production of, investment research that is intended or likely to be subsequently disseminated to clients of the firm or to the public, under its own responsibility or that of a member of its group.
[Note: article 25(1) of the MiFID implementing Directive]
The concept of dissemination of investment research to clients or to the public is not intended to include dissemination exclusively to persons within the group of the firm.
[Note: recital 33 of the MiFID implementing Directive]
Measures and arrangements required for investment research
A firm must ensure the implementation of all of the measures for managing conflicts of interest in SYSC 10.1.11 R in relation to the financial analysts involved in the production of investment research and other relevant persons whose responsibilities or business interests may conflict with the interests of the persons to whom investment research is disseminated.
[Note: article 25 (1) of the MiFID implementing Directive]
Persons whose responsibilities or business interests may reasonably be considered to conflict with the interests of the persons to whom investment research is disseminated include corporate finance personnel and persons involved in sales and trading on behalf of clients or the firm.
[Note: recital 30 of the MiFID implementing Directive]
A firm must have in place arrangements designed to ensure that the following conditions are satisfied:
- (1)
if a financial analyst or other relevant person has knowledge of the likely timing or content of investment research which is not publicly available or available to clients and cannot readily be inferred from information that is so available, that financial analyst or other relevant person must not undertake personal transactions or trade on behalf of any other person, including the firm, other than as market maker acting in good faith and in the ordinary course of market making or in the execution of an unsolicited client order, in financial instruments to which the investment research relates, or in any related financial instruments, until the recipients of the investment research have had a reasonable opportunity to act on it;
[Note: article 25(2)(a) of the MiFID implementing Directive]
- (2)
in circumstances not covered by (1), financial analyst and any other relevant persons involved in the production of investment research must not undertake personal transactions in financial instruments to which the investment research relates, or in any related financial instrument, contrary to current recommendations, except in exceptional circumstances and with the prior approval of a member of the firm's legal or compliance function;
[Note: article 25(2)(b) of the MiFID implementing Directive]
- (3)
the firm itself, financial analysts1, and other relevant persons involved in the production of investment research must not accept inducements from those with a material interest in the subject matter of the investment research;
[Note: article 25(2)(c) of the MiFID implementing Directive]
- (4)
the firm itself, financial analysts, and other relevant persons involved in the production of investment research must not promise issuers favourable research coverage; and
[Note: article 25(2)(d) of the MiFID implementing Directive]
- (5)
issuers, relevant persons other than financial analysts, and any other persons must not, before the dissemination of investment research, be permitted to review a draft of the investment research for the purpose of verifying the accuracy of factual statements made in that investment research, or for any other purpose other than verifying compliance with the firm's legal obligations, if the draft includes a recommendation or a target price.
[Note: article 25(2)(e) of the MiFID implementing Directive]
Knowledge by a financial analyst or other relevant person that the firm intends to produce or disseminate investment research to its clients or to the public (including in circumstances where research material has not yet been written) could constitute knowledge of the likely timing and content of investment research under COBS 12.2.5 R (1).
For the purposes of COBS 12.2.5 R (2):
- (1)
current recommendations should be considered to be those recommendations contained in investment research which have not been withdrawn and which have not lapsed; and
[Note: recital 34 of the MiFID implementing Directive]
- (2)
exceptional circumstances in which financial analysts and other relevant persons may, with prior written approval, undertake personal transactions in financial instruments to which investment research relates should include those circumstances where, for personal reasons relating to financial hardship, the financial analyst or other relevant person is required to liquidate a position.
[Note: recital 31 of the MiFID implementing Directive]
Small gifts or minor hospitality below a level specified in the firm's conflicts of interest policy and mentioned in the description of that policy that is made available to clients in accordance with COBS 6.1.4 R (8) should not be considered as inducements for the purposes of COBS 12.2.5 R (3).
[Note: recital 32 of the MiFID implementing Directive]
A financial analyst should not become involved in activities other than the preparation of investment research where such involvement is inconsistent with the maintenance of the financial analysts objectivity. The following should ordinarily be considered as inconsistent with the maintenance of a financial analyst's objectivity:
- (1)
participating in investment banking activities such as corporate finance business and underwriting; or
- (2)
participating in 'pitches' for new business or 'road shows' for new issues of financial instruments; or
- (3)
being otherwise involved in the preparation of issuer marketing.
[Note: recital 36 of the MiFID implementing Directive]
Exemption from investment research measures and arrangements
A firm which disseminates investment research produced by another person to the public or to clients is exempt from complying with the requirements in COBS 12.2.3 R and COBS 12.2.5 R if the following criteria are met:
- (1)
the person that produces the investment research is not a member of the group to which the firm belongs;
- (2)
the firm does not substantially alter the recommendations within the investment research;
- (3)
the firm does not present the investment research as having been produced by it; and
- (4)
the firm verifies that the producer of the investment research is subject to requirements equivalent to those in COBS 12.2.3 R and COBS 12.2.5 R in relation to the production of that investment research, or has established a policy setting such requirements.
[Note: article 25(3) of the MiFID implementing Directive]
Means and timing of publication of investment research
The FSA would expect a firm's conflicts of interest policy to provide for investment research to be published or distributed to its clients in an appropriate manner. For example, the FSA considers 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 distribution channels; and
- (2)
inappropriate for an employee (whether or not a financial analyst) to communicate the substance of any investment research, except as set out in the firm's conflicts of interest policy.
The FSA would expect a firm to 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 financial instrument. A firm would therefore be expected to consider whether its conflicts of interest 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.
Investment research for internal use
The FSA considers that the significant conflicts of interest which could arise are likely to mean it is inappropriate for a financial analyst or other relevant person to prepare investment research which is intended firstly for internal use for the firm's own advantage, and then for later publication to its clients (in circumstances in which it might reasonably be expected to have a material influence on its clients' investment decisions).