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COB 7.13 Personal account dealing

Application

COB 7.13.1 R

This section applies to a firm that conducts designated investment business.

COB 7.13.2 G

This section has been written in accordance with the FSA's responsibilities under articles 10 and 11 of the Investment Services Directive.These rules also form part of the conditions applied to EEA firms with a UK branch office in the interest of the general good under article 17 of the Investment Services Directive.

Purpose

COB 7.13.3 G

Principle 3 (Management and control) requires a firm to take reasonable care to organise and control its affairs responsibly and effectively. Principle 8 (Conflicts of interest) requires a firm to manage conflicts of interest fairly between itself and its customers. This section is designed to ensure that a firm'scustomers are not disadvantaged by the personal dealings of the firm'semployees. Firms will, therefore, need to ensure that appropriate controls and monitoring arrangements are implemented and maintained.

Restrictions on personal account dealing

COB 7.13.4 R

A firm must take reasonable steps to ensure that:

  1. (1)

    a personal account transaction in a designated investment undertaken by any of its employees does not conflict with the firm's duties to its customers under the regulatory system, unless COB 7.13.6 R applies; and

  2. (2)

    when it permits an employee to undertake a personal account transaction in a designated investment in relation to which the firm conducts designated investment business, or in any related investment, it receives prompt notification of, or is otherwise able to identify, that transaction.1

COB 7.13.5 G

Firms should note that an employee is defined in the Glossary (for the purposes of this section) as meaning not just an individual who is employed or appointed by a firm but also an individual who is:

  1. (1)

    an appointed representative of a firm; or

  2. (2)

    employed or appointed by an appointed representative of a firm, whether under a contract of service or services or otherwise.

So, where a firm has one or more appointed representatives, COB 7.13.4 R will apply to the firm in relation to, for example, employees of its appointed representative in exactly the same way as it would were those individuals employed by the firm itself.

Exceptions

COB 7.13.6 R

COB 7.13.4 R does not apply to:

  1. (1)

    an employee who is a sole trader whose regulated activities consist only of own account transactions; or

  2. (2)

    an employee, if the firm has taken reasonable steps to determine that the employee will not be involved to any material extent in, or have access to information about, the firm'sdesignated investment business. Firms are reminded that there are further provisions relating to the management and activities of investment analysts in COB 7.16.

COB 7.13.6A G

For the purposes of COB 7.13.6 R (2), the FSA considers that an investment analyst is likely to be involved to a material extent in the firm'sdesignated investment business. Firms are reminded that there are further provisions relating to the management and activities of investment analysts in COB 7.16.2

Reasonable steps

COB 7.13.7 E
  1. (1)

    For the purposes of COB 7.13.4 R, a firm's "reasonable steps" should ensure that:

    1. (a)

      the restrictions, and the basis, if any, upon which its employees may undertake personal account transactions, are set out in a written notice drawn explicitly to the attention of each employee, and that the contents of such a notice are made a term of his contract of employment or contract for services;

    2. (a)A

      an investment analyst may not undertake a personal account transaction in a designated investment if the investment analyst prepares investment research which is published or distributed to clients:

      1. (i)

        on that designated investment or its issuer; or

      2. (ii)

        on a related investment, or its issuer;unless the personal account transaction is:

      3. (iii)

        not contrary to any published or distributed recommendation for which he is responsible as an employee of the firm, which has not been withdrawn; or

      4. (iv)

        to realise the cash value of a holding or position, is undertaken in order to meet an obligation of the investment analyst which is not related to any designated investment within (i) or (ii), and is one to which the firm has given its permission in writing;2

    3. (b)

      the written notice in (1)(a) states that, if an employee is precluded from entering into a transaction for his own account, he must not (except in the proper course of his employment):

      1. (i)

        procure any other person to enter into such a transaction; or

      2. (ii)

        communicate any information or opinion to any other person if he knows, or ought to know, that the person will, as a result, enter into such a transaction, or counsel or procure some other person to do so; and

    4. (c)

      procedures are established and maintained by the firm that are appropriate to its business, and that are designed with a view to ensuring that:

      1. (i)

        each of its employees does not undertake a personal account transaction in a designated investment in relation to which the firm conducts designated investment business, or in any related investment, unless the firm has given its permission in writing to that transaction, or to transactions generally in designated investments of that kind;1

      2. (ii)

        when the firm gives such permission, the requirements in COB 7.13.4 R (1) are complied with.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COB 7.13.4 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of COB 7.13.4 R.

COB 7.13.8 G

A firm will be able to identify its employees' personal account transactions under COB 7.13.4 R (2) if it designates its employees' own accounts in a way that enables them to be distinguished from other customers' accounts.

COB 7.13.9 G

When an employee undertakes a personal account transaction through a person other than the firm or its associate, a copy of the note confirming details of the transaction issued by that person will be sufficient notification for the purposes of COB 7.13.4 R (1).

COB 7.13.10 G

Firms should note that for the purposes of COB 7.13.7 E (1), while they may look to a third party to make the appropriate arrangements to ensure that the "reasonable steps" referred to in that provision are taken, ultimate responsibility for ensuring that such steps are in fact carried out rests with the firm. Therefore a firm, which has entered into arrangements with its appointed representative under which that appointed representative agrees to carry out the steps in COB 7.13.7 E (1)(a) in relation to individuals employed by the appointed representative, remains responsible should the appointed representative fail, for any reason, to carry out the necessary steps. In relation to COB 7.13.7 E (1)(c)(i), it should be noted that all permissions have to be given by the firm itself.2

COB 7.13.10A G
  1. (1)

    Because of the nature of the conflicts of interest that arise, a firm may decide:

    1. (a)

      that an investment analyst should be prohibited from carrying out any personal account transactions at all; or

    2. (b)

      that an investment analyst should be prohibited from undertaking a personal account transaction in a designated investment if the investment analyst prepares investment research:

      1. (i)

        on that designated investment or its issuer; or

      2. (ii)

        on a related investment, or its issuer; or

      3. (iii)

        on a designated investment or an issuer which belongs to the same industry or business sector as that designated investment; or

    3. (c)

      that there should be a prohibition on personal account transactions by investment analysts for a limited time covering a period before and after the intended publication date for investment research.

  2. (2)

    If a firm does impose a prohibition, it may wish to make clear to the employee whether or not the prohibition extends to the sorts of transaction which the Glossary excludes from the definition of personal account transaction (for example, transactions in units in regulated collective investment schemes, and certain discretionary transactions).2

Record keeping requirements

COB 7.13.11 R
  1. (1)

    A firm must make a record of:

    1. (a)

      the restrictions upon personal account dealing and the basis upon which any permission to deal is made;

    2. (b)

      each permission given by it under COB 7.13.4 R (2) ;

    3. (c)

      each notification made to it under COB 7.13.4 R (2) ;

    4. (d)

      in respect of COB 7.13.6 R (2), the basis upon which the firm has determined that an employee will not be involved in, or have access to information about, the firm'sdesignated investment business; and

    retain these records for the minimum period specified in (2), (3) or (4), as the case may be.

  2. (2)

    In relation to a record under (1)(a), the period is three years from the date that the restrictions or basis were communicated to the employee.

  3. (3)

    In relation to each permission and notification in (1)(b) and (c), the period is three years from the date that the permission or notification was made.

  4. (4)

    In relation to a record under (1)(d), the period is three years after the date on which the individual ceases to be an employee.

COB 7.13.12 G

A firm's records under COB 7.13.11 R (1) should be sufficiently detailed to identify the position in relation to (1)(a) to (d) for each of its employees. So where the firm gives permission under (1)(b) to a particular employee, as opposed to employees generally, an individual record of that permission is required to be made and retained. However, where the firm's restrictions on personal account dealing are set out in, for example, a standard booklet which is issued to all its employees, it is sufficient for the purposes of (1)(a) for the firm's records to show what global restrictions were in place at any given moment in time and it is not necessary for there to be a record of each booklet that was issued to each employee.