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COB 7.16 Investment research


COB 7.16.1R

1This section applies to a firm that prepares investment research for publication or distribution to its clients, or that publishes or distributes investment research to its clients.


COB 7.16.2G

1The purpose of this section is to amplify relevant Principles, and set out particular steps a firm should take, in relation to investment analysts and investment research. The FSA considers that in this context Principle 1 (Integrity), Principle 2 (Skill, care and diligence), Principle 3 (Management and control), Principle 5 (Market Conduct), Principle 6 (Customers' interests), Principle 7 (Communication with clients) and Principle 8 (Conflicts of interest) are particularly relevant.

Conflicts of interest in investment research: general

COB 7.16.3G

1The FSA considers that conflicts of interest are much less likely to arise if investment research is solely for a firm's own internal use, for example 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 firstly for internal use for the firm's own advantage, and then for later publication to clients (in circumstances in which it might reasonably be expected to have a material influence on the clients' investment decisions).

COB 7.16.4G

1The obligations referred to in COB 7.16.2 G apply to all types of investment research. A firm's senior management is responsible for ensuring that its systems, controls and procedures are robust and adequate to identify and manage the conflicts of interest which arise in relation to investment research or similar publications, and to ensure, as far as practicable, that those arrangements operate effectively. The FSA does not consider that these conflicts of interest can be adequately managed by disclosure alone.

Policies for managing conflicts of interest: impartial investment research

COB 7.16.5R
  1. (1)

    1This rule applies to a firm that publishes or distributes investment research and where either:

    1. (a)

      the firm holds it out (in whatever terms) as being an impartial assessment of the value or prospects of its subject matter; or

    2. (b)

      it is reasonable for those to whom the firm has published or distributed it to rely on it as an impartial assessment of the value or the prospects of its subject matter.

  2. (2)

    If this rule applies, a firm must:

    1. (a)

      establish and implement a policy, appropriate to the firm, for managing effectively the conflicts of interest which might affect the impartiality of investment research of the type described in (1);

    2. (b)

      make a record of the policy and retain it until at least three years after it ceases to have effect;

    3. (c)

      take reasonable steps to ensure that it and its employees comply with the policy;

    4. (d)

      make available to any person in writing, on request, a copy of the policy (for example, by including it on an appropriate website); and

    5. (e)

      take reasonable steps to ensure that the policy remains appropriate and effective.

  3. (3)

    The policy must identify the types of investment research to which it applies, and must make provision for systems, controls and procedures (making clear the extent to which the firm's policy relies on Chinese walls or other information barriers within the firm):

    1. (a)

      to identify conflicts of interest which might affect the impartiality of the investment research to which the policy relates; and

    2. (b)

      to manage effectively conflicts of interest, to the extent that they arise or might arise within the firm, in relation to at least the following:

      1. (i)

        the supervision and management of investment analysts;

      2. (ii)

        the remuneration structure for investment analysts;

      3. (iii)

        the extent to which investment analysts may become involved in activities other than the preparation of the investment research;

      4. (iv)

        the extent to which (if at all) inducements offered by issuers, or others with material interest in the subject matter of investment research, may be accepted by investment analysts or senior employees of the firm;

      5. (v)

        who may comment on draft investment research before publication, and the process for taking account of their comments;

      6. (vi)

        the timing and manner of publication and distribution of investment research and of the communication of its substance; and

      7. (vii)

        what information or disclosures are appropriate to include in the investment research (taking due account of matters required by law).

COB 7.16.6G
  1. (1)

    1Investment research may be held out as impartial in various ways, for example if it is labelled with that term or similar terms like 'independent' or 'objective'. Even without this kind of labelling on the investment research itself, it may still be held out as impartial if, for example, the firm's representatives state that it is so (in writing or orally), or behave in a way that reasonably gives that impression.

  2. (2)

    The policy a firm makes available under COB 7.16.5 R(2) is likely to be implemented by detailed procedures and operational arrangements. Those detailed procedures and operational arrangements need not be published.

Policy content: general

COB 7.16.7G

1Firms should organise the investment research function (including the way in which their investment analysts are supervised and remunerated) in a way which minimises the potential influence of the commercial interests of the firm, its employees, its associates, or its clients, on the impartiality of its investment research.

COB 7.16.8G

1A firm's policy under COB 7.16.5 R should be appropriate for its own structure and business. The policy will therefore need to take account of the following factors (further guidance on what an appropriate policy might cover is set out in COB 7.16.9 G to COB 7.16.15 G, not all of which will be relevant to every firm):

  1. (1)

    the firm's size and organisational structure;

  2. (2)

    the classification under COB 4.1 of its clients, to whom the investment research is published or distributed, and their experience and expertise;

  3. (3)

    the nature of the investments in relation to which (or in relation to the issuers of which) the firm publishes or distributes investment research; and

  4. (4)

    the nature of the business which it conducts with or for its clients and on its own account.

Policy content: supervision and remuneration of analysts

COB 7.16.9G

1If an individual (such as someone involved in raising capital for a corporate client) has responsibilities that might reasonably be considered to conflict with the interests of the clients to whom the investment research is published or distributed, it will not usually be appropriate for him to be responsible for:

  1. (1)

    the day to day supervision or control of an investment analyst;

  2. (2)

    decisions on the subject matter or content of investment research or the timing of its publication (though it may be appropriate for him to have an opportunity to check the accuracy of the facts relied on in the investment research);

  3. (3)

    determining the remuneration of an investment analyst.

COB 7.16.10G
  1. (1)

    1An investment analyst's remuneration should be structured so as not to create (or reasonably suggest the creation of) an incentive which is inconsistent with the provision of an impartial assessment of the subject matter of investment research by the analyst.

  2. (2)

    An investment analyst's remuneration should not be linked to a specific transaction, or to recommendations contained in investment research, but it may be linked to the general profits of the firm.

Policy content: involvement of analysts in other activities

COB 7.16.11G
  1. (1)

    1An investment analyst should not be involved in activities in a way which suggests that he is representing the interests of the firm or a client if this is likely reasonably to appear to be inconsistent with providing an impartial assessment of the value or prospects of the relevant investments.

  2. (2)

    A firm's policy may allow it to use an investment analyst's knowledge and information to assist it to research corporate finance business opportunities, to provide ideas to sales or trading staff, or to provide information and advice to the firm's investment clients.

  3. (3)

    It is likely to be inappropriate for the policy to allow the firm to:

    1. (a)

      use an investment analyst in a marketing capacity (for example in pitches to solicit or obtain corporate finance business from the issuer of a relevant investment), if this would give a reasonable perception of lack of impartiality in his investment research; or

    2. (b)

      allow an investment analyst to act in a way which reasonably appears to be representing the issuer of a relevant investment, for example, in roadshows relating to issues or allocations of relevant investments.

Policy content: avoiding inappropriate influences

COB 7.16.12G

1Firms should put in place arrangements so that investment research sets out impartial views about the value or prospects of the relevant investment or the relevant issuer of the investment analyst or analysts responsible for its content. For example:

  1. (1)

    the firm should prohibit any of its investment analysts or other employees, from offering or accepting an inducement to provide favourable investment research (COB 2.2.3 R requires the firm itself to take reasonable steps to ensure that such inducements are not offered, given, solicited or accepted);

  2. (2)

    the firm should not give effective editorial control to someone whose role or commercial interests might reasonably be considered to conflict with the interests of the clients to whom the investment research is to be published or distributed; accordingly, a firm should:

    1. (a)

      not allow anyone other than an investment analyst (such as a relevant issuer) to approve the content of investment research before publication; and

    2. (b)

      only allow a person outside the firm (such as a relevant issuer), or any employee other than the investment analyst, to view it before its publication for verification of factual information in the investment research.

Policy content: means and timing of publication

COB 7.16.13G

1A firm's policy and procedures should provide for investment research to be published or distributed to its clients in an appropriate manner. For example it will be:

  1. (1)

    appropriate for a firm to take reasonable steps to ensure that its investment research is published or distributed only through its usual channels, as set out in the policy;

  2. (2)

    inappropriate for an employee (whether or not an investment analyst) to communicate the substance of any investmentresearch, except as set out in the policy.

COB 7.16.14G

1A firm should also 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 relevant investment. Consequently a firm should consider whether its 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.

Policy content: disclosures

COB 7.16.15G

1A firm should consider what information by way of disclosures should accompany the investment research it publishes or distributes.