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COBS 11.6 Use of dealing commission1

COBS 11.6.1GRP

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.

Application

COBS 11.6.2RRP

This section applies to a firm that acts as an investment manager when it executes customer 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.

COBS 11.6.2AGRP

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.

Use of dealing commission to purchase goods or services

COBS 11.6.3RRP
  1. (1)

    Subject to (3), an3 investment manager must not accept any good or service3in addition to the execution of its customer orders if it:

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    1. (a)

      executes its customer orders through a broker or another person;

    2. (b)

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

    3. (c)

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

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  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's customers; or

      2. (ii)

        amounts to the provision of substantive research.

COBS 11.6.4ERP
  1. (1)

    Under COBS 11.6.3R (3)(c)(i), for a good or service to be directly related to the execution of trades on behalf of the investment manager's customers it must be:3

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    1. (a)

      linked to the arranging and conclusion of a specific investment transaction (or series of related transactions); and

    2. (b)

      provided between the point at which the investment manager makes an investment or trading decision and the point at which the investment transaction (or series of related transactions) is concluded.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COBS 11.6.3R (3)(c)(i)3

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  3. (3)

    3Contravention of (1) may be relied on as tending to establish a contravention of COBS 11.6.3R (3)(c)(i).

COBS 11.6.5ERP
  1. (1)

    Under COBS 11.6.3R (3)(c)(ii), for a good or service to amount to the provision of substantive research the relevant research must:3

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    1. (a)

      be3 capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about its customers' portfolios;

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    2. (b)

      whatever form its output takes, represent3 original thought, in the critical and careful consideration and assessment of new and existing facts, and must3 not merely repeat or repackage what has been presented before;

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    3. (c)

      have3 intellectual rigour and must 3not merely state what is commonplace or self-evident; and

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    4. (d)

      present the investment manager with meaningful conclusions based on analysis or manipulation of data.3

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  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with COBS 11.6.3R (3)(c)(ii).3

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  3. (3)

    3Contravention of (1) may be relied on as tending to establish a contravention of COBS 11.6.3R (3)(c)(ii).

COBS 11.6.6GRP

An example of a good or service 3relating 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. These would not meet the evidential criteria for a good or service to be directly related to the execution of trades under COBS 11.6.4E (1).3

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COBS 11.6.7GRP

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 in order to present the investment manager with meaningful conclusions. These would not meet the evidential criteria for a good or service to amount to the provision of substantive research under COBS 11.6.5E (1)3.

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COBS 11.6.8GRP

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 11.6.4E (1) or COBS 11.6.5E (1)3 include:

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  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. (4A)

    3corporate access services;3

  6. (5)

    subscriptions for publications;

  7. (6)

    travel, accommodation or entertainment costs;

  8. (7)

    order and execution management systems;

  9. (8)

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

  10. (9)

    membership fees to professional associations;

  11. (10)

    purchase or rental of standard office equipment or ancillary facilities;

  12. (11)

    employees' salaries;

  13. (12)

    direct money payments;

  14. (13)

    publicly available information; and

  15. (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.

COBS 11.6.8AGRP
  1. (1)

    3An investment manager intending to pass on to its customers any charges under the exemption at COBS 11.6.3R (3) should have regard to its duties under the client's best interests rule. For example, this means that:

    1. (a)

      an investment manager should not pass on a charge to a customer under the exemption at COBS 11.6.3R (3) that is greater than the cost charged by the broker or relevant person specifically for the relevant good or service falling under COBS 11.6.3R (3);

    2. (b)

      if an investment manager intends to pass on a charge to a customer under the exemption at COBS 11.6.3R (3), and the relevant good or service being offered in return for a broker's or other person's charges is not distinctly priced, the investment manager should make a fair assessment of the charge that it would be permitted to pass onto its customer under that rule. In making this determination, the investment manager may need to consider whether it can carry out a fact-based analysis of the unpriced good or service. For example, it may be appropriate to use other comparable priced goods or services (whether produced internally or procured from another person) or an estimate of the cost of providing a comparable good or service internally as an indication of a fair charge to pass onto a customer for the relevant good or service; and

    3. (c)

      where the investment manager is in a position to negotiate or itself dictate the price of a good or service it receives that is to be charged to a customer under the exemption at COBS 11.6.3R (3), it should act honestly, fairly and professionally in accordance with the best interests of its customer.

  2. (2)
    1. (a)

      Where a good or service received by an investment manager comprises the provision of substantive research together with elements that are not substantive research (see COBS 11.6.7 G and COBS 11.6.8 G), COBS 11.6.3R (3) only applies for those elements that amount to the provision of substantive research. This means that the investment manager should disaggregate any such good or service received, to ensure that it only passes on charges under the exemption at COBS 11.6.3R (3) for the substantive research elements that it receives.

    2. (b)

      In disaggregating elements under (a), it may be useful for an investment manager to consider the amount that it would be would be willing, in good faith, to pay for those elements of a good or service that cannot be charged to a customer under COBS 11.6.3 R. Such an exercise can assist the investment manager, when determining the charges to be passed on to the customer under the exemption at COBS 11.6.3R (3) for the substantive research elements, to ensure that the customer will not subsidise the other elements that benefit the investment manager.

    3. (c)

      The guidance under (a) and (b) is equally relevant to situations where:

      1. (i)

        the good or service to be disaggregated is priced as a whole but the elements to be disaggregated are not distinctly priced; and

      2. (ii)

        the overall good or service that is to be disaggregated is not distinctly priced.

    4. (d)

      The considerations in (1) are equally relevant for any disaggregated good or service.

COBS 11.6.9GRP

The reference to substantive 3research in the rule on use of dealing commission (COBS 11.6.3 R) is not confined to investment research as defined in the Glossary. Substantive research can potentially be or include investment research, but this is not part of the criteria under COBS 11.6.5 E.3 In addition, any goods or services that relate to the provision of research that the FCA regards as not acceptable under COBS 11.6.7 G or COBS 11.6.8 G3 should be viewed as not meeting the requirements of 3COBS 11.6.3R (3)3, notwithstanding that their content might qualify as investment research.

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COBS 11.6.10GRP

This section applies only to arrangements under which an investment manager receives from brokers or other persons a good or service that directly relates 3to the execution of trades or amounts to3 the provision of substantive 3research. It has no application in relation to execution and research generated internally by an investment manager itself.

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COBS 11.6.11GRP

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

Rule on prior disclosure

COBS 11.6.12RRP

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).

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Guidance on prior disclosure

COBS 11.6.13GRP

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.

COBS 11.6.14GRP
  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 directly relate to the execution of trades or amount to the provision of substantive research3 in accordance with the rule on use of dealing commission (COBS 11.6.3 R).

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  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.

Rule on periodic disclosure

COBS 11.6.15RRP

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

COBS 11.6.16RRP

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.

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COBS 11.6.17GRP

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.

Making periodic disclosures in a timely manner

COBS 11.6.18ERP
  1. (1)

    A firm will make periodic disclosure to its customers under this section in a timely manner if it is made at least once a year.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with the rule on periodic disclosure (COBS 11.6.16 R).

Record keeping

COBS 11.6.19RRP

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.

COBS 11.6.20GRP

Firms are also reminded of the general record keeping requirements in SYSC 3.2 and SYSC 9 (as applicable). An investment manager should keep appropriate records of the basis on which it concludes that a particular good or service may be received under the exemption at COBS 11.6.3R (3) in return for the charges in COBS 11.6.3R (1)(b).