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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.

Use of dealing commission to purchase goods or services

COBS 11.6.3RRP
  1. (1)

    An investment manager must not accept goods or servicesin addition to the execution of its customer orders if it:

    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 goods or services in return for the charges referred to in (b).

  2. (2)

    This prohibition does not apply if the investment manager has reasonable grounds to be satisfied that the goods or services received in return for the charges:

    1. (a)
      1. (i)

        are related to the execution of trades on behalf of the investment manager's customers; or

      2. (ii)

        comprise the provision of research; and

    2. (b)

      will reasonably assist the investment manager in the provision of its services to its customers on whose behalf the orders are being executed and do not, and are not likely to, impair compliance with the duty of the investment manager to act in the best interests of its customers.

COBS 11.6.4ERP
  1. (1)

    Where the goods or services relate to the execution of trades, an investment manager should have reasonable grounds to be satisfied that the requirements of the rule on use of dealing commission (COBS 11.6.3 R) are met if the goods or services are:

    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 the rule on use of dealing commission (COBS 11.6.3 R)

COBS 11.6.5ERP
  1. (1)

    Where the goods or services relate to the provision of research, an investment manager will have reasonable grounds to be satisfied that the requirements of the rule on use of dealing commission (COBS 11.6.3 R) are met if the research:

    1. (a)

      is 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;

    2. (b)

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

    3. (c)

      has intellectual rigour and doesnot merely state what is commonplace or self-evident; and

    4. (d)

      involves analysis or manipulation of data to reach meaningful conclusions.

  2. (2)

    Compliance with (1) may be relied upon as tending to establish compliance with the rule on use of dealing commission (COBS 11.6.3 R).

COBS 11.6.6GRP

An example of goods or servicesrelating to the execution of trades that the FSA does not regard as meeting the requirements of the rule on use of dealing commission (COBS 11.6.3 R) is post-trade analytics.

COBS 11.6.7GRP

Examples of goods or services that relate to the provision of research that the FSA 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 to reach meaningful conclusions.

COBS 11.6.8GRP

Examples of goods or services that relate to the execution of trades or the provision of research that the FSA does not regard as meeting the requirements of either evidential provisions COBS 11.6.4 E or COBS 11.6.5 E include:

  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. (5)

    subscriptions for publications;

  6. (6)

    travel, accommodation or entertainment costs;

  7. (7)

    order and execution management systems;

  8. (8)

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

  9. (9)

    membership fees to professional associations;

  10. (10)

    purchase or rental of standard office equipment or ancillary facilities;

  11. (11)

    employees' salaries;

  12. (12)

    direct money payments;

  13. (13)

    publicly available information; and

  14. (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 11.6.9GRP

The reference to research in the rule on use of dealing commission (COBS 11.6.3 R) is not confined to investment research as defined in the Glossary. The FSA's view is that research can include, for example, the goods or services encompassed by investment research, provided that they are directly relevant to and are used to assist in the management of investments on behalf of customers. In addition, any goods or services that relate to the provision of research that the FSA regards as not acceptable under COBS 11.6.6 G or COBS 11.7.6 R should be viewed as not meeting the requirements of COBS 11.6.3R (2), notwithstanding that their content might qualify as investment research.

COBS 11.6.10GRP

This section applies only to arrangements under which an investment manager receives from brokers or other persons goods or services that relateto the execution of trades or the provision of research. It has no application in relation to execution and research generated internally by an investment manager itself.

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 relate to the execution of trades or the provision of research. This prior disclosure should form part of the summary form disclosure under the rule on inducements (COBS 2.3.1 R).

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 relate to the execution of trades or the provision of research in accordance with the rule on use of dealing commission (COBS 11.6.3 R).

  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 relate to the execution of trades and, wherever appropriate, separately identify the details of the goods or services that are attributable to the provision of research.

COBS 11.6.17GRP

In assessing the adequacy of prior and periodic disclosures made by an investment manager under this section, the FSA 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 London Investment Banking Association.

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.