COBS 11A.1 Underwriting and placing

Firms which provide advice on corporate finance strategy, as set out in Paragraph 3 of Part 3A of Schedule 2 to the Regulated Activities Order, and provide the service of underwriting or placing of financial instruments must, before accepting a mandate to manage the offering, have arrangements in place to inform the issuer client of the following:

1. (1) the various financing alternatives available with the firm, and an indication of the amount of transaction fees associated with each alternative;
2. (2) the timing and the process with regard to the corporate finance advice on pricing of the offer;
3. (3) the timing and the process with regard to the corporate finance advice on placing of the offering;
4. (4) details of the targeted investors, to whom the firm intends to offer the financial instruments;
5. (5) the job titles and departments of the relevant individuals involved in the provision of corporate finance advice on the price and allotment of financial instruments; and
6. (6) the firm's arrangements to prevent or manage conflicts of interest that may arise where the firm places the relevant financial instruments with its investment clients or with its own proprietary book. 

(1) Firms must have in place a centralised process to identify all underwriting and placing operations of the firm and record such information, including the date on which the firm was informed of potential underwriting and placing operations. Firms must identify all potential conflicts of interest arising from other activities of the firm, or group, and implement appropriate management procedures. In cases where a firm cannot manage a conflict of interest by way of implementing appropriate procedures, the firm must not engage in the operation.

(2) Firms providing execution and research services as well as carrying out underwriting and placing activities must ensure adequate controls are in place to manage any potential conflicts of interest between these activities and between their different clients receiving those services.

Firms must have in place systems, controls and procedures to identify and prevent or manage conflicts of interest that arise in relation to possible under-pricing or over-pricing of an issue or involvement of relevant parties in the process. In particular, firms must as a minimum requirement establish, implement and maintain internal arrangements to ensure both of the following:

1. (1) that the pricing of the offer does not promote the interests of other clients or firm's own interests, in a way that may conflict with the issuerclient's interests; and
2. (2) the prevention or management of a situation where persons responsible for providing services to the firm's investment clients are directly involved in decisions about corporate finance advice on pricing to the issuer client.

Firms must provide clients with information about how the recommendation as to the price of the offering and the timings involved is determined. In particular, the firm must inform and engage with the issuer client about any hedging or stabilisation strategies it intends to undertake with respect to the offering, including how these strategies may impact the issuer client's interests. During the offering process, firms must also take all reasonable steps to keep the issuer client informed about developments with respect to the pricing of the issue.

(1) Firms placing financial instruments must establish, implement and maintain effective arrangements to prevent recommendations on placing from being inappropriately influenced by any existing or future relationships.

(2) Firms must establish, implement and maintain effective internal arrangements to prevent or manage conflicts of interests that arise where persons responsible for providing services to the firm's investment clients are directly involved in decisions about recommendations to the issuer client on allocation.

(3) Firms must not accept any third-party payments or benefits unless such payments or benefits comply with relevant applicable requirements in COBS 2.3A. In particular, the following practices will be considered not compliant with those requirements and will therefore be considered not acceptable:

1. (a) an allocation made to incentivise the payment of disproportionately high fees for unrelated services provided by the firm (‘laddering’), such as disproportionately high fees or commissions paid by an investment client, or disproportionately high volumes of business at normal levels of commission provided by the investment client as a compensation for receiving an allocation of the issue;
2. (b) an allocation made to a senior executive or a corporate officer of an existing or potential issuer client, in consideration for the future or past award of corporate finance business (‘spinning’); and
3. (c) an allocation that is expressly or implicitly conditional on the receipt of future orders or the purchase of any other service from the firm by an investment client, or any entity of which the investor is a corporate officer.

(4) A firm must establish, implement and maintain an allocation policy that sets out the process for developing allocation recommendations. The allocation policy must be provided to the issuer client before agreeing to undertake any placing services. The policy must set out relevant information that is available at that stage, about the proposed allocation methodology for the issue.

(5) A firm must involve the issuer client in discussions about the placing process in order for the firm to be able to understand and take into account the client's interests and objectives. The firm must obtain the issuerclient's agreement to its proposed allocation per type of client for the transaction in accordance with the allocation policy.

Firms must have in place systems, controls and procedures to identify and manage the conflicts of interest that arise when providing investment services to an investment client to participate in a new issue, where the firm receives commissions, fees or any monetary or non-monetary benefits in relation to arranging the issuance. Any commissions, fees or monetary or non-monetary benefits must comply with the relevant applicable requirements in COBS 2.3A and be documented in the firm's conflicts of interest policies and reflected in the firm's inducements arrangements.

(2) Firms engaging in the placement of financial instruments issued by themselves or by entities within the same group, to their own clients, including their existing depositor clients in the case of credit institutions, or investment funds managed by entities of their group, must establish, implement and maintain clear and effective arrangements for the identification, prevention or management of the potential conflicts of interest that arise in relation to this type of activity. Such arrangements must include consideration of refraining from engaging in the activity, where conflicts of interest cannot be appropriately managed so as to prevent any adverse effects on clients.

(3) When disclosure of conflicts of interest is required, firms must comply with the requirements in SYSC 10.1.8R, including an explanation of the nature and source of the conflicts of interest inherent to this type of activity, providing details about the specific risks related to such practices in order to enable clients to make an informed investment decision.

(4) Firms which offer financial instruments that are issued by themselves or other group entities to their clients and that are included in the calculation of prudential requirements specified in the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU), the UK CRR, Directive 2013/36/EU or the PRA and FCArules implementing the RRD, must provide those clients with additional information explaining the differences between the financial instrument and bank deposits in terms of yield, risk, liquidity and any protection provided in the PRArules implementing the DGSD.

(1) Where any previous lending or credit to the issuer client by a firm, or an entity within the same group, may be repaid with the proceeds of an issue, the firm must have arrangements in place to identify and prevent or manage any conflicts of interest that may arise as a result.

(2) Where the arrangements taken to manage conflicts of interest prove insufficient to ensure that the risk of damage to theissuer client would be prevented, firms must disclose to the issuer client the specific conflicts of interest that have arisen in relation to their, or group entities’, activities in a capacity of credit provider, and their activities related to the securities offering.

(3) Firms' conflict of interest policy must require the sharing of information about the issuer's financial situation with group entities acting as credit providers, provided this would not breach information barriers set up by the firm to protect the interests of a client.

Firms must keep records of the content and timing of instructions received from clients. A record of the allocation decisions taken for each operation must be kept to provide for a complete audit trail between the movements registered in clients' accounts and the instructions received by the firm. In particular, the final allocation made to each investment client must be clearly justified and recorded. The complete audit trail of the material steps in the underwriting and placing process must be made available to the FCA upon request.