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COBS 12.1 Purpose and application

Purpose

COBS 12.1.1 G

1The purpose of this chapter is to:2

  1. (1)

    2set out specific requirements 2relating to the production and dissemination of investment research and non-independent research; and

  2. (2)

    3provide guidance on matters in the 3Market Abuse Regulation relating to the disclosures to be made in, and about, 3investment recommendations.

    2333

Application: Who?

COBS 12.1.2 R

This chapter applies 2to a firm.2

  1. (1)

    2[deleted]

  2. (2)

    2[deleted]

Application: Where?

COBS 12.1.3 G

The EEA territorial scope rule modifies the general rule of application to the extent necessary to be compatible with European law (see paragraph 1.1 of Part 2 of COBS 1 Annex 1). This means that COBS 12.2 and COBS 12.3.4 G also apply to passported activities carried on by a UKMiFID investment firm from a branch in another EEA state, but do not apply to the United Kingdombranch of an EEAMiFID investment firm in relation to its MiFID business.

COBS 12.2 Investment research

Application

COBS 12.2.1 R

This section applies to a firm which produces, or arranges for the production of, investment research that is intended or likely to be subsequently disseminated to clients of the firm or to the public, under its own responsibility or that of a member of its group.

[Note: article 25(1) of the MiFID implementing Directive]

COBS 12.2.2 G

The concept of dissemination of investment research to clients or to the public is not intended to include dissemination exclusively to persons within the group of the firm.

[Note: recital 33 of the MiFID implementing Directive]

Measures and arrangements required for investment research

COBS 12.2.3 R

A firm must ensure the implementation of all of the measures for managing conflicts of interest in SYSC 10.1.11 R in relation to the financial analysts involved in the production of investment research and other relevant persons whose responsibilities or business interests may conflict with the interests of the persons to whom investment research is disseminated.

[Note: article 25 (1) of the MiFID implementing Directive]

COBS 12.2.4 G

Persons whose responsibilities or business interests may reasonably be considered to conflict with the interests of the persons to whom investment research is disseminated include corporate finance personnel and persons involved in sales and trading on behalf of clients or the firm.

[Note: recital 30 of the MiFID implementing Directive]

COBS 12.2.5 R

A firm must have in place arrangements designed to ensure that the following conditions are satisfied:

  1. (1)

    if a financial analyst or other relevant person has knowledge of the likely timing or content of investment research which is not publicly available or available to clients and cannot readily be inferred from information that is so available, that financial analyst or other relevant person must not undertake personal transactions or trade on behalf of any other person, including the firm, other than as market maker acting in good faith and in the ordinary course of market making or in the execution of an unsolicited client order, in financial instruments to which the investment research relates, or in any related financial instruments, until the recipients of the investment research have had a reasonable opportunity to act on it;

    [Note: article 25(2)(a) of the MiFID implementing Directive]

  2. (2)

    in circumstances not covered by (1), financial analyst and any other relevant persons involved in the production of investment research must not undertake personal transactions in financial instruments to which the investment research relates, or in any related financial instrument, contrary to current recommendations, except in exceptional circumstances and with the prior approval of a member of the firm's legal or compliance function;

    [Note: article 25(2)(b) of the MiFID implementing Directive]

  3. (3)

    the firm itself, financial analysts1, and other relevant persons involved in the production of investment research must not accept inducements from those with a material interest in the subject matter of the investment research;

    [Note: article 25(2)(c) of the MiFID implementing Directive]

  4. (4)

    the firm itself, financial analysts, and other relevant persons involved in the production of investment research must not promise issuers favourable research coverage; and

    [Note: article 25(2)(d) of the MiFID implementing Directive]

  5. (5)

    issuers, relevant persons other than financial analysts, and any other persons must not, before the dissemination of investment research, be permitted to review a draft of the investment research for the purpose of verifying the accuracy of factual statements made in that investment research, or for any other purpose other than verifying compliance with the firm's legal obligations, if the draft includes a recommendation or a target price.

    [Note: article 25(2)(e) of the MiFID implementing Directive]

COBS 12.2.5A G

Firms are reminded that they must also comply with COBS 11.7 (Rule on personal account dealing).

COBS 12.2.6 G

Knowledge by a financial analyst or other relevant person that the firm intends to produce or disseminate investment research to its clients or to the public (including in circumstances where research material has not yet been written) could constitute knowledge of the likely timing and content of investment research under COBS 12.2.5 R (1).

COBS 12.2.7 G

For the purposes of COBS 12.2.5 R (2):

  1. (1)

    current recommendations should be considered to be those recommendations contained in investment research which have not been withdrawn and which have not lapsed; and

    [Note: recital 34 of the MiFID implementing Directive]

  2. (2)

    exceptional circumstances in which financial analysts and other relevant persons may, with prior written approval, undertake personal transactions in financial instruments to which investment research relates should include those circumstances where, for personal reasons relating to financial hardship, the financial analyst or other relevant person is required to liquidate a position.

    [Note: recital 31 of the MiFID implementing Directive]

COBS 12.2.8 G

Small gifts or minor hospitality below a level specified in the firm'sconflicts of interest policy and mentioned in the description of that policy that is made available to clients in accordance with COBS 6.1.4 R (8) should not be considered as inducements for the purposes of COBS 12.2.5 R (3).

[Note: recital 32 of the MiFID implementing Directive]

COBS 12.2.9 G

A financial analyst should not become involved in activities other than the preparation of investment research where such involvement is inconsistent with the maintenance of the financial analysts objectivity. The following should ordinarily be considered as inconsistent with the maintenance of a financial analyst's objectivity:

  1. (1)

    participating in investment banking activities such as corporate finance business and underwriting; or

  2. (2)

    participating in 'pitches' for new business or 'road shows' for new issues of financial instruments; or

  3. (3)

    being otherwise involved in the preparation of issuer marketing.

[Note: recital 36 of the MiFID implementing Directive]

Exemption from investment research measures and arrangements

COBS 12.2.10 R

A firm which disseminates investment research produced by another person to the public or to clients is exempt from complying with the requirements in COBS 12.2.3 R and COBS 12.2.5 R if the following criteria are met:

  1. (1)

    the person that produces the investment research is not a member of the group to which the firm belongs;

  2. (2)

    the firm does not substantially alter the recommendations within the investment research;

  3. (3)

    the firm does not present the investment research as having been produced by it; and

  4. (4)

    the firm verifies that the producer of the investment research is subject to requirements equivalent to those in COBS 12.2.3 R and COBS 12.2.5 R in relation to the production of that investment research, or has established a policy setting such requirements.

[Note: article 25(3) of the MiFID implementing Directive]

Means and timing of publication of investment research

COBS 12.2.11 G

The FCA would expect a firm'sconflicts of interest policy to provide for investment research to be published or distributed to its clients in an appropriate manner. For example, the FCA considers 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 distribution channels; and

  2. (2)

    inappropriate for an employee (whether or not a financial analyst) to communicate the substance of any investment research, except as set out in the firm'sconflicts of interest policy.

COBS 12.2.12 G

The FCA would expect a firm to 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 financial instrument. A firm would therefore be expected to consider whether its conflicts of interest 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.

Investment research for internal use

COBS 12.2.13 G

The FCA considers that the significant conflicts of interest which could arise are likely to mean it is inappropriate for a financial analyst or other relevant person to prepare investment research which is intended firstly for internal use for the firm's own advantage, and then for later publication to its clients (in circumstances in which it might reasonably be expected to have a material influence on its clients' investment decisions).

COBS 12.3 Non-independent research

Application

COBS 12.3.1 R

This section applies to a firm that produces or disseminates non-independent research.

[Note: article 24(2) of the MiFID implementing Directive]

Labelling of non-independent research

COBS 12.3.2 R

A firm which produces or disseminates non-independent research must ensure that it:

  1. (1)

    is clearly identified as a marketing communication; and

  2. (2)

    contains a clear and prominent statement that (or, in the case of an oral recommendation, to the effect that) it:

    1. (a)

      has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and

    2. (b)

      is not subject to any prohibition on dealing ahead of the dissemination of investment research.

[Note: article 24(2) of the MiFID implementing Directive]

COBS 12.3.3 R

The financial promotion rules apply to non-independent research as though it were a marketing communication.

[Note: article 24(2) of the MiFID implementing Directive]

Management of conflicts of interest in area of non-independent research

COBS 12.3.4 G

In accordance with SYSC 10, a firm will be expected to take reasonable steps to identify and manage conflicts of interest which may arise in the production of non-independent research. Situations where conflicts of interest can arise include:

  1. (1)

    relevant persons trading in financial instruments that are the subject of non-independent research which they know the firm has published or intends to publish before clients have had a reasonable opportunity to act on it (other than when the firm is acting as market maker in good faith and in the ordinary course of market making, or in the execution of an unsolicited client order); and

  2. (2)

    preparation of non-independent research which is intended firstly for internal use by the firm and then for later publication to clients.

COBS 12.4 2 2Investment recommendations

Application

COBS 12.4.1 R

2[deleted]

COBS 12.4.1A EU

2[article 20 of the Market Abuse Regulation]

2[Note: This section applies to a person that prepares or disseminates investment recommendations3.]

COBS 12.4.2 G

[deleted]2

2
COBS 12.4.3 G

[deleted]2

Fair presentation and disclosure

COBS 12.4.4 R

[deleted]2

2
COBS 12.4.4A EU

2[article 20(1) of the Market Abuse Regulation]

COBS 12.4.5 R

[deleted]2

COBS 12.4.6 R

[deleted]2

Additional obligations in relation to fair presentation of recommendations

COBS 12.4.7 R

[deleted]2

COBS 12.4.8 G

The disclosures required under article 20(3) of the Market Abuse Regulation2 may, if the person2 so chooses, be made by graphical means (for example by use of a line graph).

2
2
COBS 12.4.9 R

[deleted]2

Additional obligations for producers of investment recommendations in relation to disclosure of interests or conflicts of interest2

COBS 12.4.10 R

[deleted]2

COBS 12.4.11 G

A person may choose to disclose significant shareholdings above a lower threshold than is required by article 20(3) of the Market Abuse Regulation.2

2
COBS 12.4.12 G

[deleted]2

COBS 12.4.13 G

In relation to companies limited by shares and incorporated in Great Britain, the most meaningful measure of "total issued share capital" is likely to be the concept of "paid up and issued share capital" under the Companies Act 1985 or Companies Act 2006 (as applicable)1.

COBS 12.4.14 G

Where article 20(3) of the Market Abuse Regulation requires a disclosure of the proportions of all investment recommendations published that are “buy”, “hold”, “sell” or equivalent terms, the FCA considers it important for these equivalent terms to be consistent and meaningful to the recipients in terms of the course of actions being recommended, particularly for non-equity material.2

2
COBS 12.4.15 R

[deleted]2

COBS 12.4.16 R

[deleted]2

2
COBS 12.4.17 R

[deleted]2