COBS 18 Annex 1 Research and inducements for collective portfolio managers

11

Application

1.1

G

This section applies to:

(1)

a small authorised UK AIFM and a residual CIS operator, in accordance with COBS 18.5.2R;

(2)

a full-scope UK AIFM and an incoming EEA AIFM branch, in accordance with COBS 18.5A.3R;

(3)

a UCITS management company, in accordance with COBS 18.5B.2R.

1.2

G

In accordance with COBS 18.5.3CR and COBS 18.5A.7R, this section does not apply in relation to an AIF or CIS which in accordance with its core investment policy:

(1)

does not generally invest in financial instruments that can be:

(a)

registered in a financial instruments account opened in the books of a depositary; or

(b)

physically delivered to the depositary; or

(2)

generally invests in issuers or non-listed companies to potentially acquire control over such companies either individually or jointly with other funds.

2

Rule on research and inducement

2.1

R

When executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund, a firm must not:

(1)

accept and retain any fees, commissions or monetary benefits; or

(2)

accept any non-monetary benefits,

where these are paid or provided by any third party or a person acting on behalf of a third party.

2.2

R

A firm must:

(1)

return to the fund as soon as reasonably possible after receipt any fees, commissions or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the services provided to that fund; and

(2)

inform the investors in the fund about the fees, commissions or any monetary benefits transferred to them (see paragraph 2.4G).

2.3

R

Paragraph 2.1R does not apply to:

(1)

minor non-monetary benefits that are:

(a)

capable of enhancing the quality of service provided to the fund (see paragraph 3.1R); and

(b)

of a scale and nature such that they could not be judged to impair the firm’s compliance with its duty to act honestly, fairly and professionally in the best interests of the fund; and

(2)

research if the requirements of COBS 2.3B (Inducements and research) as modified by paragraph 4 are met.

2.4

G

A firm may inform investors in the fund about the fees, commissions or monetary benefits transferred to them through:

(1)

the periodic reporting statements provided to participants in an unregulated collective investment scheme in accordance with COBS 18.5.11R for a small authorised UK AIFM or a residual CIS operator; or

(2)

the annual reports provided on request to investors, for a small authorised UK AIFM in relation to an authorised AIF, a full-scope UK AIFM, an incoming EEA AIFM branch or a UCITS management company.

3

Acceptable minor non-monetary benefits

3.1

R

A firm must not accept a non-monetary benefit unless it is a minor non-monetary benefit which is reasonable, proportionate and of a scale that is unlikely to influence the firm’s behaviour in any way that is detrimental to the interests of the fund, and which consists of:

(1)

information or documentation relating to a financial instrument that is generic in nature; or

(2)

written material from a third party that:

(a)

is either:

(i)

commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by the company; or

(ii)

produced on an ongoing basis, where the third party is contractually engaged and paid by the issuer;

(b)

clearly discloses the relationship between the third party and the issuer; and

(c)

is made available at the same time to any firm wishing to receive it, or to the general public; or

(3)

participation in conferences, seminars and other training events on the benefits and features of a specific financial instrument; or

(4)

hospitality of a reasonable de minimis value, such as food and drink during a business meeting or another training event mentioned under (3); or

(5)

research relating to an issue of shares, debentures, warrants or certificates representing certain securities by an issuer, which is:

(a)

produced by a person that is providing underwriting or placing services to the issuer on that issue;

(b)

made available to prospective investors in the issue; and

(c)

disseminated before the issue is completed; or

(6)

free sample research provided for a limited trial period where:

(a)

the trial period lasts no longer than three months;

(b)

the trial period is not commenced with a provider within 12 months from the termination of an arrangement for the provision of research (including a previous trial period) with that provider;

(c)

the research provider offering the free trial has no existing relationship with the recipient firm for the provision of research or execution services; and

(d)

the recipient firm keeps records of the dates of any trial periods, and sufficient records to demonstrate compliance with the conditions in (a) to (c) above.

3.2

G

An acceptable minor non-monetary benefit consisting of information or documentation relating to a financial instrument that is generic in nature may include material provided by a third party that:

(1)

consists of:

(a)

short term market commentary on the latest economic statistics; or

(b)

company results or information on upcoming releases or events;

(2)

contains only a brief unsubstantiated summary of the third party’s own opinion on such information; and

(3)

does not include any substantive analysis (for example, where the third party simply reiterates a view based on an existing recommendation or substantive research).

3.3

G

A non-monetary benefit that involves a third party allocating valuable resources to the firm is not a minor non-monetary benefit.

4

Inducements and research

4.1

R

A firm must comply with COBS 2.3B, as modified by this section, when executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund.

General modifications

4.2

R

The application provision in COBS 2.3B.1R (Application) and associated guidance in COBS 2.3B.2G do not apply.

4.3

R

Where COBS 2.3B applies to a firm, the following modifications apply:

(1)

in COBS 2.3B.3R:

(a)

the reference to “providing investment services or ancillary services to clients” is to be construed as a reference to “executing orders, or placing orders with other entities for execution, that relate to financial instruments for, or on behalf of, the fund”; and

(b)

the reference to “COBS 2.3A.5R, COBS 2.3A.15R or COBS 2.3A.16R” is to be construed as a reference to COBS 18 Annex 1 2.1R ;

(2)

in COBS 2.3B.4R(1)(a), the reference to “third party research in respect of investment services rendered to its clients” is to be construed as a reference to “third party research in respect of scheme management activity or, for an AIFM, AIFM investment management functions”;

(3)

in COBS 2.3B.11R(3)(b)(ii), the reference to “the firm’s policy for using third party research established under COBS 2.3B.12R” is to be construed as a reference to “the firm’s written statement made in accordance with COBS 18 Annex 1 4.8R”;

(4)

in COBS 2.3B.22G:

(a)

the reference to “COBS 2.3A.19R or COBS 2.3A” is to be construed as a reference to “COBS 18 Annex 1 3.1R or COBS 18 Annex 1 3.2G”; and

(b)

the reference to “COBS 2.3A.15R or COBS 2.3A” is to be construed as a reference to “COBS 18 Annex 1 2.1R”; and

(5)

in COBS 2.3B.24G, the reference to COBS 11.2A is to be construed as a reference to:

(a)

COBS 11.2 for small authorised UK AIFMs, residual CIS operators, full-scope UK AIFMs and incoming EEA AIFM branches; and

(b)

COBS 11.2B for UCITS management companies.

4.4

R

COBS 2.3B.8R(1) and the reference to “agreeing the research charge with its clients” in COBS 2.3B.4R(2)(a) only apply if the fund has its own governing body which is independent of the firm.

4.5

G

(1)

An example of a fund that has its own governing body which is independent of the firm is a fund that is a body corporate where the firm is not a director of the fund.

(2)

An example of a fund that does not have its own governing body which is independent of the firm is a fund that is a body corporate where the firm is the sole director of the fund.

4.6

G

In accordance with COBS 18.5.3R(1), COBS 18.5A.5R and COBS 18.5B.4R(1), references to client are to be construed as references to any fund in respect of which the firm is acting or intends to act.

Disapplication of disclosure provisions

4.7

R

The following provisions do not apply and references to them in COBS 2.3B are to be ignored:

(1)

COBS 2.3B.5R;

(2)

COBS 2.3B.6G;

(3)

COBS 2.3B.8R(2);

(4)

COBS 2.3B.9G;

(5)

COBS 2.3B.12R; and

(6)

COBS 2.3B.20R.

Prior disclosure of the research account to investors

4.8

R

A firm using a research payment account must set out in writing:

(1)

how the firm will comply with the elements of COBS 2.3B.4R(4);

(2)

how research purchased through the research payment account may benefit the fund, taking into account its investment objective, policy and strategy;

(3)

the approach the firm will take to allocate the costs of research fairly among the funds it manages;

(4)

the manner in which, and the frequency at which, the research charge will be deducted from the assets of the fund; and

(5)

a statement as to where up-to-date information on the matters covered in COBS 18 Annex 1 4.11R can be obtained.

4.9

R

An authorised fund manager of an authorised fund must publish the information in paragraph 4.8 in the fund’s prospectus.

4.10

G

(1)

A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in paragraph 4.8 with the information to be made available about AIFs in accordance with FUND 3.2.2R(9) (Prior disclosure of information to investors).

(2)

A small authorised UK AIFM of an unauthorised AIF or a residual CIS operator may wish to publish the information in paragraph 4.8 with the information to be made available about AIFs in accordance with COBS 18.5.5R (Scheme documents for an unauthorised fund).

4.11

R

(1)

A firm using a research payment account must publish:

(a)

the budgeted amount for research; and

(b)

the amount of the estimated research charge for each fund.

(2)

a firm must not increase its research budget or research charge unless it has provided clear information about the increase in good time before it is to take effect.

(3)

The information in (1) and (2) must be made available to investors and potential investors in the fund.

Periodic disclosure of the research payment account to investors

4.12

R

A firm using a research payment account must, for each fund it manages, provide information to investors on the total costs the fund has incurred for third-party research in the most recent annual accounting period.

4.13

R

An authorised fund manager of an authorised fund must publish the information in paragraph 4.12 in the annual long report of the authorised fund.

4.13

G

A full-scope UK AIFM of an unauthorised AIF may wish to publish the information in paragraph 4.12 with the information to be made available about AIFs in accordance with FUND 3.3 (Annual report of an AIF).

4.14

R

A firm using a research payment account must, on request, make available a summary of the following information to investors for the most recent annual accounting period:

(1)

the providers paid from the account;

(2)

the total amount each provider was paid;

(3)

the benefits and services received by the firm; and

(4)

how the total amount spent from the account compares to the budget set by the firm, noting any rebate or carry-over if residual monies are held in the account.