COBS 12.2 Investment research and non-independent research

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

1. (1)

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

   1. (a)

       treat it as a marketing communication and ensure that it is clearly identified as such;

   2. (b)

       ensure that the non-independent research contains a clear and prominent statement that (or, in the case of an oral recommendation, to the effect that) it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

A firm which produces or disseminates non-independent research must implement the measures set out in SYSC 10.1.11R(2), in relation to the relevant persons involved in the production of the non-independent research and other relevant persons whose responsibilities or business interests may conflict with the interests of the persons to whom such research is disseminated.

In relation to non-independent research, firms are reminded to consider their SYSC 10 obligations more generally and, in particular, whether conflicts arise in relation to:

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

(1) Subject to (2), 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, must implement the measures set out in SYSC 10.1.11R(2), in relation to the financial analysts involved in the production of the investment research and other relevant persons whose responsibilities or business interests may conflict with the interests of the persons to whom such research is disseminated.

1. (2)

    Paragraph (1) does not apply to a firm which disseminates investment research produced by another person to the public or to clients where the following conditions are met:

   1. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

       the firm verifies that the producer of the investment research is subject to requirements equivalent to those under this chapter in relation to the production of that research, or has established a policy setting such requirements.

(1) The measures and arrangements adopted by the firm to manage the conflicts of interests that might arise from the production and dissemination of material that is presented as investment research should be appropriate to protect the objectivity and independence of financial analysts and of the investment research they produce. Those measures and arrangements should ensure that financial analysts enjoy an adequate degree of independence from the interests of persons whose responsibilities or business interests may reasonably be considered to conflict with the interests of the persons to whom the investment research is disseminated.

(2) The substantial alteration of investment research produced by a third party should be governed by the same requirements as the production of investment research.

1. (1)

    A firm falling within COBS 12.2.19R(1) must have in place arrangements designed to ensure that the following conditions are satisfied:

   1. (a)

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

   2. (b)

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

   3. (c)

       a physical separation exists between 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 the investment research is disseminated or, when considered not appropriate to the size and organisation of the firm as well as the nature, scale and complexity of its business, the establishment and implementation of appropriate alternative information barriers;

   4. (d)

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

   5. (e)

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

   6. (f)

       before the dissemination of investment research to issuers, where the draft includes a recommendation or target price, no person, other than financial analysts, are permitted to review a draft of the investment research for the purpose of verifying the accuracy of factual statements made in that research, or verifying compliance with the firm's legal obligations.

   (2)

    For the purposes of (1)(a) and (b), ‘related financial instrument’ means any financial instrument the price of which is closely affected by price movements in another financial instrument which is the subject of investment research, and includes a derivative on that other financial instrument.

1. (1)

    For the purposes of COBS 12.2.21R(1)(b):

   1. (a)

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

   2. (b)

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

   (2) For the purposes of COBS 12.2.21R(1)(c), persons whose responsibilities or business interests may reasonably be considered to conflict with the interests of the persons to whom investment research is disseminated should include corporate finance personnel and persons involved in sales and trading on behalf of clients or the firm.

2. (3) For the purposes of COBS 12.2.21R(1)(d), fees, commissions and monetary or non-monetary benefits received by the firm providing investment research from any third party should only be acceptable when they are provided in accordance with COBS 2.3A.

(1) Financial analysts should not engage in activities other than the preparation of investment research where engaging in such activities is inconsistent with the maintenance of their objectivity. These include participating in investment banking activities such as corporate finance business and underwriting, participating in ‘pitches’ for new business or ‘road shows’ for new issues of financial instruments, or being otherwise involved in the preparation of issuer marketing.

1. (2)

    ‘Participating in ‘pitches’ for new business’ would generally include a financial analyst interacting with an issuer to whom the firm is proposing to provide underwriting or placing services (including the issuer's representatives outside of the firm and any person who has an ownership interest in the issuer) until:

   1. (a)

       the firm that employs the financial analyst has agreed to carry on regulated activities that amount to underwriting or placing services for the issuer; and

   2. (b)

       the extent of the firm's obligations to provide underwriting or placing services to the issuer as compared to the underwriting or placing services of any other firm that is appointed by the issuer for the same offering is confirmed in writing between the firm and issuer.

   (3) It may nevertheless be possible, in limited circumstances, for a financial analyst's interactions with any such person referred to under (5) to be entirely separate from the firm's ‘pitches’ such that the risk to their objectivity being impaired would be reasonably low.

2. (4) However, the FCA considers that would not be the case where the analyst is aware of the ‘pitches’, or may have reason to believe that the firm is conducting the ‘pitches’.
3. (5) In any case, a firm should recognise that any situation in which there is a connection between its ‘pitches’ and a person with whom its financial analyst interacts can give rise to a conflict of interest (see SYSC 10 (Conflicts of interest)).

A firm subject to COBS 12 must retain the records it is required to make under these rules.