Financial Services. Financial communications post MiFID

Transcription

1 BRIEFIG Financial Services Financial communications post MiFID This document looks at the rules on financial promotions and marketing communications following the introduction of MiFID. 1. ITRODUCTIO Sections 1 to 4 contain a detailed analysis of the new rules and explain which type of documents fall within MiFID (or outside of MiFID) and considers the impact that this will have to the rules on financial promotions and marketing communications in relation to investments (in this document, we call such documents financial communications ). Sections 5 and 6 concentrate on the applicability of these rules in practice. Whether a financial communication (1) can benefit from the exemptions contained in the Financial Promotion Order ( FPO ), or (2) needs to comply with FSA s financial promotion rules depends on: Whether the person making the communication is authorised; Whether the communicator is carrying on MiFID business ; Whether the communication is to a client ; and Whether the communication is to a person who is exempt for the purposes of FPO. The information is summarised in a flowchart at Appendix A. 2. Authorised firms Firms that are FSA authorised need to comply with FSA COBS 4 unless the financial communication is exempt. We discuss this in more detail in sections 3, 4 and 5 below. Firms that are not authorised may only send a financial communication to persons who are exempt under the FPO.

2 FPO exemptions are not available in respect of financial communications by authorised firms, where the financial communication relates to MiFID business and is to a client. 3. MiFID business The following table displays MiFID, investment services and activities, and ancillary services. Where a firm carries on ancillary services, these services are not MiFID business. However, if a firm carries on both investment services and activities and ancillary services, then all of those services/activities are MiFID business. IVESTMET SERVICES AD ACTIVITIES Receipt and transmission of orders in relation to financial instruments Execution of orders on behalf of clients Dealing on own account Portfolio management Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis Placing of financial instruments without a firm commitment basis Investment advice* (upgraded from non-core services) Operation of Multilateral Trading Facilities* IVESTMET SERVICES AD ACTIVITIES Safekeeping and administration of financial instruments (including custody and related services) Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm doing so is involved in the transaction Foreign exchange services connected with the provision of investment services Services related to underwriting Investment research and financial analysis* Investment services/activities that are related to the underlying of derivatives, where these are connected to the provision of investment or ancillary services* * ew services post MiFID

3 4. COMMUICATIO TO A CLIET AD CLIET CATEGORISATIO Client Where an authorised firm is carrying on MiFID business (see Section 3 above) the second aspect to be considered is whether the communication is to a client which is defined in COBS as follows: A person to whom a firm provides, intends to provide or has provided: - a service in the course of carrying on a regulated activity; or - in the case of MiFID or equivalent third country business, [or] an ancillary service, is a client of that firm. A client includes a potential client. In relation to the financial promotion rules, a person to whom a financial promotion is or is likely to be communicated is a client of a firm that communicates or approves it. FPO exemptions are not available in respect of financial communications by authorised firms, where the financial communication relates to MiFID business and is to a client. If the FPO exemptions are not available, all financial communications must be fair, clear and not misleading and the promotions are subject to the financial promotion rules in COBS 4 (see Appendix B for a summary). ote that prospectuses produced under the Prospectus Rules fall outside both COBS 4 and the financial promotions rules under FSMA. Corporate Finance Contacts Under COBS there is a carve out to the definition of clients for corporate finance contacts. A corporate finance contact is defined by FSA Rules as a person with whom designated investment business may be conducted and where the firm conducting business with the corporate finance contact : does not behave in a way towards that person which might reasonably be expected to lead that person to believe that he is being treated as a client; and clearly indicates to that person that it: - is not acting for him; and - will not be responsible to him for providing protections afforded to clients of the firm or be advising him on the relevant transaction. Where appropriate, such provisions should also be set out in any other promotional materials provided to corporate finance contacts. otwithstanding this carve out, COBS 3.2.2G states that a corporate finance contact will be a client for the purposes of the financial promotion rules if the firm communicates or approves a financial promotion. However, a communication that would otherwise be a financial promotion is not a financial promotion where an FPO exemption applies. This is because where an authorised firm sends a financial communication to an investor on the basis of an exemption in the financial promotion rules, it will not be approving or communicating a financial promotion. Accordingly, a corporate finance contact remains not a client for the purposes of the financial promotion regime and the FPO exemptions remain applicable. A non-fpo exempt recipient, who is a corporate finance contact, is a client for the purposes of the financial promotion rules, whether they are a corporate finance contact or not and therefore COBS 4 applies in its entirety to financial promotions to such recipients. We are aware of the view held by some that the application of the corporate finance contact wording in 3.2.2G depends on a broad interpretation given to the term financial promotion - that a communication to engage in investment activity is a financial

4 Accordingly, a corporate finance contact remains not a client for the purposes of the financial promotion regime and the FPO exemptions remain applicable. promotion irrespective of the availability of an FPO exemption. However we think a legitimate interpretation of the term financial promotion is one that takes account of the availability of the FPO exemptions and we believe FSA agree with this view. 5. HOW DO THE MIFID FIACIAL PROMOTIO RULES APPL I PRACTICE? Placings A document issued by an (unauthorised) company on a fundraising, for example a Powerpoint presentation and the admission document on AIM can only be sent to FPO-exempt recipients. Post admission, and when the document is made publicly available on a Company s website, it is no longer a financial promotion (it is no longer live and is a historical document). However, if it is subsequently relied on for marketing purposes or similar then the same financial promotion restrictions apply and it can only be sent to FPO exempt recipients. A document issued by an authorised firm (for example a placing letter to corporate finance contacts attaching the client company s P proof admission document) that is sent to FPO-exempt recipients and that indicates that the authorised firm is acting for the company, not the recipient, must be fair, clear and not misleading. As the placees will normally subscribe on the back of a P-proof, the P-proof must also be signed off as being fair, clear and not misleading. Accordingly, verification needs to be concluded at that juncture. If these documents are sent to non- FPO-exempt recipients, COBS 4 applies and the documents must comply with the MiFID regime for promoting to retail clients (this is a largely similar process to that previously applied in approving a financial promotion for the purposes of s.21 of FSMA). An internal approval / sign off procedure should be in place to ensure that, as appropriate, the documents are COBS 4 compliant. Offer and defence documents in relation to a takeover bid Firms should avoid making offers on behalf of clients except where to a limited set of recipients (target board and its advisers, for example). Where documents are issued by a regulated firm, that firm may use the FPO exemptions [that may be] available for the intended recipient to avoid the application of COBS 4, in which case the document(s) must be fair, clear and not misleading. If the document is a prospectus, COBS 4 does not apply. Sub-underwriting agreement with other brokers and placee commission sharing agreements The other broker will not be a client and therefore FPO exemptions are available. The document(s) must be fair, clear and not misleading. Company presentations and marketing documents The analysis will depend upon who produces and communicates the documents. See Appendix A. The Company can only send the [presentation] to a retail client covered by an FPO exemption (generally a certified sophisticated investor or high net worth association). If the authorised firm distributes a presentation prepared by the company, it should also ensure that it is fair, clear and not misleading and so needs to be verified. Research including pre-ipo research Research is an ancillary service but is provided to clients and is likely to be provided alongside a MiFID business service such as dealing on account. Therefore, research must comply with COBS 4 as the exemptions are not available.

5 An authorised firm will not be able to use the corporate finance contact analysis (detailed above) due to the fact that research will be communicated to a client for whom it has been commissioned. Consequently, if research is being communicated by the authorised firm to retail clients it must comply with full COBS 4. This may mean that a firm will determine to exclude retail clients from the circulation list for research, as the presence of projections will mean that the COBS 4 sign off will be more onerous. Chairman s list Where there is a chairman s list (e.g. on an IPO) where the investors do not fall within an FPO exemption it is typical for those investors to invest through a broker with whom the communications can lawfully be sent. Otherwise, the communications must comply fully with COBS 4. Journalists / PR Agents Such groups are not clients and will be receiving document for information purposes only (not investment purposes), therefore there is no restriction on communicating a document to such groups. Flipping the communication The company could make a communication instead of the authorised firm in order to make use of an FPO exemption (for instance to a high net worth individual who would be a retail client under the new rules) and therefore avoiding the fuller application of COBS 4. However, this will not be possible where documents (such as a placing letter) must be communicated by the authorised firm. Moving forward, it is possible that the use of contract notes (rather than placing letters) may provide a way around this problem. 6. PRACTICAL STEPS An authorised firm should ensure that their documentation does not contain FPO exemption wording when they are conducting MiFID business and the recipient is (i) a client, or (ii) a corporate finance contact that is not FPO-exempt. Review and sign off procedures should be enhanced to take into account the differing circumstances detailed in this document, and the flow chart at Appendix A used to identify what detail is required. An authorised firm should continue to use the FPO exemptions for non- MiFID business and where an FPO exemption can be used for a corporate finance contact. However, when sending out documentation in its own name, together with documentation produced by an unauthorised person (for example, a placing letter that attaches an offering document). An authorised firm s document should make clear that it is not responsible for the unauthorised person s document, and that only the company is its client and the authorised firm owes no duty of care to the recipient.

6 Appendix A Financial communications MiFID Business and being sent to a client? Authorised firm? FPO applies FPO does not apply COBS 4 APPLIES FPO exemption applies? Retail Client? Fair, Clear and ot Misleading requirement applies (ote: there is a degree of circumspection depending on whether the recipient is retail, professional or eligible counterparty). Exempt recipients? Promotion may be made Promotion may not be made unless issued or approved by an authorised person or All COBS 4

7 Appendix B COBS 4 summary Post 1 ovember 2007, the FSA has adopted a principles based approach to conduct of business generally. The principle in relation to financial communications (FSA Principle 7) states that: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading. Consequently, firms are being encouraged not to refer exclusively to detailed rules but also to consider the overarching principles involved and focus on the outcomes. The detailed rules have been revised to take into account MiFID and are contained in COBS 4. COBS 4 sets out detailed rules that apply to financial communications to which MiFID applies. The amount of prescribed rules depends on the classification of the client and can be summarised as follows: Eligible Counterparties COBS 4 does not apply to business conducted with eligible counterparties, except for the rules in relation to compensation information (4.4.1R). However, firms must still ensure that promotions to eligible counterparties are not misleading. Professional Clients Financial promotions can be made to professional clients provided they are [f]air, clear and not misleading (4.2.1R). This high-level principle removes the more detailed and prescriptive rules that were contained within COB and give firms more flexibility and responsibility when considering their financial promotions. Retail Clients Unless specified otherwise, all of the rules in COBS 4 apply to retail clients. In summary, as well as ensuring that communications are fair, clear and not misleading: All comparisons used must be fair, balanced and meaningful (4.5.6R); Financial promotions must be consistent with other information provided (4.6.8R). Firms should not have detailed material throughout a document, and then a short strap line that undermines what has come beforehand; and Communications should not emphasise benefits without fair / prominent indication of risks (which included disguising, diminishing etc important statements / warnings) (4.5.2R).

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