Conflicts of Interest Potentially Detrimental to Aclient

Conflicts of Interest Potentially Detrimental to Aclient

MiFID2 Delegated Regulation April 2016



Conflicts of interest potentially detrimental to aclient

(Articles 16(3) and 23 of Directive2014/65/EU)

Forthepurposesofidentifyingthetypesofconflictofinterestthatariseinthecourseof providinginvestmentandancillaryservicesoracombinationthereofandwhoseexistence maydamagetheinterestsofaclient,investmentfirmsshalltakeintoaccount,bywayof minimumcriteria,whethertheinvestmentfirmorarelevantperson,orapersondirectlyor indirectlylinkedbycontroltothefirm,isinanyofthefollowingsituations,whetherasa result of providing investment or ancillary services or investment activities orotherwise:

(a)thefirmorthatpersonislikelytomakeafinancialgain,oravoidafinancial loss, at the expense of theclient;

(b)thefirmorthatpersonhasaninterestintheoutcomeofaserviceprovidedto the client or of a transaction carried out on behalf of the client, which is distinct from the client's interest in thatoutcome;

(c)thefirmorthatpersonhasafinancialorotherincentivetofavourtheinterest of another client or group of clients over the interests of theclient;

(d)the firm or that person carries on the same business as theclient;

(e)thefirmorthatpersonreceivesorwillreceivefromapersonotherthanthe client an inducement in relation to a service provided to the client, in theform of monetary or non-monetary benefits orservices.


Conflicts of interestpolicy

(Articles 16(3) and 23 of Directive2014/65/EU)

1.Investmentfirmsshallestablish,implementandmaintainaneffectiveconflictsof interestpolicysetoutinwritingandappropriatetothesizeandorganisationofthe firm and the nature, scale and complexity of itsbusiness.

Wherethefirmisamemberofagroup,thepolicyshallalsotakeintoaccountany circumstances,ofwhichthefirmisorshouldbeaware,whichmaygiverisetoa conflict of interest arising as a result of the structure and business activities ofother members of thegroup.

2.Theconflictsofinterestpolicyestablishedinaccordancewithparagraph1shall include the followingcontent:

(a)it must identify, with reference to the specific investment services andactivities andancillaryservicescarriedoutbyoronbehalfoftheinvestmentfirm,the circumstances which constitute or may give rise to a conflict ofinterest entailing a risk of damage to the interests of one or moreclients;

(b)it must specify procedures to be followed and measures to be adopted inorder to prevent or manage suchconflicts.

3.Theproceduresandmeasuresreferredtoinparagraph2(b)shallbedesignedto ensure that relevant persons engaged in different business activities involvinga conflict of interest of the kind specified in paragraph 2(a) carry on those activities at alevelofindependenceappropriatetothesizeandactivitiesoftheinvestmentfirm andofthegrouptowhichitbelongs,andtotheriskofdamagetotheinterestsof clients.

For the purposes of paragraph 2(b), the procedures to be followed and measures tobe adoptedshallincludeatleastthoseitemsinthefollowinglistthatarenecessaryfor the firm to ensure the requisite degree ofindependence:

(a)effective procedures to prevent or control the exchange of informationbetween relevantpersonsengagedinactivitiesinvolvingariskofaconflictofinterest where the exchange of that information may harm the interests of one ormore clients;

(b)the separate supervision of relevant persons whose principal functionsinvolve carryingoutactivitiesonbehalfof,orprovidingservicesto,clientswhose interests may conflict, or who otherwise represent different interests thatmay conflict, including those of thefirm;

(c)theremovalofanydirectlinkbetweentheremunerationofrelevantpersons principally engaged in one activity and the remuneration of, orrevenues

generated by, different relevant persons principally engaged in anotheractivity, where a conflict of interest may arise in relation to thoseactivities;

(d)measures to prevent or limit any person from exercising inappropriate influenceoverthewayinwhicharelevantpersoncarriesoutinvestmentor ancillary services oractivities;

(e)measures to prevent or control the simultaneous or sequential involvement of a relevant person in separate investment or ancillary services or activitieswhere such involvement may impair the proper management of conflicts ofinterest.

4.Investmentfirmsshallensurethatdisclosuretoclients,pursuanttoArticle23(2)of Directive2014/65/EU,isameasureoflastresortthatshallbeusedonlywherethe effective organisational and administrative arrangements established bythe investmentfirmtopreventormanageitsconflictsofinterestinaccordancewith Article23ofDirective2014/65/EUarenotsufficienttoensure,withreasonable confidence, that risks of damage to the interests of the client will beprevented.

The disclosure shall clearly state that the organisational andadministrative arrangementsestablishedbytheinvestmentfirmtopreventormanagethatconflict arenotsufficienttoensure,withreasonableconfidence,thattherisksofdamageto the interests of the client will be prevented. The disclosure shall includespecific description of the conflicts of interest that arise in the provision of investmentand/or ancillary services, taking into account the nature of the client to whom thedisclosure is being made. The description shall explain the general nature and sourcesof conflictsofinterest,aswellastheriskstotheclientthatariseasaresultofthe conflictsofinterestandthestepsundertakentomitigatetheserisks,insufficient detail to enable that client to take an informed decision with respect to theinvestment or ancillary service in the context of which the conflicts of interestarise.

5.Investment firms shall assess and periodically review, on an at least annual basis,the conflicts of interest policy established in accordance with paragraphs 1 to 4 andshall take all appropriate measures to address any deficiencies. Over-reliance ondisclosure of conflicts of interest shall be considered a deficiency in the investmentfirm's conflicts of interestpolicy.


Record of services or activities giving rise to detrimental conflict ofinterest

(Article 16(6) of Directive2014/65/EU)

Investmentfirmsshallkeepandregularlyupdatearecordofthekindsofinvestmentor ancillaryserviceorinvestmentactivitycarriedoutbyoronbehalfofthefirminwhicha conflict of interest entailing a risk of damage to the interests of one or more clients hasarisen or, in the case of an ongoing service or activity, mayarise.

Senior management shall receive on a frequent basis, and at least annually, written reportson situations referred to in thisArticle.


Investment research and marketingcommunications

(Article 24(3) of Directive2014/65/EU)

1.For the purposes of Article 37 investment research shall be research orother information recommending or suggesting an investment strategy, explicitly or

implicitly, concerning one or several financial instruments or the issuers of financial instruments,includinganyopinionastothepresentorfuturevalueorpriceofsuch instruments,intendedfordistributionchannelsorforthepublic,andinrelationto which the following conditions aremet:

(a)the research or information is labelled or described as investment research orin similar terms, or is otherwise presented as an objective orindependent explanation of the matters contained in therecommendation;

(b)if the recommendation in question were made by an investment firm to aclient, itwouldnotconstitutetheprovisionofinvestmentadviceforthepurposesof Directive 2014/65/EU.

2.Arecommendationofthetypecoveredbypoint(35)ofArticle3(1)ofRegulation (EU)596/2014thatdoesnotmeettheconditionssetoutinparagraph1shallbe treated as a marketing communication for the purposes of Directive 2014/65/EUand investment firms that produce or disseminate that recommendation shall ensure that it is clearly identified assuch.

Additionally,firmsshallensurethatanysuchrecommendationcontainsaclearand prominentstatementthat(or,inthecaseofanoralrecommendation,totheeffect that)ithasnotbeenpreparedinaccordancewithlegalrequirementsdesignedto promote the independence of investment research, and that it is not subject toany prohibition on dealing ahead of the dissemination of investmentresearch.


Additional organisational requirements in relation to investment research ormarketing communications

(Article 16(3) of Directive2014/65/EU)

1.Investment firms which produce, or arrange for the production of,investment researchthatisintendedorlikelytobesubsequentlydisseminatedtoclientsofthe firmortothepublic,undertheirownresponsibilityorthatofamemberoftheir group, shall ensure the implementation of all the measures set out in Article 34(3)in relation to the financial analysts involved in the production of the investment research and other relevant persons whose responsibilities or business interestsmay conflict with the interests of the persons to whom the investment researchis disseminated.

The obligations in the first subparagraph shall also apply in relationto recommendations referred to in Article36(2).

2.Investmentfirmsreferredtointhefirstsubparagraphofparagraph1shallhavein place arrangements designed to ensure that the following conditions aresatisfied:

(a)financial analysts and other relevant persons do not undertakepersonal transactionsortrade,otherthanasmarketmakersactingingoodfaithandin the ordinary course of market making or in the execution of anunsolicited clientorder,onbehalfofanyotherperson,includingtheinvestmentfirm,in financialinstrumentstowhichinvestmentresearchrelates,orinanyrelated financialinstruments,withknowledgeofthelikelytimingorcontentofthat investmentresearchwhichisnotpubliclyavailableoravailabletoclientsand cannot readily be inferred from information that is so available, untilthe recipients of the investment research have had a reasonable opportunity toact on it;

(b)incircumstancesnotcoveredbypoint(a),financialanalystsandanyother relevant persons involved in the production of investment research donot undertake personal transactions in financial instruments to whichthe investment research relates, or in any related financial instruments, contraryto currentrecommendations,exceptinexceptionalcircumstancesandwiththe prior approval of a member of the firm's legal or compliancefunction;

(c)a physical separation exists between the financial analysts involved inthe production of investment research and other relevant personswhose responsibilities or business interests may conflict with the interests ofthe persons to whom the investment research is disseminated or, whenconsidered notappropriatetothesizeandorganisationofthefirmaswellasthenature, scale and complexity of its business, the establishment and implementationof appropriate alternative informationbarriers;

(d)the investment firms themselves, financial analysts, and other relevantpersons involved in the production of the investment research do notaccept inducementsfromthosewithamaterialinterestinthesubject-matterofthe investmentresearch;

(e)the investment firms themselves, financial analysts, and other relevantpersons involvedintheproductionoftheinvestmentresearchdonotpromiseissuers favourable researchcoverage;

(f)before the dissemination of investment research issuers, relevant personsother thanfinancialanalysts,andanyotherpersonsarenotpermittedtoreviewa draft of the investment research for the purpose of verifying the accuracyof factual statements made in that research, or for any purpose otherthan verifying compliance with the firm's legal obligations, where the draftincludes a recommendation or a targetprice.

For the purposes of this paragraph, ‘related financial instrument’ shall beany financialinstrumentthepriceofwhichiscloselyaffectedbypricemovementsin another financial instrument which is the subject of investment research, and includes a derivative on that other financialinstrument.

3.Investment firms which disseminate investment research produced by anotherperson tothepublicortoclientsshallbeexemptfromcomplyingwithparagraph1ifthe following criteria aremet:

(a)the person that produces the investment research is not a member of thegroup to which the investment firmbelongs;

(b)the investment firm does not substantially alter the recommendations withinthe investmentresearch;

(c)theinvestmentfirmdoesnotpresenttheinvestmentresearchashavingbeen produced byit;

(d)theinvestmentfirmverifiesthattheproduceroftheresearchissubjectto requirements equivalent to the requirements under this Regulation in relationto the production of that research, or has established a policy settingsuch requirements.


Additional general requirements in relation to underwriting orplacing

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

1.Investmentfirmswhichprovideadviceoncorporatefinancestrategy,assetoutin SectionB(3)ofAnnexI,andprovidetheserviceofunderwritingorplacingof financial instruments, shall, before accepting a mandate to manage the offering,have arrangements in place to inform the issuer client of thefollowing:

(a)the various financing alternatives available with the firm, and an indicationof the amount of transaction fees associated with eachalternative;

(b)the timing and the process with regard to the corporate finance adviceon pricing of theoffer;

(c)the timing and the process with regard to the corporate finance adviceon placing of theoffering;

(d)details of the targeted investors, to whom the firm intends to offer thefinancial instruments;

(e)thejobtitlesanddepartmentsoftherelevantpersonsindividualsinvolvedin the provision of corporate finance advice on the price and allotment;and

(f)firm’sarrangementstopreventormanageconflictsofinterestthatmayarise where the firm places the relevant financial instruments with itsinvestment clients or with its own proprietarybook.

2.Investment firms shall have in place a centralised process to identify allunderwriting and placing operations of the firm and record such information, including the dateon which the firm was informed of potential underwriting and placing operations.Firms shallidentifyallpotentialconflictsofinterestarisingfromotheractivitiesofthe investmentfirm,orgroup,andimplementappropriatemanagementprocedures.In caseswhereaninvestmentfirmcannotmanageaconflictofinterestbywayof implementingappropriateprocedures,theinvestmentfirmshallnotengageinthe operation.

3.Investmentfirmsprovidingexecutionandresearchservicesaswellascarryingout underwritingandplacingactivitiesshallensureadequatecontrolsareinplaceto manage any potential conflicts of interest between these activities and betweentheir different clients receiving thoseservices.


Additional requirements in relation to pricing of offerings in relation to issuanceof financialinstruments

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

1.Investment firms shall have in place systems, controls and procedures to identifyand prevent or manage conflicts of interest that arise in relation to possibleunder-pricing orover-pricingofanissueorinvolvementofrelevantpartiesintheprocess.In particular,investmentfirmsshallasaminimumrequirementestablish,implement and maintain internal arrangements to ensure both of the following:

(a)thatthepricingoftheofferdoesnotpromotetheinterestsofotherclientsor firm’s own interests, in a way that may conflict with the issuer client'sinterests; and

(b)thepreventionormanagementofasituationwherepersonsresponsiblefor providing services to the firm's investment clients are directly involvedin decisions about corporate finance advice on pricing to the issuerclient.

2.Investment firms shall provide clients with information about howthe recommendation as to the price of the offering and the timings involvedis determined.Inparticular,thefirmshallinformandengagewiththeissuerclient aboutanyhedgingorstabilisationstrategiesitintendstoundertakewithrespectto theoffering,includinghowthesestrategiesmayimpacttheissuerclients'interests. Duringtheofferingprocess,firmsshallalsotakeallreasonablestepstokeepthe issuer client informed about developments with respect to the pricing of theissue.


Additional requirements in relation toplacing

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

1.Investment firms placing financial instruments shall establish, implementand maintain effective arrangements to prevent recommendations on placing frombeing inappropriately influenced by any existing or futurerelationships.

2.Investment firms shall establish, implement and maintain effectiveinternal arrangementstopreventormanageconflictsofintereststhatarisewherepersons responsible for providing services to the firm's investment clients aredirectly involved in decisions about recommendations to the issuer client onallocation.

3.Investmentfirmsshallnotacceptanythird-partypaymentsorbenefitsunlesssuch payments or benefits comply with the inducements requirements laid down in Article 24ofDirective2014/65/EU.Inparticular,thefollowingpracticesshallbe considered not compliant with those requirements and shall therefore beconsidered notacceptable:

(a)anallocationmadetoincentivisethepaymentofdisproportionatelyhighfees forunrelatedservicesprovidedbytheinvestmentfirm('laddering'),suchas disproportionatelyhighfeesorcommissionspaidbyaninvestmentclient,or disproportionately high volumes of business at normal levels ofcommission provided by the investment client as a compensation for receiving anallocation of theissue;

(b)an allocation made to a senior executive or a corporate officer of an existingor potential issuer client, in consideration for the future or past award ofcorporate finance business('spinning');

(c)an allocation that is expressly or implicitly conditional on the receipt offuture ordersorthepurchaseofanyotherservicefromtheinvestmentfirmbyan investment client, or any entity of which the investor is a corporateofficer.

4.Investmentfirmsshallestablish,implementandmaintainanallocationpolicythat sets out the process for developing allocation recommendations. The allocation policy shall be provided to the issuer client before agreeing to undertake anyplacing services.Thepolicyshallsetoutrelevantinformationthatisavailableatthatstage, about the proposed allocation methodology for theissue.

5.Investment firms shall involve the issuer client in discussions about theplacing processinorderforthefirmtobeabletounderstandandtakeintoaccountthe client'sinterestsandobjectives.Theinvestmentfirmshallobtaintheissuerclient's

agreement to its proposed allocation per type of client for the transactionin accordance with the allocationpolicy.


Additional requirements in relation to advice, distribution andself-placement

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

1.Investment firms shall have in place systems, controls and procedures to identifyand managetheconflictsofinterestthatarisewhenprovidinginvestmentservicetoan investmentclienttoparticipateinanewissue,wheretheinvestmentfirmreceives commissions, fees or any monetary or non-monetary benefits in relation toarranging theissuance.Anycommissions,feesormonetaryornon-monetarybenefitsshall comply with the requirements in Article 24(7), 24(8) and 24(9) ofDirective 2014/65/EU and be documented in the investment firm's conflicts of interestpolicies and reflected in the firm's inducementsarrangements.

2.Investment firms engaging in the placement of financial instruments issuedby themselves or by entities within the same group, to their own clients, includingtheir existing depositor clients in the case of credit institutions, or investmentfunds managed by entities of their group, shall establish, implement and maintain clearand effective arrangements for the identification, prevention or management ofthe potential conflicts of interest that arise in relation to this type of activity.Such arrangements shall include consideration of refraining from engaging in theactivity, whereconflictsofinterestcannotbeappropriatelymanagedsoastopreventany adverse effects onclients.

3.Whendisclosureofconflictsofinterestisrequired,investmentfirmsshallcomply withtherequirementsinArticle34(4),includinganexplanationofthenatureand sourceoftheconflictsofinterestinherenttothistypeofactivity,providingdetails about the specific risks related to such practices in order to enable clients to makean informed investmentdecision.

4.Investment firms engaging in the offering of financial instruments issued by themselves or other group entities to their clients and those instruments areincluded in the calculation of prudential requirements specified in Regulation (EU)No 575/2013 of the European Parliament and of the Council 20, Directive 2013/36/EUof the European Parliament and of the Council 21 or Directive 2014/59/EU of the European Parliament and of the Council 22, shall provide such clients withadditional informationexplainingthedifferencesbetweenthefinancialinstrumentandbank

20Regulation(EU)No575/2013oftheEuropeanParliamentandoftheCouncilof26June2013on prudential requirements for credit institutions and investment firms and amending Regulation (EU)No 648/2012 (OJ L 176, 27.6.2013, p.1).

21Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the

activity of credit institutions and the prudential supervision of credit institutions and investmentfirms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L176, 27.6.2013, p.338).

22Directive2014/59/EUoftheEuropeanParliamentandoftheCouncilof15May2014establishinga frameworkfortherecoveryandresolutionofcreditinstitutionsandinvestmentfirmsandamending

Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC,2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and(EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p.190).

depositsintermsofyield,risk,liquidityandanyprotectionprovidedinaccordance with Directive 2014/49/EU of the European Parliament and of the Council23.


Additional requirements in relation to lending or provision of credit in the contextof underwriting orplacement

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

1.Where any previous lending or credit to the issuer client by an investment firm, oran entitywithinthesamegroup,mayberepaidwiththeproceedsofanissue,the investment firm shall have arrangements in place to identify and prevent ormanage any conflicts of interest that may arise as aresult.

2.Wherethearrangementstakentomanageconflictsofinterestproveinsufficientto ensure that the risk of damage to the issuer client would be prevented,investment firmsshalldisclosetotheissuerclientthespecificconflictsofinterestthathave arisen in relation to their, or group entities’, activities in a capacity of creditprovider, and their activities related to the securitiesoffering.

3.Investment firms’ conflict of interest policy shall require the sharing ofinformation abouttheissuer’sfinancialsituationwithgroupentitiesactingascreditproviders, provided this would not breach information barriers set up by the firm to protectthe interests of aclient.


Record keeping in relation to underwriting orplacing

(Articles 16(3), 23 and 24 of Directive2014/65/EU)

Investment firms shall keep records of the content and timing of instructionsreceived fromclients.Arecordoftheallocationdecisionstakenforeachoperationshallbe kept to provide for a complete audit trail between the movements registeredin clients'accountsandtheinstructionsreceivedbytheinvestmentfirm.Inparticular, thefinalallocationmadetoeachinvestmentclientshallbeclearlyjustifiedand recorded. The complete audit trail of the material steps in the underwritingand placing process shall be made available to competent authorities uponrequest.