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Financial Promotions and the High Net Worth or Sophisticated Investor

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					Financial Promotions and the
High Net Worth or Sophisticated Investor
DR CAROLE A COTTER

This publication is not intended to be exhaustive, nor a substitute for legal advice. Dated 28/2/2008.

1. This practice note concerns a limited set of circumstances but one that has
   recently experienced a significant regulatory change.

2. Until 1 November 2007, when the provisions implementing the European
   Parliament and Council Directive on markets in financial instruments (No.
   2004/39/EC) (“MiFID”) came into force, a financial promotion of an investment
   product to High Net Worth or Sophisticated Investors (both as defined in the
   Financial Services and Markets Act 2000 (Financial Promotion) Order 2005)
   (“FPO”)i could be made by any person, whether an Authorised Person1 or not
   without having to be reviewed against the detailed requirements of the FSA
   Handbook. This would have been in line with the UK approach to regulation,
   which assumes that the level of protection given to an investor should reflect the
   investor’s level of financial experience. Thus, the promoters of investments to
   clients who fitted the criteria of the FPO could write their marketing material
   without concern for certain parts of the FSA Handbook.

3. The ‘post – MiFID’ position on promotions is discussed on the web site of the FSA
   under the title ‘Communicating with clients, including financial promotions’. The
   relevant sections are extracted below:


    How do the FPO exemptions apply?

    The Financial Promotion Order (FPO) exemptions remain available to unauthorised
    persons and are potentially relevant to firms communicating outside MiFID scope.

    MiFID business: However, the FPO exemptions are not available in relation to MiFID
    business. Provisions derived from MiFID in relation to communications always apply,
    subject to MiFID driven exemptions, even if the promotion would otherwise fall within
    scope of exemptions in the FPO. So, if an FPO exemption would have applied
    previously, firms may need revised systems and controls to ensure their promotions are
    fair, clear and not misleading. The application of these systems should be
    proportionate to the nature of the product and the target market. For instance, the
    same level of attention may not be required for promotions to professional clients as to
    the mass market.


1If hyperlinks do not work (for example in a pdf version), please refer to the FSA
Glossary. http://fsahandbook.info/FSA/html/handbook/Glossary
   Put simply, this means that the FPO exemptions will not apply to promotions
   communicated or approved by an Authorised Person where the business is
   MiFID Business.

   The table below may assist:

    Can I rely on the FPO exemptions (e.g. ‘High Net Worth’ or ‘Sophisticated
    Investor’ )re. my marketing document?
    Issuer                   Authorised Person     Non – Authorised Person
    MiFID Business           No                    Yes
    Non – MiFID Business     Yes                   Yes

4. A strange anomaly emerges in that a person authorised and regulated by the
   FSA for the conduct of investment business is not covered by the FPO
   exemptions for all types of product and services marketed, whereas any other
   person is. It must be remembered, however, that a non-authorised person has
   always to consider the nature of its activities and whether it should in fact be
   authorised under the Financial Services and Markets Act 2000 (“FSMA”). In
   addition, the extent of the authorisation ( for which, see the FSA Register) has to
   be considered; in a recent matter a person had to add to the investments it was
   authorised to arrange deals in before it could proceed with the marketing
   process.

5. Once it is established that an Authorised Person is marketing services falling
   within the definition of MiFID Business (for example, arranging deals in
   investments or the giving of investment advice) the person has to consider what
   rules in the FSA Handbook apply. In order to be able to do this, the client needs
   to be categorised as a ‘retail client’, ‘professional          client’ or ‘eligible
   counterparty’ because not all rules apply to all clients. For example, COBS 2.1.1
   states that the Authorised Person must act in the best interests of the client.
   However, this rule only applies to a non-retail client where the business is MiFID
   Business.

    Do I have to comply with COBS 2.1.1 – i.e. act in the best interests of the client?
                            Retail Client                  Non – Retail Client
    MiFID Business          Yes                            Yes
    Non – MiFID Business    Yes                            No

6. As a further twist in the regulatory tail, it will be noted that the definitions
   ‘Sophisticated Investor’ and ‘Elective Professional Client’ may both have to be
   considered in a promotional scenario in respect of the same investor. For
   example, whether Mr X were a sophisticated investor would be relevant if a
   promotion concerned non-MiFID Business (because there would be no need to
   have the promotion approved by an authorised person). If Mr X were not a
   Sophisticated Investor or the business were MiFID Business Mr X would be a Retail
   Client or an Elective Professional Client. It would not be correct to say (in any
   marketing document) that a promotion were aimed at Sophisticated Investors
   only if, in fact, it was aimed at Elective Professional Clients only. This is because
   the level of information required in a promotion where the business is MiFID
   Business is related to whether the client is an Elective Professional Client and not
   whether it is a sophisticated investor. In practical terms, a firm that is used to
   addressing its promotional material to Sophisticated Investors will need to adjust
   its precedents for this set of circumstances.

7. There are, therefore, a number of questions to be asked in the context of
   reviewing material to be given to High Net Worth and Sophisticated Investors:

   •   Is the material under review a Financial Promotion?
   •   Is the person taking responsibility for the accuracy (and so on) of the material
       an Authorised Person?
   •   Does the material concern business that falls under the category ‘MiFID
       Business’?
   •   Is the client a Retail Client or a Professional Client?

   The regulatory burden falls on a promoter who is regulated and authorised by
   the Financial Services Authority and comparable persons within the EU.

8. We have also been asked how all this affects an AIM flotation and placing
   document. An AIM admission document (drawn up in accordance with the rules
   for AIM published by the London Stock Exchange) would normally be covered
   by Section 68 of the FPOii, which exempts a financial promotion that is required
   before the relevant investments can be admitted. The issuing company in
   question is most likely not an Authorised Person and so the FPO exemptions
   apply to a financial promotion made by the company. However, in the case of
   placing letters or a pathfinder document that are promoted by a Broker (who
   would be authorised) the situation changes dramatically. The broker would
   have to consider the FSA Handbook requirements in respect of ‘financial
   promotions’. In addition, the Broker has a clear conflict of interest between
   acting for the company as the NOMAD and acting for a client. To the extent
   that any such document were able to be promoted by the issuer company
   (taking advantage of the FPO exemption) a Broker would have to make sure
   that a person who was normally a client of the Broker understood in this
   circumstance that the Broker had not approved the AIM admission document.
   The following wording might usefully be included in the placing letters or
   pathfinder document:


Any future or present clients of [NOMAD] in its authorised capacity [to give
investment advice or receive and transmit orders] who receive this document from
[NOMAD] must be aware that [NOMAD] is not acting on their behalf in the
physical transmission of this document to them. This financial promotion is issued
by the Company, not [NOMAD]. This document does not, accordingly, contain
materials that are aimed at protecting investors and are required by the FSA in
 respect of financial promotions by authorised persons.


Additional wording might be considered for the broker’s covering letter or other
‘wrapper’.

Of course, it is a matter for the company and its advisers, whether it wishes to
include such wording in its document but the fact remains that if the ultimate
investor is a client (or treated as a client) of an Authorised Person the Authorised
Person will have to ensure compliance of promotional material with the FSA
Handbook requirements.

FOR FURTHER INFORMATION, PLEASE CONTACT:
http://www.dickinson-dees.com/people/dr_carole_a_cotter.asp
http://www.dickinson-dees.com/people/Jonathan_Hewitt.asp

Legislation Extracted from Lexis Nexis on 20/02/08
i
48 Certified high net worth individuals

(1)    If the requirements of paragraphs (4) and (7) are met, the financial promotion restriction does not apply to any
communication which—

(a)    is a non-real time communication or a solicited real time communication;
(b)    is made to an individual whom the person making the communication believes on reasonable grounds to be a certified
      high net worth individual, and

(c)    relates only to one or more investments falling within paragraph (8).
(2)    “Certified high net worth individual” means an individual who has signed, within the period of twelve months ending
      with the day on which the communication is made, a statement complying with Part I of Schedule 5.

(3)   The validity of a statement signed for the purposes of paragraph (2) is not affected by a defect in the form or wording of
      the statement, provided that the defect does not alter the statement's meaning and that the words shown in bold type
      in Part I of Schedule 5 are so shown in the statement.

(4)    The requirements of this paragraph are that either the communication is accompanied by the giving of a warning in
      accordance with paragraphs (5) and (6) or where, because of the nature of the communication, this is not reasonably
      practicable,—

(a)    a warning in accordance with paragraph (5) is given to the recipient orally at the beginning of the communication
      together with an indication that he will receive the warning in legible form and that, before receipt of that warning, he
      should consider carefully any decision to engage in investment activity to which the communication relates; and

(b)    a warning in accordance with paragraphs (5) and (6) (d) to (h) is sent to the recipient of the communication within two
      business days of the day on which the communication is made.

(5)   The warning must be in the following terms—
      “The content of this promotion has not been approved by an authorised person within the meaning of the Financial
      Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may
      expose an individual to a significant risk of losing all of the property or other assets invested.”.
      But where a warning is sent pursuant to paragraph (4)(b), for the words “this promotion” in both places where they occur
      there must be substituted wording which clearly identifies the promotion which is the subject of the warning.

(6)   The warning must—

(a)    be given at the beginning of the communication;

(b)    precede any other written or pictorial matter;

(c)    be in a font size consistent with the text forming the remainder of the communication;

(d)    be indelible;

(e)    be legible;

(f)   be printed in black, bold type;

(g)    be surrounded by a black border which does not interfere with the text of the warning; and

(h)    not be hidden, obscured or interrupted by any other written or pictorial matter.

(7)   The requirements of this paragraph are that the communication is accompanied by an indication—

(a)    that it is exempt from the general restriction (in section 21 of the Act) on the communication of invitations or
      inducements to engage in investment activity on the ground that it is made to a certified high net worth individual;
(b)    of the requirements that must be met for an individual to qualify as a certified high net worth individual; and

(c)    that any individual who is in any doubt about the investment to which the communication relates should consult an
      authorised person specialising in advising on investments of the kind in question.

(8)   An investment falls within this paragraph if—

(a)    it is an investment falling within paragraph 14 of Schedule 1 being stock or shares in an unlisted company;

(b)    it is an investment falling within paragraph 15 of Schedule 1 being an investment acknowledging the indebtedness of
an unlisted company;

(c)    it is an investment falling within paragraph 17 or 18 of Schedule 1 conferring entitlement or rights with respect to
      investments falling within sub-paragraph (a) or (b);

(d)    it comprises units in a collective investment scheme being a scheme which invests wholly or predominantly in
      investments falling within sub-paragraph (a) or (b);

(e)    it is an investment falling within paragraph 21 of Schedule 1 being an option to acquire or dispose of an investment
      falling within sub-paragraph (a), (b) or (c);

(f)   it is an investment falling within paragraph 22 of Schedule 1 being rights under a contract for the sale of an investment
      falling within sub-paragraph (a), (b) or (c);

(g)    it is an investment falling within paragraph 23 of Schedule 1 being a contract relating to, or to fluctuations in value or
      price of, an investment falling within sub-paragraph (a), (b) or (c),

      provided in each case that it is an investment under the terms of which the investor cannot incur a liability or obligation
      to pay or contribute more than he commits by way of investment.
(9)     “Business day” means any day except a Saturday, a Sunday, Christmas Day, Good Friday or a day which is a bank
       holiday under the Banking and Financial Dealings Act 1971 in any part of the United Kingdom.




50 Sophisticated investors
(1)    “Certified sophisticated investor”, in relation to any description of investment, means a person—

(a)     who has a current certificate in writing or other legible form signed by an authorised person to the effect that he is
       sufficiently knowledgeable to understand the risks associated with that description of investment; and

(b)     who has signed, within the period of twelve months ending with the day on which the communication is made, a
statement in the following terms:
       “I make this statement so that I am able to receive promotions which are exempt from the restrictions on financial
       promotion in the Financial Services and Markets Act 2000. The exemption relates to certified sophisticated investors and I
       declare that I qualify as such in relation to investments of the following kind [list them]. I accept that the contents of
       promotions and other material that I receive may not have been approved by an authorised person and that their
       content may not therefore be subject to controls which would apply if the promotion were made or approved by an
       authorised person. I am aware that it is open to me to seek advice from someone who specialises in advising on this kind
       of investment.”.

(1A)     The validity of a statement signed in accordance with paragraph (1)(b) is not affected by a defect in the wording of
       the statement, provided that the defect does not alter the statement's meaning.

(2)     If the requirements of paragraph (3) are met, the financial promotion restriction does not apply to any communication
which—
(a)     is made to a certified sophisticated investor;

(b)     does not invite or induce the recipient to engage in investment activity with the person who has signed the certificate
       referred to in paragraph (1)(a); and

(c)     relates only to a description of investment in respect of which that investor is certified.

(3)    The requirements of this paragraph are that the communication is accompanied by an indication—
(a)      that it is exempt from the general restriction (in section 21 of the Act) on the communication of invitations or
       inducements to engage in investment activity on the ground that it is made to a certified sophisticated investor;
(b)     of the requirements that must be met for a person to qualify as a certified sophisticated investor;

(c)     that the content of the communication has not been approved by an authorised person and that such approval is,
       unless this exemption or any other exemption applies, required by section 21 of the Act;

(d)     that reliance on the communication for the purpose of engaging in any investment activity may expose the individual
       to a significant risk of losing all of the property invested or of incurring additional liability;

(e)     that any person who is in any doubt about the investment to which the communication relates should consult an
       authorised person specialising in advising on investments of the kind in question.

(4)    For the purposes of paragraph (1)(a), a certificate is current if it is signed and dated not more than three years before
       the date on which the communication is made.


50A Self-certified sophisticated investors
(1)   “Self-certified sophisticated investor” means an individual who has signed within the period of twelve months ending
      with the day on which the communication is made, a statement complying with Part II of Schedule 5.

(2)   The validity of a statement signed for the purposes of paragraph (1) is not affected by a defect in the form or wording of
      the statement, provided that the defect does not alter the statement's meaning and that the words shown in bold type
      in Part II of Schedule 5 are so shown in the statement.

(3)   If the requirements of paragraphs (4) and (7) are met, the financial promotion restriction does not apply to any
communication which—

(a)    is made to an individual whom the person making the communication believes on reasonable grounds to be a self-
      certified sophisticated investor; and

(b)    relates only to one or more investments falling within paragraph (8).

(4)   The requirements of this paragraph are that either the communication is accompanied by the giving of a warning in
      accordance with paragraphs (5) and (6) or where, because of the nature of the communication this is not reasonably
      practicable—

(a)    a warning in accordance with paragraph (5) is given to the recipient orally at the beginning of the communication
      together with an indication that he will receive the warning in legible form and that, before receipt of that warning, he
      should consider carefully any decision to engage in investment activity to which the communication relates; and

(b)    a warning in accordance with paragraphs (5) and (6) (d) to (h) is sent to the recipient of the communication within two
      business days of the day on which the communication is made.

(5)   The warning must be in the following terms—
      “The content of this promotion has not been approved by an authorised person within the meaning of the Financial
      Services and Markets Act 2000. Reliance on this promotion for the purpose of engaging in any investment activity may
      expose an individual to a significant risk of losing all of the property or other assets invested.”.

      But where a warning is sent pursuant to paragraph (4)(b), for the words “this promotion” in both places where they occur
      there must be substituted wording which clearly identifies the promotion which is the subject of the warning.

(6)   The warning must—

(a)    be given at the beginning of the communication;

(b)    precede any other written or pictorial matter;

(c)    be in a font size consistent with the text forming the remainder of the communication;

(d)    be indelible;

(e)    be legible;

(f)   be printed in black, bold type;

(g)    be surrounded by a black border which does not interfere with the text of the warning; and

(h)    not be hidden, obscured or interrupted by any other written or pictorial matter.

(7)   The requirements of this paragraph are that the communication is accompanied by an indication—
(a)    that it is exempt from the general restriction (in section 21 of the Act) on the communication of invitations or
      inducements to engage in investment activity on the ground that it is made to a self-certified sophisticated investor;

(b)    of the requirements that must be met for an individual to qualify as a self-certified sophisticated investor;

(c)    that any individual who is in any doubt about the investment to which the communication relates should consult an
      authorised person specialising in advising on investments of the kind in question.

(8)   An investment falls within this paragraph if—

(a)    it is an investment falling within paragraph 14 of Schedule 1 being stock or shares in an unlisted company;

(b)    it is an investment falling within paragraph 15 of Schedule l being an investment acknowledging the indebtedness of an
unlisted company;

(c)    it is an investment falling within paragraph 17 or 18 of Schedule 1 conferring entitlement or rights with respect to
      investments falling within sub-paragraph (a) or (b);

(d)    it comprises units in a collective investment scheme being a scheme which invests wholly or predominantly in
      investments falling within sub-paragraph (a) or (b);

(e)    it is an investment falling within paragraph 21 of Schedule 1 being an option to acquire or dispose of an investment
      falling within sub-paragraph (a), (b) or (c);

(f)   it is an investment falling within paragraph 22 of Schedule 1 being rights under a contract for the sale of an investment
      falling within sub-paragraph (a), (b) or (c);

(g)    it is an investment falling within paragraph 23 of Schedule 1 being a contract relating to, or to fluctuations in value or
      price of, an investment falling within sub-paragraph (a), (b) or (c),

      provided in each case that it is an investment under the terms of which the investor cannot incur a liability or obligation
      to pay or contribute more than he commits by way of investment.

(9)   “Business day” means any day except a Saturday, a Sunday, Christmas Day, Good Friday or a day which is a bank
      holiday under the Banking and Financial Dealings Act 1971 in any part of the United Kingdom.
ii    68 Promotions in connection with admission to certain EEA markets



(1)    The financial promotion restriction does not apply to any communication--
(a)     which is a non-real time communication or a solicited real time communication;
(b)     which a relevant EEA market requires to be communicated before an investment can be admitted to trading on that
market
(c)    which, if it were included in a prospectus issued in accordance with prospectus rules made under Part VI of the Act,
       would be required to be communicated by those rules; and
(d)     which is not accompanied by any information other than information which is required or permitted to be published by
        the rules of that market.


(2)    In this article "relevant EEA market" means any market on which investments can be traded or dealt in and which--
(a)     meets the criteria specified in Part I of Schedule 3; or
(b)     is specified in, or established under the rules of an exchange specified in, Part II of that Schedule




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