Conflicts of Interest Policy

1. INTRODUCTION TO CONFLICTS OF INTEREST

This policy has been written to support Catalyst Investment Group Limited in its recognition of conflicts of interest, with a strict adherence to the rules and regulations set out by the Market in Financial Instruments Directive (MiFID) and the Financial Services Authority.

1.1 Impact of Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive (MiFID) comes into force on 1 November 2007 and includes organisational provisions for firms which maintain the European focus on conflicts of interest.

Under MiFID the obligation to manage conflicts of interest only applies where a firm carrying out a regulated or ancillary activity provides a service. In addition, CIGL will only be required to manage conflicts that could have a detrimental effect on clients to whom it provides a service in the course of carrying out a regulated or ancillary activity. Therefore, the obligation does not extend to providing services that the FSA does not regulate.

Firms subject to MiFID are required to establish, implement and maintain an effective conflict of interest policy set out in writing and appropriate to the size and organisation of the firm and the nature, scale and complexity of its business.

It is the responsibility of CIGL to take all reasonable steps to identify, prevent, disclose and record any conflicts of interest that may arise now, or in the future.

1.2 Conflict Management

Proper management of conflicts of interest is at the heart of maintaining fair, orderly and efficient financial markets. The FSA expects firms to establish arrangements to identify, manage and mitigate risks arising from conflicts. The key, of course, is how effective these arrangements are.

1.2.1 The Obligation

The Implementing Rules require firms to identify, manage, record and, where relevant, disclose actual or potential conflicts of interests between themselves and their clients and between one client and another, and to have in place a policy relating to conflicts of interest (the "Obligation").

The Obligation only applies where the firm provides a service to a client in carrying out a regulated activity, ancillary activity or ancillary service.

The FSA has undertaken significant supervisory work on conflicts, identifying characteristics of good practice expected in a well managed firm, these include:

• Senior management being fully engaged in conflict identification and management at their firms, while taking a holistic view of conflicts risk and conflict mitigation within the full range of business activities for which they are responsible.
• Senior management achieving a consistent treatment of conflicts of interest throughout their organisation.
• Senior management receiving management information on the extent and mitigation of, conflicts of interest in their business in order to control their business effectively.
• The firm reviewing on a regular basis the types of mitigation it considers acceptable to address conflict risks.
• The culture of an organisation is a key mitigating tool for the proper management of conflicts of interest.

1.2.2 Types of Conflict identified by the FSA

This section highlights the main types of conflict of interest highlighted by the FSA. For the purpose of identifying the types of conflict of interest that may arise in the course of providing a service and whose existence may entail a material risk of damage to the interests of a client.

CIGL must take into account, as a minimum, whether the firm or a relevant person, or a person directly or indirectly linked by control to the firm:

• is likely to make a financial gain, or avoid a financial loss, at the expense of the client;
• has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client’s interest in that outcome;
• has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;
• carries on the same business as the client; or
• receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monies, goods or services, other than the standard commission of fee for that service.

1.2.3 Conflicts identified by CIGL

CIGL is required to identify actual and potential conflicts during the course of carrying out regulated activities, ancillary activities or services. In order to establish whether a firm is subject to the requirement to manage a conflict of interest, the following factors need to be assessed:

• Does the conflict arise in the course of carrying out regulated activities, ancillary activities or ancillary services which constitute MiFID business?
• Does the firm provide one or more services to a client?

Once actual or potential conflicts of interest have been identified CIGL must take all reasonable steps to prevent those conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its clients.

2. THE NATURE OF THE OBLIGATION

Section 10.1.1R of the Senior Management Arrangements, Systems and Controls of the FSA Handbook applies to a common platform firm which provides services to its clients in the course of carrying on regulated activities or ancillary activities or providing ancillary services (but only where the ancillary services constitute MiFID business).

The effect of 10.1.1R is that the Obligation applies in relation to conflicts that arise or potentially arise in the course of carrying out regulated activities, ancillary activities or ancillary services or any combination of these.

Under the required obligations to manage conflicts, CIGL must:

• take all reasonable steps to identify conflicts of interest between (i) itself or any person directly or indirectly linked to the firm by control and its clients or (ii) one client and another;
• maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its clients;
• put in place appropriate information controls or barriers to prevent information from "externally facing" research activities flowing to the rest of the business;
• prepare, maintain, and implement an effective Written Policy;
• provide retail clients or potential retail clients with a description of the Policy as well as further details of conflicts requested by the client;
• disclose the general nature and sources of conflicts with the interests of the client. Where the arrangements to manage such conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to the interests of a client will be prevented; and
• keep records of the services and activities performed where a conflict has arisen or may arise. Such obligation may, in some circumstances, be discharged through compliance with the requirement to prepare, maintain, and implement an effective Policy.

CIGL employees must advise customers only on what is appropriate to them and all reasonable steps must be taken to ensure fair treatment of the customer.

In providing designated investment services to its customers, CIGL must observe two fundamental principles;

(i) That CIGL does not disclose to any person any confidential information given to it by its customers and does not use such information for its own benefit or for the benefit of any other customer, without the original customer’s informed consent

(ii) CIGL must at all times act in the best interests of its customers

2.1 To whom does this policy apply?

This Policy applies to all CIGL employees; from board level to temporary employees and placement students. It is the responsibility of all CIGL employees to have read and understood this policy, and where a conflict of interest arises, it is the responsibility of all employees to act in accordance to this Policy.

2.2 Where can the Rules be found?

The Rules can be found in the FSA’s Handbook:

FSA Handbook:

High Level Standards:

Senior Management Arrangements, Systems and Controls (SYSC):

SYSC 10 (Conflicts of Interest)

 

http://fsahandbook.info/FSA/html/handbook/SYSC/10

For further information on locating the rules please consult your Compliance Officer.

3. MANAGEMENT OF CONFLICTS

CIGL is responsible for ensuring that all systems, controls, and procedures are robust and adequate, so as to identify and manage any conflicts of interest that may arise and ensuring that those arrangements operate effectively. In practice, this responsibility rests with senior management.

FSA Rules do not impose any specific requirements on senior management in relation to the identification and management of conflicts of interest. However, in complying with the general SYSC requirements senior management should:

 

• be fully engaged in conflict identification and management;
• consider the conflicts risk and conflict mitigation within the full range of business activities for which they are responsible;
• have policies and procedures that aim to achieve a consistent treatment of conflicts of interest throughout their organisation; and
• receive management information on the extent and mitigation of conflicts of interest in their business, in order to assist them in controlling their business effectively.

CIGL maintains and operates an effective organisational and administrative arrangement with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of its clients.

It is of the utmost importance that any conflicts of interest are managed as effectively and as swiftly as possible and the matter should be brought to the attention of the Compliance Officer. If it is decided that this is in fact a new or potential conflict of interest then measures will be put in place to manage the conflict.

CIGL proposes to disclose an actual or potential conflict of interest as a method of managing a conflict, but only where CIGL is not reasonably confident that its procedures and measures for managing the conflict or potential conflict will prevent the risk of damage to the interests of its clients.

Policies must be incorporated which limit the possibility of conflicts arising between employees, officers and agents of the firm and the firm's clients. Such policies would include, for example, staff dealing policies and restrictions on outside interests such as directorships of other companies.

3.1 Incentivised Behaviour

 

When devising organisational structures CIGL must ensure that they do not incentivise behaviour that may lead to conflicts, e.g. through remuneration, appraisal or other management/control arrangements that reward or potentially reward behaviour that disadvantages the interests of clients in favour of the firm or other clients. However, permissible indirect links would include, for example, bonuses calculated according to the general performance of the firm.

 

3.2 Information Barrier

 

When an effective information barrier is in operation, individuals on the other side of the wall will not be regarded as being in possession of knowledge denied to them as a result of the information barrier. Consequently, any conflict that may be considered to arise due to the possession within the firm of relevant knowledge can be considered as effectively managed to the extent that knowledge is behind an effective information barrier (assuming that an information barrier is an appropriate measure to ensure the requisite level of independence in the particular case).

 

The choice of what measures/combination of measures to put in place for the purposes of managing its conflicts of interests is left to its discretion, provided that the firm takes all reasonable steps to manage its conflicts of interest.

 

4. DEALING WITH CONFLICTS OF INTEREST

CIGL deals with conflicts of interest in two ways:

(i) Avoiding one of the activities which gives rise to the conflict so as to manage any conflict in the first instance.

(ii) Establishing strict “Chinese Walls” between different desks and teams of personnel within CIGL to restrict the transmission of information between them.

Pre-MiFID the disclosure of conflicts to customers and the adoption of a policy of independence would be used to deal with conflicts of interest. However, disclosure should not be seen as a method by which firms can manage a conflict of interest, but should only be used where all reasonable steps to manage a particular conflict of interest are not sufficient to ensure that the risk of damage to the interests of a client will be prevented. This issue is dealt with in more detail below.

4.1 Avoiding Conflicting Activities

Pre-MiFID conflicts were solely managed by the informed consent of the various parties concerned. However, this is now considered to be part of managing any potential conflict as a whole. CIGL will seek the customers general agreement to the existence of a number of circumstances that may give rise to technical conflicts of interest.

4.1.1 Independence Policy

It is the policy of CIGL that all staff should act independently in so far as the interests of their respective customers are concerned. No member of staff may consider, or be swayed in any service provided to a customer, by the interests of any other department or of CIGL generally, or of any other customer.

It is therefore a rule that, in performing any service on behalf of a customer, only the customers interest is to be considered, and any interest or potential interest of CIGL, or of any other customer should be disregarded.

4.1.2 Methods of Conflict Management

 

Methods utilised by CIGL to manage conflicts of interest will depend upon the type on conflict, these are listed below:

 

• Tidy Desk Policy

• Secure Computer Policy

• Restrict the individual involved to working in areas outside the area of conflict

• Safeguard private and important documents

 

Reliance on a policy of independence may not always be sufficient. The policy is appropriate to deal with a situation where a conflicting propriety interest of CIGL can be identified and discounted in identifying a customer. However, where any employee has, in whatever circumstances, knowledge of information that is confidential to one customer, it may be breach of duty to ignore this information in advising another. The Compliance Officer should be contacted in any situation were a perceived conflict has arisen.

4.2 Chinese Walls

Chinese Walls are administrative and physical barriers, internal arrangements designed to restrict the flow of sensitive information and to manage potential conflicts of interest. Details regarding Chinese Walls can be found in the FSA Handbook.

For the purposes of CIGL the Chinese Wall is used to separate the Corporate Finance and the Broking departments. Chinese Walls are information barriers implemented within firms to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions. This allows the functions of Corporate Finance (raising capital, for example) to continue while allowing the Brokers to fulfil their role without compromising the trust placed in them by their clients. At CIGL the departments are separated by two physical walls which act as a barrier allowing admittance to authorised personal only, a swipe card system is in operation to enforce this. The computer system is designed to eliminate the risk of sensitive information flowing between departments, with all work to be conducted on personal folders inaccessible to other individuals.

MiFID contains a general obligation to manage conflicts of interest:

“An investment firm shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest as defined in Art.18 from adversely affecting the interests of its clients.

Member States shall require investment firms to take all reasonable steps to identify conflicts of interest between themselves and their clients or between one client and another

Where organisational or administrative arrangements made by the investment firm…to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to clients interest will be prevented, the investment firm shall clearly disclose.” (MiFID, Art.13(3)

 

When a Chinese Wall is established and maintained it allows information to be withheld from the other side of the wall, but only to the extent that one of the sides is carrying out designated investment business. A firm will not be guilty under the offences of Misleading Statements and Practices or Market Abuse where the failure arises from the operation of a Chinese Wall.

Chinese Walls can be established and maintained in the following ways:

 

• A physical barrier restricting the flow of information between employees, which is monitored and enforced.
• Restricted access to documents and information, including electronic documents.
• Prohibition and restriction of certain communications between employees.
• A written policy and procedure statement, communicated to and acknowledged by employees, and disciplinary sanctions for breach of the policies and procedures.
• Acknowledgements by employees of receipt of policies, attendance at training concerning Chinese Walls and the management of conflicting interests.
• Separate management and supervision of employees on different sides of the Chinese Wall. Limiting employee crossings of the wall.
• Review and monitor all employee/personal account trading.

If you become aware of information due to the failure of a Chinese Wall or for any other reason, which could lead to a conflict of interest you must refer the matter to the Compliance Officer.

4.3 Disclosure

In contrast to the position under the pre-MiFID FSA Rules, disclosure should not be seen as a method by which firms can manage a conflict of interest. Instead, disclosure should only be used where all reasonable steps to manage a particular conflict of interest are not sufficient to ensure, with reasonable confidence, that the risk of damage to the interests of a client will be prevented.

In these circumstances, a firm should consider whether disclosure is appropriate or whether, bearing in mind the risks involved, it should refrain from acting for the client. Where the client is a professional client or an eligible counterparty it is likely to be in a better position to understand the disclosure made to it and to understand the risks involved if it continues to deal with the firm.

Although disclosure alone will not normally be an appropriate course of action, if a conflict cannot otherwise be managed it may be the only option in certain circumstances. For example, a firm may have multiple interests in the success of a private equity transaction; if its clients also wish to participate in the transaction, disclosure alone may be appropriate where it is clear to clients in what respects they are unable to rely on the firm to act in their interests.

Disclosure should, like all other communications to the client, be clear, fair and not misleading, irrespective of the categorisation of the client. A disclosure should contain sufficient detail about the relevant conflict of interest to enable the client in question to make an informed decision.

Whilst CIGL can make general disclosure of conflicts of interest in, for example, their terms of business, where there is something specific that a client will need to know in order to make an informed decision in relation to a particular service, activity or transaction, this must be disclosed in specific terms. In the case of retail clients, it may be necessary to provide greater detail than in the context of disclosure to professional clients.

4.4 Notion of Reasonableness

CIGL is required to take all reasonable steps to identify conflicts of interest and to manage these. The requirements under the Implementing Rules do not prohibit firms from carrying on activities, which could by their very nature create conflicts of interest or activities that, when carried on together within the same legal entity or group, potentially create conflicts of interest.

The Obligation is not absolute and applies by reference to reasonableness. CIGL will be expected to disclose a conflict of interest if it is otherwise unable to manage the conflict effectively. In determining what steps are reasonable to identify and manage conflicts of interest, CIGL will take into account:

 

• the level of risk that a conflict of interest may constitute or give rise to a material risk of damage to the interests of a client or clients;
• the nature of the conflicts in question;
• the way in which the firm is organised and the nature, scale and complexity of the firm’s business in the UK and internationally; and
• the nature and range of products and services offered in the course of its business.
  
  The requirement to identify and manage conflicts of interest applies equally to all types of clients.

4.5 Nature, scale and complexity of the firm’s business

Although CIGL only performs a limited range of services and activities it may still face conflict situations regularly. For example, a firm conducting only corporate finance business may regularly face situations where there is a conflict of interest between its clients and potential clients (e.g. potentially competing bid situations). Similarly, a firm conducting only investment management activity could regularly encounter conflicts of interest while allocating securities to different funds and different client portfolios.

Where the relevant services provided by a firm to its clients carry a high risk of those clients' interests being damaged by conflicts of interest a firm may need to apply proportionately greater resources to managing such conflicts.

5. IDENTIFICATION OF CONFLICTS

CIGL must identify and deal with any conflicts of interest that may arise either between a customer and the interests of CIGL or between two or more customers. Conflicts may especially arise where CIGL acts on both sides of a transaction, or advises a customer in relation to investments that may be available from CIGL. Conflicts of this nature should be anticipated and appropriate measures should be put in place before they arise.

CIGL should, on an ongoing basis, assess situations within all businesses that could potentially give rise to conflicts of interest, either conflicts between the firm and its client or conflicts among its clients. Conflicts of interest are not always readily apparent. Any representative of CIGL found in a situation where a conflict of interest cannot be avoided must consult with the Compliance Officer.

5.1 What should be considered?

Employees should be aware of current conflicts of interest and be cautious as to where and when new conflicts of interest are likely to arise. Key examples of where conflicts of interest tend to arise are as follows:

• Having more than one business function within the office;
• Flow of information between business functions; or
• Acting in more than one respect from different types of clients.

CIGL should, on an ongoing basis, assess situations within all of its businesses that could potentially give rise to conflicts of interest, either conflicts between the firm or a relevant person and its client or conflicts among its clients. CIGL should consider the services and activities carried out by each line of business in order to identify any conflicts that may arise between clients of the firm and that business line. Firms should also have in place processes that enable them to identify any new conflicts that may arise.

Each situation will have its own particular set of conflicts, relevant to its specific services and activities offered. Catalyst will need to identify and manage each situation. A non-exhaustive list of typical examples of situations where conflicts may arise is listed below. The list is divided between conflicts that may arise between the interests of CIGL and the interests of one or more clients and those that may arise between the interests of different clients of CIGL. Some of the examples could sit in either category of conflict.

 

5.2 CIGL v Client conflicts

• Where CIGL trades its proprietary positions in a security when at the same time it has information about future transactions with clients in relation to that security;
• Where one of the employees of CIGL engages in personal account dealing in respect of securities and CIGL has a client with an interest that potentially conflicts with such dealing;
• Where CIGL is the syndicate agent for a financing arrangement for a client and the corporate finance team is looking to advise another firm targeting that client;
• Where CIGL has information in relation to distressed assets and trades proprietary positions in those assets;
• Where CIGL has provided corporate finance advice to one corporate client and subsequently, when that corporate client becomes a target of a bid, CIGL also seeks to act for the bidder;
• Where CIGL is providing advice in relation to a debt issuance and is advising other clients as to the pros and cons of investing in the debt;
• Where one part of a multi-service financial institution is used by another part of the same institution which owes fiduciary obligations, e.g. an investment manager placing orders with affiliated broker dealers; and
• Where substantial gifts and entertainment (including non-monetary gifts) are received that may influence behaviour in a way that conflicts with the interests of the clients of CIGL.

5.3 Client v Client conflicts

• Where CIGL provides corporate finance advice in relation to the same target to clients who are direct competitors of one another;
• Where CIGL provides investment research in relation to an entity or group to which it also provides corporate finance advisory services;
• Where CIGL provides advisory and financing services to one client in respect of a bid and seeks to provide financing services to another client in respect of the same bid;
• Where CIGL is a discretionary portfolio manager for more than one client or fund, in particular in respect of issues relating to allocation.

When assessing conflicts of interests, CIGL must consider not just its own conflicts but also conflicts which arise between: (i) relevant persons, or (ii) a person directly or indirectly linked by control to CIGL, and the duty CIGL owes to its clients.

The broad definition of relevant person includes those individuals directly involved in the provision of services to CIGL under an outsourcing arrangement for the purpose of the provision by CIGL of regulated activities. Under SYSC 10.1.4R the interests of employees of service providers may be relevant to their conflict management obligations, for example where an employee of a service provider has access to information that might allow them to make a profit at the expense of a client.

5.4 Restitution and Redress

If effective efforts have been made to control conflicts of interest, (e.g. the use of Chinese Walls to prevent the flow of information between two different business functions) then this provides a defence for a firm against FSA enforcement action, or an action for damages under section 150 of the Act, based on a breach of a relevant requirement to disclose or use information.

The FSA can use enforcement on grounds of principle breaking, i.e. for not treating customers fairly, and thus employees must never aim to abuse conflicts of interest.

6. RECORD KEEPING

In accordance with the FSA, CIGL must keep and regularly update a record of the kinds of service or activity carried out by or on behalf of the firm in which a conflict entailing a material risk of damage to the interests of one or more clients has arisen or, in the case of an ongoing service or activity, may arise.

Conflict of Interest record keeping is the responsibility of the Compliance Officer. There is no set date on when the record must be made; however, the conflict should be recorded within a practical and reasonable time-frame. The record of the conflict must then be kept in paper format or electronically for 5 years from the start of the conflict.

Provided that a record of the Policy (and any changes to it) is kept for a period of five years, implementation and regular updates of the Policy ensures compliance with the recordkeeping requirement set out above. This is because the obligation to implement and update a Policy requires all firms to identify the circumstances which constitute or may give rise to a conflict of interest entailing a material risk of damage to the interests of one or more clients.

6.1 Training and Review

All CIGL employees will be given training on how to be aware of conflicts of interest and how to report any new or future conflicts of interest. CIGL employees may also have the opportunity to sit the Financial Regulation exam or equivalent which gives a brief introduction to the main principles, including conflicts of interest.

Combining training sessions and the possibility of sitting regulatory exams will ensure competency throughout all employees and especially with regards to conflicts of interest.

The conflict of interest policy will undergo an annual review to ensure that it is both up to date and relevant. Where necessary it will be amended.