Notice to clients as a result of recent UK regulatory changes
JPMorgan Cazenove Limited is providing this information pursuant to changes to the Conduct of Business Rules of our regulator, the Financial Services Authority (the “FSA Rules”). These changes arise as a result of the implementation of the Markets in Financial Instruments Directive (known as MiFID).
Information about JPMorgan Cazenove: JPMorgan Cazenove is an investment bank incorporated in England and Wales. JPMorgan Cazenove is authorised and regulated by the Financial Services Authority. This regulatory oversight includes our branch offices in the European Economic Area where they conduct investment services and activities to clients outside the member state where they are located. Information about our business and services is available on our website www.jpmorgancazenove.com.
Client categorisation: Under MiFID, all clients must be categorised as an eligible counterparty, professional client or retail client. Unless we notify you otherwise, JPMorgan Cazenove proposes to classify your company (the “Company”) as a professional client in respect of all investment services and activities and ancillary services which it may conduct with or for the Company. As the Company will not receive the protections afforded to retail clients under the FSA Rules, you should contact JPMorgan Cazenove immediately if you do not agree with this categorisation or if there is any change in the Company’s corporate, regulatory or financial status.
The FSA Rules provide a mechanism for clients to elect a different categorisation. If the Company seeks to elect eligible counterparty categorisation, it will not receive all the protections afforded to professional clients, such as those relating to conduct of business, client information and communication and financial promotion, non-advised services and order execution and handling. If the Company seeks to elect retail client categorisation, it will be entitled to additional information disclosures and risk warnings. However, JPMorgan Cazenove reserves the right not to provide services to clients who elect retail client categorisation.
If the Company is acting as an agent for another person, JPMorgan Cazenove will treat the Company as its client for the purposes of the FSA Rules.
Personal recommendations: If the corporate finance services JPMorgan Cazenove provides to the Company represent a personal recommendation, then JPMorgan Cazenove has obligations under the FSA Rules to take reasonable steps to ensure that the recommendation is suitable for the Company. A personal recommendation is advice on buying, selling, subscribing or underwriting investments which is given to the Company as an investor or potential investor, and which is either presented as suitable for the Company or based on a consideration of the Company’s circumstances.
A significant proportion of corporate finance services do not involve the provision of personal recommendations within the scope of the FSA Rules, for example when we engage in valuation analysis, assist in the preparation of offer documents or provide services to companies issuing securities. In those instances we will not be responsible for making an assessment of the suitability or appropriateness of the investment for the Company. However, some corporate finance services may involve providing a personal recommendation where we give advice which is directly related to the Company’s decision to engage in mergers and acquisitions activity involving the buying and selling of shares in companies.
Where we do provide a personal recommendation, we are required to understand the Company’s investment objectives, including, where relevant, information on the length of time for which the Company intends to hold the investment, its preference regarding risk taking, its risk profile and the purposes of the investment. Furthermore, if we are unable to obtain this information, we will not be permitted to make the personal recommendation.
For the purposes of the FSA Rules, we are entitled to, and will, assume that the Company has the necessary level of experience and knowledge to understand the risks involved in the proposed transaction and is able financially to bear investment risks consistent with its investment objectives as described to us.
Trading in financial instruments: If the Company engages in trading activities with or through JPMorgan Cazenove, we will open a securities account for it. Our securities accounts are subject to Terms of Business which will be sent to the Company upon opening of the account and which will govern the relationship between us in relation to those and related activities. The Terms of Business also contain important disclosures about the nature and risks of trading in financial instruments, in accordance with the FSA Rules. We will also send the Company information regarding our Order Execution Policy which sets out our approach to ensuring high quality execution of client orders.
Managing conflicts of interest: In order to ensure we act in the best interests of our clients, we take very seriously the need to manage potential conflicts of interest. JPMorgan Cazenove operates a conflicts of interest policy which includes procedures and policies for segregation of duties and reporting lines and the operation of information barriers (Chinese walls). JPMorgan Cazenove’s research department in particular is subject to a wide range of procedures designed to maintain the impartiality of research analyst views. Our policy also includes a prohibition on the giving or receiving of gifts which are likely to conflict to a material extent with duties to clients (excluding small gists and minor hospitality). If we feel we are unable to manage a conflict in relation to a particular engagement, we will notify the Company of this and decline to effect the transaction or give advice in relation thereto. Further information regarding our policy is available upon request.
We and our affiliated companies in the JPMorgan group are engaged in investment business for our own account and for clients. In certain circumstances our interests or those of our affiliated companies may be regarded as conflicting with the interests of a client in relation to a particular transaction, or they may have some other interest that is material (a “Material Interest”). We have procedures to ensure independence of advice. So as to override any duty or restriction which would otherwise be implied by law, we and our affiliated companies may have a Material Interest and that employees responsible for providing services to the Company may be doing so despite the existence of a Material Interest. The Company acknowledges and accepts that, by reason of contractual, legal, regulatory or other obligations, JPMC and its Associates may be prohibited from disclosing, or it may be inappropriate for them to disclose, information to the Company, in particular about a Material Interest. We may provide services and earn (and retain) all fees payable notwithstanding the existence of Material Interests within JPMorgan Cazenove or its affiliated companies.
Information regarding investments: Notwithstanding the foregoing, we provide the following disclosures pursuant to the FSA Rules. The Company should not deal in investments such as shares, bonds and warrants unless it understands their nature and the extent of the Company’s exposure to risk. This notice cannot disclose all those risks. The Company should also be satisfied that the product is suitable for it in the light of its circumstances and financial position. Different instruments involve varying levels of exposure to risk and in deciding whether to trade in such instruments the Company should be aware of the applicable risks, some of which are described below. Furthermore, the level of risk also varies by the nature of the investment strategy deployed. For example, a ‘short’ sale exposes the Company not only to price changes but also to the risk that you are unable to obtain the relevant instrument for the purposes of settling the sale. Certain strategies, such as a ‘spread’ position or a ‘straddle’, may be as risky as a simple ‘long’ or ‘short’ position. Overseas securities and securities denominated other than in sterling are exposed to movements in exchange rates. You should be aware of the additional risks associated with investment in emerging and developing markets. Although certain financial instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. In almost all cases, the price or value of investments will depend on, among other things, fluctuations in the financial markets outside our control and may fall as well as rise. Past performance is no indicator of future performance and the Company may not receive the original amount invested in return.
Shares A share is an ownership interest in a public or private limited company or similar corporate entity. Shares carry certain rights associated with partial ownership of the company, though the extent of these rights (such as entitlements to vote and receipt of dividends and other distributions) do vary and are governed by the articles of association or other constitutional documents of the company.
Typically, shares rank behind all secured, preferential and unsecured creditors in distributions and upon winding up of the company. Ordinary shares (and depositary interests or receipts that represent ordinary shares) typically rank behind preference shares. Accordingly, the Company should not buy a share unless it is a prepared to sustain a total loss of the money it has invested plus any transaction charges.
The price of shares may be more volatile than that of fixed income investments such as bonds.
Similar considerations apply in relation to units in collective investment schemes. It should be noted, however, that some investment funds are incorporated entities and therefore the traded security is a share rather than a unit.
Bonds A bond is a security representing a debt obligation of the issuer, which may be a company or any other incorporated, unincorporated, statutory or governmental entity. A bond is typically an unsecured senior obligation of the issuer, which will rank behind all secured and preferential creditors but ahead of subordinated creditors and shareholders. However, some bonds are secured and others are subordinated to other unsecured creditors (including senior lenders, bondholders and trade creditors). It is important that you take care to understand the ranking of the bond you are trading.
Bonds represent contractual obligations of the issuer so it is important that you understand their terms and conditions, which will contain provisions which are relevant to your investment decision, including regarding maturity and early repayment (which may not be at the full principal or face amount), interest, ranking, governing law and a number of other matters.
Instruments such as debentures and loan stock have some characteristics similar to those of bonds. As stated above, it is important that the Company understands the terms and conditions of these instruments for purposes of your investment decision.
Even if a bond has a fixed principal amount repayable at maturity, its trading price and hence its yield will vary in accordance with a number of factors including the current credit quality of the issuer and market conditions. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Bond prices may be volatile, especially in illiquid securities. Furthermore, bonds (including convertible and exchangeable bonds described further below) are not commonly traded on a stock exchange but rather by and among dealers, and therefore are subject to similar pricing characteristics to unlisted securities.
Convertible bonds are bonds which include in their terms and conditions an embedded option to acquire another security, typically ordinary shares, at a strike price that is pre-established but which may vary. Alternatively the number of shares obtained upon exercise of the option may vary. The security acquired will be newly-issued by the issuer of the bond. An exchangeable bond has many of the same characteristics as a convertible bond but the underlying security is an existing security issued by an entity other than the issuer of the bond. The prices of convertible and exchangeable bonds will therefore adjust in accordance with the characteristics (and volatility) of both their bond and option elements. Exercise of a convertible or exchangeable bond will give rise to a financial commitment to acquire the underlying security at the strike price.
It is essential for anyone who is considering purchasing convertible or exchangeable bonds to understand that the right to subscribe or purchase the underlying security which the bond confers is usually limited in time with the consequence that if the investor fails to exercise this right within the predetermined time scale then the option element of the investment becomes worthless. If, however, the option element is out of the money, the value of the bond element will typically less than that of a “plain vanilla” bond issued by the same issuer. On the other hand, certain convertible or exchangeable bonds have terms under which they must convert into equity at a certain date, such that the capital distribution characteristics of these mandatory convertible or exchangeable bonds are closer to shares than bonds.
Warrants A warrant is a time-limited right to subscribe for shares, bonds, debentures, loan stock or other securities and is exercisable against the original issuer of the underlying securities. A relatively small movement in the price of the underlying security results in a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile.
It is essential for anyone who is considering purchasing warrants to understand that the right to subscribe which a warrant confers is invariably limited in time with the consequence that if the investor fails to exercise this right within the predetermined time scale (or the strike price of the warrant does not fall below the market price of the underlying security during that time scale) then the investment becomes worthless. Exercise of a warrant will give rise to a financial commitment to acquire the underlying security at the strike price of the warrant.
You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.
Some other instruments are also called warrants but are actually options (for example, a right to acquire securities which is exercisable against someone other than the original issuer of the securities, often called a ‘covered warrant’).
Unlisted instruments Transactions in unlisted securities and other financial instruments may involve greater risk than dealing in exchange traded instruments because there is no exchange market through which to liquidate your position or to assess the value of the instrument or the exposure to risk. Bid and offer prices need not be quoted, and even where they are, they will be established by dealers in these instruments and consequently it may be difficult to establish what is a fair price. Price volatility may be greater than for exchange-traded products.
Foreign markets Foreign markets will involve different risks from the UK markets. In some cases the risks will be greater. The potential for profit or loss from transactions on foreign markets or in foreign denominated contracts will be affected by fluctuations in foreign exchange rates.
The above provides brief information about certain instruments in which you may make investments. It does not purport to be comprehensive and further information is available upon request. The above describes only financial aspects of such investments. JPMorgan Cazenove does not purport to provide information on legal, regulatory, tax or accounting matters nor should the above construed as providing such information. Please consult your professional adviser specialising in these matters.
