J&E Davy Unlimited Company

On 1 March 2021, the Central Bank of Ireland (the Central Bank) reprimanded and fined J&E Davy (Davy) €4,130,000 in respect of four breaches of the European Communities (Markets in Financial Instruments) Regulations 2007 (the MiFID Regulations) that occurred over different intervals between July 2014 and May 2016. The Central Bank’s investigation arose from a transaction a group of 16 Davy employees (the Consortium) undertook in a personal capacity with a Davy client (the Client) in November 2014 (the Transaction). Within the Consortium was a group of senior executives (the Committee). In permitting the Transaction, Davy prioritised facilitating an opportunity for the Consortium to make a personal financial gain over ensuring that it was complying with its regulatory obligations. The Transaction highlighted a weak internal control framework within Davy in relation to conflicts of interest management and personal account dealing. All of this served to create an elevated risk of investor detriment. Following details about the Transaction becoming public four months after it occurred, Davy contacted the Central Bank to provide an explanation. At that stage, Davy failed to disclose the full extent of the wrongdoing. This lack of candour was treated as an aggravating factor in this case. The MiFID Regulations aim to ensure high levels of market transparency and investor protection and include important regulatory requirements in relation to conflicts of interest and personal account dealing (where employees of an authorised firm trade for themselves rather than clients.) The Central Bank’s investigation found failings in the following areas: 1. Conflicts of interest identification and management: In permitting the Transaction, Davy breached the MiFID Regulations by failing to take all reasonable steps to identify whether a conflict of interest arose. At the time of the Transaction, Davy was not operating in a conflicts of interest aware environment. Whilst Davy did have a conflicts of interest policy, employees were permitted to decide whether transactions in which they had an interest could give rise to a conflict of interest on a case-by-case basis, without independent oversight and without a requirement to keep a record of steps taken. In deciding at the outset whether the Transaction was permissible, Davy’s primary focus should have been to identify whether any conflict of interest arose between the Consortium and the Client. Davy failed to do this properly because the only cursory discussion of this issue was by senior individuals who intended to participate in the Transaction and were therefore not impartial. In effect, this amounted to no consideration of the issue at all by Davy. 2. Personal account dealing framework: Davy did not have a robust control framework in place to prevent employees from entering into personal transactions that could give rise to a conflict of interest. The Consortium circumvented the personal account dealing framework completely, such that Davy's compliance function (Davy Compliance) first became aware of the Transaction four months later, when certain information about the Transaction became public. 3. Ensuring the compliance function can discharge its role properly: A compliance function can only discharge its role effectively when it has access to all relevant information. Davy permitted the Transaction to proceed without any oversight by Davy Compliance. Davy Compliance was sidestepped by the Consortium, and as the personal account dealing framework was circumvented, Davy Compliance did not detect the Transaction as part of its monitoring. The Central Bank determined the appropriate fine to be €5,900,000, which was reduced by 30% to €4,130,000 in accordance with the settlement discount scheme provided for in the Central Bank’s Administrative Sanctions Procedure. https://www.centralbank.ie/docs/default-source/news-and-media/legal-notices/settlement-agreements/public-statement-relating-to-settlement-agreement-between-the-central-bank-of-ireland-and-j-e-davy.pdf?sfvrsn=25718e1d_7