Investment Research (MiFID definitions)
European Union Electricity Market Glossary

 


 

 

 

The Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (MiFID II Delegated Directive) includes specific provisions on how MiFID firms may receive third party research such that it is not deemed to be an inducement.

 

This part of MiFID II is of particular interest to portfolio managers and independent advisers who are otherwise banned from accepting any inducements except for minor non-monetary benefits.

 

 

MiFID created two categories of investment research: the first one that is presented as objective or independent, and the second one that does not meet that standard and is labelled as a marketing communication. As stated in Recital 28 of the MiFID Implementing Directive 2006/73/EC, both categories of research are intended to sit under the MAR definition of investment recommendations.

 

Some respondents to the consultation indicated there is a risk that the wording of Article 20(1) of MAR, "persons who produce or disseminate investment recommendations or other information recommending or suggesting an investment strategy shall take reasonable care to ensure that such information is objectively presented", fails to include non-independent research. In this respect, ESMA clarifies that requirement is not intended to apply only to those recommendations that are held out as being objective or independent.

 

At the same time, ESMA confirms that irrespective of the label attached to a note, as long as a note meets the MAR definition of "investment recommendations" (Article 3(1)(35)) or of "information recommending or suggesting an investment strategy" (Article 3(1)(34)), is in scope of Article 20(1) and (3) of MAR.

 

ESMA's Final Report Draft technical standards on the Market Abuse Regulation of 28 September 2015 (ESMA/2015/1455), p. 73

 

In principle, MiFID II prohibits firms who provide independent investment advice or portfolio management services from receiving any inducements in relation to these services to clients, except for minor non-monetary benefits (Article 24(7) and (8)).

 

Nevertheless, the MiFID II Delegated Directive recognises that third party research is an important input for investment firms.

 

It allows investment firms providing portfolio management, or other investment or ancillary services, to receive research from third parties in a way that does not contravene the inducements rules.

 

Article 13(1) of the MiFID II Delegated Directive stipulates that research received from third parties is not regarded as an inducement for an investment firm if it is received in return for either of the following: 


 

a. direct payments by the investment firm out of its own resources, or

 


b. payments from a separate Research Payment Account controlled by the investment firm (provided a number of conditions relating to the operation of the account are met).

 

In order to comply with the latter option above and operate an acceptable Research Payment Account model, a firm must ensure that:

 

- the Research Payment Account can only be funded by a specific research charge to the client,

 

- they set and regularly assesses a research budget,

 

- they are held responsible for the account, and

 

- they regularly assess the quality of research purchased based on robust quality criteria and its ability to contribute to better investment decisions.

 

Research charge further must only be based on a research budget set by the investment firm for the purpose of establishing the need for third party research in respect of investment services rendered to its clients not be linked to the volume and/or value of transactions executed on behalf of the clients

 

The requirements in Article 13 of the MiFID II Delegated Directive also include disclosure obligations on firms relating to the research charge and use of the research budget, requiring both ex ante and ex post disclosures, and producing a 'research policy' to be provided to clients.

 

Further governance and oversight requirements stipulated in Article 13 of the MiFID II Delegated Directive, which apply to the Research Payment Account, are designed to ensure that the said account is operated by a firm in the best interests of its clients, and that the firm is fully accountable for the use of additional research, allocating costs to clients fairly.

 

The respective requirements include, in particular, an obligation that investment firms who provide both execution services and research goods and services to other investment firms (e.g. investment banks and other brokers) must identify separate charges that only reflect the cost of executing the transaction, while the provision of each other benefit or service must be subject to a separately identifiable charge.

 

The supply of, and charges for, those benefits or services must not be influenced by or be conditioned by levels of payment for execution services.

 

FCA Consultation Paper III, Markets in Financial Instruments Directive II Implementation, September 2016, CP16/29 (p. 28, 29) gives the following directions for setting budgets for use of Research Payment Accounts and client‐specific research charges:


"While the MiFID II delegated directive requires a specific charge to a client based on a research budget, it does not state that a budget has to be set at an individual portfolio level. So, we consider firms can set a research budget that applies to a number of client portfolios or funds where they share similar investment strategies and objectives, such that they can benefit from the same inputs based on the asset allocation and underlying instruments they can invest, or are invested, in. This may allow firms to set a budget at a desk-level or strategy level provided the individual and collective portfolios subject to the budget share sufficiently similar research needs. A firm may choose to set a top-down, firm-level research budget as part of a process by which it then sets specific budgets at the level of groups of portfolios based on a bottom up assessment of research needs.

 

[...] Firms must ensure the specific charge to a client and the corresponding budget that charge is contributing towards does actually pay for research which can assist its investment decisions for the client. Firms should document and be able to justify how they have grouped client portfolios for this purpose. Firms must have robust systems and controls to ensure a fair allocation of research costs in the best interests of their individual clients. A group of portfolios for which a shared budget is set should not be so broad that portfolios with substantively different research needs are subject to the same budget.

 

[...] Client-specific charges must still be estimated and disclosed upfront, based on the relevant pre-set budget. The firm should have a transparent methodology for how they determine a fair allocation for these purposes. This may involve a pro-rated split of a research budget across the identified group of client portfolios to derive an estimated charge for each client."

 

 

 

MiFID II

 

Article 24(7) and (8)

 

7. Where an investment firm informs the client that investment advice is provided on an independent basis, that investment firm shall:

 

(a) assess a sufficient range of financial instruments available on the market which must be sufficiently diverse with regard to theirtype and issuers or product providers to ensure that the client's investment objectives can be suitably met and must not belimited to financial instruments issued or provided by:

 

(i) the investment firm itself or by entities having close links with the investment firm; or

 

(ii) other entities with which the investment firm has such close legal or economic relationships, such as contractualrelationships, as to pose a risk of impairing the independent basis of the advice provided;

 

(b) not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or aperson acting on behalf of a third party in relation to the provision of the service to clients. Minor non-monetary benefits that arecapable of enhancing the quality of service provided to a client and are of a scale and nature such that they could not be judgedto impair compliance with the investment firm's duty to act in the best interest of the client must be clearly disclosed and areexcluded from this point.

 

8. When providing portfolio management the investment firm shall not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of theservice to clients. Minor non-monetary benefits that are capable of enhancing the quality of service provided to a client and are of ascale and nature such that they could not be judged to impair compliance with the investment firm's duty to act in the best interest ofthe client shall be clearly disclosed and are excluded from this paragraph.

 

 

 

 

Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits

 

Article 13

Inducements in relation to research

 

1. Member States shall ensure that the provision of research by third parties to investment firms providing portfolio management or other investment or ancillary services to clients shall not be regarded as an inducement if it is received in return for any of the following:

 

(a) direct payments by the investment firm out of its own resources,

 

(b) payments from a separate research payment account controlled by the investment firm, provided the following conditions relating to the operation of the account are met:

(i) the research payment account is funded by a specific research charge to the client;

(ii) as part of establishing a research payment account and agreeing the research charge with their clients, investment firms set and regularly assess a research budget as an internal administrative measure;

(iii) the investment firm is held responsible for the research payment account;

(iv) the investment firm regularly assesses the quality of the research purchased based on robust quality criteria and its ability to contribute to better investment decisions.;

 

(c) where an investment firm makes use of the research payment account, it shall provide the following information to clients:

(i) before the provision of an investment service to clients, information about the budgeted amount for research and the amount of the estimated research charge for each of them.

(ii) annual information on the total costs that each of them has incurred for third party research.

 

2. Where an investment firm operates a research payment account, Member States shall ensure that the investment firm shall also be required, upon request by their clients or by competent authorities, to provide a summary of the providers paid from this account, the total amount they were paid over a defined period, the benefits and services received by the investment firm, and how the total amount spent from the account compares to the budget set by the firm for that period, noting any rebate or carry-over if residual funds remain in the account. For the purposes of point (b)(i) of paragraph 1, the specific research charge shall:

(a) only be based on a research budget set by the investment firm for the purpose of establishing the need for third party research in respect of investment services rendered to its clients; and

(b) not be linked to the volume and/or value of transactions executed on behalf of the clients.

 

3. Every operational arrangement for the collection of the client research charge, where it is not collected separately but alongside a transaction commission, shall indicate a separately identifiable research charge and fully comply with the conditions in paragraph 1, points (b) and (c).

 

4. The total amount of research charges received may not exceed the research budget.

 

5. The investment firm shall agree with clients, in the firm's investment management agreement or general terms of business, the research charge as budgeted by the firm and the frequency with which the specific research charge will be deducted from the resources of the client over the year. Increases in the research budget shall only take place after the provision of clear information to clients about such intended increases. If there is a surplus in the research payment account at the end of a period, the firm should have a process to rebate those funds to the client or to offset it against the research budget and charge calculated for the following period.

 

6. For the purposes of point (b)(ii) of paragraph 1, the research budget shall be managed solely by the investment firm and is based on a reasonable assessment of the need for third party research. The allocation of the research budget to purchase third party research shall be subject to appropriate controls and senior management oversight to ensure it is managed and used in the best interests of the firm's clients. Those controls include a clear audit trail of payments made to research providers and how the amounts paid were determined with reference to the quality criteria referred to in paragraph 1 (b) (iv). Investment firms shall not use the research budget and research payment account to fund internal research.

 

7. For the purposes of point (b)(iii) of paragraph 1, the investment firm may delegate the administration of the research payment ac-count to a third party, provided that the arrangement facilitates the purchase of third party research and payments to research providers in the name of the investment firm without any undue delay in accordance with the investment firm's instruction.

 

8. For the purposes of point (b) (iv) of paragraph 1, investment firms shall establish all necessary elements in a written policy and provide it to their clients. It shall also address the extent to which research purchased through the research payment account may benefit clients' portfolios, including, where relevant, by taking into account investment strategies applicable to various types of portfolios, and the approach the firm will take to allocate such costs fairly to the various clients' portfolios.

 

9. An investment firm providing execution services shall identify separate charges for these services that only reflect the cost of executing the transaction. The provision of each other benefit or service by the same investment firm to investment firms, established in the Union shall be subject to a separately identifiable charge; the supply of and charges for those benefits or services shall not be influenced or conditioned by levels of payment for execution services.

 

 

 

 

Recitals 26 - 30 of the Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits

 

(26) Investment firms providing both execution and research services should price and supply them separately in order to enable investment firms established in the Union to comply with the requirement to not accept and retain fees, commissions or any monetary or non-monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients set out in Article 24(7) and (8) of Directive 2014/65/EU.

 

(27) In order to provide legal certainty concerning the application of new rules for the reception or payment of inducements, in particular with respect to investment firms providing investment advice on an independent basis or portfolio management services, further clarifications in relation to the payment or reception of research should be provided. In particular, where research is not paid directly by the investment firm out of its own resources but in return for payments from a separate research 
payment account certain essential conditions should be ensured. The research payment account should only be funded by a specific research charge to the client which should only be based on a research budget set by the investment firm and not linked to the volume and/or value of transactions executed on behalf of clients. Any operational arrangements for the collection of the client's research charge should fully comply with those conditions. When using such arrangements, an investment firm should ensure that the cost of research funded by client charges is not linked to the volume or value of other services or benefits or used to cover any other purposes, such as charges for execution.

 

(28) In order to ensure that portfolio managers and independent investment advisers properly monitor the amounts paid for research and to ensure that research costs are incurred in the best interests of the client, it is appropriate to specify detailed governance requirements on research spending. Investment firms should retain sufficient control over the overall spending for research, the collection of client research charges and the determination of payments. Research in this context should be understood as covering research material or services concerning one or several financial instruments or other assets, or the issuers or potential issuers of financial instruments, or be closely related to a specific industry or market such that it informs views on financial instruments, assets or issuers within that sector. That type of material or services explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated opinion as to the present or future value or price of such instruments or assets, or otherwise contains analysis and original insights and reach conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the investment firm's decisions on behalf of clients being charged for that research.

 

(29) For further clarity concerning the restriction on the receipt of inducements by investment firms in relation to independent investment advice or portfolio management and the application of research rules, it is also appropriate to indicate how the minor non-monetary benefit exemption may be applied in relation to certain other types of information or material received from third parties. In particular, written material from a third party that is commissioned and paid for by a corporate issuer or potential issuer to promote a new issuance by that company, or where the third party is contractually engaged and paid by the issuer to produce such material on an ongoing basis, should be deemed acceptable as a minor non-monetary benefit subject to disclosure and the open availability of that material. In addition, non-substantive material or services consisting of short term market commentary on the latest economic statistics or company results for example or information on upcoming releases or events, which is provided by a third party and contains only a brief summary of its own opinion on such information that is not substantiated nor includes any substantive analysis such as where they simply reiterate a view based on an existing recommendation or substantive research material or services, can be deemed to be information relating to a financial instrument or investment service of a scale and nature such so that it constitutes an acceptable minor non-monetary benefit.

 

(30) In particular, any non-monetary benefit that involves a third party allocating valuable resources to the investment firm shall not be considered as minor and shall be judged to impair compliance with the investment firm's duty to act in their client's best interest.

 

 

 

 

Investment Research

 

1. Market practices and regulatory concerns

 

Based on common market practices, research is often received by portfolio managers from brokers with whom the portfolio manager executes orders on behalf of its clients, which is considered to be an inducement. While execution and the provision of research are two distinct services, a common pricing and delivery strategy is to bundle them into a single service paid through dealing commissions (charged to clients). The charge for this bundled service is higher than the charge for an execution-only service. These arrangements present a conflict of interest for the manager which obtains benefits (research) for itself and for other clients through the use of its clients' money/assets.

 

The bundled service business model contains several inefficiencies that lead to suboptimal allocation of resources and higher costs and lower returns for end investors. The primary cause is the lack of price transparency with respect to the services provided. As a single dealing charge is levied for the bundled provision of execution and research services, it is not apparent what the value of the execution service is independent of the research service.

 

Furthermore, provision of research is frequently "tiered" according to the total value of dealing fees paid to a broker over a period of time: the greater the value of the dealing fees, the more research services are provided. The bundled service business model generates several regulatory concerns:

 

Principal-agent problems:

 

Portfolio managers are stewards of client resources and are obliged to act within theirclients' best interests. Under the bundled service arrangement, the provision and the value of research is linked to the value / volume of trade executed through the broker. As the portfolio managers are agents of the principal end investor, principal-agent problems can arise throughan incentive to "churn" a client's portfolio to receive research. Since the provision ofresearch is linked to the value / volume of trades, portfolio managers could unnecessarily execute trades on an end investor's account to generate additional brokerage and thus gain premium research services. There may be very little incentive for the portfolio manager not to do this, since ultimately it is the end investor that bears the costs. To note, this is problematic even if there is a marginal benefit to the client paying the brokerage.
Buying research with client dealing commissions that does not benefit the client.

 

Lack of a clear price signal. Since research services are often not separately priced from execution services, it is not clear what the value to the portfolio manager and the market price of the research provided are. The inability to value the research correctly could: Lead portfolio managers to consume more research or lower quality research than is optimal, since a proper cost-benefit assessment of the research is difficult. Make it difficult for portfolio managers to be transparent with clients on the allocation of asset management fees.

 

2. ESMA's technical advice

 

Taking into account stakeholders' comments, ESMA put forward a solution aiming to identify the conditions under which research does not qualify as an inducement and can therefore be allowed beyond the limits imposed by MiFID II. The provision of investment research should not be regarded as an inducement if it is received in return for:

 

i. direct payments by the manager out of its own resources (which they may choose to reflect in an increase to the firm's portfolio management or advice fees), or

 

ii. payments from a separate research payment account controlled by the manager and funded by a specific research charge to the client. A number of other detailed requirements on the governance of the research payment account are suggested: (a) the firm must set a research budget not linked to transactions; (b) it agrees the research charge with the client (and may only increase it with the client's written agreement); (c) it has in place a number of governance arrangements to ensure the quality of research and accountability to clients; (d) ex-ante and ex-post disclosures to clients. Firms offering execution of orders and research services should also be requested to price and supply these services separately.

 

ESMA's technical advice (by breaking the link between research and execution) appears to address the inefficiencies identified above and should act as an important behavioural incentive for portfolio managers to obtain value for their clients in research spending.

 

The advice should lead to transparent pricing of research which in turn could have a number of beneficial effects, including:


• Matching supply and demand in the research market.


• Allowing for efficient allocation of resources.


• More competition in the research market - while VAT arguments should not be relevant within this debate, it should be noted that existing VAT practices do distort competition between independent research providers (which are likely to be VAT-able) and integrated brokers (for which the bundling of research and transaction costs is likely to make them VAT-exempt).

 

The technical advice should also reduce the principal-agent problems. The cost of research would be communicated to the client. In this way, clients would have more information to hold managers accountable for research purchased. Also, there would be no more incentives to churn a client portfolio to access research since research and execution payments will be separated. Compliance with best execution requirements would also be facilitated (the execution rate will only cover the transaction costs and would not subsidise other services or products).

 

a) Impact on SME research

 

Some stakeholders argued that the ESMA proposals might impact the production of SME research. From an economic perspective, full transparent pricing would allow managers to access research at levels suitable to their needs. The result would be a research marketplace where the quantity of service supplied is equal to the quantity of service demanded, as opposed to the current environment where, arguably, such services are oversupplied or inappropriately distributed, to the detriment for instance of research on SMEs. Under current rules, there is an over-supply of low value, duplicative research coverage of large corporates.

 

Several voices also argued that these practices, linking the receipt of research to volume/value of trading (so in the more liquid stocks), have participated to the reduced provision of research on SMEs. The separation of research from execution arrangements would reduce the payments that managers currently direct towards duplicative research through dealing commissions and would instead allow them to purchase more value-added, in-depth research on smaller companies and niche sectors.

 

Pricing of research should therefore allow for a more efficient allocation of resources and help managers to have a clear idea of the best way to allocate resources. Also, as discussed above, transparent pricing might lead to a better correspondence between price and quality of research services.

 

The UK FCA for instance recently confirmed "Our evidence indicates that dealing commission arrangements currently favour the largest brokers and not the independent research providers or small brokers who supply more research on SMEs" (FCA Feedback statement (FS15/1/) on DP14/3 – Discussion on the use of dealing commission regime, February 2015, P. 15. https://www.fca.org.uk/static/documents/feedback-statements/fs15-01.pdf).

 

The flexibility for the portfolio manager to continue to pass research costs to clients can be seen as an additional argument against allegations that managers would reduce research budgets to below an optimal level, with a supposed subsequent impact on the demand for coverage of SMEs.

 

b) Impact on fixed-income research

 

The MiFID II prohibition of inducements applies to all instruments without any discrimination. Accordingly, the ESMA's technical advice applies to both equity and fixed income research. Brokers often offer fixed-income research precisely as an 'inducement' to differentiate themselves and to gain trades. Independent research providers explicitly called for the proposals to apply to fixed-income research. Without these measures they consider it is very difficult/impossible for them to access the market and be paid for such research when brokers provide fixed-income research allegedly "for free". Including research in the spread preserves a monopoly in fixed-income research for brokers, excluding competition from independent providers. Independent research providers would choose to offer fixed income and wider macro-economic research if there was a means by which they could compete and be paid.

 

The UK FCA statement mentioned above (FS 15/1) confirms this. "In fixed income, costs of research, as well as some other discrete costs, are usually embedded within the negotiable bid / offer spreads quoted by brokers. We believe this would mean that, in the new regime, a manager would have the option either to pay directly for research, or use the research charge and payment account to do so, which can be applied to clients with fixed income portfolios in the same way as for equities. If research is currently a material part of a broker's costs, we would expect a narrowing of spreads as a result of the decoupling of research from trading spreads. Evidence suggests there is much less research on the credit markets produced and consumed for fixed income than for equities, and levels of payments for it are likely to be much smaller for this reason (in which case, any adjustment in spreads may be less pronounced). However, applying ESMA's approach to fixed income markets will bring transparency in an area that is currently more opaque than equity markets since research is entirely embedded in implicit transaction costs. It will open up the market for providing research on the credit markets to firms other than brokers in the bond markets. An independent research provider wishing to supply research on the credit markets currently faces a significant competitive disadvantage compared with brokers, as there is no mechanism such as CSAs to allow a third-party research provider to be paid from transaction costs and no market precedent for 'hard dollar' payments in this area" (our underlining).

 

To conclude, the potential benefits of these proposals (a priced research market that would lead to more competition between brokers and independent research providers, resulting in more innovation and specialisation in their goods and services, enhanced transparency, allowing investment firms to better demonstrate their compliance with the inducements and best execution requirements and wider conflicts of interest provisions) apply to fixed-income too.

 

c) Impact on international competitiveness

 

Some stakeholders mentioned the difference with the US regulations and argue that EU managers might be less competitive than US ones (were research charges made transparent).

 

First of all, one should bear in mind that the US system is quite complex and the rationale of US and potential EU future rules are to some extent converging. In the US managers are under strong fiduciary duties including the duty to pay the lowest commission rate on trades.

 

A 'safe harbour' exempts managers from the duty to pay the lowest commission rate on trades and allows them to use client funds to purchase 'brokerage and research services' under certain circumstances. Several requirements need to be observed (eligible research and brokerage; requirements on the asset managers to determine that the service or product assists the manager in carrying out their investment responsibilities, make 'good faith' determinations to ensure the value of products or services are reasonable in light of amounts paid for them, and conduct 'mixed use assessments' if a product or service received may be used for multiple purposes by the manager). The logic of the ESMA proposals on assessment of quality and price of research or on the allocation of charges to clients may be seen as comparable to the above.

 

There are also disclosure requirements around the arrangements an asset manager has in place and the documentation on their processes for 'good faith' determinations (and again one can make a comparison with ESMA proposals which foresee appropriate controls and senior management oversight).

 

Already today there are important differences of approach between the US and the EU and firms already manage those differences. In practice, they often adopt a global policy based on the highest prevailing investor protection standard. Especially in the US, the overriding concept of fiduciary duty to act in clients' best interests may otherwise leave them open to litigation if they adopted a 'lower' protection.

 

Lastly, enhanced accountability by portfolio managers and a more competitive research market has the potential to lower costs and improve returns to customers, which should in turn make EU investment managers more rather than less competitive.

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 95 - 98

 

 

 

 

MiFID II: interaction with third country broker-dealers

 

Relevant MiFID II rules on investment research and inducements and the operation of the research payment account ("RPA")

 

According to Article 13, paragraph 1 of the MiFID II Delegated Directive (EU) 2017/593 of 7 April 2016, a MiFID II Portfolio Manager can choose one of two options when procuring research from third country broker-dealers: (a) direct payments by the MiFID II Portfolio Manager out of its own resources, or (b) payments from a separate RPA controlled by the MiFID II Portfolio Manager.

 

Article 13, paragraph 1(b) of the MiFID II Delegated Directive obliges a MiFID II Portfolio Manager which chooses the option of establishing a RPA to meet a series of conditions governing the operation of this account, notably that the portfolio manager agrees a research charge with its clients. The operation of the RPA prescribed in Article 13, paragraph 1(b) is incumbent on any MiFID II Portfolio Manager that does not pay for research directly out of its own resources.

 

In addition, Article 13, paragraph 9 provides, among other things, that research provided to MiFID II Portfolio Managers shall be subject to a separately identifiable charge.

 

Answers to frequently asked questions

 

1. Under MiFID II, may a MiFID II Portfolio Manager or its Third Country Sub-Advisor combine: (i) a payment for research; and (ii) a payment for execution services into a single commission to a third country broker-dealer?

 

Based on the current practice of national competent authorities, a third country broker-dealer may receive combined payments for research and execution as a single commission when providing such services to a MiFID II Portfolio Manager or its Third Country Sub-Advisor, as long as the payment attributable to research can be identified. The MiFID II Portfolio Manager or its Third Country Sub-Advisor which operates a RPA is responsible for managing its research budget based on a reasonable assessment of the need for research and subject to appropriate controls, which include maintaining a clear audit trail of payments made to research providers. In addition, the MiFID II Portfolio Manager or its Third Country Sub-Advisor which operates a RPA must be able, at all times and based on its own internal allocation/budgeting process, to identify vis-à-vis its own clients the amount spent on research with a particular third country broker-dealer.

 

2. Are third country broker-dealers required to identify a separate charge for research in cases where a MiFID II Portfolio Manager or its Third Country Sub-Advisor pays for these services out of: (a) a RPA; or (b) directly out of its own resources?

 

Based on an interpretation of article 13(9) of MiFID II Delegated Directive, in both cases - where research is paid for by means of a RPA or directly out of the MiFID II Portfolio Manager’s or its Third Country Sub-Advisor’s own resources - the MiFID II Portfolio Manager/Third Country Sub-Advisor is responsible for ensuring compliance with the requirements of Article 13. These include the requirement to identify a separate charge for research supplied by third country broker-dealers. In the absence of a separate research invoice, the MiFID II Portfolio Manager or its Third Country Sub-Advisor may decide, among other things, to consult with third parties, including the third country broker-dealer, with a view to determining the charge attributable to the research provided. The supply of and charges for those benefits or services shall not be influenced or conditioned by levels of payment for execution services.

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

Directive 2014/65/EU on markets in financial instruments (MiFID II), Article 24(7) and (8)

 

Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits, Article 13, Recitals 26 - 30

 

Commission Staff Working Document Impact Assessment Accompanying the document Commission Delegated Regulation supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to definitions, transparency, portfolio compression and supervisory measures on product intervention and positions {C(2016) 2860 final} {SWD(2016) 156 final}, 18.5.2016, SWD(2016) 157 final, p. 95-98

 

Markets in Financial Instruments Directive II Implementation, FCA Consultation Paper III, September 2016, CP16/29, p. 25, 28, 29

 

MiFID II: interaction with third country broker-dealers

 

 

 

 

 

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    Links    

 

 

 

 

Investor Relations, MiFID II and the looming research shakeout

 

The future of investment research post-MiFID II

 

MiFID II to contract research coverage

 

The future of equity research 

 

 

 

 

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Last Updated on Sunday, 12 November 2017 23:02
 

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