The annual Extel survey of investment managers has recorded over recent years a dramatic increase in the amount of client commissions that are being used by fund managers to pay for corporate access. By some estimates over 30% of commissions earmarked for Research are being used to pay investment banks for arranging meetings with corporate CEOs and CFOs. A number of industry commentators have questioned whether such corporate access meets the FSA’s definition of research which is encapsulated in the following points.
- is capable of adding value to the investment or trading decisions by providing new insights that inform the investment manager when making such decisions about its customers’ portfolios;
- whatever form its output takes, represents original thought, in the critical and careful consideration and assessment of new and existing facts, and does not merely repeat or repackage what has been presented before;
- has intellectual rigour and does not merely state what is commonplace or self-evident; and
- involves analysis or manipulation of data to reach meaningful conclusions.
There is no dispute that corporate access is valued by the fund management industry. The question relates to whether it is a research service being provided to them which meets the criteria above or whether it is an input into their own internal research processes.
The issue of corporate access was addressed in the Euro IRP sponsored CSFI report “The future of Independent research” in 2011.
The FSA has reviewed the situation across the industry and has responded with a letter on conflicts of interest (http://www.fsa.gov.uk/static/pubs/other/conflicts-of-interest.pdf) to the CEOs of fund management companies. This, inter alia, states that:
Firms did not regularly review whether services were eligible to be paid for using customers’ commission
COBS11.6.3R limits what can be purchased to ‘execution’ or ‘research’ services. COBS11.6.5E provides evidential standards to determine what constitutes research. We found that few governing bodies regularly reviewed whether the products and services purchased using client commissions were eligible to be paid for with customers’ funds. In particular, various firms were using commissions to pay for market data services and were unable to demonstrate how these met all of our evidential standards for research services. Firms were also unable to demonstrate how brokers arranging for access to company management1 or providing preferential access to IPOs, constituted research or execution services.
The Boards of fund management companies are being asked to review these points and to affirm that appropriate processes and controls are in place.