Current Regulatory Projects

United Kingdom

Euro IRP is actively engaged in consulting with regulators at this vital time for the industry. At the heart of the Association’s work is MiFID II and having worked extensively on representing our members interests during the shaping of the Delegated Acts by ESMA, the Association’s focus now moves to the interpretation of these Acts by individual member states. Recent submissions have been to the FCA in the UK and to the AMF in France and our work here continues.

We are very proud to announce that Euro IRP has played a pivotal role in the drafting of new guidelines with the FCA and with AFME to ensure equal access for independent research providers (as unconnected analysts) to issuers during the IPO process. This includes access to all detailed written information and equal-footing in meetings with issuers alongside the connected analysts from the syndicated banks. These process guidelines follow on from the FCA’s new rules written in COBS 11A.1.4A-F and represent a significant achievement for the association.

The future of the payment of research

H1 2012 the FSA visited 15 UK asset managers and found that 13 of them exercised less care and control over client commissions than their own corporate funds and did not regularly review whether services were even eligible to be paid for using customer’s commissions.

The result was a letter on conflicts of interest ( to the CEOs of fund management companies, making it clear that:

  • Corporate Access Concierge services run by the Investment Banks was NOT eligible to be paid for by commissions (by this time accounting for 29% of commissions paid)
  • UK Asset Management CEO’s had to sign off personally to the FSA by the end of February 2013 that their firms were fully compliant.

With regards to best practice, the report also highlighted the following:

  • One firm had carefully considered which services represented valuable inputs to its investment process and challenged brokers about why it should pay for other services
  • Another firm set a maximum spend on research services and, once these limits were reached, switched commission rates for the brokers concerned to execution only rates (50-70% less) for the remainder of the commission period.

The FSA then highlighted that by so doing both firms could show that they were acting in their customers’ best interests and putting customers’ interests before their own.

If this Best Practice is adopted – and by the end of this month we may know more – the effect will be UK asset managers setting actual monetary research budgets by provider – so for the first time moving toward a ‘priced’ research environment – something the Investment Banks have strongly resisted and further levelling the playing field for independent research.

Meanwhile the Investment Management Association (which as a result of the FCA actions set up a Research Review Working Group to write a white paper on the “Future of Research”) is examining all possible funding approaches for institutional research provision, but with a view so far to dealing with their central concern, that unless UK asset managers do a better job of accounting for and controlling research commissions, and direct it for the payment of research, regulators might question the practice of using commissions to buy research. The paper is due out in the next month.

The reason why this has GLOBAL implications is that the UK’s FCA is the de facto global regulator for equity commissions – so changes implemented here will result in the harmonisation of operational procedures at global asset managers. Quite simply they will need to treat clients equally and manage their businesses to the most conservative compliance geography in which the firm operates.

This is the reality of new regulatory targeting across all of finance. The biggest challenge remains lower commission levels overall, but these changes are potentially better for IRP’s in the voting arena with the prospect of our research being priced on the same basis as the IBs and so gaining a bigger share of research commission pots. It may also herald a new wave of cuts in IB research budgets and a new wave of redundancies in the IBs, with them then offering lower quality services. The changes may also open up the market to a wider group of Independents – and competition from more groups.

Over the next few months keep a watchful eye for:

  1. IMA announcements.
  2. The FCA Asset Management Conference on Oct. 30 at which the FCA is expected to offer further interpretive guidance on “Conflicts”.
  3. The IMA Future of Research Funding White Paper, expected before year-end.

FSA Policy On Bundled Brokerage And Soft Commission Arrangements
In 2000, the Chancellor of the Exchequer appointed Paul Myners to carry out a review of institutional investment in the UK. His final report, published in March 2001, proved particularly controversial on one topic: “He concluded that there was an incentive for fund managers to direct business to brokers to obtain additional services, rather than the most favourable trade execution terms for their customers, and that this represented an unacceptable market distortion” (quote CP 176, page 3). The Myners review kick-started a major debate on how fund managers should pay for equity research. As one investor commented: “although only 2 out of the 201 pages in the report address commission payments, commission payments have been the main focus of attention.”

The two reports are shown here:

The resulting new regime limits the types of goods and services which a firm may receive in return for paying dealing commissions on customer transactions to third party brokers – the only allowable services are execution and research. In addition the new regime specifies that investment managers provide adequate disclosure of these costs to their clients. The FSA is encouraging members to make use of the industry-led proposals for this disclosure from the IMA, NAPF and LIBA.

The Code develpoed by the NAPF and IMA requires two levels of client disclosure known as Level 1 and Level 2. Level 1 disclosure, provided annually, will describe the investment manager’s policies and procedures as regards the management of costs paid on behalf of clients. Level 2 disclosure, provided at least six-monthly, will provide both client-specific and firm-wide information on how commissions paid have been generated/used. Page 13 of the IMA code provides a commission disclosure table showing a split between execution and research. IMA defines execution services as “those services related to trade execution that meet the criteria laid down by the FSA for payment out of commissions” (p 17). However LIBA adds a third category being execution advisory services as distinct from best execution.

The final rules were published in July 2005 and are shown here:  FSA Final Rules.

The final consultation document was the March 2005 document entitled PS 05/05: FSA PS 05 05 March 2005

Other Reading
Although two years old, the Deloitte Report, commissioned by the FSA, remains an interesting read: Deloitte Report Re CP 176 May 2004

In October 2006 Oxera produced a report for the FSA as part of the unbundling post-implementation review, which involved a baseline survey in February/March 2006 and another survey in 2007/2008.


The AMF (Autorité des marchés financiers) in France has taken a number of steps supportive to independent research.

December 2004-July 2005: working group on independent investment research.

July 2005 publication of the working group’s report:

July-September 2005: public consultation on the report.

New regulation was draft by the AMF to authorise:

  • The unbundling of brokerage commissions;
  • The execution of Commission Sharing Arrangements (CSAs)

July-October 2006: public consultation on the AMF’s draft regulation

January 2007: the new draft regulation was approved by the AMF’s Board, consisting of (i) amendments to the AMF’s General Regulation and of (ii) an instruction by the AMF.

Q1 2007 the draft new regulation ratified by French Ministry of Finance

31 December 2007: the end of the soft commission arrangements in France.

Other European

Reports On Financial Analysts
In April 2002, it was agreed among the European Commission and Economic and Finance Ministers that the Commission should assess the role of financial analysts and possible measures to improve their participation in the market. In November 2002, the European Commission services set up a market-focused Forum Group of experts to research and evaluate current regulatory and market practice issues, with a view to recommending optimal regulatory and best practice options within an integrated European capital market.

The report was called: The Forum Group Report Or “Financial Analysts: Best Practices In An Integrated European Financial Market. Recommendations From The Forum Group To The European Commission Services.” It was published on the 4 September 2003. This report suggest the EU should take a principles based approach and control rather than remove conflicts. These recommendations are rather conservative compared to the SEC moves. The main report has nine appendices. We also include the consultation responses.

United States

SEC Clarifies Soft Dollar Policy (28e)
In 2005 and 2006 the SEC published guidance regarding client commission practices under section 28(e) of the Securities Exchange Act of 1934.

Euro IRP made two submissions on the subject, the first of which encouraged a consistent approach to global regulation regarding commission arrangements:

In our more recent submission we were positive about the SEC modifying its interpretation of “provided by” and “effecting” under section 28(e):

In light of changes in market structure and submissions following the October submission, the SEC looked at the “effecting” and “provided by” terminology, and in its July 2006 release introduced considerably more flexibility. For clarity on this, please see p. 50-54 of “Commission Guidance Regarding Client Commission _Practices Under Section 28(e) of the Securities Exchange Act of 1934” published on July 24, 2006 ( With the changes in the “provided by’ interpretation, there is a new option allowing the broker-dealer to create a pool of research dollars, funded by commissions paid by managed accounts, to pay for research services as instructed by the money manager. This type of client commission arrangement (CCA) is similar in many respects to the UK CSA payment structure. Indeed, the SEC introduced this flexibility in part due to submissions from UK organizations, suggesting that unbundling has been influential. The SEC has made it clear that it wants to make it as easy as possible for money managers to pay for independent research.

The SEC’s “no-action letter”
Subsequent to the SEC’s July 2006 guidance on client commissions under section 28(e), the Staff of the Commission’s Division of Market Regulation issued a “no-action letter” on January 17, 2007 to Goldman, Sachs & Co which confirmed that research firms who are not broker-dealers may be compensated for providing research services to their money manager clients through payments from a “commission pool” set apart in a client commission arrangement under section 28(e) without registering as broker-dealers. The payment structure described in the no-action letter is very similar in structure to a UK CSA. The SEC Staff noted that the following factors must be present for a non-broker-dealer research firm to be compensated from a “commission pool” set aside by an executing broker-dealer:

  • The money manager must be responsible for independently determining the value of the research services under SEC 28(e), although the money manager’s good faith determination may be based on input from the research firm.
  • The broker-dealer may not be involved in determining the value of the research services to the money manager.
  • The research firm must receive payment from a pool of commissions that, by agreement between the broker-dealer and the money manager, is set aside for obtaining research services.
  • Payment to the research firm may not be conditioned, directly or indirectly, on the execution of any particular transaction or transactions in securities that are described or analyzed in the research services.
  • The research firm may provide the research services in return for payment from a pool of commissions, but may not perform other functions that are typically characteristic of broker-dealer activity (e.g., soliciting brokerage transactions by disseminating quotations, accepting or handling customer orders, introducing or carrying customer accounts, receiving or holding customer funds or securities, etc.).

The no-action letter clarifies that research firms who receive payments from commission-generated pools of funds do not have to be registered broker-dealers under certain conditions. The Staff’s position appears to be based on the proposition that the pools lose their character as “commissions” when they are used to compensate a research firm for research and the research firm does not perform broker-dealer functions.