The MiFID II regime will have ramifications for buy-side global asset managers and sell-side research providers relating to use of dealing commissions and cost allocation for research expenditures, writes William Yonge, private investment funds partner at Morgan Lewis.
This may raise a quandary for US portfolio managers that have not needed to trace the indirect costs to clients (in the form of dealing commissions) to the benefits to those clients from research if such portfolio managers fit within the US Section 28(e) safe harbour.
It is feared that where portfolio managers opt to pay for research out of their own resources, there may be a resulting contraction in their research spend, as budgets shift from chief investment officers to finance directors.
Some UK fund management houses have already announced that they will be paying for research out of P&L.
EU brokers will only need to price research separately when dealing with EU portfolio managers and will not need to provide such pricing information when providing research to non-EU managers.
As clients of EU portfolio managers will soon be receiving information about research charges, it is inevitable they will demand the same from their non-EU portfolio managers.
Cross-border deals
MiFID II's requirement that payments for research be unbundled from commissions has also raised questions about potential global implications because of cross-border dealings by global portfolio managers and broker-dealers.
For example, under US law the receipt of "hard dollar" payments for research, whether through an RPA or out of a portfolio manager's own funds, might cause US broker-dealers to be deemed "investment advisers" subject to the Investment Advisers Act of 1940 (Advisers Act) and in turn impede principal trading.
Code of conduct unveiled for MiFID II research unbundling
The new research payments regime in the EU will also have global implications to the extent that EU regulators take an expansive view on how the new research payment regime applies in a cross-border context (for example, in the context of outsourcing, delegation, sub-advisory, or other arrangements) or where global asset management firms strive to implement consistent policies across affiliates for administrative ease and to ensure fair treatment for all clients.
Whatever Brexit means for the UK and the remainder of the EU, it will not likely result in a wholesale abandonment by the UK of the new research payment regime delivered (with the UK present as midwife) under MiFID II.
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