[Newsletter n. 10]


On 27 October 2017, the European Commission issued a guidance in the form of Frequently Asked Questions (“FAQ”), aimed at clarifying certain concerns raised by the analyst research industry in connection with the “extraterritorialapplication of MiFID II on third country broker-dealers’ provision of research and execution services to EU investment firms that provide portfolio management or other investment or ancillary services in the EU (MiFID II Portfolio Managers) and their third country sub-advisors that are contractually obliged to comply with MiFID II (Third Country Sub-Advisors) (“EU investment firms”).

Concerns have arisen due to the existence of different approaches to payments for research outside the European Union (for instance, under US rules, brokers cannot receive direct payments for research unless they are formally registered as investment advisers) that may clash with the MiFID II requirement on research, which from 2018 will basically oblige EU investment firms to make direct payments for this service rather than bundling such costs together with trading costs.

Indeed, Article 13(1) of MiFID II Delegated Directive (EU) 2017/593 sets out that the precondition for the provision of research by third parties to investment firms providing portfolio management or other investment or ancillary services to clients not to be regarded as an inducement is that the research is received in return for either of the following:

  1. direct payments by the MiFID II Portfolio Manager out of its own resources;
  2. payments from a separate research payment account (RPA) controlled by the MiFID II Portfolio Manager.

The main goal of the explicit unbundling of charges for execution services and investment research is to avoid that the cost of investment research is passed onto clients and seems in line with the strengthen MiFID II inducement regime. However, while it strictly applies only to EU firms, the impact is likely to be broader, as investment companies buy analyst researches from many countries over the world.

As a matter of facts, until now, asset managers received research — including written reports and phone calls with analysts — for free, although the cost of this service was built into trading fees, which are usually paid by portfolio managers’ clients.

Through the FAQ, the EU Commission seeks to explain how EU firms can obtain research and brokerage services from third country broker-dealers in compliance with their MiFID II obligations.

  1. In the first FAQ, the Commission clarifies that a third country broker-dealer may receive combined payments for research and execution as a single commission provided that the payment attributable to research can be identified. In addition, the EU investment firm 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. In the second FAQ, the Commission explains that the EU investment firm is responsible to identify the charge for a research – payed through RPA or directly out of its own resources – that is supplied by third country broker-dealers as a separate item. In the absence of a separate research invoice, the EU investment firm may consult with third parties, including the third country broker-dealer, to determine the charge attributable to the research provided.

In addition, this FAQ emphasises that the supply of and charges for such research shall not be influenced or conditioned by levels of payment due for execution services provided by the same broker-dealer.

The practical impact of the published clarifications on the business is not clear as the main clash is between different practices (direct payment and paying for via trading commissions).

In fact, if on the one side of the ocean, MiFID II will force asset managers caught by the directive to set clear budgets for research from banks and brokerages for the first time, on the other side, the SEC issued a no-action relief on 26 October 2017 according to which it will give temporary relief to allow US brokers to receive payments in hard dollars or through research payment accounts from investors who are subject to MiFID II without having to become investment advisers.

In any case, the feared consequence for third-country brokers is a blow to their revenues as European portfolio managers come under pressure to reduce their spending on research. At the same time, there will likely be a re-modelling of the investment research business, with online research marketplaces springing up often at the initiative of former bankers, who are realising that bank and broker-dealer research will operate as a free-standing profit centre and that investors are seeking new forms of information and analytics, through big data and artificial intelligence, which can complement conventional fundamental research in portfolio decision making.

Legália will monitor future developments on these topics and is available to provide you with any clarification or support in the subject matter of this Newsflash.



Vito Vittore

Elena Pagnoni
Of counsel

Mirella Conte

Luigi Bonifacio