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US Managers Should Prepare for MiFID II Now!

Traders Magazine Online News, January 24, 2018

Dave Choate

Hundreds of articles have addressed how MiFID II will impact research in the global market, but most U.S. managers still think they are “outside the scope.”  Think about this: If a large portion of the global investment management community is going to provide additional transparency to EU clients, then U.S. asset owners will soon demand the same.  The bottom line is all U.S. managers should begin preparations, even if they are currently “outside the scope.”

MiFID II does not eliminate advisors’ ability to use commissions for research. However, it does create the need for new accounting- and reporting-research processes. The difficulty of MiFID II is in the “4 Pillars of Transparency.” It is important to understand that adopting these “Pillars of Transparency” does not violate U.S. regulations. 

The first pillar focuses on pricing all research inputs, including services that are traditionally provided in a bundled-commission structure.  On its face, this seems easy.  However, valuing every corporate access meeting, research report and analyst conversation can be a daunting task.  Use your current broker-vote procedure to start the process.  Current CSA payments and third-party research services should be the easy part.

The second pillar is about budgeting research costs based on cash value rather than trading volume.  Be careful, because if you come up short on trading volume, you will be expected to pay cash to cover the shortfall.  Alternatively, if you generate excess research credit, you may have to refund the excess to your clients or ask for permission to carry it over to the following year.  Tracking research credits and payments at the customer level is fraught with danger, but it may be necessary.

The third pillar calls for allocating research to the strategy and customer-account level.  While current U.S. regulations allow a manager to “spread the benefit” across all accounts, MiFID-level transparency requires that you only use a client’s assets (i.e. commissions) for research that benefits that client.  In most cases, we are seeing managers allocating costs based on AUM.

The fourth pillar centers around implementing a client approval and reporting process.  For years, plan sponsors have asked for soft/research disclosure after the fact.  MiFID II adds a requirement that each client approve the research budget in advance of any research payments.  This may result is some confrontational communications with your clients.  Some may even try to opt out.

What are the benefits to preparing now?  According to a large buy-side shop in New York, consultants are already including MiFID II questions in their RFPs.  More specifically, they are asking if you can provide MiFID-like transparency regarding research expenditures.  You want to be able to answer, “YES.”  Another U.S.-based manager indicated their reason: marketing to clients who are subject to MiFID II and looking for a new home.

Final thoughts:  Trying to maintain two distinct compliance structures for MiFID-related and U.S. clients is a recipe for disaster.  As soon as your client understands that some clients will be provided with MiFID-level transparency, they will want it too. If you can provide the transparency for one client, then you have presumably priced all research, budgeted by cost/need rather than volume, allocated research by strategy and even created a reporting process.  If you don’t think U.S.-based pension funds and plan sponsors will want the same level of transparency, then you are fooling yourself.


Dave Choate is a Senior Vice President and the Director of Global Sales at Capital Institutional Services, Inc.. He has served the company for almost 32 years and is responsible for marketing to investment managers and fund sponsors in North America.

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