31 October 2017

Broker Exemption: Deal or No Deal?

By Scott Fulton | 31st October 2017

The FCA’s announcement (26th October 2017) that “unconnected” analysts must be able to have access to companies seeking to list on the LSE goes straight to the heart of the current debate around research and corporate access under MiFID II. Specifically, the issue of what constitutes a material or a minor, non-monetary benefit to the fund manager.

Rather than “materiality” leading to a premium for services, brokers appear to be conducting a price war for their research with several offering their entire output for as little as US$10,000 per annum, per user. Others have cited the “broker exemption” whereby they can continue to distribute research and organise meetings without payment from fund managers because the corporate client pays for it.

This begs an interesting question.

In a market where investment research and corporate meetings have an independent value for the first time, why would you offer those services for little or no fee?

We believe that the answer lies in the need to maintain a distribution network within the investment community for new issuance.

Banks and brokers earn large fees from raising money for their clients in the equity market. Winning mandates is determined by the ability to “get the deal away”; through the ranking of the analyst and/or the number of fund managers it can introduce to the company.

Under MiFID II, demonstrating these deal credentials may become more difficult. Both investment research and meetings with fund managers are deemed to have a “material benefit” and must be paid for separately. Our research highlights that fund managers, using their own resources, are reluctant to take on significant additional cost and will be selective in what and whom they pay.

Further, the regulations state that the exemption for research and meetings for new issuance is only granted if all analysts, not just those from the sponsoring bank/broker can write on the issue and all market participants can have access to the company, not just the clients of the bank/broker.

Thus, the market for research and meetings – either for new issuance or financial calendar work – is likely to be both less valuable and more competitive than is currently the case.

This challenges those brokers who have historically relied on their corporate client list to maintain their position in the market for new issuance.

Hence the “broker exemption”.

This comes from Article 12(3)(b) of the MiFID II Delegated Directive which allows the distribution of “written material from a third party (broker) that is commissioned and paid for by a corporate issuer” to investment firms if it is made available to the public and if there is “no expectation or actual payment from a recipient investment firm…or restriction in access that could in any way infer the provision of this material could act as an inducement”.

So far so good. The clause clearly allows whole of market distribution of material which is paid for by a corporate client on an on-going basis.


But Recitals 29 and 30 of the Directive clarify how this material is created and what it can contain.

“Any non-monetary benefit (e.g. issuer-sponsored coverage) that involves a third party (broker) allocating valuable resources to the investment firm shall NOT be considered as minor and shall be judged to impair compliance with the investment firm’s duty to act in their client’s best interest”. Recital 30 MiFID II Delegated Directive

Investment firms may treat “non-substantive material or services consisting of short term market commentary on…company results” (Recital 29 MiFID II Delegated Directive) as minor non-monetary benefits.

Finally, Article 12(3)(b) states that “the assessment of whether the material is substantive or not (and therefore can be viewed as a minor non-monetary benefit) should only be linked to its content and not to the qualification given/alleged by the provider”.

Thus, a broker can issue corporate materials and arrange meetings for any fund manager provided it does not “allocate valuable resources” and the content is “short term market commentary”. The judgement as to whether this is compliant is the fund manager’s and not the broker’s.

Under these restrictions there must be a question mark over the usefulness of materials and meetings provided under the “broker exemption” for companies not seeking to list or raise further funds.

As Anthony Hilton of The Evening Standard commented recently;

“It will be an interesting unforeseen consequence of MiFID II if its efforts to make markets more friendly to investors succeeds only in making them much less friendly to listed companies”.

Capital Access Group (CAG) is an independent provider of meetings between companies and fund managers. It only charges its corporate clients for this service and does not trade in equities. As such, it does not come under MiFID II regulations. We can provide whole of market access to UK companies now facing challenges within their traditional broker support.

CAG is conducting a survey of its fund management contacts, asking to what extent the “broker exemption” has traction within the investment community. Responses so far have been encouraging but we would like to hear from more fund managers.

The survey can be accessed using this link.

We will be publishing the results of this survey in the week commencing 6th November 2017 and will be presenting more detail at a seminar hosted by Crowe Clark Whitehill on 14th November 2017.

If you would like to attend this seminar, please contact [email protected]