CAG & MiFID II: A Safe Haven in an Uncertain World
MiFID II has only been in force for one month and market practice has yet to be established. Given the far-reaching scope of the new regulatory framework, it is unsurprising that there remain differing interpretations of the new rules. However, the UK equity market remains open and corporate life must go on. UK companies with December year-ends are about to announce results for 2017 and to embark on a round of investor contact. Companies, brokers and funds are all “feeling their way” in the new, MiFID II environment, potentially presenting challenges in maintaining the company/investor dialogue on which the equity market depends.
Capital Access Group (CAG) can work with all parties to ensure that these lines of capital market communication remain open under the new rules.
We can do this because CAG is not MiFID II regulated. We do not provide investment (equity) execution services and our offer cannot be characterised by funds as an inducement to trade. Therefore, we can contact and work with any fund manager to arrange corporate meetings without compromising that manager’s MiFID II compliance. Typically, CAG organises thousands of meetings for its clients each year.
Challenges remain for all parties given the nature of the rules which have been presented to the market. The European Securities and Markets Authority (ESMA) has published a lot of guidance in the last 12 months on the potential market practice under MiFID II. However, as we have seen, this has still created areas of uncertainty.
For example, ESMA states that corporate access is not investment research and cannot be “bundled” within payments or arrangements for research provision. It argues that, where broker-sponsored access is judged to be a material monetary benefit, funds must pay them for it separately at “commercial” rates.
Critically, judging the status of these meetings and whether they require payment is left to the funds and not the brokers. A compliance situation which appears to be causing confusion amongst all market participants.
Based on ESMA’s specific comments regarding corporate access and starting with its definition of material monetary benefit, (contained in the Q&A document of 3rd October 2017), CAG believes that there is scope for this confusion to continue;
“Corporate access services offered by a third party (broker) that are by their nature exclusive, such as individual meetings or field trips with a corporate, may involve the allocation of valuable resources by the provider and / or have a value to the recipient (fund) such that the benefit is not minor in nature and scale and could influence their behaviour”.
ESMA goes onto suggest that funds can arrange their own meetings and/or use the services of a non-MiFID II provider (such as CAG) stating that;
“This removes the primary potential conflict of interest or inducement risk that could arise if meetings are provided by another MiFID firm with whom they (funds) have other commercial relationships”.
Despite this guidance, we are aware that some brokers continue to offer access services to companies without payment from funds. This may refer to Article 12(3)(b) of the MiFID II Delegated Directive for non-monetary services. However, the article appears to regulate only the provision of research material which cannot be “bundled” with corporate access.
Our view that this exemption is limited also to capital raisings is supported by the reference in ESMA’s recent Q&A document (3rd October 2017) to corporate access;
“ESMA considers that where a corporate’s investor relations office (or its ‘house broker’ if the service is paid for by the issuer) organises investor ‘road shows’ to support a capital raising event and it is freely and publicly open to analysts from investment firms and other investors it could be capable of qualifying as acceptable minor non-monetary benefits under Article 12(3). As set out in Q&A 6, it will be for the recipient investment firm to determine whether or not it can accept a benefit”.
Ultimately, the provision of corporate access under MiFID II is governed by the overarching definition of materiality contained in Recital 30 of the Delegated Directive;
“Any non-monetary benefit 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.”
In summary, we believe that regulatory guidance threatens broker-sponsored corporate access; both from a “valuable resource” and influence perspective. Unless funds are prepared to pay brokers for material meetings with company management, there is a risk that MiFID II will limit this communications channel materially.
Our own research suggests that UK funds are unlikely to pay brokers for meetings, even when they do not hold shares in the corporate in question (re: CAG Q3 Investor Survey). This was reinforced by the recent letter from Norges Bank Investment Management (NBIM) to its portfolio companies (IR Magazine, 22nd January 2018), stating it would not pay for meetings with corporates. NBIM is one of the largest asset managers in the world with c. US$1.0 trillion under management.
Under MiFID II, companies could find themselves meeting existing shareholders only. While this is not to be dismissed, the need to meet and engage with new investors remains paramount for all companies. There is a clear risk that new investors may have to contact companies direct and not meet at all in order to ensure compliance.
As an independent provider CAG can ensure that this compliance is not at risk. Our non-MiFID II status offers all parties the ability to maintain a dialogue, working in a complementary manner with companies, brokers and fund managers.