For you, what has been the most interesting development about the North American research market’s response to Mifid II?
We have already started to see managers looking to make changes to their global processes as a result of what they’ve learned from their Mifid II implementation, including better valuation and voting, better data capture and the resulting improvement in the quality and value of management reporting, and their relationship with research providers.
There is growing pressure on the regulator [SEC] from several large US asset managers to harmonize the rules with the EU, with institutional investors in the US also backing this call in order to gain greater transparency around costs. The US has seen statements being released by the Securities Industry and Financial Markets Association expressing the need for broker-dealers to be able to charge separately for research, exempting them from the Advisers Act. This shows a willingness from an industry body to promote transparency within the research consumption process.
How do you see the situation developing from here?
For global firms, operating a business under two or more different regulatory regimes can be challenging. The requirement to implement two separate processes for the US and Europe can pose a significant administrative burden and increase operational costs if not managed correctly.
Equally, as European investors become more attuned to greater transparency and client accountability, US asset and hedge fund managers may face competitive pressure as investors expect the same level of transparency they receive from European managers.
Aligning both processes can deliver immediate benefits to firms, not only operationally but also from the insights captured from the adoption of a consistent research valuation framework across sites.
We understand that the process of unbundling payments in the US with hard dollars creates possible problems for the sell side, without addressing the current and future state 1934 Securities Exchange Act, section 28(e). The SEC, from now until July 3, 2020, has much to think about.
What in your view is the most important decision US asset managers need to make now?
An assessment of the potential cost and operational impact should begin today. Winning mandates from institutional investors could hinge upon giving an informed response to this potentially significant change.
Managers that are able to provide greater transparency around where and how funds are allocated can enjoy greater confidence from their clients. As EU firms have been through this process already, it is worth considering where investment firms tripped up and how to avoid that in the US market.
What advice would you give US asset managers?
With the whole market going through the same process, it may be tempting to hang back and engage in the process late. The argument for doing this is that one has to wait for the final rules before complying. But asset managers will find that institutional investors want to know how big an issue this might be – even before there is certainty.
Asset managers that have not started assessing the impact – through analysis of research consumption, expenditure and other sell-side services – will struggle to answer the most basic questions. The key takeaway is to start early, and answer questions with confidence. There is definitely a first-mover advantage here.