AMF pushes for new charter on issuer-sponsored research

Feb 12, 2020
French financial regulator develops action plan to support equity research

The French financial regulator has said it will support the use of issuer-sponsored research in Europe as part of its response to changes to the research industry brought about by Mifid II. 

Under a new action plan, the AMF says it will encourage all market participants to work on a charter – based on existing regulations – that supports good practice for research paid for by companies. In particular, the regulator wants research to make clear when there are financial links between the company and the research author. 

‘Sponsored research existed prior to Mifid II, but we observe an increased production of this specific type of research in response to a greater demand from issuers for analyst coverage,’ says a spokesperson for the AMF.

‘Based on the goal of shared best practice spanning as wide a range of market participants as possible, the AMF would encourage all stakeholders to work on a charter that provides for best practice based on existing regulatory obligations.’

The move follows the release of a report, commissioned by the AMF, that found the use of issuer-sponsored research had grown following the implementation of Mifid II, which came into effect in 2018. According to this report, the number of research contracts ‘financed by the issuer’ in the French market grew from 289 at the end of 2017 to 368 by mid-2019. 

Mifid II banned payments for research and corporate access via trading commissions, putting a stop to the long-running practice of bundling costs together for a variety of services. 

As a result, investors have begun to carefully scrutinize their payments to brokers and have cut back on research spending. The biggest European institutional investors cut their research budgets by around 20 percent in 2018, with further cuts of 5 percent to 6 percent expected in 2019, according to a study by Greenwich Associates.

A charter would help to address any concerns about issuer-sponsored research in the market, says the AMF. 

‘We have heard that some asset managers may have concerns that this research may be biased or that it is not entirely clear [whether] such research is paid for by the issuer [or whether] the analyst is independent,’ says the spokesperson. ‘Hence the need to clarify the applicable framework.’

Neil Shah, director of research at Edison Group, a provider of issuer-sponsored research, welcomes the idea of a charter that encourages best practice. He says the sponsored-research market is ‘starting to take shape’ and ‘what you want is that the industry develops in a sensible fashion’.

‘It’s good to give issuers a choice – competition is good – but what you don’t want is participants in the market that damage the credibility of the space,’ he explains.

European regulators have not seen eye to eye regarding the impact of Mifid II on research coverage. Last year, an analysis by the UK’s Financial Conduct Authority reported that small and mid-cap companies had not seen a ‘material reduction’ in research coverage following the introduction of the new rules.

By contrast, the AMF says its own study finds ‘the reform has led to a fall in corporate coverage’. The French regulator has noted that the UK market operates under different conditions through the extensive use of corporate brokers, which may account for some differences in the impact of Mifid II between markets. 

The AMF’s move to support more sponsored research follows shortly after the release of new guidelines on the topic by NIRI. The US IR association says interest in sponsored research is growing amid ongoing changes to the cash equities business.

‘In the last couple of years with Mifid II and the changes to commission structures, I started to receive more questions from members – particularly small and micro-cap companies – about company-sponsored research,’ NIRI president and CEO Gary LaBranche told IR Magazine last month. ‘We started hearing about the interest in guidance in different parts of the country over the course of several months.’

Other goals of the AMF action plan include tweaking or clarifying some of the research rules within Mifid II. For example, the regulator will seek to ease the pressure on independent research providers, which have struggled to compete under the new regime. 

The AMF also says it will make clearer when corporate access services can be treated as a minor non-monetary benefit – referring to services considered small enough to not create a risk of inducement.

‘The objective is to provide clarifications to help the industry qualify services that corporate access involves, when conducting its analysis,’ says the AMF spokesperson. ‘We are keen to avoid a situation where a service is not offered at all because there is uncertainty over its qualification. The plan’s purpose lies more in clarification than in a redrafting of the rules.’

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