In this edition of Regulation Around the World, we review recent steps that financial services regulatory authorities have taken regarding investment research.
As the UK Financial Conduct Authority (FCA) noted, international harmonization on research provision regulation should be pursued as addressing the issues only in the UK will not be sufficient given research is a cross-border activity. However, our research suggests that at present, only the UK and the EU are looking at the topic.
The UK’s regulatory regime on investment research is currently based on the MiFID II requirements and whilst these requirements are thought to have had some positive effects, there is a feeling that unbundling and the introduction of research payment accounts have had some adverse impacts and introduced some unnecessary complexity. In light of this, the UK has begun an Investment Research Review which has already led to HM Treasury making certain recommendations to reform the UK regime including providing for additional optionality for paying for investment research. The FCA has recently issued a consultation paper on this issue.
From the EU perspective, a report issued by the European Commission’s Listing Act Package in 2020 noted that as far back as 2012, there had been a fall in research intensity and loss of coverage. In the Commission’s Listing Act Package and Retail Investment Strategy Package, further changes to MiFID II are set out, including those on investment research and unbundling.
Elsewhere there have been little or no developments. For individual Member States like France and Germany this may be unsurprising given that changes are afoot at the EU level. But there have also been no significant recent developments in other jurisdictions like Hong Kong, Singapore, Australia and South Africa. In the United States (US) there have also been no further recent developments other than the US Securities and Exchange Commission allowing its October 2017 MiFID II no action relief letter to lapse. Given the limited changes, the US section instead addresses cross-border issues as to research reports on equity and debt securities produced or distributed in the US.
This publication covers developments to April 10, 2024.
Key developments include:
- Global - The International Organization of Securities Commission’s (IOSCO) 2003 Principles for Addressing Sell-Side Equity Research Conflicts of Interest provides an overview of the types of conflicts of interest securities analysts face and a framework for addressing these conflicts. Other notable publications include IOSCO’s 2007 final report on soft commission arrangements for collective investment schemes and the 2018 final report on conflicts of interest and associated conduct risks during the equity capital raising process.
- United Kingdom - The UK adopted the MiFID II unbundling requirements which require asset managers to explicitly pay for third-party research, and brokers to price and provide research separately. This was a major shift from previous practices, where brokers provided research and asset managers accepted it as part of a bundle of services, with no specific charge. In the summer of 2023 HM Treasury issued a report setting out the outcome of the UK’s Investment Research Review which included a series of recommendations including the introduction of additional optionality for paying for investment research. The FCA has recently issued a consultation paper on this issue.
- United States - We address cross-border issues as to research reports on equity and debt securities (collectively, “securities research”) produced or distributed in the United States.
- Canada - Investment research prepared by investment dealers (Dealers) in Canada is principally regulated by the Canadian Investment Regulatory Organization which has adopted the longstanding rules of one of its predecessor organizations, the Investment Industry Regulatory Organization of Canada, relating to the preparation and publication of research reports. In the updater we set out certain best practices that Dealers should consider when publishing research reports.
- Europe - A report published in 2020 by the European Securities and Markets Authority noted that for the first time since 2006, both SMEs and large companies across the EU had, in net terms, begun to lose research coverage. Amendments to MiFID II as part of the 2022 Listing Act Package seek to revitalize the market for investment research and ensure sufficient research coverage for small and medium-capitalization companies. Article 24 of MiFID II is being updated to include conditions to label research as ‘issuer-sponsored research.’ The 2023 Retail Investment Strategy Package also makes amendments to the MiFID II rules on inducements.
- Netherlands - Prior to MiFID II, the Netherlands had an inducements ban in the context of service provision to retail clients (not in relation to professional clients) and it was explicitly stated by the regulator at the time that research was also to be regarded as an inducement. As a member of the EU, the Netherlands transposed MiFID II and the provisions concerning inducements and research payment accounts can be found in 168a and 168aa Decree on Conduct of Business Supervision of Financial Undertakings under the Wft (Besluit Gedragstoezicht financiële ondernemingen Wft, or BGfo).
- France - As a member of the EU, France has transposed MiFID II. In its feedback on the public consultation in relation to the MiFID II rules on the funding of investment research, the French Autorité des marchés financiers (AMF) stated that it did not intend to go beyond the requirements of MiFID II, which would otherwise amount to gold plating of European rules. In 2018 the AMF published guidance on the funding of research. A speech by the AMF’s Secretary General last October noted that MiFID II had “accelerated the demise of the research ecosystem”.
- Germany - Inducements are affected by the major EU reform dubbed the Retail Investment Strategy Package. With its proposal, the Commission intends to revise the principles governing the acceptance and retention of inducements in connection with the provision of investment services. In particular, the Commission plans a ban on inducements for advisory business. These plans of the Commission are viewed critically by the industry associations in Germany. For example, the German Banking Industry (Deutsche Kreditwirtschaft) has published a critical statement regarding the Retail Investment Strategy on May 24, 2023.
- Luxembourg - As a member of the EU, Luxembourg has transposed MiFID II. Article 13 of Commission Delegated Directive 2017/593 has been implemented by Article 12 of the Grand-ducal Regulation of May 30, 2018. Last summer, the Association of the Luxembourg Fund Industry issued a position paper on the Commission’s Retail Investment Strategy.
- Italy - As a member of the EU, Italy transposed MiFID II and the provisions concerning inducements and research payment accounts can be found in Articles 55 to 57 of the Consob Intermediaries Regulation. In the market it has been noted that the MiFID II rules had a significant impact on investment research, and some commentators highlighted that this may not have been beneficial to investors.
- United Arab Emirates - In the UAE, there are three regulators with oversight for investment research: the Emirates Securities and Commodities Authority, the Dubai Financial Services Authority and the Financial Services Regulatory Authority.
- Hong Kong - In Hong Kong the provision of investment research is, subject to certain exceptions, subject to licensing and viewed as an activity that could give rise to conflicts of interest. As a result, the Hong Kong Securities and Futures Commission (SFC) as well as the Hong Kong Monetary Authority view investment research through this lens when conducting on-site inspections. Chapter 16 of the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC covers analysts.
- Singapore - In 2013, the Monetary Authority of Singapore issued guidelines on addressing conflicts of interest arising from a related corporation issuing or promulgating research analyses or research reports. These guidelines were subsequently updated in 2018.
- China - The China Securities Regulatory Commission has issued for consultation draft measures on strengthening the administration of securities trading by publicly offered securities investment funds. For the first time these measures explicitly address “soft dollar arrangements” in the mutual fund sector.
- Australia - The primary Australian Securities and Investments Commission regulatory guide for investment research businesses is Regulatory Guide 79 which provides guidance on certain licensing and conduct obligations in Part 7.7 of the Corporations Act 2001.
- South Africa - Provided that investment research material falls within the outlined exclusions, it is not considered "advice" under the Financial Advisory and Intermediary Services Act, 2002. Consequently, there's no requirement for the provider of such investment research to be registered as a financial services provider.
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