Since MiFID II came into force in 2018, IROs have had to adjust the way they work with regard to corporate access for investors. While brokers once played a key role in facilitating discussions between investors and issuers, the changing landscape brought about by the European legislation has seen a move away from that model.
The Capital Access Group discovered that only five per cent of fund managers would now pay a broker to arrange a meeting with an issuer following the introduction of the new rules. Find out the connection between MiFID II and corporate access in this article as well as how the role of IROs has changed.
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The change in the corporate access model after MiFID II
MiFID II explained in simple terms
MiFID II is an amendment to the Markets in Financial Instruments Directive in the European Union. It sought to protect investors and help the financial markets run in a more efficient and transparent manner. MiFID II implemented a series of new requirements and tests for issuers, along with regulations on product governance and independent investment advice. In addition, it clarified and strengthened rules on inducements, record-keeping, the responsibility of management bodies and more.
This new directive has a broader scope than the previous one. It covers almost all assets and professions within the EU’s financial markets in an attempt to create a standard blueprint for the entire union.
How does MiFID II affect corporate access?
The big change in terms of corporate access is that investment companies cannot pay brokers from trading commissions for the work they put into connecting them with issuers. These costs must be taken from the fund’s profit and loss statement instead. This requires an additional budget and means that investment firms have to be able to prove to their clients that the access they received is valuable enough to be worth the outlay.
The previous system of ‘free’ meetings arranged by brokers can be seen under the terms of MiFID II to be an inducement, which makes it non-compliant with the terms of the directive. This means that fund managers have to decide whether to pay the money, become more selective about the corporate access they seek or invest in building an in-house team that can make direct contact with issuers.
Relevant MiFID II Requirements
|Clients’ best interests||Investment firms should always act in their clients’ best interests, meaning that all decisions should be taken in a fair, honest and transparent manner. If, for example, a broker sets up a ‘free’ meeting with an issuer, the broker is providing valuable resources that could be of value to the investor and that might influence a purchase of shares. This would not be seen as acting in the clients’ best interests.|
|Conflicts of interest||Requirements on preventing conflicts of interest between the investment firm and a client, or between separate clients, have become more strict with the amended directive. Firms needed to manage and mitigate conflicts previously, but now the onus has shifted towards preventing a potential conflict of interest from happening in the first place.
Besides reporting to senior management at least annually, firms have to document the nature of the conflict and the action taken to prevent it.
|Inducement regime||Firms cannot pay or receive benefits from third parties. The only exception is when these benefits do not prevent the firm from acting in their clients’ best interests and are designed to enhance the service provided to the firm from that third party.|
|Unbundling||Asset managers can no longer simply accept a bundle of services from a broker for a fixed price. MiFID II requires a breakdown of the costs for each service, such as equity research, to offer more transparency to clients on the costs behind both research buying decisions and trade execution decisions.|
|Payment for order flow||Described as the “practice of brokers receiving payments from third parties for directing client order flow to them as execution venues,“ payment for order flow (PFOF) is likely to be in contravention of MiFID II. The reasoning is that an asset manager might choose to use the third party offering the highest payment rather than the one that will provide the best return for the manager’s clients.|
The change in the corporate access model after MiFID II
The IR Society discovered that 90% of investors used corporate access provided by the sell-side before the implementation of MiFID II. In addition, only 38% on the buy-side said that they relied on companies contacting them directly. Following MiFID II, 54% said they would be more reliant on companies approaching them and 52% will reduce their use of the sell-side.
Below are a number of changes to the model of corporate access seen since January 2018.
Free corporate access is considered an inducement
‘Free’ corporate access through brokers is now considered an inducement. So, investment firms have to decide whether to pass on the costs of gaining corporate access to the funds or to take the hit of paying for access through third parties from their bottom line.
Increasing direct control over corporate access
With the added cost and fears over contravening the terms of the directive, many investors have decided to dispense with the services of brokers altogether. Major funds such as Fidelity International and Norges Bank Investment Management, which manages more than US$1 trillion of assets annually and is the world’s largest sovereign wealth fund, have recruited teams to take corporate access matters in-house.
Norges Bank even wrote to issuers to tell them it would not pay for meetings and that IROs should contact them directly to ensure engagement continued. Chief investment officer, Petter Johnsen, said,
“We see access to senior management as being a central part of our investment process, and key to fulfilling our role as a responsible active owner. In sending this letter, we felt it was important to reiterate this message with the companies the fund owns to help ensure the level of access we currently receive does not change under MiFID II.”
Empowering the corporates
Corporates are now free to find the approach to corporate access that suits their needs. Many can easily organise their own events in cities where they know their major investors, and some are taking the task in-house completely.
Others are using a hybrid approach, organising their own investor relations activities as well as involving brokers on the sell-side. They do this to search out new investors and investors in locations where the firm is less knowledgeable about its shareholder base.
“We cannot claim we know everybody out there – we don’t,” says Gunhild Grieve, Head of IR at German power company RWE, “and frankly we do see a benefit in the sell-side and its salespeople where it is their job to speak to investors, day in and day out.”
Equity research and sponsored equity research
Under the unbundling rules, brokers need to set out a specific price for equity research. The cost can no longer be included in the fees for execution services. This led to a disincentivising of asset managers to commission third-party investment research, which, a survey of 250 IROs from leading firms across Europe found, has led to a decline in the quantity and quality of the research available.
This means that many smaller issuers are uncovered or undercovered by research. One solution is to invest in company-sponsored research that provides the earnings estimates they need to be discovered and considered by investors.
It is possible to pay for research using a separate research payment account (RPA), as long as the charges to clients are transparent.
Different interpretation of the rules in France
In a move that sets it apart from the rest of the EU and the UK, French regulator AMF (Autorité des Marchés Financiers) has interpreted the rules on corporate access to allow ‘free’ meetings organised by a broker acting as a concierge service for an investment manager, separately from any research services. The regulator deems this a minor-non-monetary benefit and is therefore exempt from inducement regulations.
How can IROs obtain corporate access under MiFID II?
IROs have to be agile when arranging corporate access. If you are working with brokers, you need to ascertain which of your investors or potential investors they have an existing relationship with. If you no longer use brokers, you need to maintain your engagement policies and expect direct meeting requests. This will require additional resources in many corporations, including people and software. The use of digital tools to leverage IR data will be critical for IROs when navigating capital markets under MiFID II.
When arranging non-deal roadshow schedules and other IR events, targeting remains vitally important to broaden attendance beyond just those investors using brokers. It takes more organisation to fill up the schedule and make the most of the time dedicated to that event.
There are two things you can do to make your IR processes more efficient in this environment:
- Analyse your shareholder base to understand which types of investors you are attracting, decide if you want to attract more of them and find the best way to reach them, notably by establishing the relationships between your shareholders and sell-side firms.
- Use a digital, cloud-based investor CRM such as IR.Manager to ensure you keep your data about events relying on multiple brokers as well as direct investment contacts in a single location. Data from your CRM enables you to assess the efficiency of your IR processes and it helps you make sure you are equipped to track and quantify the engagement level of active brokers.
What are inducements under MiFID II?
Inducements are generally incentives offered in the process of recommending investment services. Benefits provided by third parties, such as ‘free’ corporate access services, can be construed as inducements.
Does MiFID II apply to US firms?
MiFID II does not necessarily apply to US firms, as it is an EU directive. It is also enshrined in UK law and regulated by the Financial Conduct Authority (FCA), having been implemented before Brexit. However, when US firms do business in countries that come under the scope of MiFID II, they have to comply with its requirements relating to investment decisions. Many US firms already adhere to the directive in order to prevent compliance issues across their global business.
The connection between MiFID II and corporate access has proven challenging for both the buy-side and the sell-side, but all parties are finding their way with the new directive. For issuers, there is more work for the IR department. On the bright side, this allows them to take more control over investor engagement.
References and Further Reading
- How to manage shareholder communications
- Finetune your investor targeting
- Best execution under MiFID II
- MiFID II details and guidance from the European Securities and Markets Authority
- Advice from non-EU brokers from ESMA