MiFID2 for asset managers headlines and roadmaps

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1 MiFID2 for asset managers headlines and roadmaps Nick Colston Darren Fox Wednesday 05 & Thursday 06 October 2016

2 Introduction what we ll cover today 1. Re-cap and recent developments 2. L2 Directive: finalised rules on inducements and investment research 3. L2 Regulation: finalised conduct and organisational rules 4. Impact on AIFMs and UCITS Management Companies 1 / B_LIVE_EMEA1: v1

3 Part 1 Re-cap and recent developments 2 / B_LIVE_EMEA1: v1

4 Re-cap on MiFID2 MiFID2 repeals and replaces the current Markets in Financial Instruments Directive (MiFID1) Wide application across financial services industry covers investment banks, private banks, brokers, wealth managers, exchanges, markets, data providers Also applies to asset managers regulated as MiFID investment firms Some limited application to asset managers structured under AIFMD and UCITS if they have top-up / extended MiFID style permissions (see later in presentation at Part 4) Now coming into force on 3 January 2018 (one year extension from original deadline of 3 January 2017) 3 / B_LIVE_EMEA1: v1

5 Some of the key issues raised by MiFID2 Key issues for asset managers now a familiar list! Inducements and investment research Transaction reporting Post-trade transparency Best execution disclosures Dark pool double volume cap Telephone taping Transaction record keeping Product governance Remuneration Direct electronic access and algo trading We ll pick-up in today s session how 2016 developments impact on these. 4 / B_LIVE_EMEA1: v1

6 Key developments in the last 12 months EU level 7 April 2016: draft Level 2 Directive on product governance, inducements and investment research (L2 Directive) 25 April 2016: draft Level 2 Regulation on organisational requirements and conduct obligations (L2 Regulation) UK level 15 December 2015: first UK consultation on MiFID2 implementation dealing primarily with markets and transparency (CP1) 29 July 2016: second FCA consultation on MiFID2 implementation dealing primarily with systems, client assets and complaints (CP2) 29 September 2016: third FCA consultation on MiFID2 implementation dealing with core conduct of business rules (CP3) Brexit FCA CP2 and CP3 confirm that MiFID2 will still be implemented in UK, following Brexit vote 5 / B_LIVE_EMEA1: v1

7 Hot off the presses FCA CP3 in the UK Key consultation paper dealing with UK implementation of MiFID2 s conduct of business rules Copy-out approach for most MiFID2 provisions (partially) parallel rulebook dealing with both non-mifid and MiFID rules also copy-out of L2 Regulation, even though directly applicable Certain limited gold-plating for MiFID investment firms: investment research, inducements (overlap with RDR), and product governance (overlap with RPPD) Significant gold-plating for AIFMs and UCITS ManCos Inducements and payments for research Transparency on top 5 execution venues Telephone taping and retention of electronic communications We ll return to these points later in the presentation. 6 / B_LIVE_EMEA1: v1

8 Part 2 L2 Directive: finalised rules on investment research 7 / B_LIVE_EMEA1: v1

9 Inducements and investment research Level 1 Existing MiFID1 inducements rule retained for all MiFID firms Additional, new rules on inducements for portfolio managers and independent financial advisers Portfolio managers must not accept fees, commissions, or other monetary or non-monetary benefits paid or provided by a third party, in relation to the provision of services to clients Key exception: minor non-monetary benefits capable of enhancing quality of service of a scale and nature so as not to impair compliance with firm s duty to act in best interests of client subject to a disclosure obligation Since Level 1 Directive published in 2014, ongoing uncertainty and debate about how these rules apply to receipt of research by asset manager 8 / B_LIVE_EMEA1: v1

10 L2 Directive important clarifications on research Confirms that receipt of research by IM = inducement (non-monetary benefit) Research not an inducement (and, therefore, permitted to be received by IM) if paid for: directly by IM out of its own resources; or from a separate research payment account (RPA) controlled by the IM and funded by the IM s client(s), provided various conditions met (see below) Impact on managers which receive free / bundled research? One piece of good news: L2 Directive allows amounts to fund RPA to be collected using transaction-based research charge So it will be possible to retain a model similar to CSA model, at least within equities space Impact on fixed income markets? Sell-side firms: must separately identify research costs from execution costs 9 / B_LIVE_EMEA1: v1

11 What types of research are caught by these rules? Research in scope: relates to one or more financial instruments / issuers (or industry / market research which informs views on instruments or issuers in that sector); and either: a) explicitly or implicitly recommends an investment strategy and provides a substantiated opinion as to the value or price of such instruments; or b) otherwise contains analysis, original insights and conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value Excluded: written material from a third party, that is commissioned and paid for by a corporate issuer to promote a new issuance; and short term market commentary (or information on upcoming releases or events) containing a brief summary of the author s opinion, that is not substantiated and does not include any substantive analysis 10 / B_LIVE_EMEA1: v1

12 Requirements for use of RPAs RPA conditions: 1) the RPA must be funded by a specific research charge to the client 2) the manager must set and regularly assess a research budget as an internal measure 3) the manager will be held responsible for the RPA 4) the manager must regularly assess the quality of the research purchased, based on robust quality criteria and its ability to contribute to better investment decisions Disclosure requirements: initial, ongoing, and ad-hoc on request Express agreement with the client How does this interact with existing CSA model? 11 / B_LIVE_EMEA1: v1

13 UK FCA implementation (CP3) Deleting current COBS 11.6 (as no longer a regime based around dealing commission / soft dollars) Largely a copy-out (for MiFID investment firms) Confirmation that research charges can be collected alongside trades Research budgets permitted to be agreed across multiple clients FCA permits use of single RPA for all clients (indeed encourages it) FCA suggests operational changes needed to retain use of CSAs 12 / B_LIVE_EMEA1: v1

14 UK FCA implementation (CP3) gold plating FCA proposes to extend the MiFID2 rules on receipt of research to: AIFMs UCITS ManCos whether or not they have article 6 top-up permission 13 / B_LIVE_EMEA1: v1

Receipt of inducements decision tree, post-mifid 2 Inducement*? Inducement? No* Allowed Yes Independent Investment Advice?

No Yes (a) Designed to enhance quality of services to clients (11(2) Level 2 Directive) (b) Does not impair compliance with the

to the client of the existence, nature and amount of the fee, commission, benefit or method of calculation (24(9) MiFID2)?

15 Receipt of inducements decision tree, post-mifid 2 Inducement*? Inducement? No* Allowed Yes Independent Investment Advice? No Yes Yes Minor Non- Monetary Benefit? (12(3) Level 2 Directive) No Not Allowed (24(7)(b) & 24(8) MiFID2) Portfolio Management? No Yes (a) Designed to enhance quality of services to clients (11(2) Level 2 Directive) (b) Does not impair compliance with the investment firm s duty to act honestly, fairly and professionally in accordance with the best interest of its clients and (c) Disclosure to the client of the existence, nature and amount of the fee, commission, benefit or method of calculation (24(9) MiFID2)? Yes Allowed No Not Allowed * Inducements would not include research paid for out of the firm s own resources or via an RPA meeting the requirements of MiFID2. 14 / B_LIVE_EMEA1: v1

16 Part 3 L2 Regulation: finalised conduct and organisational rules 15 / B_LIVE_EMEA1: v1

17 L2 Regulation - overview Published April 2016 Sets out core conduct and organisational rules under MiFID2 Effectively replaces implementing directive under MiFID1 that directive similarly set out core conduct and organisational rules in the UK: mostly implemented in COBS and SYSC As a regulation, L2 Regulation is directly applicable in EU member states no national implementation required however, FCA proposes to copy a lot of L2 Regulation into FCA Rules 16 / B_LIVE_EMEA1: v1

18 L2 Regulation familiar rules continuing in force Much of L2 Regulation re-states familiar rules: high level organisational rules requirement to have a compliance function and compliance policies the obligations of senior management personal account dealing rules conflicts of interest rules, including the rules on identification of conflicts and the content of a conflicts policy notifying clients of client classification status risk warnings suitability and appropriateness rules But there are some pitfalls to watch out for. 17 / B_LIVE_EMEA1: v1

19 Form and content of marketing communications Current retail form and content rules will be extended to professional client communications too balance and prominence of information presentation of risks fair comparisons past, simulated past, and simulated future performance information Significant extension beyond existing fair, clear and not misleading standard Impact on past and current marketing documents and processes 18 / B_LIVE_EMEA1: v1

20 Telephone taping further details Level 1 Directive sets out obligation to keep records, including electronic communications and to record certain telephone lines L2 Regulation clarifies some of the details around phone taping: firms must ensure quality, accuracy and completeness of records records stored in durable medium which is readily accessible recording extended to internal calls monitoring requirement: risk based and proportionate record of employees permitted to use a privately owned device training In the UK: FCA s exemption for investment managers will not continue FCA proposes in CP3 to gold-plate these requirements onto AIFMs and UCITS ManCos (with or without top-up permissions) 19 / B_LIVE_EMEA1: v1

21 Outsourcing portfolio management to third countries Current retail rules on outsourcing portfolio management to third country managers will be extended to professional client mandates too In addition to standard MiFID outsourcing rules: Sub-IM must be authorised in its home country Sub-IM must be effectively supervised by its competent authority IM s and Sub-IM s competent authorities must enter into cooperation agreement dealing with information sharing and enforcement Practical impact: UK and other EU firms which delegate to third countries 20 / B_LIVE_EMEA1: v1

22 Information disclosures Initial disclosures: extension of current retail initial disclosure rules to professional client business disclosures about the firm, its services, and prescriptive disclosures around costs and charges in practice, firms will likely satisfy this by way of new annex to IMA Ongoing disclosures: periodic statement from portfolio manager to clients much more granular rules on content of statement increased reporting frequency: Quarterly reports as default Monthly reports for a leveraged portfolio can be provided via shared access to online valuation system 21 / B_LIVE_EMEA1: v1

23 Other key changes under L2 Regulation Best execution policy summary detail to be provided to clients Information about scope of independent investment advice Compliance monitoring Complaints handling Underwriting, placing and corporate finance activities 22 / B_LIVE_EMEA1: v1

24 Part 4 Impact on AIFMs and UCITS Management Companies 23 / B_LIVE_EMEA1: v1

25 Authorisation structures for EU asset managers Alternative Investment Fund Managers Directive (AIFMD): applies to EUbased alternative investment fund manager (AIFM) of an alternative investment fund (AIF), such as a hedge fund manager or private equity fund manager Undertakings for Collective Investments in Transferable Securities Directive (UCITS): applies to management company (ManCo) of a UCITS fund (regulated EU investment funds, which are intended to be suitable for distribution to the public). Can also be authorised as AIFM (SuperManCo) MiFID: applies to firms which provide portfolio management services to their clients, including firms which act as the sub-investment manager to another firm which is an AIFM or UCITS ManCo MiFID2 and MiFIR generally only apply to MiFID investment firms, not to AIFMs and ManCos some specific limited sections of MiFID2 apply to AIFMs and ManCos with extended permissions 24 / B_LIVE_EMEA1: v1

26 Extended permissions for AIFMs and ManCos Both AIFMD and UCITS Directive permit AIFMs / ManCos to perform additional extended ( top-up ) services, beyond fund management These are MiFID-style services, including portfolio management and investment advice, but the firm is not authorised under MiFID Both AIFMD and UCITS cross-refer to specific provisions of MiFID1 which apply to an AIFM / ManCo with top-up permissions primarily relating to organisational and conduct matters list of MiFID1 references updated to equivalent parts of MiFID2 some ambiguity about certain of the cross-references (see below) Other than this list, none of the rest of MiFID2 / MiFIR is applicable Possibility of national gold plating? 25 / B_LIVE_EMEA1: v1

27 How do the directives apply under EU law? Type of firm Does MiFID2 apply? Does MiFIR apply? Does AIFMD apply? Does UCITS apply? MiFID investment firm AIFM AIFM (with top-up) ( ) UCITS ManCo UCITS ManCo (with top-up) ( ) SuperManCo SuperManCo (with top-up) ( ) 26 / B_LIVE_EMEA1: v1

28 How does MiFID2 apply to an AIFM? (Part 1) MiFID2 requirement AIFM (no topup)? [EU] AIFM (with top-up)? [EU] 1 General organisational rules (MiFID1 carry overs) 2 Algo trading * UK goldplating? No No 3 Product governance * No 4 Information security No 5 Independent investment advice 6 Telephone taping and retention of e-comms * No Yes all AIFMs in scope * The application to AIFMs with top-ups is potentially ambiguous under MiFID2. 27 / B_LIVE_EMEA1: v1

29 How does MiFID2 apply to an AIFM? (Part 2) MiFID2 requirement AIFM (no topup)? [EU] AIFM (with top-up)? [EU] UK goldplating? 7 Transaction record keeping No 8 Transaction reporting No 9 Post-trade transparency No 10 Inducements and receipt of research * 11 Best execution 12 Transparency of Top 5 trading venues Yes all AIFMs in scope No Yes all AIFMs in scope 28 / B_LIVE_EMEA1: v1

30 How does MiFID2 apply to an AIFM? (Part 3) MiFID2 requirement 13 Remuneration AIFM (no topup)? [EU] AIFM (with top-up)? [EU] * UK goldplating? No 14 INDIRECT: Direct electronic access ( ) ( ) 15 INDIRECT: Dark pools / double-volume cap ( ) ( ) 16 INDIRECT: Sell-side offering placings ( ) ( ) 17 INDIRECT: Transparency in non-equity markets ( ) ( ) N/A N/A N/A N/A Does this open-up the possibility for regulatory arbitrage? 29 / B_LIVE_EMEA1: v1

31 Questions Happy to discuss any questions 30 / B_LIVE_EMEA1: v1

Simmons & Simmons MiFID2 Manager The essential tool to stay on top of MiFID2 reform A practical tool that helps all firms directly or indirectly affected by MiFID2 understand the core provisions,

32 Simmons & Simmons MiFID2 Manager The essential tool to stay on top of MiFID2 reform A practical tool that helps all firms directly or indirectly affected by MiFID2 understand the core provisions, identify the relevant requirements and track the status of implementation on an EU and national level. Updated monthly with 24/7 access via Simmons & Simmons elexica For more information visit our Online Services Hub today or us to arrange demonstration at mifid2manager@simmons-simmons.com Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 31 / B_LIVE_EMEA1: v1

33 Contact details Nick Colston Partner Financial Services T E nick.colston@simmons-simmons.com Darren Fox Partner Financial Services T E darren.fox@simmons-simmons.com 32 / B_LIVE_EMEA1: v1

34 33 / B_LIVE_EMEA1: v1

35 simmons-simmons.com elexica.com This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. 34 / B_LIVE_EMEA1: v1

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