Q&A on Unbundling for US Asset Managers
What’s been most interesting about the North American research market’s response to MiFID II?
From a Red Deer perspective, we have already started to see clients looking to make changes to their global processes as a result of their learnings 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 from several large US asset managers to harmonize the rules with the European Union (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 SIFMA (The Securities Industry and Financial Markets Association) expressing the need for broker dealers to be able to charge separately for research with exemption from the Advisers Act. This shows a willingness from an industry body to promote transparency within the research consumption process.
How will it develop 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 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 least 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 of 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 the 3rd July 2020 has much to think about and we welcome any opportunity to share our learnings and solutions to this possible issue, in the same way, that we have been assisting our clients with a US presence in the last 12 months.
What is the most important decision that US asset managers need to make now?
An assessment of the potential cost and operational impact should begin today, working in unison with your research management provider, especially drawing on their experience from across both sides of the Atlantic. Winning mandates from institutional investors could hinge upon giving an informed response to this potentially significant change. Managers who 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. A first mover advantage exists for US managers able to learn from and implement based on the European experience.
Does Red Deer's offering align with both the current American and European market structure, and has it adapted in order to do so?
Yes. Red Deer’s Research Management solution allows firms to tailor the solution to their own unique front, middle and back-office workflows globally, and combine where appropriate. It allows firms to track, value and understand interactions in-house, adopt a single and consistent voting process, manage and forecast research costs at the appropriate level, and to streamline research management across the firm while maximizing investors’ value from research.