‘Hard Dollar’ Mandate Could Stifle Research

Terry Flanagan

Regulations requiring that investment research be paid for in so-called hard dollars could stifle the research industry and potentially sideline smaller asset managers.

“One of the things that we fear is that in an environment where regulation is too burdensome and the rules of engagement change so dramatically, that it will limit the amount of research that is available in the marketplace,” Tom Conigliaro, managing director of investment services at Markit, said during a March 31 webinar. “It will exacerbate a trend that we’ve seen on the buy side toward ‘in-sourcing’ of research. In that kind of environment, usually the largest managers with the most resources and assets under management will be in the best position to in-source the top talent that is available out in the marketplace.”

This would disadvantage smaller managers who don’t have the same capability to hire the best and the brightest, and to build an internal research team. “You can clearly see how it would create a potential lopsided environment on the buy side, benefiting the largest managers.”

The issue is especially in acute in Europe, where the European Securities and Markets Authority has proposed that firms providing execution services will need to charge for execution costs, research and any other good or service through separately identifiable charges.

While Esma’s proposals do not explicitly prohibit commission sharing arrangements, the U.K. Financial Conduct Authority in February issued a statement that current CSA approaches are incompatible with the intention of Esma’s proposals that there should be no link between execution and research payments.

”We have to try and go back to what are the overarching principles that the regulators and the policymakers are trying to achieve,” said Michael Parslow, head of EMEA commission management at Credit Suisse, during the webinar. “Obviously, it is de-coupling of the research decision from the execution portion.”

CSAs provide the mechanism to accomplish this goal, said Parslow. Over the last nine months of 2014, Credit Suisse’s CSA program paid over 400 research providers, he said. “There’s effectively a healthy market for research.”

A hard-dollar research market would decrease the availability of research used in the investment management process, including both proprietary, bundled, sell-side research as well as research from numerous independent sources, according to a comment letter by Westminster Research Associates, a broker-dealer specializing in the administration of CSAs.

Noted Conigliaro, “You could see smaller advisers potentially being crowded out in terms of accessing that research, because in a supply-demand sense, the price of that research could be hard for them to justify compared to their larger competitors.”

From the sell-side perspective, dealers would need to re-direct research resources to those clients that pay. “If we have clients in other international cities that are paying for that research, we may well find a head of research not directing resource to European asset managers if there’s a severe contraction,” Parslow said. “That has to be, potentially, one of the unintended consequences.”

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