The European Commission issued guidance on 26 October in the form of frequently asked questions to clarify how EU investment firms subject to MiFID II should interact when they seek out brokerage and research services from broker-dealers in non-EU countries.
The Commission is aware of industry concerns related to the application of MiFID II on third country broker-dealers’ provision of research and execution services to European Union (EU) investment firms that provide portfolio management or other investment or ancillary services in the EU (MiFID II Portfolio Managers) and the MiFID II Portfolio Managers’ third country sub-advisors that are contractually obliged to comply with MiFID II (Third Country Sub-Advisors). The Commission understands the need to take into account different approaches to payments for research outside the European Union and to ensure that MiFID II Portfolio Managers and their Third Country Sub-Advisors can continue to access research and execution services from third country broker-dealers. To that end, the Commission has been in discussions with authorities in jurisdictions whose broker-dealers currently provide research and execution services to MiFID II Portfolio Managers and their Third Country SubAdvisors to discuss the potential impact of the MiFID II provisions on regulatory and market structures in those jurisdictions. As a result of these discussions, the Commission has determined that additional clarification in this area would be helpful to assist MiFID II Portfolio Managers and their Third Country Sub-Advisors with implementation of MiFID II in the cross-border context. Accordingly, the Commission sets out its views in the following Frequently Asked Questions. These do not purport to represent an authoritative interpretation of the law and are without prejudice to the view that the Commission may take on the matter in legal proceedings before the European Court of Justice.
Relevant MiFID II rules on investment research and inducements and the operation of the research payment account (“RPA”) According to Article 13, paragraph 1 of the MiFID II Delegated Directive (EU) 2017/593 of 7 April 2016, a MiFID II Portfolio Manager can choose one of two options when procuring research from third country broker-dealers: (a) direct payments by the MiFID II Portfolio Manager out of its own resources, or (b) payments from a separate RPA controlled by the MiFID II Portfolio Manager.
Article 13, paragraph 1(b) of the MiFID II Delegated Directive obliges a MiFID II Portfolio Manager which chooses the option of establishing a RPA to meet a series of conditions governing the operation of this account, notably that the portfolio manager agrees a research charge with its clients. The operation of the RPA prescribed in Article 13,
paragraph 1(b) is incumbent on any MiFID II Portfolio Manager that does not pay for research directly out of its own resources.
In addition, Article 13, paragraph 9 provides, among other things, that research provided to MiFID II Portfolio Managers shall be subject to a separately identifiable charge.
Answers to frequently asked questions
1. Under MiFID II, may a MiFID II Portfolio Manager or its Third Country Sub-Advisor combine: (i) a payment for research; and (ii) a payment for execution services into a single commission to a third country broker-dealer?
Based on the current practice of national competent authorities, a third country brokerdealer may receive combined payments for research and execution as a single commission when providing such services to a MiFID II Portfolio Manager or its Third Country SubAdvisor, as long as the payment attributable to research can be identified. The MiFID II Portfolio Manager or its Third Country Sub-Advisor which operates a RPA is responsible for managing its research budget based on a reasonable assessment of the need for research and subject to appropriate controls, which include maintaining a clear audit trail of payments made to research providers. In addition, the MiFID II Portfolio Manager or its Third Country Sub-Advisor which operates a RPA must be able, at all times and based on its own internal allocation/budgeting process, to identify vis-à-vis its own clients the amount spent on research with a particular third country broker-dealer.
2. Are third country broker-dealers required to identify a separate charge for research in cases where a MiFID II Portfolio Manager or its Third Country Sub-Advisor pays for these services out of: (a) a RPA; or (b) directly out of its own resources?
Based on an interpretation of article 13(9) of MiFID II Delegated Directive, in both cases where research is paid for by means of a RPA or directly out of the MiFID II Portfolio Manager’s or its Third Country Sub-Advisor’s own resources the MiFID II Portfolio
Manager/Third Country Sub-Advisor is responsible for ensuring compliance with the requirements of Article 13. These include the requirement to identify a separate charge for research supplied by third country broker-dealers. In the absence of a separate research
invoice, the MiFID II Portfolio Manager or its Third Country Sub-Advisor may decide, among other things, to consult with third parties, including the third country broker-dealer, with a view to determining the charge attributable to the research provided. The supply of and
charges for those benefits or services shall not be influenced or conditioned by levels of payment for services.
Source: European Commission
This Commission’s FAQ represents the view of the Commission and does not prejudice further decision by the Court of Justice of the European Union. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law.
