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European financial regulation usually strikes fear into US asset managers. Twelve months after the implementation of MiFID II, however, some US managers are voluntarily signing up for transparency rules that do not apply to them. The second Markets in Financial Instruments Directive came into effect last year. It requires European asset managers to separate the cost of research from trading commissions paid to brokers, a process known as unbundling. The rules were designed to prevent brokers giving investment managers an inducement to trade and also to provide transparency over the use of clients’ money. Virtually all European asset managers have opted to cover the cost of their own external research. The rules do not apply in other jurisdictions, so most international companies have limited the policy to Europe. This could be about to change, as shown by the recent decision of Capital Group, the $1.87tn US manager, to absorb the cost of third-party investment research across its global business. Although Capital is one of only a handful of asset managers to declare they will sign up to MiFID II worldwide, it is among the largest managers to do so. The move will pile pressure on rivals to follow suit.
The lack of a regulatory imperative for unbundling outside of the EU is another reason for fund groups to drag their feet. Indeed, US regulations make unbundling difficult, as local brokers cannot accept separate research payments unless they register as an investment adviser. Asset managers have found ways to navigate these restrictions, such as by continuing to pay bundled commissions but reimbursing research costs to clients. Lobby groups such as the Council of Institutional Investors, which represents 120 US asset owners that manage a total of $3tn of assets, are urging US regulators to make it easier for fund groups to make “hard dollar” payments for research.
Full article in Financial Times (subscription required)