Receipt of Equity Research under MiFID II
We believe that all research produced by Baden Hill as a trading name of Northland Capital Partners Limited falls within the exemptions set out in the MiFID II and FCA rules.
The two important exemptions that we are relying on are that the new rules requiring payment for research do not apply to (i) research commissioned or paid for by a corporate client and (ii) research which may otherwise be considered as “short term market commentary”.
In summary, we are of the firm view that all our research falls into one or both of the above exemptions. The vast majority of research produced by NCPL relates to research which has been commissioned and paid for by corporate clients. The remainder is of a sufficiently small scale and character as to be an acceptable non- monetary benefit. Therefore, we believe that persons subject to the MiFID II and FCA rules regarding inducements may continue to receive all of our research without charge.
In this connection, we would point out that NCPL does not offer any secondary execution service. Our research has always been and continues to be produced to support our corporate broking business. It has never been an attempt to win secondary trading business and, we would argue, could not therefore present any kind of inducement.
A more detailed analysis is given below. We hope you will find it to be of assistance.
In the event you do not agree with our analysis (whether out of interpretation or caution) we can of course continue to provide some or all of our research and commentary, plus access to analysts, for payment.
The nature of NCPL research
NCPL’s approach has always been different in that the production and distribution of our research is undertaken as a service for those companies by whom we are retained as corporate broker and for general marketing and promoting of the NCPL and Baden Hill names. We do not have a meaningful secondary market business and do not generally seek to encourage fund managers to deal through us.
Acceptable non-monetary benefit
There are exceptions and guidance within the inducement rules which means that affected recipients can continue to receive research and similar written material without payment in certain circumstances.
In our case, this means the ‘acceptable non-monetary benefit’ provisions of MiFID II and FCA’s rules (in particular, COBS 2.3A.19).
Under COBS 2.3A.19 for any benefit to qualify as an acceptable non-monetary benefit it must first satisfy the following four conditions.
It must be clearly disclosed prior to the provision the relevant service to theclient.
This is something you, as recipient, would need to do as regards your clients.
It must be capable of enhancing the quality of service provided to theclient.
This is clearly a matter of opinion and for you to decide although we believe our research will be useful to anyone interested in the sectors we cover.
It must be of a scale and nature that it could not be judged to impair the firm’s compliance with its duty to act honestly, fairly and professionally in the best interests of theclient.
It must be reasonable, proportionate and of a scale that is unlikely to influence the firm’s behaviour in any way that is detrimental to the interests of the relevantclient.
After satisfying these four conditions the benefit must then be one of a number of types given by the rule. In our case, these are 2.3A.19(5) (a) and (b). Taking (b) first:
This (rather unclear) description is clarified by Recital 29 of the MiFID Delegated Directive1 which states that:
‘In addition, non-substantive material or services consisting of short term market commentary on the latest economic statistics or company results for example or information on upcoming releases or events, which is provided by a third party and contains only a brief summary of its own opinion on such information that is not substantiated nor includes any substantive analysis such as where they simply reiterate a view based on an existing recommendation or substantive research material or services, can be deemed to be information relating to a financial instrument or investment service of a scale and nature such so that it constitutes an acceptable minor non-monetary benefit.’
The MiFID II research restrictions are, we believe, directed at banks and brokers with significant secondary market businesses and the fund managers with whom they transact. Where there is no real secondary or other business that client commissions or fees could be improperly directed to in order to covertly pay for research there is little or no scope for an improper inducement to be given or received.
1 Commission Delegated Directive of 07.04.16 – C(2016) 2031 – supplementing MiFID II
2 Regarding placings and IPOs we would note that FCA considers that research produced by analysts connected to the offering may be regarded in the same way as research commissioned by the issuer and thus within the exemption (see, for example, PS 17/14).