On May 8, 2014 the UK’s financial regulator, the FCA published its decision confirming that investment managers can no longer use commissions to pay brokers for corporate access. These changes will take effect on June 2, 2014.

The final rules are in the document below – go to page 14 for the specific discussion on Corporate Access:

The 2013 Thomson Reuters Extel survey shows that 25% of client commissions were used to reward brokers for corporate access, down from 27% in 2012. Among UK-based managers, the fall has been slightly larger, from 27% to 21% as a result of the FSA’s clampdown.

With an overall commission pot of $5 billion this suggests that $1.25 billion is being paid for Corporate Access. The FT notes that some hedge funds are paying brokers $20,000 an hour to meet CEOs.

Steve Kelly, MD of Thomson Reuters Extel, was quoted in the FT on June 9, saying the figures exposed a “’fundamental contradiction’, in that use of client commissions to pay for corporate access was now outlawed, but it remained a service many asset managers valued highly.”

The FT reported that “Mr. Kelly was adamant that asset managers were not simply flouting the edicts of the FSA and the Financial Conduct Authority, its successor body. It has been visibly clear to me that the buy-side has been reacting to what the FCA has said. They are definitely not ignoring it.”

Daniel Godfrey, chief executive of the UK Investment Management Association was quoted in the same article saying that the industry had reacted “very strongly” to the regulatory clampdown and that asset managers were not breaking the rules. “My bet is that client money is not being used to pay for corporate access in ways that are outside the definition of research. If it is straight corporate access, firms are paying for it out of their own pockets,” he said, a practice that is allowed.

Asset managers are able to use investors’ money to pay sell-side brokers for research, and Mr. Godfrey argued payments for corporate access were still permissible if they were “part of a process or part of a product that can clearly be defined as research”. Mr. Godfrey said the IMA had set up a working party to examine how research should be paid for.

However, Alan Miller, chief investment officer of SCM Private, the London-based investment manager, and a campaigner for more transparent fees is quoted as saying: “There is evidence that, following the FCA review, some companies have simply relabelled these payments as research to get around the rules.”

The FSA, the UK’s equivalent of the SEC, wants to stop asset managers from using commissions to compensate brokerage firms for scheduling meetings with corporate management. Below are links to recent articles highlighting this news, including in the FT, IR Magazine and other UK media.

This debate started in November when the FSA wrote to all asset management firms about conflicts of interest and stated that commissions should only be paid for execution or research and not for corporate access. The result is that the sell-side can no longer be paid by commissions for corporate access, thus threatening their “cash for access” business model. Although it is still too early to tell how this debate will play out, some institutions have already stated they will not pay brokers for corporate access. Others are questioning whether compensated access is fair as some investors end up being excluded.

Phoenix-IR’s position is very clear. As an independent provider of corporate access, free from conflicts of interest, we are not directly affected by this regulatory debate. Quite the contrary, our Reg FD friendly approach means we are able to offer issuers unencumbered access to 100% of the European investor marketplace and investors are able to benefit from this open and fair access, free of charge.

Given the huge sums of money involved in corporate access, it’s not surprising that many interested parties, including the Investment Management Association, have weighed into the debate. We will keep you posted as it evolves.

FSA shakes up corporate access – IR Magazine March 11

http://www.insideinvestorrelations.com/articles/corporate-access/19368/fsa-shakes-corporate-access-industry/

Crackdown on cash for access begins – FT March 10

http://www.ft.com/intl/cms/s/0/4ec20e16-87f5-11e2-8e3c-00144feabdc0.html#axzz2NWNYeH10

Fund managers silent over cash for access – FT March 10

http://www.ft.com/intl/cms/s/0/6095c6f8-8743-11e2-9dd7-00144feabdc0.html#axzz2NWNYeH10

UK regulator to crack down on corporate access payments – IR Magazine March 5

http://www.insideinvestorrelations.com/articles/corporate-access/19352/uk-regulator-crack-down-corporate-access-payments/

Pimp my chief executive – BBC March 5th

http://www.bbc.co.uk/news/business-21668378

FSA to crack down on cash for CEO access – Telegraph March 5

http://www.telegraph.co.uk/finance/financial-crime/9908982/FSA-to-crack-down-on-cash-for-CEO-access.html

Hedge funds pay $20,000 in ‘cash’ for CEO access – IR Magazine March 4

http://www.insideinvestorrelations.com/articles/corporate-access/19351/hedge-funds-pay-20000-cash-ceo-access/

Fund managers under FSA spotlight over corporate access fees – Guardian March 4

http://www.guardian.co.uk/business/2013/mar/04/investment-banks-fsa-scrutiny-corportae-access?INTCMP=SRCH

FSA crackdown on cash for CEO access – FT March 4

http://www.ft.com/intl/cms/s/0/084a4bdc-84db-11e2-891d-00144feabdc0.html#axzz2NWNYeH10

Cash for access – Financial regulator should tighten rules on commissions – FT March 4

http://www.ft.com/intl/cms/s/0/ffbf67ce-84c4-11e2-891d-00144feabdc0.html#axzz2NWNYeH10

Why CEO shock at ‘cash for access’ is overstated

http://blogs.ft.com/businessblog/2013/03/why-ceo-shock-at-cash-for-access-is-overstated/

Fears rise over cash for access – FT March 3

http://www.ft.com/intl/cms/s/0/afa48800-81bd-11e2-ae78-00144feabdc0.html#axzz2NWNYeH10

Guy Sears, IMA Director, Institutional, talks to the FT about what the IMA are doing to address conflicts of interest in fund management – FT February 25

http://video.ft.com/v/2187405863001/Confusion-over-dealing-commissions