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:
Source: FCA
* Public data ex U.S. is incomplete because of poor disclosure, therefore underestimating foreign ownership
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.”
Swiss Private Banking has assets under management of SFr 5.3 trillion ($5.5 tn), half of which is on behalf of off-shore customers.
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
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
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
Hedge funds pay $20,000 in ‘cash’ for CEO access – IR Magazine March 4
Fund managers under FSA spotlight over corporate access fees – Guardian March 4
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
A pan-European survey conducted by Phoenix-IR confirms that while institutional investors value highly the provision of corporate access, they are also critical of the process because of the inherent conflicts of interest. These distort the market for access to companies. Not all investors are treated fairly – some get good access to issuers and some don’t.
Access to the management of publicly listed companies clearly favours the largest most powerful institutional investors and the most active short-term traders who are the generators of the biggest trading commissions. Medium and smaller sized institutional investors suffer, as do longer-term investors such as pension funds which do not frequently turn their portfolios.
Summary findings
This survey shows that, on average, each investor uses only 9 brokers to provide corporate access. A very low number compared to >100 brokers providing corporate access and the number of meetings taking place each day of the week.
The other key findings of this survey of professional money managers reveal that:
This pan-European survey was undertaken over a 10 day period from 15-25 February, 2013 and responses were received from 120 portfolio managers in: London (47 portfolio managers), Edinburgh (6), Zurich (11), Geneva (10), Paris (9), Frankfurt (8), Copenhagen (7), Brussels (5), Vienna (4), Amsterdam (4), Stockholm (4), Dublin (3), Milan (1) and Madrid (1). The total assets managed by these institutions ranges from approximately $150 million up to $500 billion with an average around $45 billion.
Background context
Following the November 2012 publication of the FSA’s “Dear CEO letter”: Conflicts of interest between asset managers and their customers: Identifying and mitigating the risks; the investor relations consultancy Phoenix-IR surveyed institutional asset managers to gain a better understanding of their views towards corporate access.
As defined by the FSA; access to company management (sometimes also referred to as ‘corporate access’) means, in this context, the practice of third parties (typically investment banks) arranging for asset managers to meet with the senior management of corporations in which the asset manager invests, or might subsequently invest, on behalf of customers.
Many large cap corporations undertake around 200 such meetings per year.
According to the Thomson Reuters Extel Survey 2012, the proportion of dealing commissions used to pay for corporate access increased to 29% in 2012, compared with 27% in 2011 and 21% in 2010.
Corporate access is now the largest component of services provided by the sell-side, overtaking trading and execution (28%) and research (26%) for the first time.
Greenwich Associates estimates that investors give $1.4 billion annually to their brokers to arrange for corporate access. Investors often pay brokers directly or indirectly $5,000-$10,000 per meeting, depending on the level of management being accessed. But a one-on-one with a marquee CEO could be worth as much as $20,000.
Detailed findings
120 portfolio managers responded to this survey answering the following questions:
Q. How important is corporate access to you?
68% of the investors in this sample described corporate access as very important and only 7% described it as slightly important or not important. The vast majority of corporate access is provided by investment banks through non-deal roadshows or conferences. Less than 20% of corporate access is provided by other non-broking 3rd parties.
Q. How do you pay for corporate access?
71% of respondents report paying for corporate access indirectly through bundled dealing commissions while only 29% pay through unbundled CSAs.
Q. Who should pay for corporate access?
When brokers provide access, companies don’t pay; the investor does. And investors are prepared to pay large sums for access because in today’s highly regulated markets they feel meeting company management directly is one of the most important ways to gain an advantage in selecting stocks.
However, 56% of portfolio managers responding to this survey actually believe listed companies should pay for corporate access “because it is part of the cost of capital”.
Q. Do investors feel they pay too much for corporate access?
Even though most investors in this sample believe companies should pay the bill, one indication of how much value they place on corporate access is that only 14% believe they are paying too much at the moment.
Corporate access has become the single most important part of many investors’ investment process.
Q. Does the sell-side have a conflict of interest providing corporate access?
55% of investors feel the sell-side has a conflict of interest when providing access.
Q. Have you been discriminated against in the provision of corporate access?
57% of investors do not believe they have been discriminated against in the provision of corporate access. However, 43% feel they have been discriminated against in some way and they cite the broker’s conflict of interest as the main reason.
For example:
“Brokers always go to their highest paying clients first. I have seen this from both the positive and negative sides.”
Pension fund manager, London
“Brokers favour high frequency traders vs. fundamental investors.”
Long-term investor, London
“Brokers run tiered categories of customer. ‘Level one’ clients routinely get better access to corporates.”
Large investment management firm, London
“Funds with large AUM or good relationships with the broker are given access. Even though we may be large/significant shareholders, if we do not have a relationship with the broker, we have no way of getting access on roadshows.”
Pension fund manager, London
“Whilst our AuM is a reasonable size (c.$9bn) our turnover is low and hence we are not that attractive a client for brokers in terms of commissions. It seems that high commission clients get preferential access, in our view.”
Investment management firm, London
“Brokers give priority to larger fee generating clients.”
Investment management firm, London
“Based on your value to the broker, you may or not get a seat around the table.”
Hedge fund manager, London
“Discrimination is a function of size. Brokers give better access to largest clients.”
Investment management firm, Geneva
“After continual rude demands for increased commission from one multinational brokerage firm we stopped dealing with them after they threatened to cut us off from corporate access. We still tend to see the companies they bring around however generally only get last minute invites and only to group meetings.”
Investment management firm, Edinburgh
“The major conflict of interest for the sell-side is that their main direct financial incentive is to organize meetings with investors that generate a lot of commissions, i.e. short-term oriented investors with short holding periods, rather than long-term oriented investors that don’t trade a lot but could become long-term shareholders in companies.”
Long-term sustainability investor, London
“Corporate access is best provided by independent 3rd parties. The broker involvement muddies the waters and creates conflicts of interest and bias. The system of broker-driven access is flawed from many angles.”
Pension Fund Manager, London
“Companies need to make an effort to communicate with all interested parties and not only the larger holders of shares.”
Specialist investment manager, Edinburgh
“Companies should be more aggressive with investment banks when poorly informed hedge fund investors are given meetings in preference to well informed longer term investors.”
Leading investment management firm, London
“I am always surprised – but effectively positively – if a company uses an external corporation to get in contact with us as investors as it seems to be more independent.”
Investment Management firm, Frankfurt
The Investment Management Association (IMA) has published a paper Recommendations on Corporate Access and is asking for public comment by 26 February 2013 on the use of dealing commission to pay for corporate access.
The paper records the IMA’s commitment to consider wider aspects of the corporate access and research market. The IMA has said it intends to undertake a wider investigation of the “barriers to engagement that may exist between investors and investee companies”.
