(Bloomberg) — Fund managers in theEuropeanUnion must disclose more information about how they pass on the costs of investment research to consumers, as part of an overhaul of investor protection rules.
Clients should be informed about the budgeted amount for research and the amount of the expected research charge, theEuropean SecuritiesandMarkets Authoritysaid in technical guidance provided to theEuropeanCommission recently. A firm may only increase its research budget with the clients written agreement, the Paris-based regulator said.
ESMAs proposed approach would raise standards and reduce conflicts of interest across Europe and ensure that payments for research are clearly distinguished from payments for trading, Daniel Godfrey, head of the Investment Management Association, said in an e-mailed statement.
The 28-nation EUs topmarketsregulator made public more than 1,000 pages of proposed rules that cover everything from high-frequency trading curbs to transparency requirements for bondmarketsand position limits for commodity derivatives, with the aim of boosting confidence in the financial system.
These requirements are aimed at ensuring that investment firms remain accountable to their clients, ESMA said.
Research is included in trading commissions paid to investment banks by fund managers, with the cost passed on to the customer. The U.K.s Financial ConductAuthorityregulator has estimated that broker commissions totaled about 3 billion pounds ($4.7 billion) in 2012, with about half coming from research fees.
Physical Separation
On the research side, what we have tried to do here is to disentangle lets say the trading, the execution of the trading, from the research, ESMA Chair Steven Maijoor said on a conference call with reporters. In many situations, what happens is that the costs of that research is covered from the commission received from the execution of the trades, so that trading is very much connected to the research, he said.
The rules dont go as far as research must be paid for directly from the portfolio manager, Maijoor said. Research can be paid for by the client so long as he or she has a clear understanding of the process, he said.
ESMA also said firms should install a physical separation between analysts who produce investment research and people whose responsibilities or business interests may conflict with consumers of the research.
