Despite growing pressure on asset managers to fully unbundle their research and execution payments in Europe, the US market is unlikely to follow their lead, according to Matt Samelson, principal at consultancy Woodbine Associates.
Started by the UK Financial Conduct Authority’s (FCA) November 2013 consultation on the use of dealing commissions, new rules governing how asset managers use client money to pay for services are set to be rolled out across Europe as part of MiFID II.
The FCA has also discussed wider international application of the rules and is looking to engage the International Organization of Security Commissions (IOSCO) to help drive the project.
However, Samelson believes a number of structural issues make it highly unlikely that the Securities and Exchange Commission (SEC) will look to tighten existing US regulation of commission payments.
“One of the biggest barriers to introducing this in the US is contained in section 28e of the 1934 Securities and Exchange Act, which essentially permits the bundling of services,” he explained. “What this means is we would need a change in legislation approved by the House and Senate in order to be able to prevent commissions being used for bundled services.”
Thought not impossible, the political will needed to enable a change in the law is unlikely to be forthcoming.
“Legislators just don’t have the stomach for it,” added Samelson, “Every few years we see someone bring this issue up in Congress, but it never gets very far.”
He notes there is also little demand for unbundling among either the US buy-side or sell-side, both of which already benefit from the provision of bundled services.
In the UK, unbundling has been pushed forward primarily by a need to ensure that investors are adequately protected and that investment funds get the most for their money.
But Samelson said most end-investors in the US are insufficiently aware of the issues to be able to actively campaign for a change in the law.
“The problem is that a lot of investors, both retail in pension trustees, in the US don’t have the technical industry expertise on issues like this and rely on their buy-side firms to tell them what is important. It’s unlikely they will call on them to force through unbundling,” he said.
One of the key reasons the buy-side is reluctant to push for further unbundling is convenience. If research had to be paid for from an asset manager’s own fund, then purchases would require lengthy review and approval processes, whereas the bundled commission model enables the buy-side to access and pay for research as and when it is needed.Though unlikely to take on a fully unbundled model, Samelson said the US took steps to tighten up rules on what could be paid for via commissions with updated guidance on client commission practices published in 2006, meaning asset managers are already restricted to buying high quality research materials via the bundled payment model.