Category Archives: Corporate Access / MiFID II / FCA

Corporate Access Conflicts of Interest Survey

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:

  • 71% pay for corporate access indirectly through bundled dealing commissions
  • 56% want listed companies to pay for corporate access rather than investors
  • 43% believe they have been discriminated against in the provision of access
  • 55% feel the sell-side has a conflict of interest when providing access

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

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Conflicts of Interest – Corporate Access

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”.

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IMA reignites debate over bundled commissions

Source: Financial News, 14 Feb 2013

The Investment Management Association wants to look at the way the costs of corporate access, research and trading are bundled together by brokers – bringing the issue of corporate access into the unbundling debate for the first time.

The IMA, the UK trade body for asset managers, issued a statement this week in which it said it wants to investigate the way brokers charge asset managers for access to their corporate clients, and research, through commission payments bundled up with trading costs.

The statement is its official response to a letter that the Financial Services Authority wrote to the chief executives of asset management companies in November. The FSA letter said there was a potential conflict of interest within so-called “bundled commissions”. It called on fund managers to confirm that the commissions were not being used to pay for access to companies.

The debate follows one that took place 10 years ago over the way brokers provided computers and other services to asset managers through soft commissions paid by the clients of managers. The FSA took steps to restrict the acceptance of soft commissions, but left in place commission payments for research and corporate access.

In its latest letter to asset management chief executives, the FSA said: “We found few governing bodies regularly reviewed whether the products and services purchased using client commissions were eligible to be paid for with customers funds.”

The FSA added that firms were failing to organise commission payments properly. It pointed to a range of issues that need addressing. It called on the chief executives to confirm in writing by the end of this month that they are not vulnerable to conflicts of interest over commissions, and other issues.

IMA director Guy Sears said he wanted to see greater accuracy over the way access to company executives is charged.

Referring to the debate on the acceptance of soft commissions, Sears said: “It is 10 years since we had the last analysis of bundled commissions by the FSA. I believe the time for new scrutiny has arrived.”

According to an IMA statement: “The IMA intends to embark on a wider programme of work during 2013 to consider the barriers to engagement that may exist between investors and investee companies and the challenges faced by asset managers in getting bundled services and research.”

The FSA has highlighted the way in which company brokers arrange visits for investors to their clients. It said that 29% of access is paid via dealing commissions.

In its response, the IMA disputed this 29% figure: “The figure is not supported by information from members with which the IMA has spoken, appearing very large compared to the experience of these members,” it said.

In its statement, the IMA said investors should not expect to pay when companies are brought round to see them outside periods where deals are taking place. According to one manager: “Payments by companies are more often than not the case.”

The IMA added, however, that managers should pay when they approach a broker for access. In cases where analysts provided research on, say, events at a corporate meeting, payments could quality for research commissions.

The IMA said these would require different invoicing rules with costs to be broken down: “In the absence of this, it must be expected that many managers will feel unable to attribute any dealing commission to interactions with companies.”

Sears said the quality of research should also be broken into appropriate categories, each commanding a different fee: “We need greater transparency and a review of the bundled pricing system.”

 

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Corporate Access – How Important Is It? (TradeTech)

Greenwich Associates estimates that investors give $1.4 billion annually to their brokers to arrange for corporate access. Investors place a premium on the chance to talk to company officers, particularly officers in high-growth companies or industries. Access to corporate officers may mean the inside track on investing information. However, access tends to favor large investors and to stretch the boundaries of Regulation Fair Disclosure.

Corporate access sessions typically take place at investment conferences. Large investors get private meetings or small group meetings with corporate officers thanks to the brokerage firms who organize the conferences. In a survey, 47 percent of investors claimed to receive “material” information during these meetings. A study by professors from the University of Pennsylvania, the University of New York, and the University of Michigan showed that trade sizes increased significantly after these sessions, particularly when the company’s CEO was present. The study also found that over three to 30-day spans, these brokerage firms experienced significantly greater potential trading gains.

Investors tend to think that access provides more value. However, investors aren’t getting access for free. Brokers have traditionally bundled corporate access into execution and proprietary research expenses. Integrity Research Associates chairman Michael Mayhew notes that investors tend to perceive access as part of the research product. Investors pay between $5,000 and $20,000 per meeting in the form of broker commissions. Therefore, access means that investors keep less of their profits.

Concerns arise over the level of influence that access to corporate officers has on investment analysts. Investment analysts, for instance, may be influenced by the level of access that companies provide to their executives. Analysts may also be influenced by whether or not these executives are willing to attend their brokerage’s conference. Also, because a small number of traders realize large benefits from these meetings, smaller investors may lose confidence in market fairness. If investors believe that markets are unfairly biased toward large traders, then they may stop participating altogether.

Corporate officers may also stand to lose from offering access. For companies that are experiencing extreme stock volatility, access meetings may only increase the instability of the shareholder base. However, corporate officers can choose which brokerage company conferences they want to attend. This means that corporate officers are deciding which investors get access to their valuable insights. Many conclude that this directly violates the spirit of fair disclosure.

Source

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IMA offers corporate access guidance ahead of FSA deadline

Source, The Trade, Feb 13, 2013

UK buy-side trade body the Investment Management Association (IMA) has published a paper to guide institutional investors through corporate access rules in response to efforts from the regulator to separate out different broker services

The core issue in using dealing commissions to pay for corporate access is its classification as research, a point the Financial Services Authority (FSA) has sought to clarify through attestation letters. CEOs of UK asset managers must reply to the letter by 28 February stating that their firm abides by the current rules.

Buy-side firms looking to pay for corporate access through dealing commissions or commission sharing agreements (CSAs) risk infringing FSA rules if these services do not include direct broker research.

While the push for a clearer separation of broker services – execution, research and corporate access – is in line with wider efforts to make the financial ecosystem more transparent, smaller buy-side firms risk losing a key service provided by brokers to meet with corporate managers of firms they wish to invest in.

Guy Sears, director of institutional at the IMA, who helped author the paper, has called for wider debate on how corporate access is arranged and priced.

“Corporate access for buy-side firms overseas can reflect sheer commercial size – if you’re a large asset manager an issuing corporate firm will welcome a meeting, but for smaller buy-side firms they need brokers to provide access,” he commented. In the short-term, however, Sears said buy-side firms must ensure they meet the FSA rules.

The IMA paper sets out a number of scenarios whereby corporate access is not classed as research and as such cannot be paid for from dealing commissions.

“There are so many component activities that can fall under the heading of corporate access that buy- and sell-side firms need to unpack the details and look at exactly what is occurring and check it is classed as research according to the FSA rules,” Sears said.

In November, the FSA published a damning report on broker services, claiming only two out of 15 asset managers randomly assessed complied with current FSA rules on conflicts of interest.

 

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Trans-Atlantic interest in broker research model on the rise

Source: myinvestorcircle.com 22 Jan, 2013

Michael Glenister

Interest in broker commission payments spreads to US as critics continue to voice concern about state of the research and corporate access industry

Interest in potential problems with the system for corporate access payments is growing in the Unites States, according to the author of a report on the subject. which triggered widespread interest from national media and the Financial Services Authority (FSA) in the UK last year.

“Interest in the issue of corporate access payments is beginning to surface on the other side of the Atlantic after the topic received significant interest here in 2012,” Vince Heaney told this publication.

Heaney authored Independent Research: because they’re worth it?, a report for the Centre for the Study of Financial Innovation issued last year. Work from the CSFI has recently attracted national interest and added to regulatory pressure on broker research and corporate access payments.

The FSA last year issued a report into conflicts of interest at asset management firms, commenting that numerous managers were failing to adequately control broker commissions paid for with client money.

Those commissions are often seen as payment for a bundle of services, including corporate access to the boards of investee companies.

That practice was criticised by the landmark Myners report released in the UK in 2001, which noted that the bundling allowed managers to pay for a variety of services with client money, without disclosing all the fees they were attracting.

Extel, a Reuters organisation, recently estimated that corporate access payments account for around 25% of commission fees, up from 15% in the last three to four years.

Some commentators have more recently commented on other potential flaws inherent in the existing model for broker research and corporate access.

One example of a criticism voiced to this publication is that the practice of investment bank analysts providing research to clients while also providing that information to proprietary trading desks is widespread.

“Analysts at large firms will release research to clients but are conflicted because they also provide the releases to their own desks, often doing so in advance to allow the bank to get an edge over clients,” commented one source who preferred not to be named.

A handful of large financial institutions were fined by the US SEC (Securities Exchange Commission) in 2012 for forging partnerships which allowed market data and analysis either to be seen by internal trading desks before clients, or offered to specific clients before others in order to give them a competitive advantage.

According to Heaney’s report, research providers at sell-side banks are likely to come under increasing pressure in future years as their revenues are restricted.

His report notes that declining trading volumes in the equities markets are making the business of providing research less appealing to sell-side banks.

Heaney added that change provided an opportunity for independent research providers (IRPs) provided they can demonstrably deliver value. “Sell-side contraction does not imply an easier ride for IRPs,” he said, adding to evidence in his report which indicates that asset managers are increasingly seeking to measure the added value gained from trade ideas which come from IRP advice.

The CSFI survey of asset managers found that almost half (47%) of asset management firms currently pay for independent research, while 87% expect the independent research sector to gain market share next year.

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Brokers “sell” meetings with CEOs and CFOs for $4,500 p/meeting at conferences and $7,500-$10,000 p/meeting on non-deal roadshows

No wonder the sell-side is so aggressive in “selling” corporate access to issuers.  The meetings are worth a lot to them, according to an annual survey by Greenwich Associates, as one-third of U.S. equity research commissions are being used to compensate the sell-side for arranging meetings with corporate management teams.  One third of the market in U.S. equity research commissions, estimated to be worth $12.1 billion, equates to $4 billion for corporate access, in the U.S. alone.

50% of U.S. institutions now use commission sharing arrangements but institutional commission payments continue to fall because trading volumes have dropped and the buy-side continues to shift volume to electronic systems.  Nearly 40% of U.S. equity trading is now executed electronically.  This shrinking market has placed increasing pressure on sell-side profitability.

The annual Greenwich survey estimated that brokerage commissions paid by U.S. institutions on domestic equities fell 13% to an estimated $12.1 billion per annum in the first quarter of 2010.  An estimated 53% of these commissions, or $6.4 billion, was for research, corporate access and sales services not related directly to trade execution.  33% ($4 billion) is spent on corporate access, including 19% ($2.3 billion) for facilitating access to corporate management on non-deal roadshows and 14% ($1.7 billion) for conferences.

According to a post on Inside Investor Relations by Brad Allen, The Wall St Transcript (TWST), which provides software for sell-side firms to manage their corporate access programs under the MeetMax CAM name, estimates that 200,000 one-on-ones take place at conferences annually.  On average, a meeting at a conference is worth an estimated $4,500.  Integrity Research, which researches the equity research industry, reported that TWST also put a range of between $7,500 and $10,000 per meeting on the more difficult to estimate non-deal road shows.

As corporate access has become such an important business for the sell-side, how much does it benefit the companies allocating so much of their valuable executive time?  If they are being taken to meet bona fide long-term shareholders and potential shareholders it is clearly worthwhile.  But if valuable executive time is being spent with the wrong investors, there is clearly a problem.

If a hedge fund is effectively paying “your” broker $10,000 to meet with you, what is their agenda and is it in your interest?  Is your company or one of its peers the real subject of the meeting?

And remember, not all investors are paying the broker the same amount.  So who gets priority?  In most cases it’s the investor who pays the most.  The reality of today’s market is that the sell-side is simply not able to treat each investor impartially.  It has a clear conflict of interest between the needs of its client (the investor) and its steed (the issuer).

Issuers should be concerned that the marketing process lacks appropriate transparency and companies are potential victims.  There are clear conflicts of interest among financial intermediaries and there is abuse.  In our opinion the disclosure of trading conflicts is completely inadequate and companies should demand much more transparency from the sell-side.

For the Greenwich report please click on http://www.greenwich.com/Greenwich0.5/CMA/campaign_messages/campaign_docs/naeif-10-GLG.GR.pdf

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