FAQs

Q. What is MiFID and MiFIR?

A.

The new regulations are intended to protect and benefit the underlying asset owners by requiring a new level of operational transparency. The actual texts of the two regulations were published in the Official Journal on 12 June 2014 and entered into force on the twentieth day following this publication – i.e. 2 July 2014. Citations in this FAQ (below) refer to these published texts as well as a series of notes and Q&A that have been published subsequently.

Q. What is different in MiFID II from MiFID I?

A.

MiFID II goes much further than MiFID I, requiring investment managers (Buyside), to provide significant operational transparency to the underlying asset owner for mechanics such as transferring fees, commissions and both monetary or non-monetary benefit received in relation to providing investment or related ancillary services. Beyond prohibiting investment managers from accepting and retaining fees, commissions, or any monetary or non-monetary benefits from third parties while in the provision of services to the underlying asset owners, MiFID II introduces a new set of rules specifically relating to the payment of and for research. Firms will primarily need to better understand which services are being used by fund managers, how valuable those services are in terms of investment decision making, who is providing the service and how much is being charged.

Q. Where can you find the rules that are specific to Inducements?

A.

Operational procedures and conditions are in Article 23 and Article 24 of the Directive 2014/65/EU3 MiFID II. Details for inducement rules are found in Article 23(1), Article 24(1), (7), (8) and (9) and in Article 27(2) of Directive 2014/65/EU3 MiFID II. Article 13 focuses on operations (and inducements) in the context of conflicts of interest. Investor protection and the provisions relating to inducements are covered in Article 24 and Article 27. The regulators, the European Securities and Markets Authority (“ESMA”) has also issued multiple Questions and Answers document on MiFID II and MiFIR investor protection topics from December 2016 through to July 2017.

Q. ho does the MiFID II regulations impact and how?

A.

MiFID II makes sweeping changes to the current (previous) inducements regime(s) followed across Europe. The most immediate impact will be felt in Europe, but will shortly have ramifications globally. The MiFID II regulations apply to all investment firms (long only as well as hedge funds), through to the credit institutions engaged in the performance of services or business under the purview of MiFID II.

Q. Are all services across the financial services ecosystem under MiFID?

A.

Under MiFID II it will no longer be possible for investment managers to receive research without payment. Investment managers and their “ecosystem” will still be able to pay or be paid for services which enables, or is necessary for, the provision of investment services. These include regulatory levies, legal and compliance fees, custody costs, settlement and exchange fees, and other services which by their nature would not put any of the investment firms in conflicts of interest with the investment firm’s duties to act honestly, fairly and professionally in accordance with the best interests of its clients.

Q. What does the MiFID II directive mean by research inducements and how is it applied?

A.

The core of the directive is to protect the underlying asset owner through greater operational transparency. The MiFID II requirement for investment managers to demonstrate that what is received, retained and consumed by the firm enhances the overall quality of service to the underlying asset owner (the investment managers’ clients) and is used in accordance with the best interests of the client.

Q. What sorts of content can an investment manager receive without it being an inducement?

A.

Any email content that is “Research” does not constitute an inducement if it is paid for by the investment management firm itself, either out of its own Profit/Loss or out of a research payment account (RPA) funded by a specific research charge to the underlying asset owner. Otherwise, when fully disclosed to the underlying asset owners, certain minor non-monetary benefits can be retained, even if it is unrequested research provided “free of charge”. However, materials deemed to be substantive and valuable, regardless if from a third-country provider not under the purview of MiFID II are not allowed to be consumed without Art. 24 of MiFID II, Art. 12(3) and Art. 13 of the MiFID II, Delegated Directive, updated 16/12/2016.

Q. What is the process for operating an RPA?

A.

Within MiFID II there are very detailed regulatory compliance obligations relating to the operation of an RPA. Art. 24 of MiFID II, Art. 13 of the MiFID II, Delegated Directive, updated 10/10/2016. Many of these obligations state what can be paid for and how. They all require agreeing to a research budget with the underlying asset owner, periodic disclosures to the underlying asset owner as well as review processes and assessments of the purchased research. Budgeting, allocation of the research budget, determination and assessment of payments made from it are covered in Art. 24 of MiFID II, Art. 13 of the MiFID II Delegated Directive as updated 4/4/2017 making disclosures of client research charges are also within Art. 24 of MiFID II, Art. 13 of the MiFID II Delegated Directive updated 4/4/2017.

Q. Specifically what sorts of persons and firms will be impacted?

A.

MiFID II requires that investment firms have policies, procedures and systems in place to assess the nature of any service, benefit or material paid or provided by any third party. It is no longer acceptable for investment firms to receive research for free without an assessment having been made in accordance with the inducements under MiFID II.

Q. How should an investment firm deal with unrequested research that is provided free of charge?

A.

The provision or reception of research by an investment firm is subject to the rules on inducements in Article 24, paragraphs 7, 8 and 9, of MiFID II, depending on the firm’s investment activities.

Firms need to have in place policies and systems to assess the nature of any service, benefit or material paid or provided by any third party to determine whether they can provide or accept it. It is not acceptable for firms to receive research for free where no assessment has been made under the above inducements rules or there is no payment arrangement in place that complies with Article 13 of the MiFID II Delegated Directive.

A firm providing independent investment advice or portfolio management services can only receive research in relation to those activities by complying with Article 13 of the MiFID II Delegated Directive.

Q. What steps should be taken when receiving research?

A.

In relation to services or activities other than those covered under Articles 24(7) and 24(8), a firm providing or receiving research services must assess whether the provision or receipt of the research service meets the quality enhancement test (and the other conditions in Article 24(9)) or decide whether it intends to pay for the research directly or through a separate RPA under Article 13 Delegated Directive.

Where a firm does not want to accept research material, they should take reasonable steps to cease receiving it or avoid benefitting from its content, for example by automatically blocking or filtering certain senders/materials where practicable, and/or requesting a provider to stop providing research, and/or using the compliance function of the firm to monitor, assess and determine whether the material can be accepted before it reaches those parts of the firm that would make use of it.

Where the provider of research is a firm which also provides execution services under MiFID, and is subject to Article 13(9) of the MiFID II Delegated Directive, the provision of unsolicited (or ‘free’) research would not meet the obligation on them to price services separately, and ensure its supply does not potentially influence the execution services they supply. On that basis, firms should have systems and controls in place to enable them to cease providing unsolicited research.

Q. When do the rules come into effect?

A.

Officially the new regulations apply starting January 3, 2018. Because of industry wide “code freezes” in mid-December 2017, technology integration issues as well as the time required to integrate compliance and corporate policies around the technology solutions, firms have begun preparations and undertaking these efforts since early summer 2017.

Q. Where can I find details and technical specifications related to Data Management Requirements under MiFID II?

A.

MiFID and MiFIR have detailed requirements, especially relating to Recordkeeping and the security and encryption of the data related to MiFID II. More information can be found under MiFID II Arts. 16(6), 16(7) of MiFID II, Art. 72 of the MiFID II, Delegated Regulation, updated 10/10/2016.

Q. How does SPi’s Research and Email Classification Service identify and record activity?

A.

Our system is an automated content extraction, normalization, processing and classification of email communications using a front-end scan that parallels email systems off a data feed from clients. The solution extracts the email and attached contents and uses a specific set of statistical determinants built through general subject matter expertise and then refined to a client’s needs to specific compliance policies to compute probabilities the email is (or contains) Research of non-Research content.

Q. With SPi’s Research and Email Classification Service, is my data shared outside my firm?

A.

The data from email is not shared outside the firm unless requested by the client for analytics or for regulatory purposes. Our solution can be deployed in three different ways:

  • On site with the client
  • Through the cloud
  • Through a virtual private cloud or hybrid cloud solution.

If the solution is deployed on site, it will be secured by the IT security of the firm. For cloud-based solutions, it is also secured, but it is only as secure as the cloud solution itself.

Q. Can SPi track email consumption of content?

A.

If clients wish us to track email consumption of content, we can do it either server side or through the integration of a user plugin. Upon request we are also able to do the analytics related to the valuation and the consumption of content. Those analytics can also be displayed in either a dashboard or in the form of reports if commissioned by the client to do so.

Banner Image: 
FAQ Question: 
Questions: 
What is MiFID and MiFIR?
Answer: 

The new regulations are intended to protect and benefit the underlying asset owners by requiring a new level of operational transparency. The actual texts of the two regulations were published in the Official Journal on 12 June 2014 and entered into force on the twentieth day following this publication – i.e. 2 July 2014. Citations in this FAQ (below) refer to these published texts as well as a series of notes and Q&A that have been published subsequently.

Questions: 
What is different in MiFID II from MiFID I?
Answer: 

MiFID II goes much further than MiFID I, requiring investment managers (Buyside), to provide significant operational transparency to the underlying asset owner for mechanics such as transferring fees, commissions and both monetary or non-monetary benefit received in relation to providing investment or related ancillary services. Beyond prohibiting investment managers from accepting and retaining fees, commissions, or any monetary or non-monetary benefits from third parties while in the provision of services to the underlying asset owners, MiFID II introduces a new set of rules specifically relating to the payment of and for research. Firms will primarily need to better understand which services are being used by fund managers, how valuable those services are in terms of investment decision making, who is providing the service and how much is being charged.

Questions: 
Where can you find the rules that are specific to Inducements?
Answer: 

Operational procedures and conditions are in Article 23 and Article 24 of the Directive 2014/65/EU3 MiFID II. Details for inducement rules are found in Article 23(1), Article 24(1), (7), (8) and (9) and in Article 27(2) of Directive 2014/65/EU3 MiFID II. Article 13 focuses on operations (and inducements) in the context of conflicts of interest. Investor protection and the provisions relating to inducements are covered in Article 24 and Article 27. The regulators, the European Securities and Markets Authority (“ESMA”) has also issued multiple Questions and Answers document on MiFID II and MiFIR investor protection topics from December 2016 through to July 2017.

Questions: 
ho does the MiFID II regulations impact and how?
Answer: 

MiFID II makes sweeping changes to the current (previous) inducements regime(s) followed across Europe. The most immediate impact will be felt in Europe, but will shortly have ramifications globally. The MiFID II regulations apply to all investment firms (long only as well as hedge funds), through to the credit institutions engaged in the performance of services or business under the purview of MiFID II.

Questions: 
Are all services across the financial services ecosystem under MiFID?
Answer: 

Under MiFID II it will no longer be possible for investment managers to receive research without payment. Investment managers and their “ecosystem” will still be able to pay or be paid for services which enables, or is necessary for, the provision of investment services. These include regulatory levies, legal and compliance fees, custody costs, settlement and exchange fees, and other services which by their nature would not put any of the investment firms in conflicts of interest with the investment firm’s duties to act honestly, fairly and professionally in accordance with the best interests of its clients.

Questions: 
What does the MiFID II directive mean by research inducements and how is it applied?
Answer: 

The core of the directive is to protect the underlying asset owner through greater operational transparency. The MiFID II requirement for investment managers to demonstrate that what is received, retained and consumed by the firm enhances the overall quality of service to the underlying asset owner (the investment managers’ clients) and is used in accordance with the best interests of the client.

Questions: 
What sorts of content can an investment manager receive without it being an inducement?
Answer: 

Any email content that is “Research” does not constitute an inducement if it is paid for by the investment management firm itself, either out of its own Profit/Loss or out of a research payment account (RPA) funded by a specific research charge to the underlying asset owner. Otherwise, when fully disclosed to the underlying asset owners, certain minor non-monetary benefits can be retained, even if it is unrequested research provided “free of charge”. However, materials deemed to be substantive and valuable, regardless if from a third-country provider not under the purview of MiFID II are not allowed to be consumed without Art. 24 of MiFID II, Art. 12(3) and Art. 13 of the MiFID II, Delegated Directive, updated 16/12/2016.

Questions: 
What is the process for operating an RPA?
Answer: 

Within MiFID II there are very detailed regulatory compliance obligations relating to the operation of an RPA. Art. 24 of MiFID II, Art. 13 of the MiFID II, Delegated Directive, updated 10/10/2016. Many of these obligations state what can be paid for and how. They all require agreeing to a research budget with the underlying asset owner, periodic disclosures to the underlying asset owner as well as review processes and assessments of the purchased research. Budgeting, allocation of the research budget, determination and assessment of payments made from it are covered in Art. 24 of MiFID II, Art. 13 of the MiFID II Delegated Directive as updated 4/4/2017 making disclosures of client research charges are also within Art. 24 of MiFID II, Art. 13 of the MiFID II Delegated Directive updated 4/4/2017.

Questions: 
Specifically what sorts of persons and firms will be impacted?
Answer: 

MiFID II requires that investment firms have policies, procedures and systems in place to assess the nature of any service, benefit or material paid or provided by any third party. It is no longer acceptable for investment firms to receive research for free without an assessment having been made in accordance with the inducements under MiFID II.

Questions: 
How should an investment firm deal with unrequested research that is provided free of charge?
Answer: 

The provision or reception of research by an investment firm is subject to the rules on inducements in Article 24, paragraphs 7, 8 and 9, of MiFID II, depending on the firm’s investment activities.

Firms need to have in place policies and systems to assess the nature of any service, benefit or material paid or provided by any third party to determine whether they can provide or accept it. It is not acceptable for firms to receive research for free where no assessment has been made under the above inducements rules or there is no payment arrangement in place that complies with Article 13 of the MiFID II Delegated Directive.

A firm providing independent investment advice or portfolio management services can only receive research in relation to those activities by complying with Article 13 of the MiFID II Delegated Directive.

Questions: 
What steps should be taken when receiving research?
Answer: 

In relation to services or activities other than those covered under Articles 24(7) and 24(8), a firm providing or receiving research services must assess whether the provision or receipt of the research service meets the quality enhancement test (and the other conditions in Article 24(9)) or decide whether it intends to pay for the research directly or through a separate RPA under Article 13 Delegated Directive.

Where a firm does not want to accept research material, they should take reasonable steps to cease receiving it or avoid benefitting from its content, for example by automatically blocking or filtering certain senders/materials where practicable, and/or requesting a provider to stop providing research, and/or using the compliance function of the firm to monitor, assess and determine whether the material can be accepted before it reaches those parts of the firm that would make use of it.

Where the provider of research is a firm which also provides execution services under MiFID, and is subject to Article 13(9) of the MiFID II Delegated Directive, the provision of unsolicited (or ‘free’) research would not meet the obligation on them to price services separately, and ensure its supply does not potentially influence the execution services they supply. On that basis, firms should have systems and controls in place to enable them to cease providing unsolicited research.

Questions: 
When do the rules come into effect?
Answer: 

Officially the new regulations apply starting January 3, 2018. Because of industry wide “code freezes” in mid-December 2017, technology integration issues as well as the time required to integrate compliance and corporate policies around the technology solutions, firms have begun preparations and undertaking these efforts since early summer 2017.

Questions: 
Where can I find details and technical specifications related to Data Management Requirements under MiFID II?
Answer: 

MiFID and MiFIR have detailed requirements, especially relating to Recordkeeping and the security and encryption of the data related to MiFID II. More information can be found under MiFID II Arts. 16(6), 16(7) of MiFID II, Art. 72 of the MiFID II, Delegated Regulation, updated 10/10/2016.

Questions: 
How does SPi’s Research and Email Classification Service identify and record activity?
Answer: 

Our system is an automated content extraction, normalization, processing and classification of email communications using a front-end scan that parallels email systems off a data feed from clients. The solution extracts the email and attached contents and uses a specific set of statistical determinants built through general subject matter expertise and then refined to a client’s needs to specific compliance policies to compute probabilities the email is (or contains) Research of non-Research content.

Questions: 
With SPi’s Research and Email Classification Service, is my data shared outside my firm?
Answer: 

The data from email is not shared outside the firm unless requested by the client for analytics or for regulatory purposes. Our solution can be deployed in three different ways:

  • On site with the client
  • Through the cloud
  • Through a virtual private cloud or hybrid cloud solution.

If the solution is deployed on site, it will be secured by the IT security of the firm. For cloud-based solutions, it is also secured, but it is only as secure as the cloud solution itself.

Questions: 
Can SPi track email consumption of content?
Answer: 

If clients wish us to track email consumption of content, we can do it either server side or through the integration of a user plugin. Upon request we are also able to do the analytics related to the valuation and the consumption of content. Those analytics can also be displayed in either a dashboard or in the form of reports if commissioned by the client to do so.

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