Research With a Capital ‘R’: The New Definition Under MiFID II

The European Commission has established rules for the unbundling of payments for research and execution. But what constitutes research? But even as the EC’s new definition broadens research beyond single-stock recommendations, it still leaves some unanswered questions.

In establishing the new rules for research unbundling under MiFID II, the European Commission has set a definition for “Research.” It separates out what can be paid for from client funds and what is considered a “minor, non-monetary benefit.”

A line has been drawn with a thick permanent marker. On one side sits “Research,” with a capital R. This means value-add views that in one way or another inform the investment decision. The definition is broad and inclusive. It’s not just single-stock research with explicit buy and sell ratings. Also included are the more implicit views and analysis of related markets, economies and industries. In the new EU-wide definition, economics, fixed income, commodity, strategy and market research are placed firmly alongside single-stock reports with their definitive ratings.

[Related: “EU’s Hard Line on Soft Dollars May Push US Investment Managers to Stay Home”] 

The broad definition is well-suited to an industry where it’s not the conclusion that is most valued, but the work and thought process behind it. Some would argue that Sanford Bernstein has built a research business on this premise. Academic work has shown that, “Fund managers place more emphasis on information processing than on equity valuation, on business research rather than securities research and on advice rather than predictive accuracy” (Alistair Haig, Bill Rees, “The Changing Market for Investment Research,” Feb. 23, 2016).

What does that leave for the other side of the line? Little “r” research. The noise. This has been ascribed to the likes of previews and flash comments on earnings releases and economic statements. These are deemed to be non-substantive summaries, written without any valuable analysis. High volume but low impact, there is limited demand for this type of content. Where the cost of production has been close to zero, it’s been a volume game. Whoever produces more one pagers, puts their name in front of clients more often.

As with any line, there are a few parts that don’t quite fit nicely on either side. It’s not that they straddle the line; it’s more that they don’t come anywhere near it. So what’s left outside the box? Earnings estimates, consensus and sales commentary (although it’s debatable whether sales commentaries will still be around after MAR takes effect in July).

Ultimately, in deciding if content is “Research,” the question that has to be asked is: “Does it affect the fund manager’s investment decision?”

Asset management firms are the ones responsible for setting their research policies. While providers will naturally have their own views on whether their offering is Research or information, the decision ultimately rests with the asset manager. If a piece of work influences investments, then it’s an inducement and it’s Research, with a capital R. If not, then no money exchanges hands. Many will find it hard to justify directing flow based on something “minor.” But that’s nothing new.

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