ICAA Responds to FSA’s Policy Statement, Expressing Concerns
The Investment Counsel Association of America offered praise — and a few suggestions — in response to the U.K. Financial Services Authority’s November 2004 policy statement discussing proposed definitions of "research" and "execution." In addition, the ICAA took the opportunity to express ongoing concerns about how advisers will value the "research" and "execution" components of full-service brokerage under the "unbundling-on-paper" disclosure regime currently being developed by the U.K. investment management industry. According to the ICAA, the U.K. industry’s approach would involve attribution of commissions between research and execution based on "forward-looking assumptions" agreed to by brokers and advisers. The industry’s recommendations are expected in the next few weeks.
In its December 16 comment letter, the ICAA applauded the FSA’s "considered decision" not to go forward with its controversial rebating proposal and instead consider industry-led alternatives. However, the group said it remained concerned "with how advisers, for purposes of disclosure, will be able to value the component services they receive from broker-dealers as part of a single package for an agreed commission." The group indicated that the FSA should provide sufficient time to develop and test the new regime before expecting managers to make the new disclosures. The ICAA also asked the FSA to clarify that if a U.K.-authorized manager delegates a U.K. client’s mandate to a non-U.K. manager, the non-U.K. manager would not be required by the FSA to comply with the U.K industry’s disclosure regime.
Turning to the FSA’s proposed definitions of "research" and "execution" —
Under the FSA’s proposal, "raw data feeds" would fall out of the definition of research. The ICAA asked the FSA to clarify whether data services and analytics "that constitute more than merely raw data feeds" would be viewed as research. The group also noted that "services that aggregate and present data in various user-friendly formats may well add value to the investment management process."
The group suggested that certain terms used in the FSA’s definitions were too subjective, pointing to examples such as "intellectual rigor" and "original thought." It questioned whether those tests would have to be applied for each piece of research on a case-by-case basis. The group suggested a more objective focus on intellectual content, pointing to the recent recommendation of the NASD mutual fund task force in this regard.
The ICAA said it had a "number of concerns" about the FSA’s proposed definition of execution. Among other things, it argued that post-trade analytics should not be excluded from the definition, since such analyses "may play an important role in a manager’s best execution decisions for current transactions." The ICAA also noted that brokers provide certain services, such as custody or dedicated phone lines "to make trading easier for the broker." Such services, said the group, are not "paid for" or "purchased" by the manager with commissions and "therefore should rest outside the realm of potential rulemaking in this area."
The ICI did not submit a comment letter on the policy statement, according to a spokesperson.