Management companies and MiFID II
At first glance, it may seem that management companies are exempt from the regulations of MiFID II, as it is stated in article 2(i) that “collective investment undertakings and pension funds whether or not coordinated at Union level, and the depositaries or managers of such undertakings” are exempt from the scope of MiFID II. The article, however, applies to management companies, which activities are “subject to specific rules directly adapted to their activities”.
To what extent are management companies affected by MiFID II?
Management companies authorized under EU Directive 2009/65/EC (UCITS management companies) and EU Directive 2011/61/EU (AIFMs) are not within the scope of MiFID II when undertaking managing or marketing activities of UCITS/AIFs for which they are appointed UCIT management company/AIFM.
Nevertheless, authorized UCITS management companies/AIFMs are affected by MiFID II in the following ways:
- Services provided by authorized UCITS management companies/AIFMs, other than managing and marketing activities of UCITS/AIFs for which they are appointed as UCIT management company/AIFM, do fall within the scope of MiFID II if such services qualify as investment services under MiFID II. Examples of such services include the discretionary portfolio management of individual accounts and related investment advisory services.
- Authorized UCITS management companies/AIFMs are indirectly affected by MiFID II to the extent they delegate activities to service providers falling within the scope of MiFID II, and through the impact of MiFID II on entities in the investment fund distribution chain.
What direct and indirect impact does MiFID II have on management companies?
MiFID II imposes several direct and indirect restrictions and requirements on management companies falling under its scope, including but not limited to:
- Requirement for product manufacturers to implement, when marketing in-house financial instruments to retail clients, proper product approval processes (including the identification of a target market at a sufficiently granular level) and to ensure that financial instruments distributed are designed to meet the needs of the identified target market, the distribution strategy is appropriate for the target market, and reasonable steps are taken to ensure that the financial instrument is distributed to the target market.
- Requirement to implement adequate measures and arrangements to understand and identify the relevant target market for all non-in-house financial instruments offered or recommended to retail investors.
- Requirement to perform investor suitability checks when providing retail client investment advice (such as collection of information regarding the client´s preferences and investment objective) and to provide the client with a statement on suitability in a durable medium.
- Prohibition of receiving third party inducements in relation to independent discretionary investment advice and portfolio management.
- Restriction for fund distributors regarding the offering of shares or units on an execution only basis relating to non-UCITS and structured UCITS qualifying as complex instruments under MiFID II.
MiFID II and MiFIR are transposed into national law in Germany through the second “Finanzmarktnovellierungsgesetz” (2. FiMaNoG).
Although the main activities of UCIT management companies/AIFMs do not fall under the scope of MiFID II, it is of utmost importance that management companies take the necessary steps to properly comprehend the regulatory challenges imposed by MiFID II. Failure in taking necessary action may lead to potential breach of regulation relating to management company ancillary activities, to reduced marketability of shares and units of investment funds under management, or to inadequate attentiveness to increased information demands from entities within the investment fund distribution chain.
Latest update: 13.07.2017