No more fudging corporate access

This was signalled in Martin Wheatley’s speech to the FCA Asset Management Conference at the end of October. It is all about fund managers using client money to subsidise their management activities.

Corporate access is the name for the activity whereby a large broker arranges a conference on a particular sector (such as mining or pharmaceuticals) and invites the major companies in the sector to present to the large investment clients of the broker. Investors get “access” to the “corporate”.

These are regular events and form an important part of a company’s investor relations effort to court new and existing investors. The presentations made by companies are available on the companies’ investor relations websites.

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But these conferences are about more than a publicly available presentation. They are an event for large investors to get to meet the management in a one-on-one situation. These meetings are arranged during the conference and provide the institutional investor with the opportunity to ask questions and get answers that other investors (including the broker) do not hear. This can provide an edge in the analysis of the company that might help the institutional investor to outperform. This ‘corporate access’ is valued highly by investors and this has been recognised by the broker, who now demands to be remunerated for the costs of arranging it.

The very largest institution might have the clout to demand to see the management at any time without waiting for the sector conference – but for the medium-sized investor, the conference arrangement is an efficient way to get corporate access. It is also convenient for the company to have these meetings during a single event.

The FCA’s consultation is about the issue of paying for corporate access. Apparently, institutions have been paying for it out of client dealing commission that is paid for securities transactions, which is potentially in breach of the dealing commission rules.

The current rules on dealing commission were issued in 2006 after the FSA considered imposing a full unbundling regime. At the time, the FSA was very concerned that institutional investors were paying dealing commissions to brokers for dealing and other services that were “bundled” together.

It is a simple arrangement. The fund manager buys a company’s shares and the broker charges 20 basis points dealing commission. It would have been possible to pay a lower commission, say 10 basis points, just for execution of the trade: this is “execution-only”. But the fund manager pays the higher commission because he wants to receive the broker’s research and (pre-2006) get his data terminal subscriptions (Reuters, Bloomberg) paid for by the broker.

Actually, the fund manager is not himself ‘paying’ since the dealing commission is passed on to the fund manager’s client. So by committing the client to pay 20 basis points dealing commission (rather than 10), the fund manager reduces his own costs at the expense of the client. The dealing commission actually pays for a bundle of services provided by the broker, not just execution of the trade.