©2005 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[18775]
April 14, 2005
TO: INTERNATIONAL COMMITTEE No. 7-05
RE: UK FSA ISSUES SOFT COMMISSION PROPOSALS
The UK’s Financial Services Authority (FSA) recently proposed rules for bundled
brokerage and soft commission arrangements. A copy of the consultation paper is available at,
http://www.fsa.gov.uk/pubs/cp/cp05_05.pdf.
As you may know, the FSA first published a consultation paper on the use of soft
commission and bundled brokerage arrangements in April 2003. In the consultation paper, the
FSA proposed two main regulatory changes: (1) to prohibit the purchase with commissions of
goods and services for which there is reasonably predictable demand and (2) to require that the
fund manager determine the costs of execution and research and rebate the costs other than
execution to the fund. In 2004, the FSA issued policy statements that narrow the definition of
research and set out FSA views on “non-permitted” services. The FSA determined to hold off
from requiring managers to rebate to clients the portion of their commission costs that do not
represent costs of execution and gave industry time to devise a code to provide transparency
and accountability in the use of client commissions.
The FSA is now proposing rules to implement its approach to soft commission and
bundled brokerage arrangements. The proposals will limit managers’ use of commissions to
the purchase of “execution” and research” and provide guidance on what services cannot be
purchased with commissions at all. In addition, the proposals will require managers to disclose
to each client the total amount of commissions paid to each broker and the manager’s estimates
of the amounts that represent execution and research.
The FSA’s proposals will work in conjunction with a disclosure code (Code) developed
by the UK fund and brokerage industries. The Code requires disclosure, in a standard form (on
an annual basis), of: (1) a description of investment managers’ policies, processes and
procedures in the management of costs paid on behalf of clients and (2) client specific
information on how commissions paid have been generated and how they have been used
(including a split between commissions spent on execution and research).
The proposed rules provide a presumption of acceptability to the Code while allowing
managers to provide other forms of disclosure in appropriate cases. Managers not following
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the Code, however, must be able to demonstrate why they believe the level and content of the
disclosure is sufficient and appropriate.
The FSA’s proposed rules would apply to firms authorized to carry on investment
management business in the UK, regardless of the client’s location. The FSA proposes to make
the rules effective as of January 1, 2006 (with a 6-month transition period). According to the
FSA, final rules will be published by the third quarter of 2005. The FSA will propose additional
rules for how the enhanced disclosure regime should operate to the benefit of retail fund
investors by the third quarter of 2005.
* * * * *
Comments on the consultation paper are due to the FSA by May 31, 2005. The
Institute will be considering whether to submit comments on the consultation paper. If you
have any particular concerns about the FSA’s proposals, please contact me at (202) 326-5810 or
at jchoi@ici.org no later than May 1, 2005.
Jennifer S. Choi
Associate Counsel