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MiFID - Opportunity missed to provide clarity for fund administrators.

In last month's edition of Finance, I looked at whether the Markets in Financial Instruments Directive 2004/39/EC ("MiFID") would apply to fund administrators and called upon the Financial Regulator to provide some clarity for potentially affected firms. It was with interest therefore, that I read the Financial Regulator's internal discussion paper recently circulated by the Irish Funds Industry Association (the "Discussion Paper").
Financial Regulator's Internal Discussion Paper

The Discussion Paper correctly points out that administration companies are typically authorised under investment service (g) in the Investment Intermediaries Act 1995 ('IIA') which covers:
Joe Beashel



'…the administration of collective investment schemes, including the performance of valuation services or fund accounting services or acting as transfer agents or registration agents for such funds…'

I understand that there may be a general impression, arising from the circulation of the Discussion Paper, that if an administration company is authorised under investment business service (g) that MiFiD will not apply to it. This is not the case. In the Discussion Paper, the Financial Regulator does make this general point but makes it subject to the caveat that administrators must have organised their operations in the manner set out in the Financial Regulator's Guidance Note 1/99 (the 'Guidance Note').

It will be recalled, in the context of considering whether the Investor Compensation Scheme would apply to administrators, that the Financial Regulator observed that, in the usual course of events, subscription applications for, or requests to purchase, shares and redemption applications or requests to sell shares together with requests to switch or transfer ownership of shares in funds, are regarded as constituting orders in shares in collective investment schemes. As such, an administration company which receives an order from an investor or intermediary is either engaged in 'receiving and/or transmitting on behalf of investors' or 'execution of such orders other than for their own account' both of which are ISD (now MiFD) services. At that time the Financial Regulator, correctly in my view, focussed on the actual nature of the activity carried out rather than the form of authorisation, to determine whether an ISD service was being performed and consequently, whether the Investor Compensation Scheme would apply.

The Guidance Note provided that an administration company would not be regarded as providing the ISD service of 'receipt and transmission of orders' where the firm:

  • transmits orders solely to specified entities including collective investment schemes authorised under the law of a Member State to market units to the Public, and to the managers of such schemes, and
  • it does not hold client assets, and
  • it does not provide any other investment service, and
  • it is governed at a national level by rules or by a code of ethics


The Financial Regulator has concluded that if an administration company is authorised under IIA investment business service (g) and fulfils the above criteria, MiFID will not apply to it.

Where clarity is provided on one hand some uncertainty is then introduced by the Financial Regulator with the other. In the Discussion Paper the Financial Regulator goes on to note that some administrators are authorised under IIA service (a) and/or (b) that is receipt and transmission of orders and execution of orders respectively and as such '…The Financial Regulator must consider the supervision of these ISD vis-a-vis the non-ISD type fund administration companies to determine whether a single supervisory regime should be applied for both MiFID and non-MiFID firms.'

It would appear therefore, having clarified that many firms will not be caught by MiFID, that the Financial Regulator will look to apply MiFID standards anyway. If this is to be the case, then fund administration companies will want to know exactly how they will be affected; how, for example, will the MiFID conduct of business, client classification and best execution rules be applied in a fund context?

A final observation to make on the Discussion Paper is that it deals with the ISD/IIA service of receipt and transmission or orders but ignores service '(b) the execution of orders'. The Guidance Note provided that '…An Administration Company which receives orders but does not transmit those orders to another party, is deemed to execute those orders in units on behalf of investors. Such an Administration Company is an investment firm and would require authorisation under the ISD…' If an ISD service is offered MiFID will apply to that service.

The Guidance Note then goes on to detail how an administration firm could structure its operations in order to ensure it is not providing an ISD service. These conditions are:

  • all shareholder orders must be clearly addressed to the manager/fund
  • payments in respect of a subscription of shares must be payable to the manager/fund or trustee
  • at no point must the administration company hold shareholders' funds or securities
  • application forms, contract notes etc must make it clear that the contract for purchase/redemption is between the manager/fund and the shareholder
  • the manager/fund must set down clear parameters governing the role of the administration company in relation to acceptance and refusal of orders

Perhaps this stipulation can be explained by the Regulator's observation that some Member States have authorised the transfer agency activity of fund administrators under the 'receipt and transmission' category but for some reason, the Financial Regulator ignored its own earlier analysis that identified the execution of orders as an ISD service often carried out by fund administrators.

Conclusion

Unfortunately the Discussion Paper does not advance matters in any material way for fund administrations and the uncertainties identified in my article last month have, if anything, been compounded. For those authorised under IIA category (g) the Regulator has indicated that MiFID will not apply though it is subject to their operations being structured as set out in Guidance Note 1/99. This clarification becomes somewhat moot, when the Regulator then goes on to indicate that MiFID should be applied anyway, in order to avoid different regimes for MiFID and non-MiFID companies.

With implementation of MiFID now less that a year away and the implementing legislation due to be enacted on time at the end of January 2007 it is a bit late for the Regulator to now decide to impose a 'single supervisory regime.. for both MiFID and non-MiFID firms.'

If clarity on what MiFID means for fund administration companies was required last month, it most certainly is urgently required now, given the Regulator's apparent inclination to apply MiFID to all fund administration companies.


Author Details: Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the firm's Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie