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November 8, 2005

U.K.'s Quasi-Unbundling May Influence U.S.

By Peter Chapman

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  • U.K.'s Quasi-Unbundling May Influence U.S.

Commission payments are coming unraveled. U.S. money managers with operations in the U.K. are feeling pressured to disclose more details to U.S. customers about how they spend their commission dollars.

These institutions, because of new regulations and industry initiatives in Great Britain, are likely to start providing their U.S. customers with estimates of how commission payments are split between research and execution services. The breakdowns are likely to occur on a broker-by-broker basis.

Commission payments are coming unraveled. U.S. money managers with operations in the U.K. are feeling pressured to disclose more details to U.S. customers about how they spend their commission dollars.

These institutions, because of new regulations and industry initiatives in Great Britain, are likely to start providing their U.S. customers with estimates of how commission payments are split between research and execution services. The breakdowns are likely to occur on a broker-by-broker basis.

The practice of money managers assigning separate values to research and execution and disclosing that information to pension funds is just beginning in the U.K. Fund managers say it is just a matter of time before this quasi-unbundling reaches the U.S.

"What's happening in the U.K. is going to spill over into the U.S.," Mark Manley, deputy general counsel and chief compliance officer at Alliance Capital Management, noted at a recent industry conference. "It won't take long for a large global pension fund consultant to share the information it is getting in the U.K. with U.S. fund managers."

Christina Sinclair, head of institutional business policy for Britain's Financial Services Authority, also speaking at the Securities Industry Association's annual soft dollar gathering, echoed Manley's comments.

"From our discussions with fund managers," she said, "many firms believe it is not appropriate to discriminate between U.K. and non-U.K. clients in terms of the disclosure they receive. They believe that their non-U.K. clients would benefit from receiving the same information that U.K. clients get."

Driving the discussion are two documents. First is the FSA's Consultation Paper 05/5, a new rule covering bundled brokerage and soft commissions arrangements. Second, is the Investment Management Association's Disclosure Code. It details certain responsibilities of money managers to their pension fund clients. The IMA is a U.K.-based trade group for money managers.

The IMA's Disclosure Code spells out overall principles fund managers must follow in managing their customers' commission monies. It also includes a worksheet for fund managers to break out values of the research and execution components of those commission payments.

It is this worksheet that is generating the most controversy on both the buyside and the sellside. Industry-wide unraveling, or unbundling, of commission data is new. The fear is that the practice will lead to "true" unbundling.

True unbundling would require broker-dealers to bill separately for the research and execution services they provide. Client commissions would be used to pay for execution services only. Research would have to be paid out of the money manager's own funds.