The European Securities and Markets Authority’s (ESMA’s) final advice to the European Commission, which may (if the European Commission concurs) be transposed into new rules under the revised and re-cast Markets in Financial Instruments Directive (MiFID II), recommends that all MiFID firms should be required to have a permanent compliance function. Such firms include investment advisory firms, asset managers (which are not regulated as Alternative Investment Fund Managers (AIFMs) under the Alternative Investment Fund Managers Directive (AIFMD)), and proprietary trading firms.
ESMA recommends that the “permanent compliance function” at such firms should:
- monitor and assess on a regular basis the adequacy and effectiveness of the firm’s measures and procedures to comply with its obligations under MiFID II;
- advise and assist the relevant persons responsible for carrying out investment services and activities to comply with the firm’s MiFID II obligations;
- report, at least annually, to the management body on the implementation and effectiveness of the firm’s overall control environment for investment services and activities; and
- monitor the operations of the complaints-handling process and consider complaints as a source of relevant information in the context of its general monitoring responsibilities.
In addition, the compliance function should:
- have the necessary authority, resources, expertise and access to all relevant information;
- be appointed and replaced by the firm’s management and be responsible for the compliance function and for any reporting required by MiFID II;
- report on an ad hoc basis directly to the firm’s management whenever it has detected a significant risk of failure by the firm to comply with its MiFID II obligations;
- not be involved in the performance of the firm’s investment services; and
- be remunerated in such a way that they are not inappropriately incentivized in a manner that would compromise their objectivity.
Many of the new proposals appear to have been copied from the AIFMD, and the ESMA guidance suggests that firms that can show that it would be disproportionate for them to have a dedicated compliance officer may be permitted to register someone from their administrative team as their permanent compliance function, effectively disapplying the final two bullet points above on the basis of their small scale and complexity—as is the case in practice for small AIFMs under AIFMD.
MiFID II takes effect in two years and there are likely to be many more developments and changes that investment advisory firms, asset managers and proprietary trading firms will need to address in their systems and controls. Firms are advised to keep a watchful eye on developments in MiFID II and be ready later this year or in early 2016 to put the necessary changes in place.
ESMA’s final advice to the European Commission is available here.