19 October 2017


As part of their implementation programmes authorised fund managers should be considering the impact of MiFID II on their core fund-related documentation in order to: (a) ensure MiFID II compliance and (b) clarify the obligations of, and where relevant apportion responsibility to, the various players in the value chain.

There is a myriad of agreements and fund documents that asset managers need to turn their attention to. MiFID II also necessitates changes to various policies and procedures; and systems and controls.

This note focuses on the fund prospectus, constitutional document and key delegation agreements in the context of FCA authorised funds and considers, at a high level, the potential application of MiFID II to these documents. It does not purport to be exhaustive and the practical impact on each firm will of course need to be assessed in the context of the firm’s business model (e.g. whether certain obligations have been delegated to a third party).


Payment for research

If research is received by the AFM and is being paid from a research payment account (RPA), the following disclosures will need to be included in the prospectus:

  • How the firm will comply with the requirements in relation to the operation of the RPA.
  • How research purchased through the RPA may benefit the fund, taking into account its investment objective, policy and strategy.
  • The approach the firm will take to allocate the costs of research fairly among the funds it manages.
  • The manner in which and the frequency at which the research will be deducted from the assets of the funds
  • A statement as to where up-to-date information on: (i) the budgeted amount for research and (ii) the amount of the estimated research charge for each fund can be obtained.

If it is the investment manager (as the AFM's delegate) that receives the research and operates the RPA – and the AFM’s role is overseeing the IM’s operation of the RPA in respect of the AFM’s funds, this will need to be made clear and the disclosures tailored accordingly.

The introduction of a new payment out of the scheme property of the fund to facilitate the operation of an RPA will require 60 days’ prior notice to investors (or investor approval at an EGM after the end of a two-year transitional period from 03 January 2018) and certain FCA approvals and/or notifications.

Use of dealing commissions

References to the use of a (bundled) dealing commission should be deleted or amended accordingly.

Product governance

Although not mandatory under MiFID II, AFMs should consider whether to include details of the identified target market in the prospectus


Again, this is not a mandatory prospectus disclosure but firms should consider whether to include a statement as to whether the fund is “complex” or “non-complex” for the purposes of MiFID II.

Conflicts of interest

The disclosures (and the relevant conflict of interest policies) will need to be reviewed in the context of the enhanced MiFID II requirements. In particular, firms are required to take all ‘appropriate’ rather than ‘reasonable’ steps to prevent or manage conflicts and the emphasis is on prevention so disclosure may only be used as a last resort and over-reliance on disclosure is not permitted.


The prospectus may need to be updated to reflect that electronic communications and telephone calls will be recorded.

Delegation arrangements

We have focussed below on the delegation of portfolio management by an AFM under an investment management agreement. However, some of the issues would also be relevant in the context of other delegations (e.g. the modified requirements in respect of outsourcing). Existing IMAs should be reviewed and, where applicable, updated to reflect the following:

Best execution and order handling

The IMA will need to be amended to reflect the burden of compliance with the enhanced MiFID II best execution regime, specifically by reference to the IM’s execution policy (typically included as a schedule to the IMA). Provisions on order handling will also need to be reviewed in line with MiFID II requirements.

Inducements and research

Relevant provisions in the IMA may need to be revisited in light of the new requirements around inducements and payments for research – as discussed briefly above in relation to the prospectus. Where the IM intends to use an RPA we would typically expect the arrangements with respect to the operation and oversight of the RPA to be included in a separate agreement or as a new schedule to the IMA.

Conflicts of interest

Relevant provisions in the IMA should be considered and modified as appropriate in light of the enhanced standards under MiFID II around conflicts of interest.

Client reporting

The reporting provisions will need to be considered in light of the enhanced client reporting requirements under MiFID II. This may involve a degree of circularity in the context of an FCA authorised fund. For example, investment firms providing the service of portfolio management are required to inform the client (no later than the end of the business day in which the threshold is exceeded) where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% - but AFMs will have daily visibility on this in the context of their duties in valuing the fund assets and unit price!

Record keeping

Consideration should be given as to whether updates to the IMA will be required to reflect the enhanced record-keeping requirements under MiFID II.


The IMA terms should be reviewed against the modified MiFID II outsourcing requirements.

Telephone recording

The IMA should be reviewed and amended accordingly in light of the notification requirements in relation to the recording of telephone conversations and electronic communications.

Fund constitutional documents

Changes to these documents as a result of MiFID II are unlikely but, these should be checked in particular in relation to (where relevant) the introduction of a new payment out of the property of the fund to pay for the operation of an RPA.

How about the “Hosted Funds” model?

For Host AFMs, in addition to considering the practical impact of MiFID II where certain functions have been delegated by the AFM, another key consideration will be in relation to product governance and the obligations of “manufacturers” and “distributors”. The AFM and the fund sponsor will need to agree how their respective obligations in respect of the fund will be satisfied, including those around: (a) identifying a target market of end clients; (b) ensuring the strategy for distribution of the fund is compatible with the identified target market; and (c) taking reasonable steps to ensure that the fund is distributed to the identified target market.

There is also a specific requirement that where firms collaborate, to create, develop, issue and/or design a financial instrument, they must outline their mutual responsibilities in a written agreement. The obvious place to do that in this context would appear to be in the fund sponsorship agreement (entered into between the fund sponsor and the AFM and which commercially allocates responsibilities between the AFM and the fund sponsor). Commercial issues around liability and indemnification will also need to be considered in this context.

What should firms be doing?

Firms (that have not already done so) should:

  • devise a review and implementation programme (noting any timing issues e.g., in relation to any required approvals or notifications)
  • gather all the relevant agreements and documents impacted by MiFID II
  • determine the required changes (in the context of the relevant business model)
  • determine the required approvals or notifications (and seek or make the same)
  • discuss or negotiate the agreements or documents with relevant stakeholders
  • in due course, issue the updated documents (noting other practical matters such as making documents available on websites, or filing any relevant documents with regulators).

How can Burges Salmon help?

We are advising a number of clients on the implementation of MiFID II. If you would like to discuss any of the points discussed in this feature or any funds-related matters please contact Tom Dunn.

Key contact

Tom Dunn

Tom Dunn Partner

  • Head of Regulated Funds and Financial Services
  • Regulated Funds
  • Financial Services

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