Financial Times report on ‘hard cash’ payments to prime brokerages increases scrutiny on corporate access payments
Investment banks are charging asset managers, especially hedge funds, as much as $20,000 an hour for access to CEOs, according to a Financial Times report, raising questions of privileged access and potential conflict of interest.
The ‘hard cash’ payments are typically made by hedge funds to prime brokers for access to their corporate clients, reports the newspaper, describing the practice as widespread in Europe and the US and increasingly common in Asia.
The report questions whether senior management is aware its time is being sold by investment banks. ‘A rudimentary straw poll of corporate communications advisers and chief executives indicates many of them aren’t aware investors and potential investors are paying to see them,’ Daniel Godfrey, CEO of the UK’s Investment Management Association (IMA), tells the FT.
The article also raises the perennial concern among IR teams that roadshows organized by brokers suffer from inherent conflicts of interest. ‘The conflicts of interest are potentially huge here because chief executives want to meet investors that are, by and large, likely to buy their stock, [not] hedge funds that may go and short the stock,’ says one unidentified industry source quoted by the FT.
The news comes after months of scrutiny surrounding payments for access to executives. Late last year, the Financial Services Authority (FSA), the UK markets regulator, issued a letter to asset management firms expressing concern over potential conflicts of interest created by ‘inadequate’ controls over spending on research and execution services.
‘Only a few firms we visited exercised the same standards of control over these payments as they exercised over payments made from the firms’ own resources,’ the FSA says in its November 9 letter. The regulator called on the CEOs to respond and clarify the regulator’s concerns by the end of February this year.
In response to the FSA’s letter, the IMA issued a report in mid-February, asking its members and others to comment on a series of recommendations aimed at providing a ‘workable and compliant response to the new approach from the FSA.’
The association wrote in the report that it ‘expects during 2013 to propose changes to address the engagement issue, and any barriers put up by issuers and their corporate advisers, and also the pricing and unbundling of research.’
A recent Thomson Reuters Extel survey concludes that 29 percent of dealing commissions were devoted to gaining corporate access last year, an increase from 27 percent in 2011 and 21 percent in 2010. That makes corporate access the largest single expenditure out of dealing commissions, ahead of execution and research.
An article by IR Magazine in December 2011 on the US market reported that the cost of management access could vary greatly depending on who attends and the quality of the discussion, with one meeting provider saying ‘a one-on-one with a marquee CEO could be worth as much as $20,000.’
