ESMA is attempting to address the downward spiral in liquidity of smaller-cap European stocks. The challenge: fund managers expect research coverage before they invest, but coverage dried up post-MiFID. One solution is to combine payment for research with execution, but for some unloved companies, the issuers themselves must pay to be covered.
Issuer-sponsored research (ISR) is financial analysis commissioned and directly funded by issuers themselves, particularly smaller firms that lack sufficient independent analyst coverage. Post-MiFID II regulation, the requirement for asset managers to separate payments for execution and research (the ‘unbundling’ regime) caused a dramatic reduction in coverage of smaller European companies, exacerbating liquidity problems. In a related consultation on MiFID II research provisions dated 28 October 2024, ESMA acknowledged that allowing joint payments for research and execution services could revitalise research coverage but recognised the need for clear guidelines to manage conflicts of interest and ensure transparency.
In this context, ESMA’s recent consultation specifically on ISR proposes adapting the French Charter—a structured code of conduct outlining conditions for ISR—to the broader EU market, naming this approach “Option 3”. Option 3 aims to ensure ISR transparency, reduce conflicts of interest, and standardise contractual terms, remuneration structures, and disclosure requirements across Europe.
AlphaValue, a French independent research provider, underscored the issues with traditional research models in its answers to the consultation: “While the problem always existed, it has become worse over the past few years with the rising share of passive investing (doesn’t pay for research) and the flows out of small and mid-cap funds towards large caps. The available wallet for Small and mid-cap research is simply too small.” AlphaValue concluded “having sponsored research is better than no research.”
However, German respondents uniformly rejected ESMA’s preferred Option 3, strongly advocating for maintaining their national standards and contractual freedom. The German Association of Investment Professionals (DVFA) opposed additional EU-wide regulations: “We do not consider the introduction of a code of conduct expedient, especially as existing regulations are sufficient. We think the existing freedom of contract between issuers and research providers should remain in place.”
The German fund industry association, BVI, similarly dismissed the proposed changes: “We do not see any additional value to introduce a completely new code. Existing national codes should in practice be sufficient beyond current regulations.”
By contrast, French stakeholders strongly aligned with ESMA’s Option 3, which mirrors their existing national framework. AMAFI, the French sell-side market association, advocated clearly for the proposal: “We fully support leveraging the successful French Charter. Existing contracts should be grandfathered to avoid disruptions, maintaining equivalence with regulatory standards already present under MiFID II and MAR.”
BNP Paribas also expressed clear support for Option 3: “We support the ESMA initiative, taking the French Charter as a base, as it already provides clear standards that effectively address independence and conflicts of interest, with only minor necessary adaptations for broader European applicability.”
Support for Option 3 extended beyond France, with pan-European bodies such as Euro IRP, representing independent research providers, underscoring the approach’s balanced nature: “Euro IRP agrees with Option 3. A tightened code of conduct as proposed by ESMA is welcomed, provided it does not restrict independent research providers from participating. Sponsored research remains essential for market competition and coverage of smaller issuers.”
Elsewhere across Europe, the consensus favoured balanced, proportionate regulation. Italian and Spanish regulators called for simplicity and flexibility to support SMEs. The Austrian Federal Economic Chamber endorsed upfront payments but also recommended flexibility for smaller issuers. Nordic respondents agreed on structured independence standards yet opposed overly stringent disclosure obligations.
Professional analyst associations across Europe supported enhanced transparency but diverged on contractual specifics and payment terms. Financial institutions and industry associations consistently favoured greater contractual freedom, reflecting concerns over flexibility and practicality.
Investor-centric bodies advocated for immediate transparency and strict conflict-of-interest management to protect investor interests.
Eumedion, representing institutional investors dedicated to long-term investment, highlighted transparency’s critical role: “We would strongly advise to require any issuer-sponsored research to be made public immediately, at no additional costs to investors, irrespective of whether these investors have a client relationship with the research provider.
