SIFMA response to ESMA Consultation Paper regarding Guidelines on certain aspects of the MiFID II suitability requirements (ESMA35-43-2998)

The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”) brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. For more information, visit http://www.SIFMA AMG.org/amg.

Q1. Do you agree with the suggested approach on the information to clients about the purpose of the suitability assessment and its scope? Please also state the reasons for your answer.

SIFMA AMG agrees with the suggested approach of informing clients clearly and simply about the suitability assessment and its purpose, which is to enable the firm to act in the client’s best interest by recommending suitable products or services to the client based on complete and accurate information. However, we have a number of important observations and requests for clarification in the final guidelines. Please see our responses below.

Q2. Do you agree with the new supporting guideline in relation to the information to clients on the concept of sustainability preference or do you believe that the information requirement should be expanded further? Please also state the reasons for your answer.

SIFMA AMG generally agrees with the new supporting guideline as it is important that the client understands the concept of “sustainability preferences” (as well as the distinction between the different elements of the definition) so they can provide a comprehensive response to a firm’s questions regarding their preferences, but also so that the firm can understand and reflect the client’s sustainability preferences, to the extent possible, when providing that client with investment advice or portfolio management services, in accordance with the firm’s obligation to act in the client’s best interest.

However, SIFMA AMG believes that this imposes a very high degree of responsibility on firms to educate clients and notes the practical difficulties of avoiding “technical language” in this regard. In general, the term “technical language” is subjective and therefore different clients may have different views as to when a firm is using “technical language” in their interactions. More specifically, however, SIFMA AMG considers it an outright prohibition on use of technical terms to be unrealistic in this context, particularly since the different limbs of the “sustainability preferences” definition are underpinned by detailed qualitative and quantitative analysis. For example, in relation to explaining the first limb of the “sustainability preferences” definition, the criteria for an economic activity to qualify as “environmentally sustainable” (i.e. Taxonomy-aligned) under the Taxonomy Regulation, are inherently complex due to the nature of the activity-specific technical screening criteria. Moreover, the consideration of principal adverse impacts (“PAI”) limb requires the firm to agree with the client relevant qualitative and quantitative criteria in order to demonstrate such consideration. This will be exceptionally difficult when, for example, discussing science-based, quantitative thresholds around greenhouse gas emissions levels. Accordingly, SIFMA AMG believes that applying a blanket prohibition on the use of “technical language” when explaining the concept of “sustainability preferences” is unrealistic and potentially undermines firms’ ability to be clear and accurate with clients regarding the concept of “sustainability preferences” and what it means for their portfolios.