Navigating the Intricacies of Closing Brokerage vs Investment Brokerage in Financial Services

Josef Bergt

2023

Introduction

In the complex realm of financial services, understanding the nuances of contract or closing brokerage and differentiating it from investment brokerage is crucial for legal practitioners and financial institutions. This analysis delves into the specifics of closing brokerage pursuant to MiFID II, defined as the acquisition and disposal of financial instruments in another's name and on another's account (execution of orders on behalf of clients). This article aims to elucidate the key aspects of contract brokerage, its legal boundaries, and the implications for financial service providers.

The Essence of Contract Brokerage

Contract brokerage involves acting in another's name and on another's account to acquire or dispose of financial instruments. This activity encompasses several critical elements:

  • Acting in Another's Name: The service provider operates as a representative of the client, making it clear in their declarations of intent that they are acting on behalf of the client, not in their own interest.
  • Acting on Another's Account: The economic impact of the transactions conducted in the client's name directly affects the client, binding them to the outcomes of these transactions.

Distinguishing Contract Brokerage from Related Activities

The legal landscape of financial services often presents scenarios where the boundaries between different activities blur. Understanding these distinctions is vital:

  • Investment Brokerage: Unlike contract or closing brokers who represent their clients, investment brokers act as messengers, conveying the client's intent to potential buyers or sellers of financial instruments (Reception and transmission of orders in relation to one or more financial instruments). These roles are mutually exclusive.
  • Portfolio Management: This involves managing individual financial portfolios on a discretionary basis. A portfolio manager often, but not always, acts under a mandate from the client, acquiring and disposing of financial instruments on their behalf. This activity can simultaneously fulfill the criteria for both portfolio management and contract brokerage.
  • Investment advice, as defined in Annex I Section A No. 5 MiFID II, involves providing personalized recommendations to a client, either at their request or initiated by the asset management company, concerning one or more transactions with financial instruments. This includes offering information, assessments, and market expectations regarding financial instruments – essentially advice on financial instruments – and expert guidance on building or enhancing a specific client portfolio through transactions – essentially managing client assets. General advice on a type of financial instrument does not typically constitute investment advice, as such advice is considered only when it pertains to specific financial instruments and takes into account personal circumstances or at least a discernible and individual suitability for the client.
  • Investment Recommendation: From the considerations on investment advice, it is also pertinent to address the ancillary service of investment research, financial analysis and general recommendations as per Annex I Section B No 5 of MiFID II. This particularly includes securities and financial analyses or other forms of general recommendations concerning transactions with financial instruments. The focus here is on the creation, dissemination, or transmission of securities or financial analyses or other forms of general recommendations. According to the ESMA (European Securities and Markets Authority) declaration dated October 28, 2021, “ESMA70-154-2780”, investment research or “investment recommendations” are defined as follows: “EU law defines an investment recommendation as information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or several financial instruments or the issuers, including any opinion as to the present or future value or price of such instruments, intended for distribution channels or for the public. Distribution channels can be analyst reports, articles, the traditional media, or even social media.“

Conclusion

The legal framework governing contract brokerage is intricate, with specific requirements and distinctions from related financial activities. Financial service providers must navigate these regulations with precision to ensure compliance and optimize their service offerings. 

Source: BaFin Factsheet Closing Brokerage; ESMA’s Statement on Investment Recommendations on Social Media, ESMA70-154-2780

Executive Summary:

  • Definition of Contract Brokerage: Defined in Annex I Section A No 2 MiFID II, contract brokerage involves acting in another's name and on their account for the acquisition and disposal of financial instruments.
  • Distinguishing from Related Activities: Contract brokerage is distinct from investment brokerage, portfolio management and investment advice