Deciphering Investment Brokerage in Financial Services

Josef Bergt
2023

Introduction

In the intricate world of financial services law, the concept of investment brokerage holds a position of critical importance. As delineated in MiFID II, investment brokerage encompasses the facilitation of transactions involving the acquisition and disposal of financial instruments. This legal provision, embodying the essence of investment brokerage, serves as a cornerstone in the regulatory framework governing financial intermediaries. 

The Essence of Investment Brokerage

The legal definition of investment brokerage, is twofold:

• Brokerage Activity: This involves the act of conveying the investor's declaration of intent, which is directed towards the acquisition or disposal of financial instruments, to the prospective contractual partner.
• Scope of Financial Instruments: The brokerage activity must pertain to transactions involving the acquisition and disposal of financial instruments.

The Role of the Broker

The broker, in the context of this legal provision of investment brokerage, in contrast to closing brokerage, acts as a conduit, transmitting the investor's intent to engage in a transaction involving financial instruments. This transmission of intent can be in various forms, such as verbal communication or the delivery of a document, but it must represent the investor's declaration. The broker's role is pivotal in connecting the investor with potential contractual partners, thereby facilitating the transaction.

Investment brokerage services are rendered when an intermediary forwards a client's specific intent, aimed at the acquisition or disposal of financial instruments, to a potential contractual partner, thereby facilitating a possible transaction. It is crucial that the intermediary's action involves a concrete declaration of intent from the client, directed towards potential contractual partners. A business which primarily introduce business contacts to asset management companies without facilitating declarations of intent related to financial instrument transactions, do not engage in investment brokerage.

The Nature of Financial Instruments

Financial instruments, as covered by the investment brokerage activity, encompass a broad spectrum, including stocks, debt securities, derivatives, and other transferable securities pursuant to MiFID II. The brokerage activity must specifically relate to transactions involving these instruments, either in the form of acquisition or disposal.

Legal Interpretation and Implications

The interpretation of investment brokerage is influenced by the directives and guidelines at the European Union level, particularly the Markets in Financial Instruments Directive (MiFID). This harmonization ensures consistency in the regulatory approach across EU member states and on the European single market.

Distinguishing Brokerage from Related Activities

It is crucial to differentiate investment brokerage from similar activities like contract or closing brokerage. The distinction lies in the nature of the intermediary's role and the extent of their involvement in the transaction. 

For an activity to qualify as investment brokerage, the intermediary must be aware that they are forwarding a declaration of intent focused on concluding a transaction involving the acquisition or disposal of financial instruments. Therefore, a courier service that, as part of its regular operations, forwards an investor's subscription form does not engage in investment brokerage.

The role of an intermediary can also be performed electronically: Providing an IT system that forwards investor declarations of intent related to the acquisition or disposal of financial instruments to potential contractual partners also constitutes investment brokerage. This is distinct from IT systems that bring various contractual partners together according to a fixed set of rules, leaving no room for the parties to decide whether to transact with a specific partner in each case (non-discretionary rules). The operator of such a system operates a multilateral trading system subject to highest regulations.

Source: BaFin Factsheet Investment Brokerage

Executive Summary:

• Investment brokerage involves the facilitation of transactions in financial instruments.
• Broker's Role: The broker acts as a conduit or messenger for forwarding the investor's intent, connecting them with potential contractual partners.
• Financial Instruments: The brokerage activity must pertain to a range of financial instruments, including equity and debt instruments as well as derivatives.
• Legal and Regulatory Framework: The interpretation of investment brokerage is harmonized through MiFID II on the European single market, ensuring a harmonized regulatory approach.
• Compliance Obligations: Entities engaged in investment brokerage must adhere to licensing with the competent national supervisory authority, and regulatory requirements, including due diligence and transparency duties.