But extending way beyond Europe's borders, the new rules affect "anybody who's licensed to act on behalf of investors" in Europe, including U.S. money managers, said Chris Pickles, chairman of the MiFID Joint Working Group, and manager of industry relations for network provider BT Radianz, London. The working group was established to help businesses to better understand the impact of the new directive.
One of the biggest impacts of MiFID is that it will shift more power to consumers, he said.
"Basically, you need to understand the investment approach that's appropriate for clients; it goes beyond simply just knowing your client," Mr. Pickles said. "You need to demonstrate the appropriateness and suitability of a particular transaction for each client at a particular point in time."
Clients will be classified three ways: retail, professional and eligible counterparty. However some pension funds and other institutional investors may qualify as a retail investor unless they opt to be considered a professional client. The categories determine the level of investor protection to which a particular client is entitled.
For U.S. managers operating in Europe, MiFID could affect the way the way a firm conducts business globally, said David Viana, London-based vice president and risk and compliance manager of Pacific Investment Management Co. LLC, Newport Beach, Calif. PIMCO managed $600 billion worldwide as of June 30, of which $273 billion is in Europe.
"It is conceivable that a client who's contracted with us here in the U.K. will have money managed out of Newport Beach," Mr. Viana said. "So if we're looking to do things on a consistent basis as part of a global firm, the thing that worries us is that the challenge of making any changes to one part of the company will potentially impact all of our other locations."
Another question is: "Will U.S. customers have the rights to the same (investor) protection if they're investing with a manager with a European-based operation?" said Matthew Jones, manager of regulatory and legal issues for the London-based Alternative Investment Management Association, which primarily represents hedge funds in 46 countries. "And if (U.S.) investors have the same rights from a European manager, would they then want the same rights from a U.S. manager?"
The preliminary framework of MiFID is being assessed by member states and scheduled to be finalized in early 2007. Each country will be allowed some flexibility to incorporate the new rules into its national legal systems, according to a preliminary draft released earlier this year, so it could be implemented "slightly differently" in each country, Mr. Pickles said.