BIMA Conference June 1, 2006

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BIMA ConferenceJune 1, 2006
The Growing Need for Transparency in Commission
Allocation Randy Cass, CEOiSequent Inc.
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The Coming Storms
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The Pain

• 13B in annual commission allocation
• Regulatory Requirements (FSA SEC) are demanding
  that financial firms be held accountable for this
  commission spend
• Currently no system exists to track the value
  obtained

Source Greenwich Associates
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The Pain

• Portfolio Managers are unable to absorb and
  utilize all pieces of incoming information being
  sent to them
• Dozens of phone calls per day
• Multiple ideas per call
• Hundreds of emails per day
• Information Overload
• Institutional sales people are unable to
  differentiate themselves to fund managers

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The Coming Storms
Information Overflow
Regulatory Requirements
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The Risks

• Portfolio Managers are at risk of showing value
  for billions of dollars spent on bundled services
  and soft commission dollars
• Portfolio Managers must show the value beyond
  trade execution
• Portfolio Managers cannot afford the headline
  risk of misallocation of funds

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The Risks

• According to the FSA, a market failure exists in
  relation to bundled brokerage and soft dollar
  commission arrangements. The use of such
  arrangements to pay for goods services lacks
  transparency.

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The Risks

• Investment Managers Association (IMA) in the UK
  has issued a Disclosure Code in reference to
  commission spend in the UK institutional and
  retail funds.

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Overall Market

• 18,000 buy-side firms
• Institutional Money Managers, Pension Funds,
  Hedge Funds, Family Trusts, etc
• 1,000 sell-side firms
• Brokers, Banks/Financial Institutions

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Overall Market

• 13 billion is transferred in commissions from
  the buy-side to sell-side each year in North
  America
• Only 4 billion is for actual trade execution

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Regulatory Environment

• The SEC has been cracking down on
• Overcharging customers for getting into funds
• Undisclosed commissions
• PMs trading on their own accounts
• Insiders trading ahead of the fund
• Price discrimination between retail clients and
  institutional clients
• Market timing
• Late trading

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Regulatory Environment

• The issue of transparency into bundled
  commissions and soft dollar payments is one of
  the largest issues that remains without
  accountability and will be the focus of
  regulatory bodies.

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Environment Today

• Sell-Side communicates via
• email,
• spreadsheets,
• firm report cards
• Blogs,
• voice-mails
• emails
• PDFs
• Conference calls
• Meetings
• Podcasts
• Custom, proprietary, uni-directional systems
• and instant messages

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Regulatory Environment

• FSA's recent rules FSA Policy Statement
  05/9.55 mandating that asset managers provide
  their customers with a detailed breakdown of how
  much of their commission dollars are being spent
  on execution versus research services could cause
  an increased demand for the buy-side to implement
  greater processes than the commission allocation
  software systems that are currently in vogue.
• Source Integrity Research Associates

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Regulatory Environment

• The SEC has also extensively looked at the
  issues surrounding the bundling of fees for trade
  execution and other services.
• November, 2005, the SEC issued a statement
  reviewing Section 28(e)3 of the Securities
  Exchange Act of 1934, reviewing the legislation
  in place surrounding commissions charge and value
  received.

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Regulatory Environment

• In the OSCs statement of priorities for
  2006/2007, it states that it will focus on
• Providing fair, vigorous and timely enforcement
  on items such as public awareness and fraud
  prevention
• Implement a response to the mutual fund probe to
  increase investor confidence in the investment
  fund industry on compliance and fair value
  pricing
• Achieve appropriate regulatory integration of
  North American and global capital markets

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Attempts at Solutions

• 2 companies started in the UK Alphametrics and
  youDevise to address FSA
• Some Buy-Side institutions have proprietary
  systems Sell-Side has to enter into many
  systems and does not get reciprocal information
• Other third party systems trying to resolve
  either the

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Trends

• Fidelity announced in the US that it will use its
  own funds to pay for Lehman Brothers research
  rather than use client funds

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eTrade
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iSequents Promo

• StreetVision
• A web-based application which elevates the
  traditional institutional buy-side sell-side
  relationship by
• Initiating,
• Disseminating,
• Evaluating
• Aggregating
• all relevant information via a single portal, the
  I.D.E.A. Exchange.

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iSequent Management Team

• Randy Cass,
• CEO - MBA, LL.B, CFA (OTPP)
• Mel Barsky
• President BA, MBA (Scotiabank, AMEX, TSE)
• Colin Webster
• CFO B.Sc. (Founder Truition)
• Daniel Han
• Sales (Cbid Markets Inc., Dow Jones Telerate)
• Todd Verstraten
• CTO Waterloo (18 years systems architecture
  experience)

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Advisors

• Morgan McCague
• SVP, Quantitative Investments of the OTPP Board,
• Public Governor of the Toronto Futures Exchange,
  and
• President, Buy-side Investment Management
  Association
• Nicholas Thadaney
• CEO, ITG Canada Corp
• Marc Knapp
• Director of Institutional Equity,
• Loewen, Ondaatje, McCutcheon Limited
• John Cook
• President and COO of the MaRS Discovery District
  project,
• President of Invesco Canada,
• EVP Client Retention, AIM Funds Management Inc.,
  and
• EVP, BPI Financial Corporation

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Today vs. Tomorrow
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(No Transcript)
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Solution

• StreetVision addresses both the regulatory issues
  of transparency and accountability of commissions
  spent
• It also increases productivity and solves the
  issue of information overflow

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The Coming Storms
Information Overflow
Regulatory Requirements
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Thank you!

• Q A