MiFID II Misfits: Small Cap Companies & the New Realities of Investment Research


Gregg Castano - MiFID II Misfits: Small Cap Companies & the New Realities of Investment ResearchGregg Castano, CEO, Castano Communications Consulting

There have been volumes written to date about the effect the new European Union MiFID II (Markets in Financial Instrument Directive) regulations will have on the fairness, safety and efficiency of the financial markets.  Although it is an E.U. regulation, it will still impact U.S. companies because many asset managers do not confine their activities to just the U.S.  As a result, the new rules will have broad implications for U.S.-based asset managers and broker dealers that do business in the U.K. and E.U.

While the regulation will impact a wide range of investment practices, the focus here will be on investment research as it applies to small cap companies.  Under the new rules, E.U. fund managers no longer will be able to pay for research by bundling the costs in with commissions.  Instead they will have to either pay for it out of their own funds, and make up the difference by raising fees to clients, or charge the client directly via a research-payment account.

Regardless of how that shakes out, the prevailing wisdom is that net result for small cap companies is that research on them will likely dry up under MiFID II.  This means that it will be extremely difficult for investors to find relevant information about small cap companies, placing a tremendous amount of stress on the investor relations teams, internal or external, at these companies, as they struggle to get heard in a very crowded marketplace.

IROs and agencies will have to redouble their efforts to communicate their companies’ or clients’ financial messaging to the investment community, and by extension the investing public, to generate interest in their respective stocks.

But there is a way to assist, or augment, the work of the IR folks in creating a buzz around a company that has nothing to do with speaking directly to the sell-side, yet still influencing it to make stock recommendations in a company’s favor.

Nothing is better for a company than a good story that burnishes a positive image and creates some good will amongst the public at large.  As such, companies need to supplement their direct communication with the investment community with outreach to the broader population, whose opinions and impressions can help shape Wall Street’s perception of a company’s value.

This is especially effective through positive earned media.  That’s because earned media provides an implied objective third party endorsement of a company’s narrative in a public forum that can directly, or via word of mouth, reach the eyes and ears of the investment world.  In turn, this can generate interest among professional investors and motivate them to promote that company’s stock.

Caveat time, this is obviously easier said than done.  Earning both objective and positive media coverage in the desired publications and on the most influential platforms is hard.  Aside from needing a good story, you also need an even better story-teller. That’s where public relations can play a vital role.  Working in concert with the investor relations function, the PR side can help develop and communicate compelling content about a company that fosters genuine interest, respect and admiration for an organization, and in turn, demand for its shares.

In other words, relatively little known small caps must create a reputation that precedes them.  Once created, the public perception, promoted and supported by earned media coverage, can not only gain the attention of “The Street” directly, but indirectly make its way there via raised public awareness.  Both these factors will also give IR people a strong rationale to pitch equity research analysts on their companies’ or clients’ stocks, as analysts are always seeking information that isn’t readily available to their colleagues and competitors.

“It is not the strongest of the species that survives, nor the most intelligent that survives.  It is the one that is most adaptable to change.” (Charles Darwin).

There are many complexities associated with the new MiFID II regulations, but one simple truth for small caps – adapt or perish.  Those that will successfully acclimate will learn to use the resources available to them in their immediate environment to facilitate that process.  PR is one such asset that can be employed to mitigate the negative impact of this new paradigm and help their IR brethren keep the wheels of liquidity greased.


About the Author: Gregg Castano spent 32 years with Business Wire in various direct sales, sales management and executive management roles, including Co-COO, culminating in his appointment as president in 2009. While president, Castano was responsible for overseeing the sales and marketing functions, was instrumental in much of the company’s international growth strategy and served on its executive committee, which guides company direction and strategy. He performed in this role until his departure in May, 2017. Subsequently, in October of 2017, Castano formed his own independent consulting practice. Castano Communications Consulting, LLC assists entrepreneurs, startups and Small Cap IPOs nationwide with their messaging strategies. He also specializes in offering industry guidance to investment banks and private equity firms exploring acquisition opportunities within this industry segment.

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