SEC grants welcome reprieve to US sell-side firms on MiFID II research rules

US regulator the Securities and Exchange Commission (SEC) confirmed today it would be granting broker-dealers temporary “no action relief” from a regulatory clash with Europe’s MiFID II regulations, calming industry fears that UK investment firms could be cut off from US research when the legislation comes into force in January 2018.

Global regulators have been slow to provide answers as to how firms will access research from countries where the sale of research is prohibited, such as the US, when the European legislation specifically forbids sell-side firms from providing ‘free research’.

BofA strikes out with MiFID II research solution

However the SEC, whose rules currently forbid US broker-dealers from receiving payments for research unless registered as an investment adviser, has said that “on a temporary basis” the sell-side may “receive research payments from money managers in hard dollars or from advisory clients’ research payment accounts”. 

This will be for a 30-month period from January 2018, during which time further work will be done on the issue. 

Among the investors to have recently voiced concerns about the regulatory clash was Hermes’ head of investment Eoin Murray, who told Investment Week the loss of US research was a “potential disaster” for the UK industry.

The SEC is understood to have been extensively lobbied by US sell-side firms for some kind of relief in this area.

Commenting on the decision, SEC chairman Jay Clayton said it was taken with “a measured approach in an area where the EU has mandated a change in the scope of accepted practice”, without “substantially altering the US regulatory approach”. 

He said: “These steps should preserve investor access to research in the near term, during which the Commission can assess the need for any further action.” 

It follows shortly after the Financial Times revealed Bank of America Merrill Lynch had struck out ahead of rivals by registering its research unit as an investment adviser, allowing it to sell research globally.

But partner at law firm Dechert Monica Gogna said that BoA’s approach was unlikely to be a popular choice taken by other US broker-dealers due to added fiduciary requirements.

“It is an interesting move on behalf of BofA but this in itself doesn’t resolve the issue for the market,” she added.

‘Potential disaster’ as City risks losing US research, warns Hermes’ Murray

A sigh of relief

Commenting on the SEC’s decision CEO of the UK’s Financial Conduct Authority (FCA) Andrew Bailey said the arrangements “address key concerns raised with the FCA by UK market participants”.

He said: “They ensure that firms can continue to access US research from 3 January 2018, while also maintaining the investor protection safeguards of the MiFID II regime.

“In supervising the MiFID II inducements and research provisions, and cross-border practices by firms in this area, the FCA will focus on ensuring investors’ interests are advanced.

“Arrangements which comply with MiFID II and other jurisdictions’ rules, while enabling EU firms’ continued access to research produced by US and other non-EU jurisdictions are likely to be the best way of serving investors.”

He added that arrangements in which “a UK asset manager pays the EU entity of a broker for global research content, or research is circulated within a buy-side group, can also be an acceptable way of achieving this, provided that they do not influence the firm’s order routing decisions, execution costs and ability to act in its clients’ best interests”.

“We will continue to engage with firms on their implementation of MiFID II ahead of the 3 January 2018, and will monitor evolving market practices once the new rules are in effect to ensure compliance and evaluate the impact of the changes,” Bailey added.

Allianz Global Investors to absorb research costs post-MiFID II

Head of global compliance at governance, risk and compliance services provider Cordium Patrick Shea said the decision “will enable some US registered broker dealers and money managers to breathe a sigh of relief when it comes to managing the unbundling of research”.

He added: “Although the investment management industry expected that the relief would come, the release of the no action letters provides certainty as firms with US regulated activities and an EU nexus confirm MiFID II readiness.”

Partner at law firm Oliver Wyman Michael Turner echoed this sentiment, adding that the no-action decision will be “helpful in reducing potential complexity in pricing models, especially important as negotiations continue to drag on with many investment firms pushing hard on pricing”.

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