The SEC brings relief to cross-border MiFID II compliance. So why are US clients still worried?

The broker community and asset managers let out a collective sigh of relief last week as the Securities and Exchange Commission (SEC) issued a number of “no-action” letters to address clashes between the US government and the upcoming MiFID II regulations.

Following an intense period of lobbying by buyside and sellside industry bodies on both sides of the pond, the letters will enable US brokers to receive cash payments for investment research directly from asset managers or via Research Payment Accounts on behalf of MiFID affected clients. Also addressed within the letters are provisions that allow investment advisors to continue aggregating client orders, even when some clients may pay different commission rates because of MiFID II research requirements, and confirmation that safe harbor provisions will enable a manager to use client commissions to purchase “brokerage and research services” without breaching its fiduciary duty.

It should be noted that the relief provided by the SEC non-action letters apply for a 30 month period from when MiFID II goes live. A longer-term fix would require changes in legislation by Congress – what the SEC has done is to buy some time.

What the letters do not address are the concerns raised by US clients on how they will continue to be traded fairly. It is now evident that most EU-based asset managers have decided to pay for third-party investment research from their own resources for clients directly impacted by MiFID II. US clients with out-of-scope accounts are increasingly questioning why they should continue to pay for research. Although asset managers have been keen to emphasize there will be no cross-subsidization, US clients still feel that out-of-scope accounts will end up paying more than comparable in-scope MiFID accounts. The SEC relief letters are clear in that they apply to MiFID affected clients, so asset managers are still constrained on what they can do for out-of-scope clients.

A consequence of the increased transparency is that clients will be more focused on the cost of investment research. A number of recent surveys have shown that buyside spend on third-party investment research is expected to continue to drop in 2018 and beyond as buyside firms will increasingly look to leverage in-house research. Sellside firms will need to ensure that their research offerings are provided cost effectively and to those buyside firms who value the service. We expect research to continue to be a hot topic over the course of 2018 as the market evolves in response to client pressure and the regulatory environment – watch this space.

Source: US Securities & Exchange Commission. SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions. 2017.
Available at: https://www.sec.gov/news/press-release/2017-200-0.