Ever since its inception as an idea, Mifid II has been creating debate about its meaning and implications. With every new clarification or ruling has come a wave of interpretations that have frequently disappeared into disparate directions.
But things are changing. As Mifid II moves from an idea into implementation, disparities are becoming more subtle, more defined and more focused on the minutiae, which in turn is importantly leading to one endpoint in the journey rather than multiple destinations. The recent SEC ruling, which gives a 30-month reprieve to US banks and brokers to abide by Mifid II, is an important case in point. There is a strong basis to believe the ruling will actually mean business as usual and, more long term, potentially create a narrative that Mifid II will become a global standard.
For a good argument that the SEC ruling means business as usual, John Gollifer, general manager of the UK’s IR Society, says: ‘The recent SEC statement on Mifid II implementation suggests the US remains very much open for business and that there will be existing levels of support companies are accustomed to. This will ensure UK plc can continue to actively seek capital in the US through IR teams.’
Nick Arbuthnott, corporate managing director for MENA at Ipreo, agrees. ‘This means business as usual,’ he says. ‘US banks can sell research unbundled – per Mifid II – without having to register as investment advisers – per SEC, a stipulation they were extremely keen to avoid as too onerous – so European investors can still buy US research.’
The business-as-usual line is one naturally and understandably promoted by the respective regulators in Europe and America. In a statement, UK financial regulator the Financial Conduct Authority (FCA) notes, in line with the SEC and the European Securities and Markets Authority (Esma), the business-as-usual approach being central to the arrangement: ‘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 that 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.
‘The European Commission and US SEC staff statements enable this. 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 it does not influence the firm’s order-routing decisions, execution costs and ability to act in its clients’ best interests.’
Dealing with the genie
Important to all this is explaining the context in more detail. Michael Hufton, managing director at ingage, notes: ‘The first, and most important thing is that up until now the question of commission unbundling – be it research or corporate access – has been a closed door in the US. [Nobody has] wanted to go there at all. This really opens that door in a way that will be incredibly difficult to put back.’ Hufton uses the image of it being ‘difficult to put the genie back in the bottle’. Indeed it may well be.
From where we are, Hufton says: ‘This is an explicit declaration that we are going to spend 30 months looking at this, look at what the experience is and examine it properly and come to our own conclusions. That is huge: up until now [the US] has refused to consider it. Now it’s saying it’s going to take a proper look and, in the ‘public interest’, that it’s incredibly important.’
What is clear is that this was a necessary move: as Mifid II requires fund managers to pay for research in hard currency, they cannot pay commission. The current US rules require that they pay commission; they cannot pay hard dollars.
‘The risk was, until this [SEC] letter, that you had an incompatibility in the rules,’ notes Hufton. ‘What this letter does is provide written testimony that any US firm is able to disregard the US rules and adhere to Mifid II without any fear the SEC might take any action, so it gives relief for that period. The fear was that without a no-action letter from the SEC, no US firm would be able to provide research to any European firm.’
At the end of this period the SEC could revert to what happened before. On balance, however, that would seem unlikely. ‘It is too early to tell what the [SEC] conclusions will be at the end of the 30-month period,’ says Hufton. ‘What we know for sure is that for the next two and half years there is going to be no issue in terms of compatibility with Mifid II and SEC rules, because American firms will be able to adopt Mifid II rules and the SEC is going to properly examine the topic.’
Could this move by the SEC therefore mean a major step toward Mifid II becoming a global standard? ‘I wouldn’t be so bold as to say that,’ says Hufton.
There is indeed much ground to travel before this can happen but the signs are potentially there. The motivation for Mifid II to become a global standard comes very much from global managers. ‘Commercial pressures are toward one [global] standard,’ says Hufton. ‘There is evidence of Mifid II starting to globalize. This is the first example of that.’
There have been interesting responses from major players in the US on the SEC move: first, from the Council of Institutional Investors (CII), the US group of 120 asset managers that collectively manages $3 tn of assets. ‘I am told we are putting America first but we seem to be maintaining a system where US investors are paying more for research and subsidizing European investors,’ Jeff Mahoney, general counsel of the CII, told the FT this week on the back of the SEC ruling.
Second, Kara Stein, the only Democrat commissioner at the SEC, in a statement expresses similar sentiments: ‘The [SEC] staff’s no-action … merely kicks the can down the road. While a time-limited approach may allow the staff to study the impact of Mifid II, taking [more than] 900 days is simply unreasonable. It is critical that investors and other market participants have an opportunity to voice their concerns and ideas. I encourage the staff and the commission to consider timely notice and comment rulemaking in order to reach the best policy outcome in this area.’
Picking these apart, under these two influential assessments, the 30 month no-action period means US investors are ‘subsidizing’ European ones because the no-action period allows European fund managers to pay US brokers for research in hard dollars – and evidence shows hard-dollar research cost is falling – but allows domestic US fund managers to continue paying bundled commissions, which are higher than unbundled payments.
In short, and vitally, both the CII and Stein are arguing that the SEC should do more to fully unbundle and, in so doing, create a level playing field between the US and European markets by going wholeheartedly the way of Mifid II.
‘The SEC should seek to create a clear path for the unbundling of research from trade execution, for all investors, including those domiciled in the US,’ says Mahoney in a statement.
This in turn sets out a clear path for Mifid II to become a global standard.