SEC grants US brokers Mifid II compliance extension

Oct 26, 2017
New EU regulation clashes with US rules on paying for research

The SEC has given US brokers a 30-month reprieve from having to make tough decisions on complying with the research unbundling provisions of the EU’s looming Mifid II regulations.

The new rules come into effect on January 3, 2018, and US firms that operate in Europe have been anxious to learn how they can operate on the right side of both Mifid II and domestic regulations.

US rules prevent brokers from selling research for hard dollars unless they are registered with the SEC as investment advisers, whereas Mifid II will require brokers to unbundle research costs from traditional trading fees. Registered investment advisers are required to take on additional fiduciary responsibilities.

The SEC yesterday issued three no-action letters as a temporary fix. They give broker-dealers an extra 30 months during which they can receive research payments from money managers in hard dollars or from advisory clients' research payment accounts. Money managers also may continue to aggregate orders for mutual funds and other clients.

The decision is designed to reduce ‘confusion and operational difficulties’ that may arise from transitioning to Mifid II’s research requirements, SEC chair Jay Clayton says in a statement.

The agency says it needs more time to better understand how Mifid II will affect the equity research business. It will use the 30-month extension to watch the implementation of Mifid II in Europe to assess whether it is appropriate for the US, or whether a different approach is required, officials say in a related filing.

The SEC’s no-action letters state that:

  • Broker-dealers, on a temporary basis, may receive payments in hard dollars or through Mifid-governed research payment accounts from Mifid-affected clients without being considered investment advisers
  • Investment advisers can continue to aggregate client orders for purchases and sales of securities, where some clients may pay different amounts for research because of Mifid II requirements, but all clients will continue to receive the same average price for the security and execution costs.
  • Money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage.

The UK Financial Conduct Authority (FCA) has welcomed the SEC’s steps. Andrew Bailey, the FCA’s CEO, says, ‘The outcome represents a flexible solution that respects the integrity of both regulatory regimes [the US and the European Commission].’

Nathan Greene, partner at Shearman & Sterling, says: 'While there are still cross-border holes, this new and coordinated development is a big step forward.  It at least gives greater certainty of scope with the implementation date now hard upon us.'

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