The regulator is providing relief for U.S. firms facing tough research unbundling provisions. But a key commissioner says the 900-day delay is too long.
Jay Clayton, SEC chairman
The SEC, after consulting with European Union authorities, has issued three no-action letters intended to pause for 30-months some of the burdens associated with the MiFID II stipulation that firms unbundle research, a new requirement hitting home for many U.S. securities firms.
However, SEC Commissioner Kara M. Stein, a Democrat on the commission, says that she objects to the pause, calling the 900-days of relief “simply unreasonable.”
One of the major changes of the MiFID II reforms is the requirement that there be an unbundling of the money for research that buy-side firms pay to sell-side firms. Industry observers note that this pending reform will create new compliance burdens for buy-side firms and confusion for sell-side firms.
The SEC’s new temporary no-action relief will facilitate compliance with the MiFID II research provisions “while respecting the existing U.S. regulatory structure,” SEC officials say.
“The no-action relief provides a path for market participants to comply with the research requirements of MiFID II in a manner that is consistent with the U.S. federal securities laws,” according to the SEC.
“More specifically, and subject to various terms and conditions: (1) broker-dealers, on a temporary basis, may receive research payments from money managers in hard dollars or from advisory clients’ research payment accounts; (2) money managers may continue to aggregate orders for mutual funds and other clients; and (3) money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage,” according to SEC staff.
Stein issued a public statement on Oct. 26, challenging the adequacy of the SEC’s decision.
“Questions about transparency and investor protection are central to this conflict. When payments for research and trading are combined, do investors know that they are paying for research? Do investors know what they are paying for trading? Do investors know of the potential conflicts of bundled payments?” asks Stein in her statement.
“The staff’s no-action relief does not adequately address these issues and merely kicks the can down the road. This inaction may be costly to investors
Patrick Shea, head of global compliance, Cordium
and advantage some market participants over others. While a time-limited approach may allow the staff to study the impact of MiFID II, taking over 900 days is simply unreasonable,” Stein says.
The SEC created the no-action relief “with input from a range of market participants to reduce confusion and operational difficulties that might arise in the transition to MiFID II’s research provisions,” says SEC Chairman Jay Clayton, in a prepared statement.
“Staff’s letters take a measured approach in an area where the EU has mandated a change in the scope of accepted practice, and accommodate that change without substantially altering the U.S. regulatory approach,” Clayton says. “These steps should preserve investor access to research in the near term, during which the Commission can assess the need for any further action. Cooperation with European authorities, including the European Commission, has been instrumental to the SEC’s efforts, and I welcome the additional guidance the EC published today. We look forward to continued dialogue on this and other important issues.”
The no-action relief also buys time for SEC staff so that they can “better understand the evolution of business practices after implementation of the MiFID II research provisions,” according to the SEC. “During the period of the temporary relief, the staff will monitor and assess the impact of MiFID II’s research provisions on the research marketplace and affected participants in order to determine whether more tailored or different action, including rulemaking, is necessary and appropriate in the public interest.”
Some industry participants have initially expressed support for the SEC’s action.
The three no-action letters “will enable some U.S.-registered broker-dealers and money managers to breathe a sigh of relief when it comes to managing the unbundling of research,” says Patrick Shea, head of global compliance at Cordium, a governance, risk and compliance services vendor, in a prepared statement.
“Although the investment management industry expected that the relief would come, the release of the no-action letters provides certainty as firms with U.S. regulated activities and an E.U. nexus confirm MiFID II readiness,” Shea says. “MiFID II is a complex piece of regulation with a broad scope, and firms must ensure that they have closely explored all aspects and assessed relevant impact in order to feel confident that they will be compliant come January 3, 2018.”
SEC officials are encouraging comments from the public on the impact of the MiFID II’s research provisions on broker-dealers and their business models, investors, and the quantity and quality of research. Comments can be sent via this webform or via email at rule-comments@sec.gov
Need a Reprint?