The division of investment management issued three no-action letters, providing 30 months relief under the Investment Advisors Act of 1940, allowing US broker-dealers to receive payments in hard dollars, or through MiFID II-governed research payment accounts, from MiFID II-affected clients, without being considered an investment advisor.
The relief will also allow investment advisers to continue to aggregate orders for the purchase and sale of securities, with some clients paying different amounts for research, but all receiving the same average price for security and execution costs.
Finally, it allows money managers to operate in a safe harbour when making research payments to a broker-dealer out of client assets, if they’re making payment for execution through a research payment account.
Under MiFID II, investment research must be bespoke to each institution, and investment firms must pay for research with their own funds, or through a separate designated account, which is charged to the client.
Research fees must also be separated from execution and trading fees under MiFID II. The new rules are designed to improve transparency, and to stop research costs being unfairly passed on to clients.
Although the directive is an EU initiative, international firms working with European counterparties must adhere to the rules, or put a stop to those relationships.
A commission statement on the three no-action relief letters said: “Money managers may continue to aggregate orders for mutual funds and other clients; and money managers may continue to rely on an existing safe harbour when paying broker-dealers for research and brokerage.”
The decision was taken in consultation with European authorities in response to uncertainty from US brokers.
Jay Clayton, chair of the SEC, said: ”Today’s no-action relief was designed 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.”
He added: “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 news has been welcomed by an industry scrambling to make final arrangements for MiFID II research unbundling.
Chris Turnbull, co-founder of the Electronic Research Interchange (ERIC), said: “Arranged through extensive cooperation with the European Commission, these clarifications ensure regulatory harmony while supporting an agenda which should ultimately improve research quality.”
He added: “This change has been made with a clear focus on investors’ best interests. While the relief is temporary, we expect solutions that enable firms to access research which benefits their clients – no matter the source – will be maintained.”
However SEC Commissioner Kara Stein has concerns over the no-action letters, saying it “merely kicks the can down the road”.
Stein said: “This inaction may be costly to investors 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.”
“Transparency and disclosure are vital to our capital markets. Transparency in government process is equally important.”