“This is like sending the dog into your neighbour’s yard!”
When Euromoney sat down with one US capital markets specialist in New York last month, his views on the EU’s Markets in Financial Instruments Directive (Mifid) II’s impact on research provision were unequivocal.
US research providers have long railed against Mifid II’s unbundling requirements, which could force them to register as investment advisers under the Investment Advisers Act of 1940 in order to continue providing research to clients in Europe. US broker-dealers can only receive hard-dollar payments for research if they are also investment advisers, encumbering them with unwelcome additional fiduciary requirements.
On October 24, however, the day after our meeting, the SEC’s Division of Investment Management announced temporary relief from the 1940 Act for 30 months from Mifid II’s implementation in January next year.
This took the form of three “no action” letters, declaring that US broker-dealers may receive payments for research in hard dollars, that money managers can continue to aggregate orders for mutual funds and that money managers can continue to rely on existing safe-harbour laws when paying for research and brokerage – but only for the next 30 months.
Jumping the gun
This waiver ensures that European investors can maintain access to US research and that US broker-dealers can continue to sell it to them. The weight of lobbying by US banks meant that some sort of compromise was expected. Nevertheless, Bank of America Merrill Lynch recently registered its research unit as an investment adviser in a move that might now be seen as jumping the gun.
The “no action” letters are not a solution. They are a temporary reprieve. It is hard to overestimate the extent to which the Mifid II rules on research grate in the US. US banks are angry that research has been such a focus of Mifid II, with some commentators estimating that of the $50 trillion market cap impacted by the new regulations just $5 billion of it is connected to research provision.
There will be a great deal of hard bargaining ahead as US and EU regulators face off on the issue. Section 28(e) of the Securities Exchange Act of 1934, establishes a safe harbour for money managers who use the commission dollars of their advised accounts to purchase brokerage and research services for their managed accounts. And there is little appetite in the US for that to change.
“28 (e) safe harbour for soft dollars isn’t going anywhere,” declares the irate US market specialist. “There is no articulation from the SEC requiring research to be paid for in hard dollars.”
Let battle commence.