Securities Regulation Daily SEC staff provides relief to facilitate MiFID II research changes
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Thursday, October 26, 2017

SEC staff provides relief to facilitate MiFID II research changes

By Amy Leisinger, J.D.

The SEC staff has issued a series of no-action letters to provide market participants with greater certainty regarding their U.S.-regulated activities as they come into compliance with the new research provisions of the EU’s MiFID II. Specifically, subject to certain conditions, the relief allows broker-dealers to temporarily receive money managers’ research payments in hard dollars or from advisory clients' research payment accounts, permits managers to continue to aggregate orders for mutual funds, and enables managers to continue to rely on Exchange Act Section 28(e)’s existing safe harbor when paying broker-dealers for research and brokerage. The relief is designed to provide the staff with time to understand business changes following implementation of MiFID II and to determine whether additional action is necessary.

The relief is also designed to reduce confusion and difficulties that might arise in the transition to MiFID II’s research provisions and accommodate the requirements without substantially changing the U.S. regulatory approach, said SEC Chairman Jay Clayton. Commissioner Kara Stein, however, opined that the relief does not go far enough to address questions about transparency and investor protection and give an advantage to some market participants over others.

Hard dollar and advisory client payments. The Securities Industry and Financial Markets Association expressed concern to the staff that broker-dealers would not be able to provide research services to managers without subjecting themselves to regulation under the Advisers Act in connection with MiFID II. In response, the Division of Investment Management agreed to provide temporary relief for 30 months following MiFID II’s implementation date to permit broker-dealers providing research services constituting investment advice to receive hard dollar payments or payments through research accounts funded by clients without being considered an investment adviser.

Aggregation of orders. In response to a request from the Investment Company Institute, the IM division also provided relief under the Investment Company Act and the Advisers Act to permit advisers to continue to aggregate orders for securities purchases and sales on behalf of clients in reliance on previously issued no-action relief. In the prior relief, the staff stated that the aggregation of orders for advisory clients would not violate the acts if the adviser implemented procedures designed to prevent any account from being systematically disadvantaged by the process. The current relief applies where some clients may pay different amounts for research under MiFID II’s requirement of separation of execution and research payments but all clients continue to receive the same average price for the underlying security and execution costs.

Section 28(e) safe harbor. The safe harbor found in Exchange Act Section 28(e) addresses how a money manager may use client commissions to purchase brokerage and research services without breaching its fiduciary duty. Under MiFID II, managers may make payments to an executing broker-dealer out of client assets for research alongside payments for order execution, and the executing broker-dealer must transmit the research payments into specific research payment accounts (RPAs). The Division of Trading and Markets provided relief to permit managers to operate within the safe harbor if they make contemporaneous payments for research and execution through an RPA that conforms to MiFID II’s requirements and the research payments are for services eligible for the Section 28(e) safe harbor. To qualify, the executing broker-dealer must be legally obligated to pay for the research and meet all other applicable conditions of Section 28(e).

Companies: Securities Industry and Financial Markets Association; Investment Company Institute

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