The US Securities and Exchange Commission’s No-Action Letter on MiFID II lapses today and is set to cause regulatory headaches for buy side firms.
And although there are a number of potential solutions, there is no consensus on what direction to take from institutions, according to Substantive Research.
Speaking to BEST EXECUTION, Substantive Research CEO Mike Carrodus said the SEC sees the situation “as a problem of Europe’s making”, despite the fact it is expected many smaller US brokers will suffer.
Carrodus said the regulator believes it has given enough time for the industry to come up with its own solutions.
“Of course, the market thought the no action letter was an elegant solution to regulatory misalignments, and assumed it would stay in place,” Carrodus said.
“Some people also feel that the SEC would welcome any catalyst to encourage more brokers to register as investment advisors.”
Despite a vote within the House Financial Services Committee in the US in May 2023, to ‘direct’ the SEC to extend the protections once again, the SEC has allowed the protections to lapse.
The research firm outlined a number of potential ways forward including brokers becoming registered investment advisors, allowing them to take payments in cash from asset managers but this is not without operational and compliance burdens and risks.
Additionally, the research firm suggested, European asset managers could create structures where they generate commissions from trading, but then reimburse the funds in order to keep research costs away from clients.
The third solution would be for European asset managers to pay US brokers entirely in Europe for research consumed in both regions and covering both markets. However, there is no consensus on which approach holds the most promise, Substantive found.
But the impasse may be partially resolved by impending regulatory alignment in Europe, but not in time to provide clarity in the near-term.
Carrodus said it is likely some form of rebundling will be allowed in Europe next year, “but for it to have any effect in practice then asset managers will want to review how consistent the UK and EU changes are”.
“Then the major obstacle will be that so much of the European buy side pays for research in cash – they will need to decide if they can convince end investor clients to take on these costs once again. In the near term that seems unlikely given the current backdrop in the economic and investing climate, and the focus on feed generally.”
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