May 24, 2023

The Honorable Patrick McHenry
Chairman
Committee on Financial Services
U.S. House of Representatives
2129 Rayburn House Office Building
Washington, DC 20515

The Honorable Maxine Waters
Ranking Member
Committee on Financial Services
U.S. House of Representatives
4340 O’Neill House Office Building
Washington, DC 20515

Re: HFSC Full Committee Markup on May 24, 2023

Dear Chairman McHenry and Ranking Member Waters,

The Securities Industry and Financial Markets Association (SIFMA)1 respectfully submits this letter in connection with the May 24, 2023, House Financial Services Committee markup. We appreciate the Committee’s attention to these issues and thank you for the opportunity to provide our views.

H.R. 2622 – Legislation to Codify MiFID No-Action Letter

This legislation would codify the SEC staff’s no-action letter (NAL) to SIFMA on October 24, 2017, and extended on November 4, 2019, related to the Markets in Financial Instruments Directive II (“MiFID II”) to allow broker-dealers to receive cash payments for research without being deemed to be investment advisers subject to the Investment Advisers Act of 1940.2 That relief is currently set to expire on July 3, 2023.

That relief is critical to addressing the conflicts of law problem that arises between the current MiFID II requirement for investment managers to make separate, unbundled payments for research and the application of the Investment Advisers Act of 1940 (Advisers Act) to any U.S. broker-dealer that accepts such separate, unbundled payments for research. The NAL addresses this problem by preserving the traditional exemption for broker-dealers from the scope of the Advisers Act in connection with the receipt of such separate, unbundled payments for research required under MiFID II.

Neither the industry nor the Commission have found a viable solution that works for all U.S. market participants to address the conflicts of law problem presented by MiFID II in the U.S. In order to continue to accept unbundled payments for research after the relief expires, U.S. broker-dealers will be faced with tough choices that are not workable for some, such as registration of certain parts of their businesses as an investment adviser, and will lead certain firms to cease accepting such payments and cutting off the research provided. While all U.S. broker-dealers providing research would be negatively impacted if the NAL is not extended, regional and smaller broker-dealers who lack European operations would be the most harmed. And, importantly, research coverage of both EU and U.S. issuers would be curtailed.

At the same time, the EU and U.K. have undertaken steps to amend and curtail the MiFID II unbundling requirement. The EU is actively considering amendments to the requirement that are expected to be adopted by the end of the year. And the U.K. is monitoring the EU action and expected to follow suit. Thus, by failing to extend the SEC NAL, U.S. broker-dealers, investment advisors and issuers would be subject to a European requirement that presents a conflict with U.S. law, even though that requirement is likely to change in the future. The proposed legislation would direct the SEC to extend the no action relief through the end of the year, allowing for the EU and expected UK amendments to occur.

The widespread dissemination of research by broker-dealers has historically been critical to capital formation. Preserving the breadth and depth of research that broker-dealers provide, including research about smaller issuers seeking to raise capital, is critical to maintaining the competitiveness and efficiency of the U.S. capital markets. The expiration of the SEC’s no-action relief in July of this year will lead to a further reduction in available research. Codifying this relief will allow U.S.-based entities to avoid significant, irreversible, and entirely unnecessary disruptions to the market for investment research. SIFMA supports this legislation and appreciates its inclusion in the markup.

H.R. 2627 – Increasing Investor Opportunities Act

This legislation would prevent the SEC from setting limits for closed-end funds investing in private funds and would prevent private funds from circumventing anti-pyramiding fund of funds rules. This change would eliminate an informal 15 percent cap enforced by the SEC and would let closed-end funds determine the level of private fund investments that would best meet fund investment objectives and benefit shareholders. This legislation looks to expand the access that retail investors have to the benefits of investing in private markets. In this case, the access comes through an investment adviser and registered investment company. Furthermore, this legislation would provide regulatory fairness and clarity by ensuring private funds are considered “investment companies” on a consistent basis, harmonizing the treatment of private funds with registered mutual funds for fund-of-fund anti-pyramiding rules. SIFMA supports this legislation and appreciates its inclusion in the markup.

H.R. 3063 – Retirement Fairness for Charities and Educational Institutions Act

This bill would provide parity and uniformity across different types of retirement plans by permitting 403(b) plans to invest in Collective Investment Trusts (CITs) and insurance company separate accounts. Currently 403(b) plans are unable to invest in CITs and insurance company separate accounts even though other plan types such as 401ks and Thrift Savings Plans (TSP) can invest in those vehicles. Providing parity in retirement plans will ensure all Americans can securely and effectively save for retirement. SECURE 2.0 included changes to the tax code that provides uniformity to 403(b) plans regarding their tax treatment, however, this legislation did not include the necessary changes to securities law to ensure 403(b) plans were granted a level playing field with other retirement plans. SIFMA supports this provision and appreciates its inclusion in the markup.

We appreciate your consideration of our views on this important mark-up.

Sincerely,

Kenneth E. Bentsen, Jr.
President and CEO
Securities Industry and Financial Markets Association

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 See (https://www.sec.gov/divisions/investment/noaction/2017/sifma-102617-202a.htm) and (https://www.sec.gov/investment/sifma-110419).