SIFMA is disappointed with the Securities and Exchange Commission’s (SEC) refusal to extend the relief provided in its 2019 Markets in Financial Instruments Directive II (MiFID II) No-Action Letter (NAL).

The relief, which expired on July 3, 2023, allowed broker-dealers to receive cash payments for research without being deemed investment advisers subject to the Investment Advisers Act of 1940 (Advisers Act).

Investment managers rely on a robust and diverse offering of investment research to fully inform their decision-making processes and to support the performance of their fiduciary duties to clients. Investment research also plays a critical role in the efficiency of the markets.

In January 2018, the Markets in Financial Instruments Directive II (MiFID II) and related rules and regulations were implemented, and investment managers subject to MiFID II (which includes both EU- and UK-based investment managers and U.S.-based investment managers that manage certain EU and UK accounts) were immediately required to separate, or unbundle, payments for research, as broadly defined under MiFID II, from payments for trade execution.

SIFMA raised strong concerns over the requirement that registered broker-dealers accepting such required unbundled payments for research services consumed by the MiFID II managers would be subject to regulation as investment advisers under the Investment Advisers Act of 1940. In October 2017, the SEC responded to these concerns with the issuance of a no-action letter that it subsequently extended in November 2019. The no-action relief under that extension will expire on July 3, 2023.

No-action relief was necessary because of the change of law in the EU and UK, but at this point, the EU and the UK are rethinking their own approach to the rule. Extension of the no-action relief is critical to allow current processes in Europe that involve rolling back the MiFID II research reforms to play out.

In a recent report, Coalition Greenwich (a division of CRISIL) conducted in-depth research that details sell- and buy-side concerns and finds:

  • 96% of sell-side respondents are unsure their firms will need to terminate or restrict access to research when the letter expires;
  • By a large margin, industry participants prefer that the SEC extend the no-action relief – most suggest indefinitely; and
  • Overall, the expiration of the SEC MiFID II no-action letter is expected to have significant implications for the research and asset management industries.

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, facilitating capital formation in the U.S., and promoting informed investment decisions by institutional investors.

U.S. broker-dealers and investment managers should not be forced to curtail research coverage of public companies or potentially change operations solely for the purpose of complying with a European regulation that appears destined to fade away.

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