Need for Continued MiFID II Relief: Overview of Key Issues and Challenges under the Advisers Act
In January 2018, the Markets in Financial Instruments Directive II (“MiFID II”) and related rules and regulations1 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 (collectively, “MiFID II Managers”)) became required to separate, or “unbundle,” payments for “research”, as broadly defined under MiFID II and further described below (“Research Services”),2 from payments for trade execution. To address concerns that registered broker-dealers accepting such required unbundled payments for Research Services consumed by the MiFID II Managers would subject these broker-dealers to regulation as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”), the staff of the Division of Investment Management (“IM”) of the Securities and Exchange Commission (“SEC”) issued a no-action letter in October 2017 to the Securities Industry and Financial Markets Association (“SIFMA”) (the “SIFMA NAL”).3 The SIFMA NAL, which is scheduled to expire on July 3, 2023, has been critical in preserving the market for investment research by providing relief from the conflicts between U.S. and international laws that have impacted research providers and investment managers since the implementation of MiFID II.
In furtherance of our earlier meeting with the staff, and at the staff’s invitation, we are writing to explain in more detail why firms’ moving their research businesses to an investment adviser does not solve the issues created by MiFID II for many SIFMA members and why an expiration of the SIFMA NAL could significantly damage the market for, and some investment managers’ access to, Research Services. 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 light of these considerations, we believe that it is in the best interest of investors and the markets for the SEC to work with the industry to devise a workable long-term solution to the issues and challenges created by MiFID II, and we have outlined three potential paths forward below. However, given that a permanent solution may not be achievable by the scheduled expiration of the SIFMA NAL on July 3, 2023, we believe that an extension of the letter is warranted to prevent a significant disruption to the market for investment research and access to investment research. We urge the staff to take action as soon as possible because uncertainties on the matter are already unsettling arrangements between MiFID II Managers and U.S. brokers, as MiFID II Managers are scrambling to evaluate if they will be cut off from important U.S. broker Research Services.
II. The Broker Dealer Research Business Model Is Incompatible with Investment Adviser Registration
The business models of research providers vary, but a large portion of research is currently provided by broker-dealers that provide a suite of services to investment managers that may constitute “research” under the broad definition in MiFID II regulations4—including (1) written research reports and models produced by the broker-dealers’ independent research departments (“Published Research”), (2) sales and trading commentary and other bespoke trade advisory services (e.g., alpha capture, trading ideas, bespoke analysis) (“Sales and Trading Content”), and (3) interactions with research analysts, either with or withoutthe participation of sales and trading personnel (together, “Research Services”). In addition to these Research Services, these broker-dealers typically also provide traditional sales and trading brokerage services to the same managers or their end clients. The SIFMA NAL, which allowed broker-dealers to accept hard-dollar payments from MiFID II Managers for Research Services without being deemed investment advisers, was necessary because many of the requirements of the Advisers Act are fundamentally incompatible with how these research and sales and trading services are typically provided to investment managers.