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European regulations on soft dollar commission and investment research adopted as part of MiFID II are changing practices in the US.

The Future of Research in the US after MiFID II

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Overview and Recommended Requirements for Investment Managers and Advisers

This paper:

  • explores the history of research payment rules in the United States,
  • outlines the global changes in research procurement and payment practices,
  • explains why these changes are happening now, and
  • offers regulatory recommendations to address these changes.

CFA Institute, together with the Healthy Markets Association (Healthy Markets) and the Council of Institutional Investors (collectively, the Coalition), conveyed two recommendations to Jay Clayton, Chair of the US Securities and Exchange Commission (Commission or SEC) to address issues raised by the Markets in Financial Instruments Directive II (MiFID II) for US-based broker/dealers and asset managers. The Coalition recommended that the SEC revise guidance under Section 28(e) of the Securities Exchange Act of 1934 (the Exchange Act) as follows:

  1. require investment managers and advisers who seek to rely on the Section 28(e) safe harbor to disclose amounts paid for research from client assets; and
  2. require investment managers and advisers who seek to rely on the Section 28(e) safe harbor to adopt and implement procedures to ensure benefits of research go to the asset owners who pay for it.

Our Position

Recommended Regulatory and Industry Response

To address the conflicts and changes MiFID II has created for US-based broker/dealers and asset managers, we recommend the following regulatory and industry responses:

  1. the SEC should interpret Section 202(a)(11) to permit broker/dealers to accept cash as payment for investment research without having to register as investment advisers;
  2. the SEC should require asset managers to disclose to their asset-owner clients the cost of research purchased on their behalf through Client Brokerage arrangements;
  3. asset managers should adopt policies and procedures to ensure that the research purchased from Client Brokerage arrangements, over time, benefits the asset owners whose trading commissions paid for the research;
  4. asset managers should adopt and implement policies and procedures that move toward separating research procurement decisions from decisions about with whom and how to trade;
  5. the SEC should consider investor outcomes rather than specific costs, when interpreting whether an investment manager or adviser is achieving best execution for its clients; and
  6. the SEC should revise its interpretations of Section 28(e) and such other rules and guidance as is necessary and appropriate to effectuate these recommended reforms.

Main Points

MiFID II is causing tectonic shifts in the competitive balance between asset managers, brokers, and research providers.

Sophisticated asset owners, for example, have long called for disclosure of research costs paid through Client Brokerage, but with little success. Sensing the change in competitive balance from MiFID II, however, US asset owners are not only demanding disclosure of how their hired asset managers are using Client Brokerage, but in some cases demanding they not be asked to pay for research at all. Globally, too, asset managers are adjusting what they will pay for broker research as part of their broker selection and trading decisions. At the other end of the spectrum, many research providers are struggling to adapt to increased price transparency and increased scrutiny of research and trading costs.

Although ostensibly applicable only to investment firms in the 28 EU member states, MiFID II has created important and foundational changes in the global research market. That conflict ultimately required the no-action relief for brokers and asset managers that is the concern of this report.

About the Author(s)

Jim Allen
James Allen CFA

Jim Allen, CFA, is head, capital markets policy, Americas, at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

Tyler Gellasch

Tyler Gellasch is a leading capital markets policy expert whose opinions and insights are frequently sought by regulators, members of congress, market participants, and the press. Gellasch’s public service included five years as Counsel in the US Senate, as well as service as Counsel to then-new SEC Commissioner Kara M. Stein. In private practice, Gellasch has served as a general counsel of a boutique investment bank, as well as associate at Mayer Brown LLP and Morgan, Lewis & Bockius, LLP. Gellasch is also a Founder of Myrtle Makena, LLC, a consulting firm. Gellasch received his undergraduate degree from Case Western Reserve University. Both his juris doctor and master's degree in economics were awarded by Duke University.

Kurt Schacht
Kurt Schacht JD, CFA

Kurt Schacht, JD, CFA, is managing director for policy and regulatory relations at CFA Institute. He oversees global advocacy efforts including regulatory consultations, policy research, standard setter engagement and serves on a range of stakeholder advisory groups engaged on investment management policy issues. His work is focused on advancing investor protection, financial market transparency and fairness, financial reporting and audit policy and industry professionalism. He is former Chairman of the Investor Advisory Committee to the U.S. Securities and Exchange Commission (SEC) and is currently serving a three-year term as a member of the Board of Trustees for the IFRS Foundation which oversees the IASB. He served as a member of the European Commission's Expert Group on Corporate Bond Market Liquidity based in Brussels in 2017. He is a member of the: Harvard Corporate Governance Forum Advisory Council; Board of Trustees - for the Greenwich Roundtable; Advisory Board - Columbia Law Millstein Center for Global Markets. He served two terms on the Public Company Accounting Oversight Board's standing advisory group. Previously, Schacht served as chief operating and legal officer for a retail mutual complex; general counsel and COO for a Manhattan-based hedge fund; and chief legal officer for the State of Wisconsin Investment Board in Madison, Wisconsin. Schacht holds a BS degree and a JD degree from the University of Wisconsin. He was awarded the CFA charter in 1998.