Brokers in the US can breathe a sigh of relief today, as the country's securities regulator agreed with the European Commission a way for firms to work around hurdles posed by sweeping new EU markets reforms.
In a move which has been much anticipated by the industry, the US Securities and Exchange Commission (SEC) said it would allow brokers which provide research to asset managers in Europe to accept money for their research.
This change was prompted by the second Markets in Financial Instruments Directive (Mifid II), which is forcing European asset managers to pay a direct fee for research for the first time. They previously paid brokers a commission for their services, and received research effectively for free.
This old system worked well in the US, but the new Mifid II rules posed a problem for US brokers, who under their own laws were not allowed to receive “hard dollars” – or a specific payment – for research unless they registered as an investment adviser.
Instead they could only accept “soft dollars”, or a commission, for research that was given incidentally in their capacity as a broker.
Without the SEC's changes, this would essentially have rendered US research providers unable to offer their services to European asset managers post-Mifid II.
Market players speculated that this was why Bank of America Merrill Lynch applied to be an investment adviser recently. If so, the US banking giant may be regretting that it did not wait little longer to hear the SEC's reprieve.
Andrew Bailey, chief executive of the UK's Financial Conduct Authority, said:
I am grateful for the constructive conversations with the European Commission and SEC over recent months, culminating in today’s announcements. The outcome represents a flexible solution that respects the integrity of both regulatory regimes.
Jeremy Jennings-Mares, a partner at law firm Morrison & Foerster, said today's announcement that brokers would be allowed to receive payments was “a welcome and pragmatic approach by the SEC to address the upcoming conflict”.
However, the SEC has limited its bending of the rules to 30 months. “It solves the immediate issue, but allows for future regulation once the SEC wraps its regulatory arms around how the US and EU laws will work in practice,” said Jennings-Mares.
Rob Moulton, at law firm Latham & Watkins, added that the exceptions granted by the SEC were “narrowly defined”, and although the firms which fell under its scope would find it helpful there would be others left outside.
Dechert's financial regulation partner Monica Gogna said it would be interesting to see how similar dynamics play out in other countries, since many of the affected businesses are multinational.
“The SEC announcement is a reflection of how things can come together with the right engagement by various stakeholders in the industry," she said.
"It is not a ‘game changer’, but it definitely provides some relief that there is some form of certainty on how firms can pay for research to US entities."