Expiration of SEC Staff’s No Action Letters Providing Relief to Broker-Dealers Regarding MiFID II Research Requirements1
On July 3, 2023, the U.S. Securities and Exchange Commission (the “SEC”) let expire a long-standing Division of Investment Management temporary no-action letter under the Investment Advisers Act of 1940, as amended (“Advisers Act”), regarding compliance with provisions relating to research in the Markets in Financial Instruments Directive II (“MiFID II”), a legislative framework instituted by the European Union to regulate financial markets. Under the now-expired relief, the SEC committed that the Staff would not recommend enforcement action under Section 202(a)(11) of the Advisers Act against a broker-dealer providing “investment advice” to an investment manager that was required by MiFID II to pay for research with its own funds or with “hard dollars” passed through a separate research payment account.
S&K Observations for Broker-Dealers and Asset Managers Impacted by MiFID II
Among the reasons behind the SEC’s three-year extension of its MiFID II-related no-action relief was an acknowledgement that research-related business practices were rapidly evolving in the wake of MiFID II, and that “various challenges remain[ed]” when the extension was made in November 2019. The SEC further noted that the MiFID II effects on supply and demand for research were still developing and that market participants were expressing concerns about the impacts on small- and mid-sized entities from the regulatory changes. Therefore, the extension provided time for the SEC to “continue to monitor and assess the evolving impacts of MiFID II and evaluate whether any additional guidance or recommendations to the Commission for regulatory actions are appropriate.”
Notwithstanding these acknowledgements, since November 2019, the SEC has provided no meaningful guidance or recommendations to enable broker-dealers to understand what research-related activities might be considered “investment advice” such that a broker-dealer would be at risk of being recommended for Enforcement action. In a recent survey co-commissioned by the Securities and Financial Markets Association (“SIFMA”),2 both buy-side and sell-side respondents expressed confusion about the state of play upon expiration of the no-action relief, given the lack of options for certain market participants, particularly broker-dealers that currently issue research to MiFID II-impacted investment managers that do not have an ability to issue research through an affiliated investment adviser.
Broker-dealers have reacted in a variety of ways in the face of the expiring relief. Some U.S. broker-dealers have been forced to cease offering research, while other have taken unusual measures such as seeking acknowledgments that their unbundled research has no value to the counterparty recipient.
One thing that is now clear: the resurgent conflict between U.S. securities laws and those governing MiFID II firms has created significant confusion in the cross-border marketplace. U.S. broker-dealers in receipt of hard dollars for research may be at risk, particularly if their research activities are not sufficiently related to the business of effecting securities transactions. Other involved parties may also be concerned about the collateral consequences of, for example, placing a zero-dollar value on unbundled research.
1 Seward & Kissel’s prior alerts regarding MiFID II can be found here: October 27, 2017, November 6, 2017 and November 19, 2019.
2 https://www.greenwich.com/market-structure-technology/expiration-mifid-ii-no-action-letter
