SEC: Mifid II is a conflict we didn’t create

Author: John Crabb | Published: 7 Apr 2017
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To the dismay of the market, the Securities and Exchange Commission (SEC) remains unable to clarify how and when it will offer relief to the US sell-side when Europe’s Markets in Financial Instruments Directive (Mifid) II come in to play on January 3 2018.

Vanessa Meeks, senior counsel of the SEC’s investment management division agreed at the Securities Industry and Financial Markets Association’s Mifid II seminar in New York on Tuesday that the EU regulation’s direct conflict with parts of the US regime is proving problematic.

It's not clear how Mifid II will affect US firms
The Commission is yet to address how the long-awaited EU legislation’s requirement that research costs be unbundled from execution costs will affect US counterparts. Tuesday’s panel was in agreement that there will be significant ramifications if it does not do so in the near future.

“We find ourselves in the really awkward position of this not being a conflict that we created. We can’t change our own regulatory regime in response to every conflict that is created somewhere else,” said Meeks.

“We are certainly open to considering requests for narrowly tailored relief from the industry, to the extent that we can help alleviate concerns without poking holes in our own regulatory regime.”

One of the major issues affecting the sell-side is how to appropriately price research to the market following its unbundling from executions, taking into account the requirements of each client on an individual basis. This, along with problems such as how to process payment, has taken up a lot of the industry’s time in recent times.


  • EU rules that require the unbundling of research and execution costs come into force in January 3 2018, as part of the Mifid II legislation;
  • The SEC must clarify how and when it will offer relief to the sell-side in the US, as it is considered impossible to ring-fence the rules so that they only apply in Europe;
  • Not clarifying its position could be damaging for US firms that could be forced to limit research access for EU clients;
  • Conversely the SEC has suggested that it would be inappropriate to provide relief at this premature stage, as it is not a conflict that has been created in the US.

No matter how paramount these questions may be in Europe, by all accounts any conclusion is of little consequence in the US, even at this advanced stage in the negotiations. “We can have really, really great discussions about what we think the price of research should be,” said Steve Haggerty, deputy director of global research at Bank of America Merrill Lynch, “but the uncertainty around the regulatory part becomes almost overwhelming no matter how clever we are at coming up with prices”.

The panel was asked if it would be somehow possible to ring-fence Mifid II, thereby keeping the legislation within the confines of Europe. The consensus here was that this is not a possibility, that Mifid II will have a significant impact on US broker deals. The global economy is organised in a way that both buy-side and sell-side firms provide services across national and continental borders, and research is distributed on a global basis.

As an example, and there are many more just like it, Gerard Citera of JPMorgan drew attention to the fact that although US-based broker dealers may not be directly affected by the legislation, when dealing with European clients they may have the rules imposed on them, be it directly or indirectly. By introducing techniques to limit European clients’ access to valuable US research, and vice-versa, nobody is set to gain, he added.

“Essentially US firms are good at US research, and it is one of our biggest areas. If we are cut off from providing that to European managers, it hurts the managers, and it hurts us.”

This is a situation that US firms will want to avoid. As a result, and assuming that there are multiple scenarios where they will be subject to the legislation, the SEC has been strongly urged to clarify its position on how it will implement Mifid II for those domiciled in the US.

"If we are cut off from providing [US research] to European managers, it hurts the managers, and it hurts us"

The SEC has an unenviable task in providing relief to US firms, facing multiple roadblocks in solving what is ostensibly a global problem. Meeks admitted that there was not an obvious one-size-fits-all solution that the Commission could adopt, and said that even partial fixes could create significant challenges.

“As I am sure everyone knows, doing a statutory amendment – removing the concept of special compensation from the advisory – is not within the SEC's jurisdiction,” added Meeks.

Possible forms of relief could come orally or as formal no-action letters, or as also suggested, informal relief. On this however, Meeks said that it was premature for the commission to make a statement.

“There is no question as to whether informal SEC staff relief would even be appropriate in this case. So, I guess it is too early to tell,” she said.

This isn’t the first time that the SEC has been asked to handle the concept of unbundling, with the panel’s chair Steve Stone, partner at Morgan Lewis & Bockius referencing the 1972 safe-harbour ruling known as Section 28e. The ruling removed the chance of fiduciary duty on money managers who used the “commission dollars of their advised accounts to obtain research and brokerage services”.

In 1972, the SEC was quick to secure an agreement that investment managers and other fiduciaries were able to provide indispensable research. Its position on research unbundling and Mifid II is less clear, but the industry needs swift action or more headaches lie ahead for firms on both continents.

See also

Independent research providers win at Mifid II
Mifid II research rules befuddle managers
What Mifid II's research overhaul means for the buyside