The U.K. Financial Conduct Authority has welcomed the U.S. Securities and Exchange Commission’s extension of no-action relief addressing a potential conflict between U.S. regulation and the inducements and research provisions of the revised Markets in Financial Instruments Directive. One of MiFID II’s objectives is to give investors transparency into the cost of both research and trading commissions by requiring payments for these elements to be unbundled. The research that investment managers typically receive from brokers will, under MiFID II, generally be classified as a prohibited “inducement” unless the investment manager pays for the research either: (a) directly from its own resources; (b) from a “Research Payment Account” funded with an advisory client’s money and with the client’s prior approval; or (c) a combination of the two methods.
In its original no-action letter, dated October 26, 2017, the SEC confirmed that it would not take action against broker-dealers providing research services in return for MiFID II-compliant direct payments from EU investment managers where such payment would usually amount to accepting “hard dollar” payments and the research being deemed to be “investment advice” under relevant U.S. legislation. The SEC’s extension of its original no-action statement (which was due to expire on July 3, 2020) means no-action will be taken in respect of such payments by the SEC for an extended period up to July 3, 2023. The SEC states that this will allow additional time for it to monitor and assess the evolving impact of MiFID II and will give EU authorities and Member State regulators additional time to evaluate the effect of MiFID II.
The FCA published its own multi-firm review of MiFID II’s unbundling reforms in September this year, in which it found that the MiFID II reforms have improved asset managers’ accountability over costs. It plans to conduct further work in one or two years’ time to assess ongoing compliance with its rules.