When MiFID II comes into effect in two months' time, investment managers subject to its requirements will have to ‘unbundle’ the execution and research payments they make to broker-dealers, with research services being paid for with the investment manager’s own funds, an account funded with client money or a combination of the two.

Under SEC rules, a US broker-dealer receiving such payments (or ‘hard dollars’) for research, as opposed to being compensated through trading commissions (or ‘soft dollars’), would become subject to the requirements applicable to investment advisers under the US Investment Advisers Act (the ‘US Advisers Act’), many of which are inconsistent with their broker-dealer roles such as fiduciary duties and related compliance obligations.

Recognising this conflict and to preserve investor access to research in the near term, the SEC has granted temporary relief from the US Advisers Act to broker-dealers that receive unbundled research payments from investment managers subject to MiFID II.

The SEC also granted related relief to investment advisers and money managers, enabling them to continue to:

  • aggregate orders for clients who may be paying differing amounts with respect to research because of MiFID II requirements; and
  • rely on an existing safe harbour from being deemed to have acted unlawfully or breached fiduciary duties when payments for research are made out of an account funded with client money, one option permitted by MiFID II, alongside payments for execution.

The relief runs for 30 months starting from the day of MiFID II implementation (3 January) during which time the SEC intends to monitor and assess the impact of MiFID II on the research marketplace and whether more tailored or different action is necessary and appropriate.