July 29, 2022

SEC Director of IM Gives Broker-Dealers Advance Notice on Sales of Research

Mark Highman Commentary by Mark Highman

SEC Director of Investment Management William Birdthistle cautioned broker-dealers that receive cash payments for research from European asset managers that they may be required to register as investment advisers when the SEC's MiFID II no-action letter expires in July 2023. Mr. Birdthistle's remarks were delivered in a speech on the Division of Investment Management's upcoming agenda at an event hosted by Practising Law Institute.

The Division of Investment Management originally issued a no-action letter on October 26, 2017, permitting broker-dealers to receive cash payments for research services from investment advisers subject to the EU's MiFID II without being subject to regulation as "investment advisers" under the Advisers Act. The relief was helpful as such cash payments may constitute "special compensation" for advisory services that may cause a broker-dealer to fall outside the scope of the broker-dealer exclusion from the definition of "investment adviser" in Advisers Act Section 202(a)(11)(C).

On November 4, 2019, the Division of Investment Management issued a subsequent no-action letter, extending the relief until July 3, 2023. In announcing that the SEC does not intend to extend the no-action relief beyond July 2023, Mr. Birdthistle noted that the SEC understands that "firms have developed a variety of solutions to address the impact of MiFID II: Some broker-dealers have dually registered as investment advisers and others utilize a registered adviser affiliate to provide certain research services."

Apart from the reach issue, another major focus of Mr. Birdthistle's speech at the event was the SEC's continued concern that money market funds were subject to rapid runs during times of financial crisis. In this regard, he acknowledged that the SEC's 2008 rule amendments failed to prevent such a run in March 2020. That said, he emphasized that such runs posed a risk to financial stability and presented a problem that the SEC could not ignore or give up on finding a solution.

Commentary

While one may be sympathetic to the notion that a temporary no-action letter should not have a permanent life — and it is good of the director to provide substantial advance notice of the expiration of the SEC's no-action letter to SIFMA — it is still reasonable to ask, "Why should the letter expire?" Insofar as broker-dealers produce research, they are subject to a very substantial body of regulation. It is not obvious that there is any benefit in forcing broker-dealers to also register as advisers: Where is the regulatory gap that will be filled by the requirement of dual registration?

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