CRS Considers Expiration of SEC No-Action Relief on MiFID II Research Payments

The Congressional Research Service ("CRS") considered the potential impact of the expiration of the Division of Investment Management’s 2017 no-action letter permitting broker-dealers to receive cash payments for research services from investment managers subject to the EU’s Markets in Financial Instruments Directive II ("MIFID II") without being subject to regulation as "investment advisers" under the Advisers Act.

In a Report, the CRS explained that MIFID II was amended in 2018 to ban EU-based investment advisers from "bundled soft-dollar" practices, including (i) compensating broker-dealers with a single trading commission for both stock portfolio research and executing their securities trades or (ii) engaging in certain commission sharing arrangements. The CRS stated that MiFID II generally required MiFID-regulated investment advisers to make separate payments for securities research and trade execution services. The SEC’s Division of Investment Management issued the 2017 no-action letter in order to permit broker-dealers to receive cash payments for securities research from MiFID-regulated investment managers without falling within the scope of investment adviser regulation, and to assist the SEC to "better understand the evolution of business practices after the implementation of MIFID II."

The CRS noted the expiration date of the SEC no-action letter, July 3, 2023 and referenced SEC Chair Gary Gensler’s statement in June 2023 that the SEC intends to allow the no-action letter to expire. The CRS stated that U.S. broker-dealers impacted by MIFID II will likely (i) register as investment advisers, (ii) move research personnel to affiliates registered as investment advisers or (iii) withhold research produced by their U.S.-based operations from MIFID- and UK-regulated clients.

The CRS reported that the prospect of the expiration of the no-action letter has received "mixed responses." The CRS highlighted the House Financial Services Committee consideration of legislation that would codify the no-action letter. Separately, CRS noted that SIFMA warned that broker-dealer trading practices are incompatible with the disclosure and consent requirements under the Advisers Act, particularly in the context of high-speed trading. Further, CRS said that some market participants have called for the SEC to delay the expiration of the no-action letter until the EU and UK have concluded their assessment of MIFID II’s impact on smaller-sized firms. The CRS also noted that those supporting expiration assert that it would result in a more competitive market by increasing transparency as to the cost of research and trade execution services.