In three no-action letters, the SEC has provided some relief for investment advisers in complying with the European Union's overhaul of its securities regulations. Commonly referred to as MiFID II, which is set to take effect in January 2018, the directive will require investment advisers to pay for research either with its own money or through MiFID-governed research payment accounts (RPAs).
In trying to conform to MiFID, U.S.-based advisers struggle with creating a single compliance procedure for research payments in both the United States and Europe because the rules for RPAs are incompatible with current U.S. research payment rules. Section 28(e) under the Securities Exchange Act of 1934 allows investment advisers to use client commissions to purchase research without breaching its fiduciary duty to its client.
In the United States, investment advisers often use client commission arrangements to obtain brokerage and research services from a broker-dealer, typically under a commission sharing agreement or similar structure, which results in the funds being deemed an asset of the broker-dealer.
Under MiFID II, an investment adviser may make payments to an executing broker-dealer out of client assets for research alongside payments for order execution, and the executing broker-dealer must transmit the payments for research into the RPA, which is controlled by the investment adviser.
The staff's no action letter allows an investment adviser to comply with Section 28(e) if the investment adviser makes payments for research to an executing broker-dealer out of client assets alongside payments for execution through the use of a complaint RPA.
In the second no-action letter, the staff provided for a 30-month hiatus to permit a broker-dealer to receive payments either in hard dollars or through RPAs without being considered an investment adviser under the Investment Adviser Act of 1940 (Advisers Act).
Finally, in the third no-action letter, the staff provided relief under the Investment Company Act of 1940 and the Advisers Act to permit investment advisers to continue to aggregate client orders for purchases and sales of securities provided all clients will continue to receive the same average price for the security and execution costs, but some clients may pay research costs due to MiFID II's research payment obligations.
The SEC staff specifically asked for industry participants to comment on the impact of MiFID II's research provisions.
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