On Oct. 26, 2017, the U.S. Securities and Exchange Commission (SEC) staff issued three no-action letters intended to provide guidance to broker-dealers and investment advisers affected by the European Union’s Markets in Financial Instruments Directive (MiFID) II requirements, which become effective on Jan 3, 2018. MiFID II, among other requirements, compels EU investment managers to pay separately for trade execution and for investment research — services that historically have been bundled in the U.S. Specifically, the SEC staff advised:
- Investment adviser registration for broker-dealers. In a letter to the Securities Industry and Financial Markets Association (SIFMA), the SEC Division of Investment Management staff stated that for the first 30 months after the implementation of MiFID II (i.e., until July 2020), a U.S. broker-dealer may accept payments from an investment manager required by MiFID II to pay for investment research, without being registered as an investment adviser.
- Section 28(e) of the Exchange Act. In a letter to the SIFMA Asset Management Group, the SEC Division of Trading and Markets stated that payments made to an executing broker-dealer out of client assets for research, if made alongside payments to that executing broker-dealer for execution, would qualify under the safe harbor in Section 28(e) of the Securities Exchange Act of 1934 so long as all of the other conditions for reliance on Section 28(e) were also satisfied.
- Aggregation. In a letter to the Investment Company Institute (ICI), the SEC Division of Investment Management staff stated that an investment adviser may aggregate orders for execution without violating Section 17(d) of the Investment Company Act or Rule 17d-1 if the orders participate in the same average price for the underlying security and pay the same pro rata share of execution costs, even if some of the orders pay for research costs and others of the orders (because of MiFID II) do not.
On the same day, in what appears to be a coordinated move, the European Commission published FAQs on EU MiFID firms obtaining brokerage and research services from non-EU brokers.
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