MiFID II no-action letter expiry: who will take responsibility?
Recently Singletrack met with a group of representatives in London for an informal discussion of the most pressing issues facing the buy side at the moment. Our discussion was wide-ranging: we spoke about the difficulty of balancing research and data needs for the buy side, communication and feedback between sell and buy sides, the effects of shrinking budgets across capital markets and more. But, of course, the upcoming expiry of the SEC’s MiFID II no-action letter was in the front of everyone’s minds.
When we met, it had become clear that the SEC isn’t planning a u-turn on the expiry. Now is the time for firms across the industry to prepare. But how? And whose responsibility is it to ensure compliance with the new rules once the letter expires next summer?
Early in our discussion, a few expressed the view that the sell side will have to take responsibility. Partially, this related to a sense that the customer is king: buy side firms manage the money which pays research providers, so US sell side firms need to figure out how to maintain compliance when they accept payment.
However, taking this approach, and expecting the sell side to shoulder the burden will put a lot of pressure on research providers, and that pressure won’t be applied evenly.
One possible solution is that US research providers supplying research to European asset managers could seek Registered Investment Advisor (RIA) status to continue servicing clients after the letter expires. To add strength to this, some mentioned that a number of mid-tier research providers are already RIAs.
But there are a few drawbacks. This solution may prove too difficult to implement by the deadline for many providers – the process in the past has proven to be time consuming and complex. And it also introduces a consolidation risk: smaller sell side firms and IRPs are likely to struggle disproportionately with becoming RIAs. This might push more and more buy side firms to seek their research from bigger outfits who already have structures in place, are better able to adapt, or have access to alternative workarounds. Our buy side attendees agreed that losing access to the more diverse intelligence and opinion of a larger number of research providers is bad news for the industry.
We’ve mentioned other potential workarounds, one of those is for US-based firms to simply run their research business through Europe, avoiding the problem altogether. However, this solution presents many of the same risks as relying on RIA status. Of course, it’s only open to sell side firms who already have a UK/EU footprint, which means it’s unlikely to work for smaller providers in particular.
Despite the apparent lack of appetite for change on the buy side, the fact that many proposed solutions and workarounds are likely to favour big research providers and lock out smaller ones means the buy side may be forced to reconsider its stance. Some expressed the view that traders and portfolio managers (PMs) could find that their activities are directly affected by losing access to certain trusted research providers.
While the buy side might not want to take on any of the compliance burden at the moment, the picture may change if and when it becomes clear that the no-action letter expiry will cut off access to key research providers.
We don’t know yet. The situation is still evolving. This was reflected in our discussion – a consensus hasn’t emerged about how either the sell side or the buy side might, or should, adapt.
But it is clear that the letter expiry will be disruptive, both for people who produce and for people who consume research. So disruptive, in fact, that it’s likely to have an effect on profits, at least to begin with.
Of course, all this comes at a time when both the buy and sell sides are under lots of other pressures: economic turbulence and a volatile geopolitical situation mean reduced budgets across the board.
Given this situation, firms across the industry are keen to focus on maintaining their core activities at a high standard. For the sell side, that means finding ways to provide great service to their clients as efficiently as possible, and for the buy side, that means ensuring that research budgets are allocated to providers who give the best return on investment.
One step towards clarity in such uncertain times is to adopt data-driven ways of working. Knowing where efforts and resources are going, and determining where they should be going, is the key to surviving or even thriving in turbulent times.