SEC MiFID II No-Action Letter: How to preserve access to US research beyond expiration date

In 2017 the SEC issued a no-action letter that enabled US broker dealers who were not registered advisors to accept direct payment for research services from MiFID clients. This allowed firms to continue to service MiFID clients, the majority of which had decided to pay for unbundled research through P&L budget. This week, the SEC announced that they will allow the letter to expire in mid-2023.

This will make MiFID investment firms who need to pay for research independent of trade commissions in conflict with  US broker-dealers who can’t accept payment for research services. Once the letter expires, US-based broker-dealers without advisory status will no longer be able to meet the buy side’s expectations.

As a result, the sell side must separate research activities from broker-dealer operations, or the buy side must adopt more complex and varied systems for managing research agreements depending on the jurisdiction of their providers.

For the buy side, there are two main concerns. First, agreements management teams would need to set up RPAs for providers who have previously accepted hard-dollar payments. Will this require separation of payment methods for the same services in Europe as in the rest of the world? How will cross-subsidisation risks be managed and demonstrated to asset owners who will inevitably ask whether European clients are benefiting from services paid for elsewhere? 

For US providers to adapt, this will require either dually registering as investment advisors by establishing a new and separate business unit to handle research, or forming relationships with registered advisor affiliates to provide certain research services. 

Whether the buy or sell side changes approach to meet SEC requirements, there will be key operational, commercial and competitive considerations for all parties.

This latest development in regulation governing research provision and the relationship between the sell and the buy side further emphasises a long-present trend. The sell side is facing evolving pressures and demands from both regulators and the buy side, and to remain competitive, it’s essential that advisory firms adopt flexible, data-driven approaches to management and operations.

Singletrack is the market leading data-driven analytics platform for capital markets, with extensive experience in supporting sell side firms across their operations, including research distribution and management.

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Firm-type	Key Questions to consider	Needs/ Solutions
MiFID II-eligible European investment managers paying for research through P&L	Should all US research move to RPA and how will RPAs be funded (P&L or client money)? What proportion of highly utilised and valued research is provided by US broker-dealers that cannot accept hard-dollar payments? Are key providers considering exiting or spinning off research services, and what are the implications for continuation of service and maintenance of quality?	Analytics to assess quality and consumption of services Identify at risk-providers Tools to manage agreements with different payment methods
MiFID II-eligible global investment managers paying for research through P&L	How will cross-subsidisation risks be evidenced and mitigated?	Analytics to assess quality and consumption of services Identify at risk-providers Tools to manage agreements with different payment methods
MiFID II-eligible global investment managers paying for research through RPA	Opportunity to increase access to high value services?	Analytics to assess quality and consumption of services
US broker-dealer (not registered as an advisor)	Spin-off / exit non-core research services? Advisor status registration overhead? Potential benefits of advisor status to access new revenue streams (e.g. wealth management)?	Client profitability analytics and reports Smart-servicing tools
US broker-dealers registered as advisors	How to expand market share with MiFID firms that want to pay hard dollar for research?	Prospecting tools Client profitability analytics and reports Smart-servicing tools
Independent US IRPs	How to expand market share with MiFID firms that want to pay hard dollar for research?	Prospecting tools Client profitability analytics and reports
European broker-dealers	Opportunity to expand US coverage and benefit from US payments friction?	Prospecting tools Client profitability analytics and reports