SEC headquarters in Washington. (Photo: NLJ)

The Securities and Exchange Commission has given U.S. advisors and broker-dealers relief from the impending requirements under the Markets in Financial Instruments Directive, or MiFID II, which has been applied across the European Union since November 2007.

SEC staff in the Divisions of Investment Management and Enforcement provided no-action relief in letters to the Securities Industry and Financial Markets Association as well as the Investment Company Institute, allowing U.S. advisors and broker-dealers to continue current payment and aggregation practices for research and brokerage notwithstanding impending MiFID II requirements.

The three companion no-action letters allow:

  • broker-dealers to avoid advisor registration even when receiving research payments in hard dollars,
  • advisors to continue to aggregate orders even though MiFID II may require certain clients to pay more for research, and
  • broker-dealers to continue to receive bundled commissions.

“We are pleased that the SEC has provided relief for investment advisors affected by these European regulations,” said Karen Barr, president and CEO of the Investment Adviser Association, in a statement emailed to ThinkAdvisor. “The SEC’s actions have reduced the substantial uncertainty our members have lived under as they have tried to plan for implementation of MiFID II.”

According to the European Securities and Markets Authority, MiFID II requirements seek to improve the competitiveness of EU financial markets by creating a single market for investment services and activities and to ensure a high degree of harmonized protection for investors in financial instruments.

In its no-action letter, the SEC’s Division of Investment Management provided relief for 30 months from MiFID II’s implementation date under the Investment Advisers Act of 1940 to permit a broker-dealer to receive payments in hard dollars or through MiFID-governed research payment accounts from MiFID-affected clients without being considered an investment advisor.

In connection with this temporary relief, the IM division says that “staff will continue to monitor and assess the impact of MiFID II’s requirements on the research marketplace and affected participants in order to ascertain whether more tailored or different action, including rulemaking, is necessary and appropriate in the public interest.”

Cipperman Compliance Services noted that while the no-action letters are “good news for U.S. advisors and broker-dealers, who will not have to change business practices as a result of MiFID II, the bigger question is how long European regulators will allow U.S. firms a pass.”

The agency’s Enforcement Division provided no-action relief, which states that the Exchange Act Section 28(e) safe harbor addresses the manner in which a money manager can use client commissions to purchase “brokerage and research services” without breaching its fiduciary duty. 

“In the U.S., money managers often use client commission arrangements to obtain brokerage and research services from a broker-dealer, using a single, ‘bundled’ commission that is separated after execution to pay for order execution and research,” the SEC explained.

The no-action relief also states that under MiFID II, money managers 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 research payment accounts (RPAs).

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