A Cure for Wall Street’s MiFID Migraine in the Works at SEC

  • Agency preparing fix as firms worry about violating U.S. rules
  • Europe’s sweeping research regulations take effect next year

SEC Working on Cure for Wall St.'s MiFID Migraine

Wall Street has been urging Washington for months to blunt the fallout from new European rules that banks say will upend their research businesses. The industry’s top U.S. regulator now appears poised to help.

In recent weeks, the Securities and Exchange Commission has privately signaled to financial firms that it wants to disarm a tripwire that would make it difficult for U.S. brokerages to sell their market analysis to European money managers, according to industry representatives.

After seeming hesitant earlier this year, SEC staffers are engaging more with firms and have intensified efforts to find a solution before Europe’s rules take effect in January, the industry officials said.

At issue are regulations in the revised Markets in Financial Instruments Directive, a sweeping update to a European Union financial law known as MiFID. One of the thorniest provisions is a requirement that brokerages charge money managers for research, rather than offering it as free perk along with other services. Wall Street’s main sticking point: the change conflicts with U.S rules.

“The brokers and investment managers are all down in Washington saying, ‘hey, look we need a solution,’” said Larry Tabb, whose New York-based research firm -- Tabb Group -- recently expanded its London office in preparation for the new rules. SEC staff would be “actually hurting U.S. banks and firms if they don’t create a carve-out policy,” he said.

SEC spokeswoman Judy Burns declined to comment.

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The reason why the impending European regulations are problematic in the U.S. is that under American rules, companies that charge clients money for analysis can be deemed to be providing investment advice. If U.S. brokers have to register as investment advisers, they would have to comply with an additional set of costly restrictions that could shake up their business models, industry trade groups have argued.

At the same time, banks and money managers want to avoid having to operate under different sets of rules for Europe and the U.S., which would be costly and increase legal risks. Europe’s ban on free research is already expected to cost hundreds of employees their jobs, with banks expected to reduce by 30 percent the $4 billion they spend producing analysis, according to a June McKinsey & Co. report.

Washington lobbyists are pressing the SEC to come up with a solution in the next two months so that firms have enough time to make business adjustments before the European rules take effect.

The narrow window means the SEC doesn’t have time to issue new regulations, so its staff will probably issue guidance that provide assurances that firms won’t be sanctioned for complying with the EU rules, said one of the industry officials, who like others asked not to be named because the discussions with regulators aren’t public.

Meanwhile, asset managers want the SEC to clarify that they can pay for research the same way in the U.S. that they will have to in Europe.

Deadline Looming

“The industry is seeking SEC confirmation that global asset managers’ MiFID II compliance plans are consistent with US securities law provisions -- and to do so by the early fall, so that firms have adequate time to prepare,” said Jennifer Choi, an associate general counsel at the Investment Company Institute, a mutual fund trade group. “Confirmation would help global firms continue running efficient global trading and research programs for the benefit of their investors.”

SEC Chairman Jay Clayton told lawmakers in June that his agency was examining the “potential adverse impacts” on U.S. firms and working with European authorities. Since the former Wall Street lawyer took over the SEC in May, the regulator has become more focused on finding a solution, the industry representatives said.

“Clearly this will be one of his first major initiatives,” said Tabb, who runs the consulting group with offices in New York and London. “This needs to be done certainly by the end of the year.”’

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