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Regulation

Vanguard to absorb research costs after MiFID II goes into effect

Vanguard Group said it will not pass on research costs to its clients once European Union rules requiring disclosure of such costs go into effect in January.

Under the Markets in Financial Instruments Directive II, Vanguard's research costs "are expected to be under $5 million," said Freddy Martino, Vanguard spokesman. "Those research costs will be paid out of the management fees and therefore absorbed in Vanguard's (profit and loss statement).

"Vanguard has extensive internal research capabilities across the investment markets to support both our active and index portfolios," Mr. Martino said, adding that external research is used "where we believe it can add value to our clients."

Under MiFID II, effective Jan. 3, all financial firms that do business or have clients in the EU will be required to disclose research costs as a distinct line item, rather than include them in bundled commissions with executions.

Although U.S. managers aren't required to follow the rules for domestic investments and clients, most are expected to comply with MiFID II because of their global reach and the difficulty in setting up two separate infrastructures — one regime to meet U.S. rules and another to follow EU regulations.