U.S. rules allow for bundling of research and execution costs, and U.S. managers typically pay for sell-side research through bundled client payments for brokerage commissions and research, known as "soft dollar arrangements."
In 2017, a few months before MiFID II took effect, the SEC issued a no-action letter that allowed managers to unbundle research and execution costs and not violate their fiduciary duty. The letter's relief was extended in 2019.
But that relief expired Monday, and Commissioner Mark T. Uyeda is "disappointed that the SEC staff has decided not to extend the MiFID II relief for a modest additional period to accommodate" potential changes out of Europe and the U.K. that could ease the regulation's unbundling requirements, he said in a statement.
"The MiFID II relief sought to resolve a conflicts of law issue caused extraterritorially, and an extension would have been consistent with that approach," he added.
Mr. Uyeda is also concerned that the no-action letter's expiration will make it more difficult for U.S. broker-dealers to provide research.
"While sell-side research has its inherent conflicts of interest, significant restrictions that result in a dearth of sell-side research can result in the outsized prominence of other less credible sources, such as internet speculation, that can impact market prices and increase volatility and for which SEC oversight may be limited," he said. "This result can have adverse consequences for mid-sized and smaller public companies."
Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the lack of action negatively impacts the competitiveness of U.S. markets and research providers, and poses a significant risk that impacted buyside managers will lose access to important research services.
"We continue to believe SEC should take steps to extend the relief provided" in the letter, Mr. Bentsen said. "Such a step would preserve the breadth and depth of research that broker-dealers provide, including research about smaller issuers seeking to raise capital, which is vital to maintaining the competitiveness and efficiency of the U.S. capital markets and promoting informed investment decisions by institutional investors."
A bill to codify the no-action letter's relief was introduced in the House in April and was passed out of the House Financial Services Committee in May.