Wall Street is getting a three-year reprieve from the SEC on Europe’s tough investment research rules, as the U.S. regulator said it needs additional time to evaluate sweeping changes affecting the brokerage industry.
The SEC announced the extension in a Monday statement, saying American securities firms can adhere to a European requirement that brokers charge clients separately for analysis until at least 2023 and not run the risk of getting sued by the U.S. regulator. Relief that the SEC had granted the industry in 2017 was set to expire in July of next year.
The agency’s move is its latest effort to blunt the impact of the European Union’s revised Markets in Financial Instruments Directive, or MiFID II. American brokerages have warned that breaking out the cost of stock and bond analysis would seriously threaten their research businesses.
A particularly thorny issue for the SEC has been that MiFID poses a conflict with U.S. rules, which restrict brokers from selling research without first registering as investment advisors. Investment advisors have added compliance costs and regulatory burdens, obligations that brokers have been hesitant to take on.
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Practitioners say the rules conceal problems that regulators never fully considered.
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Software from Liquidnet is designed to avoid curbs on dark pools in Europe.
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The regulation encourages more transparency around fees for products that weren’t previously required to reveal such information.
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The SEC issued its extension through what’s known as a no-action letter, a notice that amounts to a regulatory get-out-of-jail free card. The letters inform brokers that they won’t be sued for breaking out the cost of research in Europe — technically a violation of SEC rules if firms aren’t registered as investment advisors
“Today’s extension of the staff’s no-action letter is an important step in our continued efforts to address changes in the market for research payments driven by MiFID II with an eye toward preserving investor access to research to the maximum extent possible,” SEC Chairman Jay Clayton said in a statement announcing the changes. “The impacts of MiFID II are evolving, as EU authorities and regulators in individual EU member states evaluate its effects and consider whether to modify their rules.”
With the clock winding down on the SEC initial reprieve, industry had been pushing for more clarity from the agency. Clayton said the extension will allow the SEC to evaluate if additional guidance or action from the agency is necessary.
Bloomberg News
