You may have heard about MiFID II, but what is it really all about?
Here it is in a nutshell. Recently the European Union adopted a new regulation, its "Markets in Financial Instruments Directive"(MiFID II), which will take effect on January 3, 2018, and includes new requirements that will affect how asset managers and their clients, including registered funds, pay for investment research. In some ways it harkens back to the soft dollar requirements here in the US, but in reality MiFID II is more potentially intrusive on operations. That'd be especially true for broker-dealers who, because of the regulation, could be forced to register as investment advisers....and for advisers who aggregate aggregate client orders for purchases and sales of securities. In the latter case, because of MiFID II requirements some clients may pay different amounts for research, which potentially runs afoul of the SEC's past guidance on aggregation of orders. Fortunately, the SEC issued three no-action letters to provide relief to affected brokers and advisers.
Critically, MiFID II bans the receipt and retention of fees, commissions, or any monetary or non-monetary benefits paid or provided by a third party in relation to providing portfolio management services or independent advice to clients. However, “Minor non-monetary benefits” capable of enhancing the quality of service provided to a client are permitted, if they are disclosed and they are of a scale and nature that could not be judged to impair compliance with the firm’s duty to act in the best interest of the client.
As you can see that is a loaded statement, worthy of interpretation and debate by many attorneys! There are also related provisions designed to further ensure the fair treatment of investment research, investment advice, and portfolio execution. In short, the EU appears to be seeking transparency in the research compensation realm.
The rub: MiFIDI potentially conflicts with U.S. regulation, e.g., Rule 28(e) under the '34 Act, Rule 17d-1 under the Investment Company Act and Section 206 of the Advisers Act. Many U.S. advisers have operations in Europe. Given the potential regulatory conflicts, such advisers are in a bind in terms of complying with either U.S. law or EU law.
As a result, there's been a flurry of activity by U.S. trade associations and the SEC to try to ease the transition to the new EU rules and longer-term, to resolve conflicts between the rules.
References and Resources:
ICI Global Slide Deck from a July 12, 2017 webinar (ICI membership required to access)