Cross-Border Implementation of MiFID II Research Provisions

On Oct. 26, 2017, the US Securities and Exchange Commission (“SEC”) published three temporary no-action letters providing US broker-dealers and investment advisers relief in the conduct of their business activities with entities subject to the European Union’s Markets in Financial Instruments Directive (“MiFID II”), which will go into effect on Jan. 3, 2018. The no-action relief, described in further detail below, permits:

  1. US broker-dealers to receive “hard dollar” payments from research payment accounts (“RPAs”) from EU asset managers subject to MiFID II without having to register as an investment adviser under the Advisers Act;
  2. Investment advisers to continue to aggregate client orders while accommodating differing research payment arrangements that will be required under MiFID II, notwithstanding certain provisions and obligations of Section 17(d) of the Investment Company Act of 1940 and Rule 17d-1 thereunder and Section 206 of the Advisers Act; and
  3. Investment advisers to rely on the “soft dollar” safe harbor provided by Section 28(e) of the Exchange Act when the adviser makes payments for research to an executing broker out of client assets — alongside payments to the executing broker for execution — with the research payments credited to an RPA administered either by the executing broker or a third-party administrator.

On the same day, the European Commission released its own FAQ to clarify how asset managers subject to MiFID II research provisions can purchase research services from US and other non-EU broker-dealers.