Council of Institutional Investors general counsel Jeff Mahoney talks to Andrew Holt about what the US group thinks of Mifid II and how it would like the SEC to address the European regulation in the US market
Could you explain the CII view of Mifid II?
Mifid II requires the separation of the cost of trade execution from that of research. That requirement is consistent with long-standing CII membership-approved policies that support the full unbundling of broker-dealer pricing for trading, research and other services. Our policy is based on the view that separating the decisions for where to trade and from where to buy research will foster better price discovery and more efficient allocation of resources related to research and trading, benefitting investors and asset owners.
How does Mifid II relate to the hard dollar rule?
In October 2017 the SEC’s division of investment management issued a temporary no-action letter to the Securities Industry and Financial Markets Association (Sifma). The Sifma letter granted narrow temporary no-action relief to broker-dealers from Section 202(a)(11) of the Investment Advisers Act of 1940.
The relief permits broker-dealers that receive research payments in ‘hard dollars’ from Mifid-affected clients to avoid registration under the act. The result is that some research providers continue to compel US investors to trade with them, even while those same research providers cannot compel bundling in Europe. This prevents some US investment advisers from being able to shop for the best research and best execution. It also subjects US investors to greater costs, and potentially shifts the costs of research globally to US investors.
What would you like the SEC to do with regard to Mifid II?
We would like the SEC to provide broad no-action relief under the act for broker-dealers that accept direct compensation in exchange for research. In the absence of such broader relief, we would like the SEC to rescind the Sifma letter as soon as practicable and issue a statement indicating that enforcement actions against unregistered broker-dealer research providers for allowing US institutional investors and their investment managers to pay for research separate from client commissions will be pursued only to the extent that the SEC concludes that such actions would be in the best interests of US investors.
We note that rescinding the Sifma letter would mean research providers would simply register as investment advisers, which would allow US investors to separately acquire research and trade with the same freedom as European investors.
What are the best and worst-case scenarios with regard to Mifid II from a CII perspective?
The best-case scenario is that Mifid II’s requirement to separate the cost of trade execution from that of research and other services becomes the practice in the US consistent with CII policies. The worst-case scenario would be for the SEC to put in place rules that insulate the US market from unbundling.
How and when do you see Mifid II becoming a global standard?
It is extremely difficult to establish truly global standards for the regulation of any product or service. We, however, remain optimistic that over time cost-effective regulation and market forces will result in improved transparency of global trading practices that will make it easier for investors around the world to know how much they are paying for research and where they can obtain best execution.
