By Ben Bain
(Bloomberg) --The U.S. Securities and Exchange Commission is preparing to give Wall Street a reprieve by telling financial firms they won’t have to overhaul their operations to comply with sweeping new European rules governing investment research, said three people familiar with the matter.
By the end of the month, the SEC is expected to provide formal assurances that it won’t object if brokerages break out the cost of market analysis for their European clients, rather than bundling it together with other services, the people said. Europe is requiring that brokers charge separately for research, but doing so could violate U.S. regulations.
At issue is Europe’s coming ban of a practice that has been routine at global banks for decades: Issuing fund managers one bill for everything from executing trades to analyzing stocks and bonds. Europe’s goal is to give investors more transparency into how much they pay for specific services, while incentivizing brokers to produce higher-quality research.
But in an odd twist, brokers say SEC rules technically prohibit them from selling stand-alone analysis unless they register with the agency as investment advisers. The investment adviser label subjects firms to a much stricter level of oversight, and has traditionally been meant for companies and individuals who manage clients’ money.
With the European rules set to take effect in January, Wall Street has been on pins and needles for months over concerns that firms would face a wave of sanctions or have to turn their U.S. businesses upside down if the SEC doesn’t grant them some sort of relief.
The SEC intends to provide assistance by issuing what are known as no-action letters, said the people who asked not to be named because the agency’s plans aren’t public. The regulatory get-out-of-jail-free cards ostensibly inform firms that the SEC won’t sue them for violating certain regulations. In this case, the no-action letters would mean U.S. brokerages won’t face punishments for selling research directly to money managers who have to comply with the European rules. The SEC is also expected to offer reprieves to mutual funds.
The moves may disappoint investor advocates and some officials at U.S. pension funds because they’ve been urging the SEC to to go even further. They want the regulator to allow what’s happening in Europe to also happen in the U.S. -- a system where investors can easily buy research from one brokerage, while paying another to execute trades.
Chris Carofine, a spokesman for SEC Chairman Jay Clayton, declined to comment.
Slicing Revenue
Granting Wall Street relief would mark the SEC’s most significant response to the European Union’s revised Markets in Financial Instruments Directive, or MiFID II. Firms on both sides of the Atlantic have been scrambling to prepare for its fallout, which McKinsey & Co. estimated could result in hundreds of job cuts and slice banks’ revenue from analyzing stocks by 30 percent over the next three years.
MiFID II is already prompting U.S. investment banks to make changes to their European operations. For instance, Goldman Sachs Group Inc. has asked some clients to pay $30,000 a year for access to basic research and conferences it organizes, according to people familiar with the matter.
In the U.S., Clayton has indicated the SEC is working on a fix to address the conflict between American and European rules, but he has yet to provide details. Earlier this month, he told House lawmakers that he doesn’t want the agency to “force the importation” of the European rules to the U.S.
Clayton added that the agency was putting together a patchwork of measures to assist U.S. firms.
Intense Lobbying
Financial-industry trade groups have spent months lobbying the SEC. The solution the regulator is poised to roll out largely reflects the wishes of the Securities Industry and Financial Markets Association, which represents brokers and asset managers, and the Investment Company Institute, whose members include large mutual funds, one of the people said.
For fund managers, the SEC’s relief is expected to provide assurances that even if they comply with the European rules on separate payments, they’ll still be able to use client money to pay for brokerage services and research in the U.S., one of the people said.
In addition, the SEC is likely to make clear that mutual fund companies can continue to aggregate the trades they make across their various investment funds. The practice, which keeps trading costs down, could be put in jeopardy by MiFID II.
How MiFID II Puts a Price on Investment Research: QuickTake Q&A
The SEC’s guidance hasn’t been finalized and could still change, according to two of the people. One idea under consideration is to make some or all of the relief for brokers and mutual funds temporary, one of the people said. That would allow the SEC to gauge the impact of the European rules before issuing its own permanent regulations.
