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Advisers Act Treatment of Broker-Dealers Providing Research Services to Investment Managers Subject to MiFID II

In a letter to the Securities Industry and Financial Markets Association (SIFMA), the staff of the SEC’s Division of Investment Management provided assurance, on a temporary basis, that it would not recommend that the SEC take enforcement action under the Advisers Act against a broker-dealer that provides research services that constitute investment advice under Section 202(a)(11) of the Advisers Act to an investment adviser that is required under MiFID II, either directly or by contractual obligation, to pay for the research services from its own resources or from an RPA funded with its clients’ money, or a combination of the two. The letter states that such assurance will expire on July 3, 2020, 30 months after MiFID II’s January 3, 2018 implementation date (the Temporary Period), and may or may not be renewed at that time.

Background SIFMA’s letter to the SEC staff requesting no-action assurance (the SIFMA Incoming Letter) stated that U.S. brokerdealers (and their EU broker-dealer affiliates) that provide research services to investment advisers subject to MiFID II can expect to receive separate payments for those research services. The SIFMA Incoming Letter expressed the concern that the receipt of such separate research payments might “inadvertently subject broker-dealers’ research services to the Advisers Act by creating questions about their ability to rely on the longstanding broker-dealer exclusion, and thereby disrupt existing business models that are already subject to a comprehensive regulatory framework overseen by the SEC and [FINRA] . . . .” This concern relates to the general exclusion of broker-dealers from the definition of “investment adviser” under the Advisers Act if the broker-dealer’s investment advisory services are “solely incidental to the conduct of his business as a broker or dealer” and the broker-dealer “receives no special compensation therefor” and the interpretation of “special compensation” vis-à-vis a separate, unbundled payment for research services. As articulated in a footnote to the SIFMA Incoming Letter, SIFMA members are concerned that, because the contours of what constitutes “special compensation” is not necessarily clear in the context of research services, the SEC or its staff might view a broker-dealer as receiving “special compensation” for investment advice it if receives payments for research services directly or indirectly out of an investment manager’s own money, from an RPA funded with the investment manager’s clients’ money, or a combination of the two.

SIFMA warned that subjecting broker-dealers to additional regulation (i.e., as investment advisers) could ultimately prevent investment advisers subject to MiFID II from accessing U.S. research services and could place U.S. broker dealers at a competitive disadvantage vis-à-vis their European competitors when doing business with EU investment advisers.

No-Action Relief In providing the requested relief, the SEC staff stated that its no-action position is “intended to address concerns that have arisen in light of the adoption of MiFID II while preserving choice in maintaining the SEC’s long-standing approach to arrangements under section 28(e) of the [Exchange Act].” The staff also stated that the Temporary Period is intended to give the staff sufficient time “to better understand the evolution of business practices after the implementation of MiFID II,” noting that EU regulators recently issued guidance on key aspects of MiFID II and that the Temporary Period would afford the industry “time to review, comprehend, and implement the guidance, and evaluate impacts on their business models.” The staff stated that it would continue to monitor and assess the impact of MiFID II’s requirements to determine if additional action is necessary.

The Division of Investment Management’s staff No-Action Letter to SIFMA regarding treatment of broker-dealers under the Advisers Act is available at: https://www.sec.gov/divisions/investment/noaction/2017/sifma-102617-202a.htm

© 2018 Vedder Price


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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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