On October 26, 2017, the SEC released three no-action letters that will provide 30 months relief under the Investment Advisers Act of 1940 for US broker-dealers under the second Markets in Financial Instruments Directive (“MiFID II”). MiFID II is a legislative reform passed by the European Commission that becomes effective in Europe on January 3, 2018. This legislation will potentially impact U.S. asset managers based on the following interactions with European counterparties:
- Operating a portfolio management subsidiary in Europe;
- Operating a marketing subsidiary in Europe that offers products or services to European investors;
- Managing assets on a cross-border basis from the U.S. directly for European clients;
- Providing sub-advisory services from the U.S. to a MiFID investment manager or European fund; and
- Trading in European fixed income and equity markets.
The SEC’s no-action letters are intended to provide guidance for U.S. asset managers involved in any of these relationships or operations. Furthermore, they address recent concerns that advisers will structure trades resulting in certain clients not paying a pro rata share of all costs (such as research costs) associated with aggregated trades.
THE NO-ACTION LETTERS
The SEC’s no-action letters permit the following business activities for U.S. asset managers, provided that the conditions set forth in the respective no-action letters are met:
- U.S. broker-dealers will be permitted to receive payments in hard dollars, or through MiFID II-governed research payment accounts, from MiFID II-affected clients, without being considered an investment adviser;
- Advisers will be permitted to aggregate orders for the purchase and sale of securities with some clients paying different fees for research, but all receiving the same average price for security and execution costs; and
- Money managers may pay broker-dealers for research with client assets if the payment is made through a research payment account.
WHAT DOES THIS MEAN FOR ME?
Fairview encourages U.S. asset managers to review their (i) internal processes and procedures, (ii) distribution strategies and (iii) relationships with European clients to determine if they are impacted by MiFID II. If so, firms should review the no-action letters to see if these potential risks are addressed. Fairview will continue to provide updates as more information is made available.