Wall Street Caves on MiFID, Allows Separate Payment for Research

(Bloomberg) -- Banks are increasingly embracing a change that could trigger upheaval for Wall Street’s vaunted stock analysts: They’ve started allowing U.S. clients to buy research without paying a steep tab for trading services.

The shift, which banks’ brokerage businesses have privately shared with customers, is arguably the biggest U.S. fallout yet from sweeping European rules that force firms to charge separately for analysis. Those regulations, which took effect in 2018, sparked a revolt among some money managers, who began asking why they still had to trade with a brokerage just to get access to its research in the U.S. when that was no longer the case across the Atlantic.

The complaints are resonating. UBS Group AG, Credit Suisse Group AG, Goldman Sachs Group Inc. and Barclays Plc are among banks that recently softened their longstanding positions on bundling analysis with trade execution in the U.S., said people familiar with the matter who asked not to be named because the moves haven’t been announced publicly.

Spokesmen at the banks declined to comment.

Not Surprising

In some ways the banks’ decisions are hardly a surprise. It’s challenging for global financial institutions to maintain different practices in the various regions they do business in and Wall Street’s biggest trade group even sought flexibility from regulators last year to make it easier for firms to sell stand-alone research in the U.S.

Indeed, a major catalyst for banks tweaking their policies was a little noticed footnote to a November statement from the U.S. Securities and Exchange Commission, the people said. In it, the agency clarified that it wouldn’t object to brokerages selling research as long as the transactions were done in a specific way.

The implications for Wall Street are significant. In theory, asset managers could decide they no longer need to have trading accounts with so many brokerages if all they want is a firm’s research. And stock and bond strategists might eventually have to prove they can bring in revenue on their own, rather than being subsidized by lucrative trading fees.

The cause of the tumult is the European Union’s revised Markets in Financial Instruments Directive, known as MiFID II. The changes, which the EU approved to crack down on conflicts of interest, have been a source of headaches for U.S. banks and the SEC.

SEC Punishments

Firms initially argued that if they complied with MiFID II, they were at risk of being punished by the SEC because the agency’s regulations require brokers to register as investment advisers if they sell research separately. Brokers didn’t want to register because the investment adviser label brings tougher investor-protection rules.

The SEC fixed that problem in 2017 by making clear that it wouldn’t sue brokers for selling stand-alone research in Europe. Two months ago, the regulator further clarified its position in a way that affirmed brokerages have a green light to sell analysis in the U.S. through a longstanding workaround.

In a carefully edited 211-word footnote attached to an SEC announcement, the agency indicated that brokerages can accept payments for research from another brokerage on behalf of a trading client. Such payments were allowed even if the client didn’t use the brokerage selling the analysis to execute trades.

Unbundling Research

The SEC didn’t go so far as saying that brokerages can accept cash payments for research or that they must offer analysis separately like the European rules require. But it did lay out a way for firms to unbundle research from trading without having to register as investment advisers.

The workaround involves tapping pools of money known as client commission arrangements, or CCAs, that brokers hold on behalf of asset managers. Investment advisers can direct their brokers to use some of those funds to buy research elsewhere, according to the SEC.

The guidance, which has become known in the industry simply as footnote 8, is “confirming that a broker-dealer can receive payment through a CCA even if the broker-dealer doesn’t have a trading relationship with the money manager acquiring the research,” the SEC said in a statement.

While the SEC’s message has reverberated throughout Wall Street, banks can still set their own policies -- and not everyone is changing. For example, Morgan Stanley isn’t seeking to provide its research to money managers with whom it doesn’t have a brokerage relationship, according to a person familiar with the matter.

A Morgan Stanley spokeswoman declined to comment.

Banks’ Shift

The recent shift by Credit Suisse, Barclays and other firms puts them more in line with JPMorgan Chase & Co., which has long accepted payments from CCA accounts for research, according to a person familiar with the matter. Bank of America Corp. has gone even further, registering its brokerage business as an investment adviser with the SEC in response to MiFID II.

At the SEC, the agency’s lawyers continue to grapple with MiFID II. Footnote 8 was attached to a November announcement stipulating that brokerages could sell research in Europe until at least 2023 without being punished by the regulator. While SEC staff issued the decision, it was worked on by many of the agency’s top officials, one of the people said.

“We are continuing to consider feedback from commenters on ways to address concerns that have been raised in this area in light of MiFID II and other changes in the market for research,” the SEC said in its statement.

©2020 Bloomberg L.P.

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