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Wall Street brokerage group urges SEC to pursue MiFID II-like unbundling reforms

Wall Street's leading trade group wants the top U.S. securities regulator to take a cue from its overseas counterparts when it comes to rules on paying for equity research.

In a March 21 letter to the SEC, the Securities Industry and Financial Markets Association urged the regulatory agency to introduce rules or exemptions that would permit U.S. broker/dealers to charge their clients separately for analysis reports and trading commissions. The move would mimic a change introduced in the European securities industry in 2018 under the sweeping financial reform package known as the second Markets in Financial Instruments Directive, or MiFID II.

While MiFID II has led to broad changes in the European banking and trading industries, SIFMA is now asking the SEC to rethink its prior guidance so that companies can begin operating with uniform business models on both sides of the pond.

"It is critical that the SEC address these changes in the research marketplace by providing permanent relief and greater flexibility both to investment managers in deciding how to pay for research and to broker/dealers in deciding how to be compensated for research," SIFMA President and CEO Kenneth Bentsen Jr. wrote.

The SEC provided relief from the European regulations in October 2017 when it said that U.S. banks, asset managers and broker/dealers would not have to overhaul their research divisions to remain compliant with regulations in both markets. But that guidance was only set to last for 30 months, which has put much of Wall Street on edge over the regulator's next move.

SIFMA specifically is pushing the SEC to allow broker/dealers to charge separately or receive cash payments for research that is provided to the investment community without those brokerages needing to register as investment advisers. If the SEC does not change its regulations, U.S. broker/dealers could be forced to register as investment advisers and operate under harsher regulations.

The move toward unbundling would also coincide with a shift taking place across the investment community where money managers want to pay for research and trading separately, something that SIFMA says broker/dealers are "legitimately reluctant" to accept.

"Whether one thinks unbundling of research and commissions is good or bad is beside the point," Bentsen wrote. "MiFID II, global client demands and market dynamics have brought us to an inflection point at which an increasing number of investment managers, especially larger ones, either believe they are compelled or have decided to pay for research separately rather than using bundled commissions."