The long-held belief that Mifid II will become a global standard seems to be taking shape, with asset managers including Invesco, Wellington Management, Dodge & Cox, T Rowe Price and MFS pushing the SEC to allow them to apply Mifid II cost transparency rules in the US.
In October 2017 the SEC gave US banks and brokers a 30-month reprieve to abide by Mifid II, giving the commission until next summer to set out its final position on the unbundling of payments for research and trading.
This reprieve was needed, as Mifid II requires fund managers to pay for research in hard currency; they can no longer pay commission. But the SEC’s rules – before the reprieve – require managers to pay commission: they cannot pay hard dollars. This places the SEC rules in direct conflict with Mifid II.
Now the push for the SEC to change its rules is part of a wider momentum, Ken Bertsch, executive director at the Council of Institutional Investors (CII), tells IR Magazine: ‘This is in line with CII policy and [that of] other members, which want price transparency – particularly where they do not have it but their European counterparts do.’
The CII’s general counsel Jeff Mahoney recently told IR Magazine: ‘The best-case scenario is that Mifid II’s requirement to separate the cost of trade execution from that of research and other services becomes the practice in the US consistent with CII policies.’
In the context of all of this, it is useful to look at where we have got to in the 15 months Mifid II has been in force. It has led to a significant fall in costs: according to the UK’s Financial Conduct Authority’s numbers, spending on research has fallen by 20 percent to 30 percent, and the absolute saving for investors in equity funds managed out of the UK was £180 mn ($234 nm) in 2018, estimated to be £1 bn over five years.
‘Faced with this evidence that unbundled commissions mean lower costs for investors versus bundled commissions, and significant lobbying to allow this unbundling from US investors, how is it tenable for the SEC to stick with a position where European investors can unbundle in the US but US investors cannot?’ comments ingage managing director Michael Hufton. ‘It makes no sense.
‘Nor would it make sense to force European investors to rebundle and put costs up. Not only would it be farcical, but it would also put US markets at a competitive disadvantage. The only logical outcome is that unbundling comes to the US market, too. The question is: when?’
The SEC has been using an industry consultation to try to square the circle: in December last year SEC chairman Jay Clayton called for feedback on how Mifid II research provisions were hitting broker-dealers, investors and issuers of all sizes. But it is difficult to see how the SEC can stop the march of Mifid II.
‘Given all this pressure from domestic US investors, allowing the no-action relief to expire is almost unthinkable,’ says Hufton. ‘But extending it – and perpetuating an advantage for European investors over US investors – is unthinkable, too. The logical outcome has to be that the SEC changes its rules.’
The SEC was offered an opportunity to discuss the issue, but declined to comment.
