MiFID II: “No matter where you go, there you are!”


The following guest article was written by Robert Nowicki, a commission management consultant with more than twenty years of experience managing the global commission management divisions of major Wall Street firms.

On July 26th William Birdthistle, SEC Director of the Division of Investment Management, announced that the SEC would let the SIFMA no action letter – pertaining to the European Union (“EU”) regulatory directive MiFID II – expire on July 3, 2023. With that statement in mind, we now find ourselves rolling back the clock to the waning months of 2017. Unfortunately, not much has changed since the no action letter was issued, because with relief in hand, the buy side and sell side simply back burnered the issue; they kicked the proverbial can down the road.

It’s helpful to remember how we got here in the first place. At the time MiFID II was finalized, the EU was fully aware of the directive’s significant conflicts with United States (“US”) law, specifically the definition of an investment adviser in Section 202(a)(11) of the Investment Adviser Act of 1940 (the “40 Act”), and the broker dealer exemption under the 40 Act in Section 202(a)(11)(C). That section exempts a broker dealer from registering as an investment adviser if it provides advice solely incidentally to its activity as a broker dealer, and for which it receives no special compensation. Hard dollar payments for research are considered to be special compensation under the 40 Act.

Regardless of how we got here, here we are. To be clear, the 40 Act is not broken, and the SEC does not need to fix it. We should never advocate that the SEC change US regulations every time an international regulator willfully creates regulation that is in conflict with our own. We prefer long term solutions rather than short term accommodations, which is why I advocated against the issuance of the SIFMA no action letter in 2017.

This is an EU problem, and the EU should fix it. In fact, prior to the no action letter, the EU’s primary regulator, the European Securities and Markets Authority (“ESMA”) was on the verge of creating an exception for investment managers that found themselves consuming US research, while operating subject to the MiFID II framework. ESMA shelved those efforts at the time, and with the no action expiration imminent I feel they should resurrect them. ESMA is fully aware that the entities they regulate cannot survive without access to the US research market.

The solution being socialized at the time was fairly straightforward. If the goal of MiFID II, as it related to research spend, was transparency, then ESMA should allow for industry wide use of Commission Sharing Agreements (CSAs) like we have in the US. In 2017, the French regulator, The Autorite des Marches Financiers (“AMF”), and the German regulator, The Bundesanstalt fur Finanzdienstleistungsaufsicht (“BaFIN”) were actually in favor of using CSAs; it was the British regulator, The Financial Conduct Authority (“FCA”) that held out and forced the issue. It should be noted that the AMF and BaFin never prohibited the use of CSAs. 

One has to wonder in a post Brexit EU if there would be the same level of push back.

We all believe that transparency is a good thing.  CSAs provide a mature and elegant solution to the payment for research issue. The conflict with US law is resolved, CSAs enable brokers and investment managers to provide their respective clients with a level of detail required in the directive, and EU investment managers do not lose access to critical US resources.

If the FCA still had concerns about the use of commissions, they could require asset managers to reimburse their underlying clients.  Even if they do not, managers that insist on paying with hard dollars could go this route.  The underlying client still would not be paying for that research. If this is not acceptable, as it stands, EU managers will be cut off from access to a large amount of US research. When that happens, they will be forced to go back to their regulators and ask “What have you done to us?”


Bob Nowicki has almost two decades of leading commission management programs at Bank of America Merrill Lynch and Evercore ISI.  Prior to that Bob was on the buy-side in operations, middle office, and trading at firms such as JP Morgan, Credit Commercial de France, Bayerische Landesbank and as Principal of a fixed income arbitrage hedge fund, Polaris Asset Management. Bob received his B.S. in Finance from St. John’s University and is currently a commission management consultant.


About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

Leave A Reply