SEC Commissioner Pushes for Review of Current U.S. Research Analyst Rules

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Last week, speaking before the International Bar Association’s Asset Management Industry Conference on Global Challenges and Opportunities, SEC Commissioner, Mark Ueda discussed the history of U.S. regulations covering investment research.  In the context of the FCA’s recent reevaluation of the unbundling requirements instituted in MiFID II, Ueda recommended a similar review of U.S. rules covering research.

History of US Research Rules

SEC Commissioner Mark Ueda’s speech before the International Bar Association’s Asset Management Industry Conference provided a comprehensive presentation of the various rules that the US and UK have implemented over the past fifty years, with the purpose of creating a case for why the SEC should review its research rules as the FCA is in the process of doing with MiFID II unbundling requirements.  Ueda started his comments saying:

“Today, I will discuss investment research provided by sell-side firms to asset managers and the rules governing such research. I have followed with much interest the United Kingdom Financial Conduct Authority’s (“UK FCA”) recent consultation on modifying certain research unbundling rules required by the UK Markets in Financial Instruments Directive (“UK MiFID”), which were derived from the European Union’s MiFID II.  I commend the UK FCA for taking up this important issue and believe it is past time to review how investment research is regulated, including in the United States.”

Ueda started his review of US research rules with the adoption of fixed commissions in 1975 and the allowance of soft dollars with the passage of Rule 28(e) of the Exchange Act in 1975.  Ueda explained the drivers prompting the Global Research Analyst Settlement in 2003, and the main research rules that sprung out of that period of regulatory activity.  He also covered Regulation AC which was adopted by the SEC in 2003.

Unintended Consequences of MiFID II

Ueda contrasted the US regime of research rules against the issues and concerns that UK and EU regulators tried to address when they adopted MiFID II in 2018.  Ueda stated:

“Regulators elsewhere in the world, notably the EU and the UK, have taken a different approach, viewing the bundling of execution and research as an inducement to asset managers and thus an investor protection issue. Accordingly, MiFID II generally requires managers to pay for research separately from execution services, charge clients a separate fee, or pay for research themselves. MiFID II’s research rules may have intended for independent research and lower commissions to offset the reduction in sell-side research; however, it appears that this experiment may have not accomplished these goals and has had unintended results.”

Ueda went on to outline the various unintended consequences of MiFID II as identified by various UK and EU regulators, including the work produced by Rachel Kent’s Independent Research Review in 2023.  Ueda also explained the conflicts that MiFID II had with US regulation regarding how US broker/ dealers could and could not be paid – a development that led to the SEC’s temporary “no action” letter enabling broker/dealers to accept cash payments for their research and not be at risk of running afoul of US regulations.  Ueda was also clear how disappointed he was that the SEC chose to allow the “no action” letter to expire in July 2023, particularly in light of the FCA’s recent consultation paper on proposed modifications to the MiFID II research unbundling rules.

Recommendation for Review

Ueda’s speech on the history of research rules in the US, UK and EU was made to one end – to make the case that US regulators should, like their UK and EU counterparts, conduct a thorough review of the research rules implemented after the Global Research Analyst Settlement, including Regulation AC.  Ueda explained:

“At the conclusion of the Global Settlement, the SEC’s then-enforcement director stated that “the full impact remains to be seen” and others hoped that it would lead to “more straight talk on Wall Street.”  The impact, unfortunately, has been a lot less research out of Wall Street, particularly for small and medium sized companies. I hope that the SEC can learn from our international colleagues and examine our own research rules, including the Global Research Settlement.  The SEC should further undertake a retrospective review of the similarly 20-year-old Regulation AC, which would be an exercise of good government and responsible regulation. In this regard, the SEC should take heed of the 2017 recommendation from the U.S. Department of the Treasury that the SEC should conduct a holistic review of the Global Research Settlement and the research analyst rules to determine which provisions should be retained, amended, or removed, with the objective of harmonizing a single set of rules for all financial institutions.”

Our Take

While it is interesting that SEC Commissioner Ueda made these comments now, when the FCA is in the process of finalizing their new rules to provide payment optionality for research to asset managers, it is actually not surprising.  Ueda expressed a similar opinion when he came out with a statement expressing strong opposition to the SEC’s decision to allow its temporary “no action” letter to expire last July.

Uyeda concluded that statement by calling for a holistic review of the regulatory framework for investment research, including a replacement of rules put in place under the Global Research Analyst Settlement over 20 years ago.  He also added that the SEC should harmonize the various rules regarding research analyst communications.

Clearly Commissioner Uyeda feels that these US research rules established over 20 years ago should be revisited and revised to address the numerous unintended consequences they created in the US capital markets. 

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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

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