{"id":36562,"date":"2023-07-17T01:22:47","date_gmt":"2023-07-17T05:22:47","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-sec-leaves-wall-street-research-in-a-jam\/"},"modified":"2023-07-17T01:22:48","modified_gmt":"2023-07-17T05:22:48","slug":"the-sec-leaves-wall-street-research-in-a-jam","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=36562","title":{"rendered":"The SEC Leaves Wall Street Research In a Jam"},"content":{"rendered":"
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As of this month, many stock analysts might find themselves outlaws.<\/p>\n

For five years, American regulators shielded Wall Street\u2019s research from a European rule that bans money managers from paying for research through trading commissions\u2014a long-established payment arrangement known as \u201csoft dollars.\u201d On July 3, the U.S. Securities and Exchange Commission let that protection lapse.<\/p>\n

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Brokers say the resulting conflict between U.S. and European laws leaves them with the choice of halting research or risking sanctions. An irony of now subjecting Wall Street to Europe\u2019s soft-dollar ban is that regulators in the European Union and the U.K. are planning to roll back the ban, after concluding that it hurt investment research. Stock market research in both the U.S. and Europe has diminished for decades, as its funding has dwindled.<\/p>\n

\u201cThere is no reason to harm U.S. market participants, investors, and companies with a European requirement that both the European Commission and U.K. are planning to significantly roll back,\u201d said Ken Bentsen, chief executive of the Securities Industry and Financial Markets Association, or Sifma.<\/p>\n

The EU\u2019s ban on paying for research through trading commissions took effect in 2018, as part of a package of financial regulations called the Markets in Financial Instruments Directive, or MiFID II. The intent of unbundling research payments as \u201chard dollars\u201d was to give investors transparency on the costs of trading and research. Most American brokers had to heed the new rule, because they did business in Europe or traded here for European clients.<\/p>\n

But Wall Street firms worried that the MiFID II rules conflicted with U.S. rules and industry practice. So they persuaded the SEC in 2017 to agree not to act against them, in announcements that the regulator calls \u201cno action\u201d letters. That protection that lapsed July 3.<\/p>\n

As a consequence, brokers who take payment for their research will be required to register as investment advisors. But investment advisors can\u2019t trade with their clients as principals\u2014which is a service brokers often provide to their institutional customers. Investment advisors are also held to a fiduciary standard\u2014which requires lengthier consultations with clients that\u00a0some brokers fear will trip up their trading operations.<\/p>\n

Smaller brokers face another obstacle to registering as an advisor, Bentsen told Barron\u2019s<\/em>. Those brokers don\u2019t manage the $100 million in assets needed for registration. Some don\u2019t manage any money at all. One such broker\u00a0<\/strong>had their application rejected by the SEC\u2019s Division of Investment Management, said Bentsen.<\/p>\n

Wall Street research is already heavily regulated, said Joe Corcoran, the managing director of Sifma\u2019s Capital Markets Group. <\/p>\n

\u201cBroker-dealers have been providing research to their money manager clients forever. It\u2019s really an inducement to get the money managers to trade with them,\u201d he said.<\/p>\n

Asked Wednesday about the SEC\u2019s refusal to extend its no-action protection against the MiFID II research rules, Chair Gary Gensler pointed out that the agency had indicated its intention last year, at a securities law conference.<\/p>\n

\u201cIf you\u2019re receiving hard dollars for research, you need to be registered as an investment advisor,\u201d said Gensler.<\/p>\n

The Democratic Gensler\u2019s view on soft dollars wasn\u2019t shared by his Republican colleagues, however. After the July 3 expiration, Commissioner Mark Uyeda warned that a soft dollar ban will diminish sell-side research and could leave investors at the mercy of internet rumors.<\/p>\n

But just as the SEC is subjecting Wall Street to the EU\u2019s soft-dollar ban, Europe is planning to back off from its rule. In a December 2022 directive on improving Europe\u2019s capital markets, the European Parliament said MiFID II\u2019s unbundling rule had reduced the availability of research\u2014especially on smaller public companies. As Barron\u2019s<\/em> warned in a 2017 article, the EU found that independent investment research had dried up under the regime.<\/p>\n

So European regulators are discussing an unbundling rollback. The U.K. has gone even further, and announced July 10 that it will reverse the soft-dollar ban that remains on its books from before the Brexit break from the EU. An independent study commissioned by Britain\u2019s Chancellor of the Exchequer, concluded last week that bundled payments had enabled U.S. brokers to invest more in research and maintain broader coverage.<\/p>\n

\u201cThere are some people who don\u2019t like soft dollar payments, even though they are heavily-regulated,\u201d said Sifma\u2019s Bentsen. \u201cThey should go to Congress to change it. They shouldn\u2019t rely on European law to do their work for them.\u201d<\/p>\n

As it happens, the brokers seem to have gotten to Congress first. On July 11, the House passed a bill which\u2014if adopted by the Senate and signed by the White House\u2014would direct the SEC to extend the no-action protection another six months, while it finds a solution to the research payment snafu.<\/p>\n

Write to Bill Alpert at william.alpert@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

As of this month, many stock analysts might find themselves outlaws. For five years, American regulators shielded Wall Street\u2019s research from a European rule that bans money managers from paying for research through trading commissions\u2014a long-established payment arrangement known as \u201csoft dollars.\u201d On July 3, the U.S. Securities and Exchange Commission let that protection lapse. […]<\/p>\n","protected":false},"author":1,"featured_media":36563,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-36562","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe SEC Leaves Wall Street Research In a Jam | iFintechWorld<\/title>\n<meta name=\"description\" content=\"As of this month, many stock analysts might find themselves outlaws. 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