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MiFID II Midpoint: Meetings with the SEC, and global unbundling acceleration

17 June 2019 Eric Menzie

Congrats, we've all made it to the midpoint of MiFID II year 2.

We have an idea of what Europe is doing, but what about the US & Asia?

In Europe, asset owners either pay for research from their own P&L, or pay only in amounts that are disclosed and budgeted in advance.

In the US and Asia, by contrast, most asset owners pay for research, but don't know what they are paying or even if the research they are buying is to their benefit.

On May 21st as a member of the Healthy Markets Association, I met with SEC Chairman Clayton, Commissioners Roisman and Jackson, Director Redfearn, and House Financial Services Capital Markets Subcommittee Chairwoman Maloney (D-NY) staff and Senate Banking Committee Chairman Crapo (R-ID) staff.

When meeting with the SEC, a smaller US-based global firm that is paying for its own P&L, addressed the significant administrative burden that going to P&L has caused them.

Market feedback has proven that this could be stated for firms of any AUM size.

We advised that an ability for advisors to pay for research via hard or soft dollars (CSAs) would be a benefit, as opposed to the P&L approach taken by many post MiFID II. Facilitating greater payment flexibility allows for more ease of unbundling, which allows for advisors to truly seek "best-ex" as well.

It is clear that the SEC is laser focused on MiFID II and is receptive to the arguments for research unbundling and that asset owners should have an ability to know how much they are paying for research (or not having to pay).

However, the SEC appeared concerned by the impact MiFID II is having in regard to small and mid-size service providers overseas, resulting in recent consolidation. Additionally, they had given the impression that they were most focused on retaining a competitive and balanced market for all participants, large and small.

So what should US and APAC asset managers do now to get ready?

US and APAC asset managers should perform a comprehensive review of their research evaluation process, reassess what they are being charged for, and ensure that every consumer of said research weighs in on its true value. Regulation or not, this has proven to be a great benefit to both buy and sell side participants.

Additionally, we have received product inquiries from solely US or APAC based non-MiFID regulated firms, who were approached by prospective European investors who requested greater transparency into the fund's research spend.

I've met recently with firms in Singapore, Hong Kong, and Australia who expressed significant interest in formalizing their research evaluation process for the first time. Many of these firms are utilizing CSAs as well to unbundle, some for the first time.

As the SEC continues work on its MiFID II and research unbundling approach this year, it appears that greater transparency into research spend is a matter of "when" - not "if" - for all investors around the globe. This should be driven primarily by the market forces of the global investor class, but regulation may not be too far away.

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