Wall Street brokers have taken the unprecedented step of urging US regulators to let them charge clients separately for stock and bond analysis, a change that would upend the industry if it happened.
The request, made on Thursday to the US Securities and Exchange Commission (SEC), adds to the fallout from European Union regulations that barred banks from bundling trading services and research into one bill for customers. The EU requirements took effect last year, prompting some firms to cut analyst jobs and trim their research budgets.
Wall Street initially lobbied to prevent the regulations from spreading across the Atlantic. But the challenge global banks have faced in maintaining one business model in Europe and another in the US has proved daunting. Another complication for US brokers is that some of their most important customers – giant mutual fund companies – have grown frustrated with having to pay a single tab for everything in the US and then write multiple checks in Europe.
“Members are increasingly seeing a desire for greater flexibility and transparency in how to pay for research among investment managers and other institutional investors that are not subject to” the EU’s rules, Kenneth Bentsen, head of the Securities Industry and Financial Markets Association, wrote in a Thursday letter to the SEC. Sifma is the brokerage industry’s main trade group.
In his letter, Bentsen specified that the SEC should let brokers “charge separately or receive cash payments for research provided to investment managers and other institutional investors without the broker-dealers being deemed investment advisers.”
Bentsen’s mention of investment advisers is important because under SEC rules such financial professionals are subject to much stiffer regulations than brokers. Most brokers have fiercely resisted having to register with the SEC as investment advisers, due to concerns that it would increase compliance costs.
Sifma’s request to the SEC is just the latest example of how Europe’s revised Markets in Financial Instruments Directive, or MiFID II, risks reshaping the global research industry. The rules are intended to eliminate conflicts of interest and give fund managers more transparency into what they pay for specific services.
If the changes are adopted in the US, securities firms could face tough decisions about whether to cull the ranks of their market strategists. In Europe, the impact has been clear, with brokers’ earnings from equity research falling an estimated 20%, or $300mn, according to Greenwich Associates.The SEC has historically considered Sifma’s positions when crafting policy. But so far, the agency has seemed hesitant to make the kind of changes that the lobbying group is seeking.
Dalia Blass, who leads the SEC unit that sets rules for mutual funds, indicated in a March 18 speech that the agency isn’t yet ready to let brokers sell stand-alone research without registering as investment advisers.
Ryan White, an SEC spokesman, declined to comment on Sifma’s letter.
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