SEC Staff Addresses Cross-Border Implementation of MiFID II Research Provisions

"2 Safe Harbor Applicable law in the US and the EU requires money managers to seek best execution for client trades and restricts the ability of money managers to use client assets for their own benefit.3 Recognizing the value of research to clients, the US Congress enacted Section 28(e) of the Securities Exchange Act of 1934 (Exchange Act) to provide a safe harbor to protect money managers from liability for a breach of fiduciary duty solely on the basis that they paid a higher commission rate than otherwise available in seeking to receive "brokerage and research services" provided by a broker-dealer. [...]the adoption of MiFID II created uncertainty as to whether an investment adviser subject to MiFID II could aggregate the orders of MiFID II clients with orders of US clients that may pay for research through commissions under Section 28(e). In the ICI Letter, the SEC Staff took a no-action position with respect to aggregated client orders that are subject to differing arrangements regarding the payment for research as required by MiFID II, when the following facts are present: * Each client in an aggregated order pays or receives the same average price for the purchase or sale of the underlying security and pays the same amount for execution; and * Each investment adviser relying on the position adopts policies and procedures reasonably designed to ensure that (i) each client in an aggregated order pays the average price for the security and the same cost of execution (measured by rate), (ii) the payment for research in connection with the aggregated order is consistent with each applicable jurisdiction's regulatory requirements and disclosures to the client, and (iii) subsequent allocation of such trade conforms to the adviser's allocation statement and/or the adviser's allocation procedures.9 Division of Investment Management Position-SIFMA Letter10 Under the SIFMA Letter, a registered brokerdealer and a foreign unregistered broker-dealer operating pursuant to Rule 15a-6 under the Exchange Act can accept direct, hard dollar, payments for research services11 that constitute investment advice for purposes of the Advisers Act without becoming subject to the definition of "investment adviser" under the Advisers Act. According to the Investment Company Institute, the SEC Staff has clarified and confirmed that the position "is not limited to MiFID II obligated firms.