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Uncertainty Grows Among U.S. Firms over Treatment of Research Costs under EU Regulation

The European Union’s Markets in Financial Instruments Directive, or MiFID II, is slated to take effect in early January 2018. The new regulatory regime aims to reduce conflicts of interests and improve transparency for investors. Among other things, the directive will require asset management firms to pay brokers for analyst research that was previously available for free in exchange for trading commissions. Asset managers may pay for investment research themselves or charge their customers explicit research fees in addition to charges for management and trading based on strict conditions. The directive affects asset managers, banks and other firms that conduct business in Europe.  According to Bloomberg, MiFID II may bring several unforeseen consequences, including job losses and lower trading volumes. The regulation may also lead to cuts in research budgets at large firms and, according to the Financial Times, may penalize smaller firms with smaller research budgets. Already, firms such as Vanguard have announced they will pay for research in Europe out of their own pockets, however many other firms are still waiting to decide on how to handle the new requirements.U.S. brokers are expected to seek the SEC’s assurance that they may accept payment for research without being deemed investment advisers and running afoul of the securities laws.  According to several media reports, industry participants have asked the SEC to provide guidance on MiFID II requirements and some estimate that the SEC will provide the guidance in early September.