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US banks scramble on research fees as reprieve on European rules runs out

finance trading stocks
Traders work on the trading floor at the Bank of America Tower in Manhattan, New York City

Wall Street banks and brokerages are in a last-minute scramble to meet a July 3 deadline to charge investors for research reports, bankers and others in the industry said, a requirement that threatens their European business if they fail to comply.

Bank of America Corp (BAC.N) and Jefferies Financial Group were among the earliest US banks to comply with the rules – but many others have not yet met the standards and are rushing to catch up, they said.

Failure to do so could mean losing millions of dollars worth of business as US firms must comply to continue providing research-related services to European clients. Many in the banking industry had hoped a regulatory reprieve in place since October 2017 would be extended beyond July 3, analysts said, explaining the reason behind the eleventh-hour scramble.

The challenge is more likely being felt by smaller and regional firms who lack European operations rather than the largest Wall Street banks, who are expected to meet the deadline, analysts said.

Banks typically provide research to clients as part of a broader offering of services, but that changed when the European Union introduced the Markets in Financial Instruments Directive (MiFID) II laws in 2018 to improve transparency.

Since then, firms operating in the European Union have been required to “unbundle” or itemize charges to investors for research such as stock picks, bespoke studies and meetings with analysts. The fees are separate from those charged for executing trades.

“It took about a year for us to become compliant to MiFID II laws — it was a long, intense process,” said Candace Browning, head of BofA Global Research. “There were definitely negotiations, there were detailed conversations with clients.”

US financial firms were initially given an exemption by the US Securities and Exchange Commission, which expires on July 3.

The Securities Industry and Financial Markets Association (SIFMA), an industry group, has asked for an extension, saying US broker-dealers who are not ready for the shift could lose business. So far, regulators have not granted the request.

“Companies continue to face challenges complying with the MiFID II unbundling requirement and US law,” said Joe Corcoran, SIFMA’s managing director and associate general counsel for capital markets.

SIFMA has had nearly a dozen discussions with the SEC on the rules since last fall, and “we believe that the right choice is to extend the no action relief,” he said.


In Europe, asset managers under MiFID II are not allowed to pay for

research through broker commissions on trading — instead, investors are billed separately by banks for research.

But in the US, many banks and brokerages are not registered investment advisers or RIAs, preventing them from charging separately for research because they are not supposed to give investment advice unless registered to do so.

Michael Eastwood, director of Americas equity research at Jefferies, said the firm received calls from peers and competitors asking about Jefferies’ process for setting up the RIA. Others made a flurry of calls to lawyers this year as they sought to comply, he said.

The process of becoming an RIA is “expensive and complicated,” said Jesse Forster, an analyst at analytics firm Coalition Greenwich. Almost three-fourths of respondents surveyed by the firm in a poll said it would be incompatible with their business models and require significant business changes that may not be worth the costs.

The poll included responses from 20 asset managers in the US and U.K., and 33 US-based broker-dealers.

“This makes it very difficult for them to provide research to European clients after July 3, and puts them at a competitive disadvantage to their non-US peers,” he said.

In preparing for the changes, BofA assigned dedicated managers and salespeople to discuss pricing for clients, some of whom wanted to pay for services outright, while others wanted to be charged based on commissions, Browning said.

Browning, who began her career as an aviation analyst, said creating a pricing model for research was similar to airlines devising frequent flyer programs, with various options for different types of customers.

Broker-dealers and researchers are now devoting significant time and resources to determine what they should charge for research, given the risk of losing revenue if they do not meet the deadline for compliance next month, analysts said.

The rules will make providing research more complex because of the required documentation and procedures, while raising regulatory uncertainty, respondents in the Coalition Greenwich poll said. The number of firms providing research could shrink if they cannot meet the requirements, Forster wrote.

As the deadline draws nearer, “there is still lot of confusion in the industry,” said Russell Sacks, a partner at law firm King & Spalding.

“There are concerns that this change is being foisted upon the firms without any data-driven evidence that the change is necessary for the protection of investors.”

MiFID II rules were introduced to push more trading onto regulated public exchanges where prices and participants are visible to all, in an effort to bolster investor protection to avoid problems seen during the 2007-2009 financial crisis.

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