Challenges for the buy-side and research providers become a reality as SEC allows ‘no-action’ research letter to lapse

With the expiry of the SEC ‘no-action’ letter based on enforcement surrounding research services, industry experts provide insights on the impacts and possible solutions.

The Securities and Exchange Commission (SEC) has allowed its no-action letter to the Securities Industry and Financial Markets Association (SIFMA), based on enforcements surrounding research services, to expire – reinforcing that it was not intended to be permanent solution.

Following the implementation of Mifid II in 2018, Europe unbundled trading and research, resulting in all asset managers having to pay for research in cash only. This contrasted regimes in the US, which had an opposite approach, with the SEC requiring research to be paid in commissions alongside a trade – disallowing research to be paid for in cash.

To resolve the disconnect in approaches, in its 2017 no-action letter to SIFMA, the SEC advised that it would not recommend enforcement action to broker-dealers accepting cash payments for research from investment managers which are required by Mifid II to pay for research from its own money as opposed to client commissions or ‘soft dollars’. 

However, in July last year, the SEC shocked market participants by providing notice that it would allow the ‘no-action’ letter to expire on 3 July 2023, with the viewpoint that there were viable solutions and enough time for asset managers to adapt to the rule change.

In May, the House Financial Services Committee had a unanimous vote to ‘direct’ the SEC to extend the letter once again, however, the US watchdog remained steadfast in its reluctance, allowing the ‘no-action’ letter to lapse, which will likely have a negative impact for the research market, including institutions and research providers.

“This is another stage of regulatory confusion and misalignment between regions,” said Mike Carrodus, chief executive of Substantive Research, speaking exclusively to The TRADE.

“The ‘no-action’ letter was designed to solve this misalignment, but as far as the SEC was concerned, the word temporary was a pretty important signifier for the market. What it means for this market and this industry is that everyone now has to come up with a solution that suits them, depending on their very specific circumstances at their organisation.

There is no solution or way of doing things that everybody can do. Everybody is going to be slightly different, using different tools, different amounts of investment and different structures to figure this problem out.”

Earlier this year, a survey from Substantive Research found that there was still ‘major confusion’ on the buy-side around the anticipated impact of the SEC allowing its Mifid II ‘no-action’ letter around investment research to expire.

Undertaken six months before today’s expiry date, Substantive found that the buy-side were just as unprepared and ‘much less hopeful’ as they were when surveyed in August last year.

Read more: ‘Major confusion’ on buy-side as six-month SEC Mifid II ‘no-action’ letter deadline looms

“The lobbying effort that was undertaken since this was announced last summer – essentially that this letter would not be rolled and continued after 3 July – has been a roller coaster ride. There was hope that the SEC would indeed change its mind. However, the SEC’s been reasonably consistent in being quite sceptical about why they should do any sort of U-turn,” added Carrodus.

“The bill that is currently going through the House will not get through in time, and it is essentially instructing the SEC to give everybody six more months. That bill is, however, not in effect. Therefore, today we lapse.”


Following the lapse of the letter, brokers in the US that are research driven, providing niche differentiated work to European asset management will be impacted, given that they don’t necessarily have the cost base to create a European entity in order to take the payments in cash in Europe. A solution that some bulge bracket firms have opted for. Such firms will either have to create new structures to take these payments or forego European revenues entirely.

European asset managers looking for diversity and greater competition in US broker research will also be impacted by the lapse. Such firms will now have a set of people they won’t be able to access because they won’t be able to pay them.

“It’s going to be a real challenge for firms and sell-side research providers in the US with European clients,” highlighted industry expert Sean Tuffy.

“Most groups relied on the ‘no-action’ relief to not do anything. It will be interesting to see how that shakes out. I would imagine that on day one, the amount of non-compliance will be near 100%. It’s more of a matter of how long it takes the industry to successfully move to a new model.”

What happens next?

With the SEC’s ‘no-action’ letter expiring, one thing for certain is that there is not a one-size-fits-all solution to compliance. Solutions will depend on who you are, where your offices are and where your clients are located.

“If you’re a bulge bracket, you’re probably gravitating towards taking payments in Europe from your European clients for research that’s also been produced in the States being consumed by your European clients. Essentially, you set up infrastructure, which means that you can now take the whole relationship through your European entity,” noted Carrodus.

“The other solution is that you bite the bullet as a broker and register as an investment advisor, allowing you take cash from anywhere, which can also provide flexibility. Another solution is that European asset managers create or increase their CSA programmes in the states to create a trading mechanism to pay for research stateside. There were a lot of hard dollar payments going on in the States, which I think was underappreciated and those people now have to look at solutions.”