Congressman Sessions Introduces Legislation to Promote Thriving U.S. Public Markets
U.S. Congressman Pete Sessions (TX-17) introduced H.R. 2622, Mifid II, to codify a Securities and Exchange Commission no-action letter that currently excludes brokers and dealers compensated for research services defined as an investment adviser.
Specifically, this bill writes a SEC no-action letter into law that allows broker-dealers to continue accepting cash or “hard dollar” payments for research reports to comply with an EU directive (Mifid II). If this no-action letter expires without extension in July, as the SEC’s Investment Management Division Director indicates it will, broker-dealers will likely be required to bring aspects of their research business under a registered investment advisory business.
Since many broker-dealers that provide research coverage for small companies do not have an affiliated registered investment advisory business, nor do they otherwise act as investment advisors, the no-action letter’s expiration would likely put firms out of business, subject them to a costly/mostly inapplicable regulatory framework, and require them to find another (yet to be determined) workaround.
An initial draft of the bill was attached to the March 9th Subcommittee on Capital Markets hearing entitled U.S. Public Markets Built for the 21st Century: Exploring Reforms to Make our Public Markets Attractive for Small and Emerging Companies Raising Capital, and was discussed with witnesses at that hearing who pointed out that this legislation is both “extraordinarily important” and “absolutely essential.”
We’ve seen a reduction in the research available on capital markets due to the uncertain future of the attached no-action letter, therefore codifying this exclusion for brokers and dealers compensated for certain research services defined as an investment adviser is clearly, “the right thing to do.”
“We applaud Congressman Sessions for introducing this bill to codify the SEC no-action letter giving broker-dealers the ability to receive ‘hard dollar’ payments to continue to provide research coverage of small public companies, who are the backbone of the American economy,” said the American Securities Association (ASA) CEO Christopher Iacovella. “If the SEC’s no-action letter expires in July, broker-dealers won’t be able to provide research on small businesses across America unless they become registered investment advisors, which would needlessly increase costs without any benefit to investors or markets. It makes no sense to import a European rule (Mifid II) into our markets, that the Europeans have learned doesn’t work and are now seeking to repeal.”
“The widespread dissemination of research by broker-dealers has long been critical to the facilitating capital formation in the U.S.," said Securities Industry and Financial Markets Association (SIMFA) President Kenneth E. Bentsen, Jr. "We commend Congressman Sessions for introducing this bill and Chairwoman Wagner's original co-sponsorship which extends necessary relief from the European regulation, Markets in Financial Instruments Directive II (Mifid II), provided by the Securities and Exchange Commission’s no-action letter. SIFMA strongly believes the U.S. Securities and Exchange Commission (SEC) should extend the current no-action relief under MiFID II to allow broker-dealers to receive unbundled payments for research without being deemed investment advisers subject to the Investment Advisers Act of 1940 (Advisers Act). The expiration of the no-action letter, currently scheduled for July of this year, has the potential to lead to significant, irreversible and unnecessary disruptions to the market for investment research. This bill will help preserve the breadth and depth of research that broker-dealers provide, including research about smaller issuers seeking to raise capital, which is vital to maintaining the competitiveness and efficiency of the U.S. capital markets and promoting informed investment decisions by institutional investors.”