Relief For Broker-Dealers Providing Research For Hard Dollars?

On May 24, 2023, the House Financial Services Committee approved H.R. 2622. The bill amends the Investment Advisers Act of 1940 to codify certain Securities and Exchange Commission (SEC) no-action letters that exclude brokers and dealers compensated for certain research services from the definition of investment adviser, and for other purposes. The bill moved out of committee on a largely bipartisan vote.

If you have not been following these events, a brief primer:

Due to the looming compliance deadline of the Markets in Financial Instruments Directive II (MiFID II), the SEC issued a No-Action Letter to the Securities Industry and Financial Markets Association (SIFMA) on October 26, 2017. The SEC stated it would not recommend enforcement action if a broker-dealer accepted cash payments for research from an entity that was required under MiFID II to pay for research out itself (hard dollars) rather than using client commissions (soft dollars).

This is important, because receiving hard dollars for research normally constitutes “providing advice about securities as a business for compensation”; the ABC test under the Investment Advisers Act of 1940. While normally exempt by definition, a broker-dealer’s conduct that meets the ABC test will cause it to lose that exemption and require it to either register as an investment adviser or cease the activity. MiFID II effectively forced broker-dealers to lose their exemption under the Advisor’s Act until the temporary relief granted through the SEC No-Action Letter was released. The letter was set to expire on July 3, 2020, but was extended to July 3, 2023.

In July of 2022, the SEC indicated that no more extensions would be granted. H.R. 2622’s provides a lifeline to the industry, though passage out of committee does not guarantee success. There is still opposition to the bill, as well as additional hurdles to overcome in the legislative process.