Greg Kilminster
Head of Product - Content
SEC Commissioner Mark T Uyeda on investment research and regulation
In a speech at the International Bar Association’s Asset Management Industry Conference on Global Challenges and Opportunities, SEC Commissioner Mark T Uyeda discussed the evolving landscape of investment research regulation and compliance.
The role of investment research
Uyeda emphasised the pivotal role of investment research in the global capital markets. Investment research, whether from sell-side firms or independent analysts, contributes to the efficient market hypothesis by ensuring that prices reflect publicly available information. This facilitates the efficient allocation of capital and risk, promoting economic growth and market liquidity. Conversely, buy-side research, typically proprietary, only influences market prices indirectly through trading activities. Uyeda warned against the decline in third-party research, which could lead to markets being swayed by social media and rumours, resulting in inefficiencies and increased capital costs.
Increasing regulatory demands
Uyeda noted the increasing regulatory demands for disclosures from public companies. For instance, the SEC’s proposed climate-related disclosure rule would mandate extensive new disclosures. Additionally, public companies must now report material cybersecurity incidents and adopt policies for the clawback of excessive executive compensation. Uyeda argued that third-party research is vital in helping investors and asset managers digest this growing volume of information. Without adequate research, the efficacy of these disclosures could be compromised.
Historical context and section 28(e)
Uyeda provided a historical lesson on sell-side research in the United States, tracing its roots back to the elimination of fixed commission rates by the SEC in 1975. This regulatory change led to concerns about whether investment managers, driven by fiduciary duties, would pay for research or focus solely on execution costs. In response, Congress enacted Section 28(e) of the Securities Exchange Act, allowing managers to pay higher commission rates for bundled research and execution services. This provision acknowledged the importance of research in investment decision-making and permitted the use of client funds for such purposes.
The Global research settlement and Regulation AC
The dot-com bubble of the late 1990s raised concerns about conflicts of interest in sell-side research, leading to the Global Research Settlement in the early 2000s. This settlement required broker-dealers to separate research analysts from investment banking activities to prevent biased research aimed at attracting investment banking business. In addition, the SEC adopted Regulation AC, mandating that research analysts certify the truthfulness of their views and disclose any related compensation.
International approaches to research regulation
Uyeda highlighted the divergent approaches to research regulation in the EU and the UK, particularly under MiFID II. Unlike the US, where bundled research and execution are permitted, MiFID II requires asset managers to pay for research separately, either directly or through client fees. However, this unbundling has led to unintended consequences, such as a decline in research coverage for small and medium-sized companies. Both the French Autorité des Marchés Financiers and the UK Financial Conduct Authority (FCA) have recognised these issues and are considering reforms to mitigate the adverse impacts of MiFID II.
The UK FCA’s recent consultation on re-bundling investment research with execution services is a significant development. It followed an Independent Research Review which found that unbundling adversely affected the quality and coverage of UK research, hampered economic growth, and placed UK asset managers at a competitive disadvantage globally. Uyeda praised the FCA for their willingness to reassess their policies and consider the broader implications on market efficiency and competitiveness.
Challenges for US broker-dealers
MiFID II’s requirements also posed challenges for US broker-dealers, particularly regarding their exemption from the definition of an investment adviser. The SEC’s Division of Investment Management provided temporary no-action relief to allow compliance with MiFID II without disrupting business models. However, this relief expired in July 2023, which Uyeda criticised as premature, especially given the ongoing reassessment of unbundling rules in the UK and EU.
Looking forward: regulation and AI
Uyeda called for a retrospective review of US regulations, including the Global Research Settlement and Regulation AC. He cited a 2017 recommendation from the US Department of the Treasury urging the SEC to harmonise research rules across financial institutions. Such a review, he claimed, would ensure that regulations remain effective and relevant in a rapidly evolving market landscape.
The Commissioner concluded by touching on the emerging role of artificial intelligence (AI) in investment research. AI has the potential to revolutionise the industry by automating data collection and analysis, thereby enhancing the coverage of smaller companies. However, Uyeda cautioned against over-reliance on AI, stressing the need for proper construction and monitoring to avoid missing critical patterns and risks.
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ESMA releases 2023 annual report
The European Securities and Markets Authority (ESMA) has released its 2023 annual report, outlining its key accomplishments in the first year of executing its new five-year strategy.
In 2023, ESMA focused on three strategic priorities and two thematic drivers derived from its strategy:
- Fostering effective markets and financial stability.
- Strengthening supervision of EU financial markets.
- Enhancing protection of retail investors.
- Enabling sustainable finance.
- Facilitating technological innovation and effective use of data.
Key achievements in 2023 include:
- Peer reviews: ESMA conducted an annual peer review of EU CCP supervision and a peer review on the supervision of CSDs providing cross-border services or participating in interoperable links.
- Costs and performance of retail investment products: ESMA issued its sixth annual report on the costs and performance of retail investment products in the EU. The report outlined that the average cost of retail investment products has declined in recent years. However, there is still significant variation across different types of products and across Member States. Overall, the performance of retail investment products has been affected by factors such as the energy crisis and rising interest rates.
- Launch of the Data Strategy for 2023–2028: This strategy outlines ESMA’s path to harness technology and leverage data to enhance market supervision and investor protection over the next five years.
- Greenwashing progress report: In June, ESMA published a progress report as the first part of its response to the Commission’s request for input on greenwashing risks and supervision. This report provided a common understanding of greenwashing, mapped the highest areas of greenwashing risks across the value chain, and identified preliminary remediation actions. ESMA will publish its final report in June 2024.
- Implementation of MiCA: ESMA issued two consultation papers on detailed rules for cryptoassets under MiCA, addressing aspects such as the authorisation requirements for cryptoasset service providers and proposed rules for investor protection measures (the third consultation package was issued in March 2024). In November, ESMA and the EBA jointly sought input on two sets of guidelines offering practical guidance on the suitability assessment of management body members and shareholders and members with qualifying holdings of issuers of asset-referenced tokens and cryptoasset service providers. Additionally, ESMA contributed to FSB and IOSCO’s work on cryptoassets and decentralised finance, leading to the publication of recommendations for regulating and supervising these activities.
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MAS issues toolkit for insurance brokers
The Monetary Authority of Singapore (MAS) has published its revised Compliance Toolkit for Approvals, Notifications and Other Regulatory Submissions to MAS for Insurance Brokers (IBs) which aims to guide and facilitate insurance brokers’ compliance with the various MAS approval and reporting requirements and timelines.
The toolkit includes the common applications, notifications or other submissions required to be made to MAS under the Insurance Act (IA), its subsidiary legislation and applicable Notices and Guidelines. It excludes approvals, notifications or other submissions which may be imposed by MAS bilaterally on IBs due to the IB’s specific circumstances.
The toolkit comprises three sections as follows:
Section A: Applications, Notifications and Regulatory Submissions Applicable to Registered IBs under Section 76 of the IA.
- Section A1: Applications for approval from MAS.
- Section A2: Notifications to be submitted to MAS.
- Section A3: Notifications in relation to broking staff.
- Section A4: Regulatory submissions to MAS.
Section B: Applications, Notifications and Regulatory Submissions Applicable to Exempt IBs under Section 92 of the IA.
- Section B1: Applications for approval from MAS.
- Section B2: Notifications to be submitted to MAS.
- Section B3: Regulatory submissions to MAS.
Section C: Applications, Notifications and Regulatory Submissions Applicable to Approved IBs under Regulation 3 of the Insurance (Approved Marine, Aviation and Transit Insurance Brokers and Approved Reinsurance Brokers) Regulations.
- Section C1: Applications for approval from MAS.
- Section C2: Notifications to be submitted to MAS.
- Section C3: Regulatory submissions to MAS.
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ASIC issues class no-action position on SPO providers
The Australian Securities and Investments Commission (ASIC) has issued a class no-action position in response to industry participants' inquiries about whether second-party opinion (SPO) providers may be providing financial product advice that requires them to hold an Australian financial services (AFS) licence.
Some context
ASIC has noticed an increasing demand for SPOs, which are used to provide an independent third-party opinion on the alignment or contribution of a financing instrument, program, or framework to industry-accepted environmental sustainability-based principles. Following queries about the possibility of SPOs involving the provision of financial product advice, ASIC decided to issue this class no-action letter.
Key takeaways
ASIC does not intend to take action for a contravention of the requirement to hold an AFS license in this context as long as the following conditions are met:
- The SPO is available only in connection with an offer to wholesale clients.
- Adequate conflict management arrangements are in place, as outlined in Regulatory Guide 181, “Licensing: Managing conflicts of interest”.
- The SPO is accompanied by specific disclosures, such as any material conflicts of interest that may arise in providing the views and opinions in the SPO and any industry-accepted framework and standards relevant to the SPO.
- The SPO is independent of the commissioning party, as set out in Regulatory Guide 112: “Independence of experts”.
Next steps
Unless amended or revoked, this no-action position applies until the end of 15 June 2026.
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BIS survey reveals Central Banks' approaches to CBDCs and cryptocurrencies
The Bank for International Settlements (BIS) has published the results of the 2023 BIS survey on central bank digital currencies (CBDCs) and cryptocurrencies. A total of 86 central banks participated in the survey, sharing insights into their involvement in CBDC work, as well as their motivations and intentions for potentially issuing one. The paper also provides insight into the use of stablecoins for payments and regulatory approaches to cryptoassets across the globe.
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World Elder Abuse Awareness Day: US regulators issue reminder to financial institutions
On World Elder Abuse Awareness Day, US regulators reminded financial institutions to be vigilant in detecting and reporting suspicious activity related to elder financial exploitation (EFE). The Financial Crimes Enforcement Network (FinCEN) issued the reminder along with resources for firms to use. Additionally, the Commodity Futures Trading Commission (CFTC) published a notice on “How to Identify and Talk About Elder Fraud”, and the National Automated Clearinghouse Association (NACHA) released an Elder Financial Exploitation Awareness Financial Institution Checklist.
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