MiFID II May Have Significant Ramifications on Research Payments Involving U.S. Managers With Cross-Border Operations

Hedge fund managers using market research that could potentially influence trading and investment decisions must be mindful of potentially dramatic rule changes following the January 2018 implementation date of the E.U. Markets in Financial Instruments Directive (commonly referred to as “MiFID II”). Key provisions of MiFID II, such as Articles 23 and 24, set forth strict rules concerning conflicts of interest and the receipt of inducements from third parties in connection with trade execution services. See “MiFID II Will Affect Market Structure, Registration and Soft Dollars for Hedge Funds Trading in Europe” (May 19, 2016). U.S. hedge fund managers would be gravely mistaken to assume these MiFID II rules are limited to the E.U., as the regulations have many extraterritorial applications. Further, U.S. regulators have been increasingly focused on research-payment issues, as evidenced by the recent SEC and FINRA enforcement actions and guidance that challenge the assumptions of many market participants about what counts as research and is therefore subject to regulation. All these points came across in a panel discussion at Morgan Lewis’ tenth annual Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives. This article presents the key takeaways from the panel, which featured Morgan Lewis partners Amy Natterson Kroll, Steven W. Stone and William Yonge. For coverage of other sessions at the conference, see “Ways Fund Managers Can Adjust to Rapidly Changing Regulatory Frameworks in the Middle East and Europe” (Jul. 13, 2017); and “Investor Pressure Drives New Performance Compensation Models and Increased Disclosure Obligations for Managers” (Jun. 29, 2017).

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