BEN REBBECK, Executive Director

This month, the U.S. Securities and Exchange Commission (the “SEC”) let expire a long-standing ‘no-action’ letter regarding the European Union’s Markets in Financial Instruments Directive II (“MiFID II”) provisions relating to research. This action by the SEC is set to further increase the challenges Australian and Southeast Asian companies face in accessing foreign institutional investment.

MiFID II is intended to enhance transparency, investor protection, and market integrity in financial markets. Although it directly applies to EU member states, its extraterritorial reach and influence has had significant impacts on small and mid-cap companies globally. Non-EU companies seeking to access investors who operate in the EU markets have been impacted by with the directive’s provisions. The outcome of which has been a reduction in the quantum and quality of investment research for small and mid-cap companies and increasing difficulty for listed companies to leverage brokers for corporate access services.

The SEC’s response to MiFID II, back in 2017, was a ‘no-action’ letter to permit US broker-dealers to receive separate payments for research without being subjected to regulation as investment advisers under the Investment Advisers Act of 1940. The concern, at that time, was subjecting broker-dealers’ research services to the Advisers Act would disrupt existing business models. A direct consequence of the SEC’s decision to allow its no action letter lapse is Australian and Southeast Asian companies’ ability to leverage global investment banks to access US institutional investors has now become significantly harder.

Since MiFID II was introduced in Europe in 2018, Australian and Southeast Asian companies looking to gain exposure to European institutional investors have found they need to undertake a significant proportion of investor targeting and engagement themselves. The SEC’s decision not to renew its MiFID II ‘no-action’ letter means Australian and Southeast Asian companies now face similar hurdles, expense and complexity in accessing US institutional investors.

While this is an unwelcome challenge outside of the US and Europe, the change is also not without controversy within the SEC itself. Earlier this month SEC Commissioner Mark T. Uyeda, hit out at his own organisation’s staff, placing a statement on the SEC’s own website saying, “I am disappointed that the SEC staff has decided not to extend the MiFID II Relief for a modest additional period …The MiFID II Relief sought to resolve a conflicts of law issue caused extraterritorially, and an extension would have been consistent with that approach.”

US broker-dealers have reacted in a variety of ways in the face of this change, including reducing or ceasing to offer research, or measures such as seeking counter intuitive acknowledgments that their unbundled research has no value to the counterparty recipient. What is clear, however, is that conflicts between U.S. and European securities laws have now created significant impacts in the cross-border marketplace for Broking, Research and Corporate Access services.

While this change will obviously increase the difficultly faced by small and mid-cap companies in accessing foreign institutional capital, significant tools and expertise now exist to ameliorate this challenge.

For example, global Investor Relations platform AccessIR provides investor relations teams and listed companies’ senior management with direct access to target tools for global investment funds and contact information for specific portfolio managers. Similarly, following the introduction of MiFID II, the IR team at FIRST Advisers have assisted numerous companies undertake their own targeting of new international investors and organise numerous global non-deal roadshows, where investment banks have been unable or unwilling to provide material support.