Big Wall Street banks are struggling to meet European regulations governing investment research after the top US watchdog said it would not grant a temporary waiver to how the rules are enforced.

After July 3, U.S. brokers are set to lose the protection of a five-year “no action” letter from the Securities and Exchange Commission that protected them from having to register as investment advisers.

Those affected are Goldman Sachs, Morgan Stanley, JPMorgan and Citigroup.

The waiver stemmed from the 2018 EU Markets in Financial Instruments Directive, which required investors to pay separately for investment research and trading services.

EU rules only require investors based in those jurisdictions to “unbundle” payments, not US investors. However, US regulations consider brokers to be investment advisers if they charge a specific fee for research rather than bundling it as a service with sales and trading.

US banks are accepting payments from Mifid-compliant customers, but have been shielded by the SEC’s letter from registering as investment advisers.

Without this protection, they are faced with the choice of registering, moving research teams to already registered subsidiaries, or potentially cutting Mifid-bound clients from research produced in the United States.

“Banks talk to each other and to their customers. It is already causing disruption,” said a person involved in the behind-the-scenes discussions.

The four banks declined to comment.

Last month, SEC Chairman Gary Gensler and senior executives met with representatives from banks and industry associations to discuss the issue. But the regulator ultimately refused to change its longstanding stance, according to three people with knowledge of the meeting.

The SEC declined to comment.

Banks have resisted investment adviser status because it would restrict them from certain activities, including primary trading, and could hamper their ability to offer tailored research, according to people with experience of the rules. The costs and complications of reorganizing registration would depend on each bank’s individual arrangements, but were not insurmountable, they added.

Several brokers, including Bank of America and investment bank Jefferies, registered research units as investment advisers as part of their initial response to Mifid in 2018. Both offer service-to-service investment banking complete and their services did not change after the change. BofA and Jefferies declined to comment.

In July last year, the SEC said it had no plans to extend the no-action letter, stressing that it had always been intended only as a temporary stopgap while the industry resolved any compliance issues with the Investment Advisers Regime.

In 2020, the regulator asked banks to discuss their issues with it to move beyond the waiver to a long-term solution.

In a February appeal to the SEC to soften its stance, industry association Sifma pointed to European debates over rolling back some Mifid provisions and called for at least an extension while they settle.

“It is counterproductive for U.S. institutions to be forced to reduce public company research coverage or potentially alter their operations just to comply with a foreign regulatory requirement that appears likely to change significantly,” he writes. .

The European rollbacks follow arguments that requiring payments has reduced the availability of research, particularly research covering small businesses.

The UK government launched a review of investment research last month, including the effects of Mifid unbundling, while the EU plans to scrap the obligation to pay for research covering companies whose turnover annual is less than 10 billion euros.

However, several U.S. investor advocates have lent their support to the SEC in hopes that forcing brokers to register as investment advisers could open the door to a broader U.S. decision to decouple research and investment costs. negotiation.

“In Europe, investment research has become transparent, investors have suddenly been liberated. . . and research and commercialization costs have fallen without any measurable decrease in access or quality. Worse than simply being left behind and in the dark, many U.S. investors have instead found themselves on the tab,” three major groups, including the CFA Institute, wrote in a letter to the SEC last month.

Critics of clustered research have long argued that it forces fund managers to pay for services they don’t want. The most prized part of research is usually a broker’s ability to offer access to company executives, but bundled services drive bank customers to use its trading services rather than simply pay for the service. of research.

These critics praised Mifid II for forcing bankers and their customers into candid conversations about the value of research.

“If you’re a low-turnover store, you don’t have a big commission portfolio. Put a little with a lot [brokers] allows you to search, but you don’t get much from being a little relevant to a lot of people,” said the commercial director of a midsize fund manager.