‘Nobody Is Proud of Soft Dollars’: the Impact of MiFID II on US Financial Markets

Abstract

Abstract Scholars and policy makers have long debated whether securities firms should be allowed to bundle the cost of execution services with the cost of research. Investor advocates condemn the practice whereas industry representatives defend it. In 2018, as part of the Markets in Financial Instruments Directive II (MiFID II) legislative regime, the EU forced the unbundling of commission charges, diverging from US legal standards which still allow ‘soft dollar’ payments for research. The EU’s unbundling regime has challenged global financial services firms, which must now comply with conflicting rules across national boundaries. For more than five years, the US Securities and Exchange Commission provided temporary no-action relief to facilitate compliance with MiFID II, but that relief expired in July 2023, presenting an opportunity to reconsider the impact of MiFID II’s unbundling regime and its implications for US regulators and investors. While this article takes a critical view of soft dollar practices, the story of MiFID II presents contested issues of policy analysis as the agency costs inherent in bundled commissions could be offset by the public benefits of additional research. Unbundling also offers a noteworthy example of an innovation in capital markets regulation flowing from Europe to the United States rather than the other way around.