Wall Street brokerages are quietly lobbying regulators to ensure new European rules that will upend banks’ investment research operations don’t spread to America. But the campaign is causing tension with public pension funds and other large investors that are some of their biggest clients.

The dustup is playing out behind closed doors in Washington at the Securities and Exchange Commission, where brokers want the agency to make clear they can continue combining the cost of financial research and trading in one bill for U.S. customers — the practice that is being banned in the European Union.

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The brokers’ push, outlined in a draft legal memo, has drawn the ire of several pro-investor groups and huge state pension systems that manage money for government employees. Arguing that the European requirements would likely reduce costs and pierce the opacity of Wall Street billing practices if applied in the U.S., they’re urging SEC Chairman Jay Clayton to bring the debate into the open.

Any SEC decision, the investor advocates have noted, could have wide-ranging consequences that impact the quality of research and ultimately how much customers have to pay banks when they trade. They say brokers and their trade group, the Securities Industry and Financial Markets Association, are trying to get the SEC to put a government stamp of approval on a proposal that seems designed to keep a lucrative business model afloat.

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“It’s understandable that some very large firms that provide research and trading would want to preserve a cash cow,” said Tyler Gellasch, who runs the Healthy Markets Association, whose members include the California Public Employees’ Retirement System and Janus Henderson Group Plc. “What I don’t necessarily understand is how anyone could think that it’s good policy to do that.”

Brewing Controversy

The brewing controversy is shaping up to be one of the first major policy tests for Clayton, the former Wall Street deals lawyer who President Donald Trump picked to be the nation’s top securities regulator. There is some urgency, too: the EU rules go into effect Jan. 3 and both sides want the SEC to weigh in well ahead of the deadline.

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Clayton, who has faced repeated questions from lawmakers about the issue, may be asked about the agency’s plans when he testifies Tuesday before the Senate Banking Committee. In response to a senator’s question earlier this month, Clayton said the SEC was working with European authorities on the matter.

SEC spokesman Chris Carofine declined to comment.

Sifma spokeswoman Cheryl Crispen declined to comment on the industry’s lobbying effort. She stressed that the legal memo, which was written earlier this month on the letterhead of Sifma’s outside lawyers, is still in draft form.

Sweeping Overhaul

The new research requirements in Europe are part of a sweeping regulatory overhaul known as the revised Markets in Financial Instruments Directive, or MiFID II. The rules were imposed to give investors more transparency into what they are being charged by brokers, who have traditionally given clients “free” market analysis as part of a suite of services lumped together as trading costs.

The coming changes are causing upheaval across the global brokerage industry. Among the issues firms are grappling with are how much to charge for their analysis of stocks and bonds, and whether the loss of steady profit streams will trigger massive layoffs.

McKinsey & Co. estimated in a June report that MiFID could result in hundreds of job cuts and slice firms’ equity research revenue by 30 percent over the next three years. In a worst-case scenario, the consulting firm said, it could fall by 50 percent.

MiFID Spreading?

MiFID will also have consequences for the money-management industry.

A number of asset managers expect the uncoupling in Europe to reduce their brokerage tabs by bringing on more competition and allowing them to shop around for services. For example, a pension fund could hire a large bank to execute trades while turning to an independent firm for market analysis.