SEC Amended Rule 606: A Stay of Implementation

Traders Magazine Online News, May 8, 2019

Christopher Bok

On November 2, 2018, the Securities and Exchange Commission (“SEC”) adopted Amended SEC Rule 606.  The Amended Rule is the product of the SEC’s longstanding mandate of providing investors (and entities acting on their behalf) with increased transparency into the securities markets to allow for more informed decision-making and the protection of the individual investor.  Continuing this trend, the Amended Rule significantly enhances the breadth and scope of information that broker-dealers will be required to disclose to customers (i.e. buy-side institutions) regarding the handling of their orders.  Once implemented, Amended Rule 606 will provide individual investors and the institutional entities acting on their behalf with significantly more detail on the order-routing behavior of broker-dealers, allowing investors greater insight into potential conflicts of interest.

Why the Delay?

The Amended Rule’s Adopting Release specified a 180-day implementation period, which required all firms affected by the Amended Rule to meet a May 20, 2019 compliance date.  Following the publication of Amended Rule 606, FIF formed a working group with the intent of assisting our member firms with the implementation of the rule.   It quickly became evident that while FIF members support the enhanced disclosures required by the Amended Rule, additional clarity and guidance (i.e. FAQs) from the SEC was required to promote the consistent implementation of the rule.  To better inform the SEC of the ambiguities identified in the Amended Rule, FIF submitted two comment letters and met with SEC Staff raising several issues, including:

• Ambiguity surrounding the definition of broker-dealer discretion;
• Scope of broker-dealer look-through requirements;
• Challenges involving the capture and reporting of child route information;
• Expectations regarding the reporting of fee/rebate information;
• Options reporting;
• Actionable IOIs;
• Several field specific concerns.

SEC Staff, through detailed discussions with industry stakeholders, acknowledged that the Amended Rule introduces several ambiguities, and to better promote the consistent and efficient implementation of Rule 606, additional guidance is required.  To allow additional time to provide broker-dealers (and their vendors) with the guidance necessary to adequately meet the expectations of the Amended Rule, as well as for firms to implement that guidance, the SEC extended the Amended Rule’s compliance date to October 1, 2019.

FIF views the extension of the Amended Rule’s compliance date from May 20^th to October 1^st as necessary to 1) allow time for the SEC to provide the industry with required guidance; 2) afford industry members with an opportunity to implement that guidance; 3) provide firms reasonable time to coordinate with their vendors/executing brokers to more effectively consolidate all order execution data in a format that will be readily transferable to 606(a) and 606(b) reports. 

What Should My Firm Do Now?

Prior to the issuance of forthcoming FAQs from the SEC, FIF recommends that firms subject to Amended Rule 606(a) and 606(b) disclosures consider the following:

• If your firm utilizes algorithms housed at another broker-dealer, ensure that the broker-dealer can provide your firm with down-stream order execution data as required by the Amended Rule (specific to 606(b)(3) on-demand reports);
• Ensure that your executing broker-dealer is positioned to provide your firm with the detail required by 606(a) and 606(b) reports;
• Discuss the anticipated Amended Rule’s requirement with legal counsel to ensure that your firm’s business analysts/developers are fully informed of the full scope of the Amended Rule’s reporting requirements;
• Determine if there are systematic gaps that may prevent your firm from reporting all required  606(a) and 606(b) data;
• Coordinate with your 606 vendor to ensure that your vendor is well-positioned to meet all 606(a) and 606(b) reporting requirements;
• Liaise with industry groups (i.e. Financial Information Forum, STA, SIFMA) to become better informed of the scope of Amended Rule 606(a) and 606(b) reporting requirements.

Next Steps

FIF anticipates that the SEC will publish robust FAQs on Amended Rule 606 reporting expectations within the next couple of weeks.  Following the publication of FAQs, FIF recommends that your firm coordinate with all entities (i.e. algo providers, executing brokers, execution venues, 606 vendors) from which the firm will require information to meet all Amended Rule 606 disclosure requirements.  Finally, FIF emphasizes that it will be imperative that your firm perform an additional gap analysis following the publication of FAQs to better determine whether your firm is positioned to comply with Amended Rule 606 on October 1. 

 

Christopher Bok is Director, Financial Information Forum

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