It has been 18 years since the SEC originally adopted order handling and routing requirements and we believe it has long been due for an overhaul. since the implementation of Rule 606 (then 11Ac1-6) order routing has been driven and shaped by significant technological innovations that have completely changed the way markets function and the manner in which broker/dealers trade. The original rules did not provide the requisite level of transparency needed to provide investors with the proper insights to make informed decisions regarding their trading partners and strategies.
The current Rule 606 states broker-dealers that route customer orders in equity and option securities are required to make publicly available quarterly reports that, among other things, identify the venues to which customer orders are routed for execution. In addition, broker-dealers will be required to disclose to customers, on request, the venues to which their individual orders were routed.
On November 2, 2018, the SEC announced amendments to RULE 606 that will require additional disclosures by broker-dealers to better serve their retail and institutional clients.
https://www.sec.gov/news/press-release/2018-253
Under REG NMS, the 606 will now be broken into two separate reports specific to the clients order flow.
606(1)(a) will be required to report only HELD order flow (A HELD order is one where the trader is held to the duty of best execution – meaning they have to provide a prompt execution at the best possible price.)
606(b)(3) will be mandatory for NOT HELD order flow(A NOT-HELD order is an order that gives the broker-dealer both time and price discretion.)
The new disclosures are designed to help clients understand how their orders are routed, what fees/rebates are associated with their brokers chosen venues and what impact (if any) these decisions had on the execution quality received. Previously, firms were not obligated to disclose this information. This level of information, in the hands of a client, will help explore the advantages/disadvantages of rebates and exchange fees and empirically prove whether or not such payment for order flow affects quality of execution and ultimately the quality of US equity markets.
WSPs and Compliance
In addition to reporting requirements, firms will need to review their Written Supervisory Procedures (WSPs) and include these amendments going forward. As with all new rules, firms should be prepared to respond to regulatory inquiries by either the SEC or FINRA.
(WSPs are a living document and need to be updated when new/changes to rules occur.)
FINRA Rule 3110requires a firm to establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with the applicable securities laws and regulations and FINRA rules..
Compliance departments should provide proper training to their compliance officers to facilitate these needs. Continuing education programs are required for firms to provide key personnel to ensure they are aware of new rules and establish a supervisory system to ensure proper controls are in place. The broker-Dealer will need to ensure adequate resources are available when customer/regulatory inquiries are requested. As they need to be responded to within a specific time frame (Currently 7 days)
BestXstats is very well versed in both 606 reporting and regulatory procedures for both of the new SEC RULES 606(1)(a) and 606(b)(3). These reports are available via our Compliance Suite where our customers log into their own client portal and have access to all of their On-Demand reports, updated on a daily basis.
*By the Deadline of May 20, 2019, Broker-dealers will need to be compliant with both the 606(1)(a) and 606 (b)(3) —
