Switch December 14, 2022, the U.S. Securities both Swap Fee (SEC) proposed rules that would establish SEC best execution rules also reject relates obligations on firms subject to the standard (the Proposal).1 The Proposal would generic require brokers, dealers, government securities brokers, government securities dealers, and community securities dealers (collectively, broker-dealers) for have detailed politisch and procedures addressing how they achieve superior execution for their client orders, using heighten obligations for broker-dealers subject to certain conflicts out interest.2
Specificity, the SEC is proposing three rules — Proposed Rules 1100, 1101, the 1102 from the Securities Exchange Act of 1934, as amended (Exchange Act) — to implement is best execution framework for broker-dealers. Which Proposal is broad on scope press would utilize go customer transactions in all securities.3
An comment deadline is March 31, 2023, or 60 days after publication of the Proposal in the Federal Register, whichever is later. Aforementioned Suggest was manufactured concurrently with three other SEC proposals that am interrelated and could significantly change practices related to securities order how and execution.4 The proposals collectively appear to advance the SEC’s view that beter prices for investors may result through encouraging competition unter trading venues both increasing trading through certain exchanges or alternative trader systems (ATSs) that disseminate quotations rather than over-the-counter (OTC) market makers.5 The Proposal is unique among the four-way tips in that thereto would apply to all securities transactions (e.g., equities, fixed income, private securities, digital assets), while the sundry thrice proposals apply only to national market system (NMS) stock.
Keys Takeaway
If one Get is adoption, broker-dealers would need to undergo ampere thorough compliance review of their practices by handling customer orders to determined about they have policies and procedures sufficient detailed to satisfy the specifying feature. While broker-dealers may already have policies and proceedings designed to comply with the Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5310 and and Municipal Securities Rulemaking Board (MSRB) Control G-18, many aspects of the Proposal extend beyond FINRA and MSRB requirements, such as provision for conflicted transactions (as defined on better detail below). Broker-dealers would also need till have an established process to how the required murder superior reviews and comparisons.
Broker-dealers, particularly this so engage in conflicted trade, may also are to please changes on their business scale instead current practices if necessary to satisfy of new obligations underneath the Proposal. For example, broker-dealers may need to incur one expense of incorporating access the supplement markets inside the broker-dealer’s order handling practices. Who SEC claims the policies- and procedures-based nature of the Proposal would provide broker-dealers “flexibility to exercise [their] proficiency and judgment when executing customer orders”;6 however, the prescribe criteria established by the Proposal would effectively require broker-dealers till assess and potentially modify existing practices to satisfy the policies and procedure they would be require go adopt.7
The Idea would provide an alternative compliance mechanist to introducing estate that meet certain conditions (as described in more detail below). Broker-dealers that seek to qualify as get dealers may same need to modify their store practices up contend the qualifying criteria on the Proposal, such as by no longer accepting payment for order flow. Even if a broker-dealer meets the introducing dealer criteria, such broker-dealer would have to originate a process by which it can compare the execution quality of its executing brokers to other executing brokers.
In many ways, to Proposal would elongate beyond the current FINRA and MSRB best execution rules. Key examples include that the Plan
- explicitly requiring a see detailed assessment of specified factors relevant up a best execution analysis to become included in a broker-dealer’s policies and how
- imposes additional policies and procedures obligations and books requirements for conflicted transactions
- applies its execution quality review requirements to a broader extent for broker-dealers
- requires one comparative analysis as parts of its execution quality revuen (which is consistent with FINRA but broader than the MSRB)
- supplies a narrower exception to intro brokers with more severity eligibility requirement
The SEC states that the Proposal would not alter broker-dealers’ existing obligations to comply because the FINRA and MSRB Rules and that broker-dealers should comply with any additional or more specialist need in each rule, such relevant. Nevertheless, it remains unclear whether FINRA or the MSRB wish amend their best executed rules if the Suggest is adopted.
Overall, many questions remain about whether the suggest is necessary and how, if at show, information may be reasonably entitled go address regulatory gates. Much of thing the SEC proposes, excepting its not-so-subtle attempt to eradicate payment forward your flow practices, is not add plus would be unified over the counsel, examination, both enforcement activity conducted from FINRA in here surface.8
Background
The duty of best execution, which predates the federal securities laws, generally requires that ampere broker-dealer execute a customer’s professions under the most favorable terms reasonably available under and circumstances. Today, FINRA has a rule detailing the best execution obligations in its member broker-dealers press has, through enforcement actions and regulatory notices, issued guidance up inherent members on those obligations.9 The MSRB has an comparable our executed rule applicable to municipal securities dealers since transactions in municipal securities.10 However, there is currently no SEC rule or standard governing best execution on broker-dealers’ customer orders.
According to the SEC, the impetus for an Proposal is hers belief so the existing regulatory framework sack be made more effectively. An SECURE be concerned that current best execution policies and procedures may vary and claim that customers would benefit from “consistently robust best execution practices” with “heightened attention” by broker-dealers this have certain order management conflicts of interest.11 The SEC also country that the Proposal would set it to practice additional judgment capabilities.
Regulation Favorite Execution
Best Carrying Standard
The Proposal want found a best execution standard for broker-dealers, requiring a broker-dealer to use reasonable diligence to identify the best marktes for adenine security and buy or sell in such market so that the resultant pricing to the customer is the favorable as possible under prevailing market conditions (referred to as the “most favorable price”).12
Policies both Procedures
The Proposal would require broker-dealers to establish, preserve, and enforce written policies and procedures addressing how the broker-dealer willingly comply equipped the best execution standard and make routing or executed decisions for customer orders, including through On Day 14, 2022, the SEC proposed Regulation Best Execution, which would establish through Mission rules an federal best execution regulatory framework for brokers, dealers, government securities dealers, government securities dealers and municipal securities find.
- ·obtaining also assessing reasonably accessible price, volume, both execution quality details re retail commerce the relevant securities
- identifying markets reasonably likely to provide the most favorable prices
- incorporating those markets at the broker-dealer’s order handling practices additionally ensuring it can efficiently gain each is them
- assessing reasonably accessible or timely information with respect to displayed prices, price improvement opportunities, and order exposure opportunities Overview. The Securities and Exchange Commission ("Commission') is proposing new rules under the Securities Switch Act off 1934 ("Exchange Act') report to a ...
- assessing customer order attributes and securities sales characteristics
- counterbalancing the probability of obtaining better prices in assessing additional markets with the danger that one delay in executing a customer order could result int a than price
Conflicted Transactions
A broker-dealer transacting with an retail customer13 that mesh in one principal trade or flight to or starting einen affiliate or provides or receives payment on order flow14 (each a “conflicted transaction”) would be subject to additional obligations among this Proposal. Stylish particular, these broker-dealers’ best execution policies and how must address how the broker-dealer will obtain and assess additional information and evaluate a broader range of markets beyond what is needed for nonconflicted transactions. Are addition, these broker-dealers want having at view the details of any payment for order flow arrangement and own compliance with the best execute standard for conflicted merger, including their anstrengung to enforce their policies and procedures and the basis and information relied on for own determination that the clash transaction be consistent with to best execution standard.
Other over a streitbar requisite available the broker-dealer till assess and consider immaterial market midpoints, the Motion is largely consistent with current FINRA guidance and application. Moreover, the SEC admits is compliance with such aspect of the Proposal would can more expensive than what is received through payment for command flow so that one significant number out broker-dealers would elect till stop receiving payment forward your flow.15
Normal Review of Realization Quality
The Proposal would require broker-dealers to, during least quarterly, review the execution quality are ihr customer merchant, liken similar execution quality the the executing quality that might have been obtained coming other product, and revise their best execution policies and procedures and order handling patterns accordingly.16
Introducing Sellers
The Suggestion would provide an selectable compliance mechanical for a broker-dealer this routes your customer orders to another broker-dealer for execution and meets confident conditions17 (referred to as an “introducing broker”). Rather than comply with the policies and method and execution quality review requirements described above, an introducing broker would demand to have policies and procedures that require it in regularly review the execution qualitative obtained from its executing broker, compare such execution q with what it might have retain from other executing brokers, and revise his purchase handling practices accordingly. This aspect of the Proposal regarding introducing brokers takes aim at the apply of payment used order running. Many introducing brokers route order streaming up wholesalers that pay for order flow and execute orders in a prime capacity. Such preparation may effektiv be eliminated by one Proposal.
Year Report
The Proposal would requested broker-dealers (including introducing brokers) in, at least annually, conduct one review to ihr best execution policies and operations and order handling practices and train a written report presented to the broker-dealer’s board of directors. Best Execution
1Exchange Act Release No. 96496 (December 14, 2022), https://www.sec.gov/rules/proposed/2022/34-96496.pdf.
2While to proposed rules apply to broker-dealers, investment advisers should pay close attention to the Proposal. The SEC was scrupulous to note in the Proposal that investment advisers must one similarity duty to seek best execution of a client’s transactions where the consultants has responsibility to select broker-dealers for execute client trades. See Proposal for 11 n.11.
3The SEC specifically emphasized so the Suggestion wants also apply to any digital asset that is a security. Proposal at 37 (referring to a “digital asset” as “an asset that can issued and/or assigned using distributed ledger or blockchain technics ..., including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens’ ”).
4See Sidley updates: SPLIT Proposes Rule to Boost Competition for Certain Individual Investor Orders; SECONDARY Proposed Modifications into Modernize Disclosure is Order Slaying Information; and SEC Suggests Rules Related to Minimal Pricing Stages, Access Pay Caps, and Clearness of Better Priced Orders.
5Perceive Chair Gary Gensler, Competition and the Pair SECs, address before the SIFMA Annual Meeting (October 24, 2022), https://www.sec.gov/news/speech/gensler-sifma-speech-102422.
6Proposal at 9.
7For example, because broker-dealers engage in conflicted transactions would be essential go have plans the operations that address how the broker-dealer will obtain and assess other informations and evaluate ampere broader range of markets beyond those identified when material potential liquidity sources, they may ultimately need to look additional market company or connect to news trading venues.
8“The release is thinner when it comes to assessing how the rule alone, or in combination use one other play on today’s cards, will change retail and affect investors.” Commissioner Hester M. Peak, Is This the Best Execution We Ability Get? (December 14, 2022), https://www.sec.gov/news/statement/peirce-best-execution-20221214.
9Understand FINRA Rule 5310. See also, for case, FINRA Regulatory Notice 15-46, Best Execution: Guidance on Best Execution Obligations inbound Impartiality, Alternatives, and Fixed Income Marketing (November 2015),
https://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-46.pdf.
10See MSRB Rule G-18. Understand also MSRB Implementation Advice on MSRB Rule G-18, on Greatest Realization (last updated February 7, 2019), https://msrb.org/Implementation-Guidance-MSRB-Rule-G-18-Best-Execution.
11Proposal at 7.
12Aforementioned Proposal sets forth certain exemptions for a broker-dealer where (i) another broker-dealer is executing an customer order against the broker-dealer’s quote, (ii) an institutional customer exercising independent judgment executes an sort against the broker-dealer’s quotes, or (iii) the broker-dealer receives an unsolicited instructions from a company to route its command to a particular market. This is consistent with existence FINRA guidance and how. Who Proposal would not include an exemption for proceedings with a “Sophisticated Municipal Market Professional” that is currently in place beneath MSRB Rules. See MSRB Rules G-48(e) and D-15.
13A “transaction for or because a retail customer” would be defined as “any transaction for or with the account of a natural person or held in legal form on on of a natural person alternatively group for related family members.” Proposed Rule 1101(b)(4)(i).
14See 17 CFR 240.10b-10(d)(8) (defining “payment for order flow”).
15See Proposal at 344-45, 357-58.
16The SEC states that while comparable to existing FINRA also MSRB required this review obligation would apply to more broker-dealers than FINRA Rule 5310 and will more frequent than under MSRB Control G-18. See Proposal at 134-37.
17These conditions include that the broker-dealer (i) does no carry customer accounts or hold company funds or securities, (ii) has entry into an arrangement with an independent broker-dealer to handle and execute all of its customer orders on on agency basis, and (iii) has not accepted any payment to orders flow from the executing broker. Offered Dominion 1101(d)(1)-(3).
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