In its 2022 Report on FINRA’s Examination and Risk Monitoring Program, FINRA continues to focus on Best Execution (Rule 5310), as outlined in the Market Integrity area, and on disclosure of routing information. There are several tasks firms should be doing to achieve compliance and stay ahead of the regulatory curve.
Best Execution
“Reasonable diligence” and “regular and rigorous” are phrases imbedded within all Best Execution reviews. As FINRA and the industry move beyond execution quality and price improvement, consider new frontiers such as customer fill rates and execution quality for fractional/notional orders.
What should broker-dealers be doing?
- Maintain updated Written Supervisory Procedures that accurately reflect your firm’s regular and rigorous approach to ensure Best Execution.
- Hold and document regular (at least quarterly) Best Execution committee meetings for equities, options, and fixed income.
- Review execution quality, not just for prescribed size buckets, but also for odd lots, fractionals, greater than 10,000 shares and not held orders.
- In addition to reviewing market orders, have a regular and rigorous process in place for limit orders, marketable limits, etc. Regular and rigorous review should include a thorough fill rate analysis by order type as well as any routing venues.
Disclosure of Routing Information
Regulation National Market System (NMS) has now been with the industry for nearly 20 years; however, it is only recently that the industry and regulators have initiated material modernization to the rule to adapt to much faster and complex equity markets. FINRA Rule 606 provides transparency for investors on where orders are routed and disclosure of real and potential conflicts of interest.
What should broker-dealers be doing?
- Ensure policies and procedures are in place to promptly and accurately publish quarterly routing reports, complying with the proper SEC format.
- Review documentation and disclosure of any “material relationships” including payment for order flow (PFOF) practices. This should be detailed and include any exchange rebate netting.
- Ensure policies, procedures and disclosures are in place to comply with new Rule 606(b)(3) to provide accurate data for clients requesting routing information. Routing data must be available for prior six months, with the ability to be delivered to the requesting client within seven business days.
- Include as an effective, best practice proper due diligence reviews of third-party vendors. Regular meetings and reviewing and comparing data are important examples of best practices.
Oyster’s experts have significant experience with Best Execution and Order Routing compliance. Our consultants perform reviews of procedures, routing practices, technology, vendor solutions, disclosures, and ensure that a “regular and rigorous” program is in place. Leverage our experience to make your compliance program efficient and effective.
