FINRA’s 2023 Examination and Risk Monitoring Program priorities have been published and, not surprisingly, Best Execution is once again identified as a top area of focus.
FINRA does a thoughtful and thorough job of clearly outlining areas of focus and firm vulnerabilities. With respect to Best Execution, FINRA reminds firms that in any transaction for the benefit of a customer, either at your firm or for another broker-dealer, a member firm must use “reasonable diligence” to seek the best possible outcome given existing market conditions. FINRA also reminds market participants that, regardless of whether they act in an agency or principal capacity, or if they route all customer order flow to another broker-dealer, the “member firm cannot transfer its duty of best execution.”
Best Execution and Review
Policies and procedures must clearly outline a “regular and rigorous” review of execution quality.
Firms must have clear documentation addressing the methodology of their review, evidencing the regular and rigorous review. Firms also need to determine the most appropriate frequency of formal reviews for their firm’s needs (no less than quarterly).
Payment for Order Flow
Payment for Order Flow (PFOF) should be thoroughly disclosed within account documentation and within required SEC 606 disclosures on the firm’s website. PFOF disclosures should not only reference direct payment, but should also cover exchange rebates or passthroughs of exchange rebates. Regardless of the type of payment, the firm needs to demonstrate that payment or other inducements do not influence routing decisions. Anything that could be considered a Conflict of Interest needs to be disclosed.
Use of Data
As Fixed Income and Options execution data becomes more accessible and relevant, expect FINRA to focus more in these areas. Do your firm’s policies and procedures differentiate between asset classes of securities with different characteristics?
FINRA will review policies, documentation, and disclosures regarding any extended hours trading that may be offered. They will also be likely to request data on trades that take place outside of historical “covered” transactions under SEC Rule 605/606; specifically, odd lots, fractional shares, and orders in excess of 10,000 shares.
FINRA and the SEC’s requirements for Best Execution are complex and can be confusing. Oyster’s Capital Markets and Trading team will conduct an assessment of your firm’s Best Execution protocols, beginning with your Best Execution Charter addressing equities, options, and fixed income securities. Additionally, Oyster can review policies and procedures, trading systems and reports, firm thresholds and reviews, and all Best Execution related disclosures. Oyster’s review will deliver recommendations resulting in a more thorough and comprehensive Best Execution platform, providing better results and regulatory compliance.
Best Execution Compliance Support
FINRA and the SEC’s requirements for Best Execution are complex. Oyster Consulting is the partner you need to ensure your Best Execution program is compliant. Our experienced team of experts will assess your firm’s Best Execution protocols relative to the rule. Our consultants will also review policies and procedures, trading systems and reports, third-party vendors, firm thresholds and all Best Execution related disclosures. Oyster Consulting is the partner you need to help you plan for what needs to be done and ensure that your firm is compliant.
