The SEC proposed amendments to Rules 605 and 606 of the Regulation National Market System ("Reg. NMS") that would require broker-dealers to (i) disclose information about how institutional orders are handled, and (ii) expand the information that is included in existing retail order disclosures.
Institutional Order Disclosures
The proposed amendments would require broker-dealers to provide customers with standardized information about their institutional order handling and execution quality, and to publicly disclose the same information on an aggregated basis to all of its customers. Specifically, the proposed rules would require a broker-dealer to (i) provide specific disclosures, upon its customer's request, concerning the routing and execution of that customer's institutional orders (i.e., orders in exchange-listed stocks with original market values of $200,000 or more) for the prior six months, and (ii) make aggregated information publicly available with respect to the broker-dealer's handling of customers' institutional orders for each calendar quarter.
Retail Order Disclosures
The proposed amendments also would make enhancements to current order-routing disclosures for retail orders by requiring broker-dealers to disclose (i) limit order information under marketable and nonmarketable categories, (ii) the net aggregate amount of any payments for order flow, (iii) any payments received from any profit-sharing relationship, and (iv) any transaction fees paid to, or transaction rebates received from, certain trading venues. Additionally, the proposed amendments would require a broker-dealer to describe any terms of payment involving order-flow arrangements and profit-sharing relationships with certain venues that may influence the broker-dealer's order-routing decisions.
The proposed amendments also would mandate the public availability of public-order-execution and order-routing reports for a period of three years.
Comments on the proposal must be submitted within 60 days after its publication in the Federal Register.
Commentary
All of the SEC Commissioners spoke favorably about the proposal. Because of this broad consensus, and because the evidence that increased disclosure may benefit investors and increase competition among broker-dealers is more than reasonable, firms that wish to comment should focus on the details of what is required and not whether the proposal will be approved.
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