Mar. 31, 2023
March 31, 2023
The Commission has proposed amendments to Rule 605 of Regulation NMS to include more comprehensive information about broker executions.
On July 28, 2000, the SEC introduced SEC 11Ac 1-5, order execution statistics SEC 11Ac1-61, routing and material relationship aspects disclosures. These rules, now known as SEC Rules 605 and 606, were implemented in response to the rising competition and fragmentation in the market. The SEC intended to ensure that the U.S. National Market System meets the needs of investors by ensuring Best Execution of all investor orders, including limit orders, from any source.
Brokers are currently required to file 606 reports quarterly. However, in December 2022, FINRA and the SEC issued risk alerts about non-compliance with 606 reports.
FINRA's report revealed several issues with 606 reporting compliance, such as firms publishing inaccurate information on order routing in the quarterly report. Some of the problems cited in the report include falsely stating that the firm does not have a profit-sharing agreement or receive PFOF from execution venues, incorrectly identifying reported execution venues as \"Unknown,\" and inaccurately identifying firms as execution venues.
Inadequate descriptions of specific terms of PFOF and other arrangements, incomplete descriptions of tiered pricing arrangements, and inadequate or incomplete descriptions of PFOF received through pass-through arrangements were among the incomplete disclosures noted in the Material Aspects disclosures portion of the quarterly report.
It is likely that brokers will be non-compliant with the new 605 reports, and this will provide little or no benefit to retail investors. The accuracy of the data contained in the 605 reports is critical to their usefulness.