Disclosure of Routing Information
Regulatory Obligations and Related Considerations
Rule 606 of Regulation NMS requires broker-dealers to disclose information regarding the handling of their customers’ orders in NMS stocks and listed options. These disclosures are designed to help customers better understand how their firm routes and handles their orders; assess the quality of order handling services provided by their firm; and ascertain whether the firm is effectively managing potential conflicts of interest that may impact their firm’s routing decisions.
- Does your firm publish accurate, properly formatted quarterly routing reports on its website for the required retention period as specified under Rule 606(a), including use of the SEC’s most recently published PDF and XML schema?
- If your firm is not required to publish a quarterly report under Rule 606(a), does the firm have an effective supervisory system to periodically confirm that your firm has no orders subject to quarterly reporting?
- If, pursuant to SEC guidance, your firm adopts by reference the Rule 606(a) report of another firm, such as your firm’s clearing firm, does your firm have an effective supervisory system to ensure that it meets the requirements of the SEC’s guidance (including examining such report and not having a reason to believe it materially misrepresents the order routing practices)?
- If your firm routes orders to non-exchange venues, does your firm adequately assess whether such venues are venues to which orders are “routed for execution” under Rule 606(a)?
- Does your firm obtain and retain sufficient information to properly report the material terms of its relationships with venues to which it routes orders for execution, including specific quantitative and qualitative information regarding PFOF and any profit-sharing relationship?
- If your firm claims an exemption from providing not held order reports under Rule 606(b)(3) (pursuant to Rule 606(b)(4) or (5)), what supervisory system does your firm have in place to determine if your firm’s or a customer’s order activity falls below the relevant de minimis thresholds?
- If your firm is required to provide customer-specific disclosures for not held orders in NMS stocks under Rule 606(b)(3), does your firm provide accurate, properly formatted disclosures for the prior six months to requesting customers within seven business days of receiving the request?
Findings and Effective Practices
- Inaccurate Quarterly Reports: Publishing incomplete or otherwise inaccurate information in the quarterly report on order routing, such as:
- reporting only held orders in listed options, instead of both held and not held orders;
- inaccurately classifying orders (e.g., classifying orders as “other orders” without considering whether such orders involve a customer request for special handling);1
- incorrectly stating that the firm does not receive PFOF from execution venues;
- not including payments, credits or rebates (whether received directly from an exchange or through a pass-through arrangement) in the “Net Payment Paid/Received” and “Material Aspects” sections of the quarterly report;
- not including exchange pricing arrangements (e.g., tiered pricing) in the “Net Payment Paid/Received” and “Material Aspects” sections of the quarterly report;
- not disclosing any amounts of “Net Payment Paid/Received,” when the firm receives PFOF for at least one of the four order types (i.e., Market Orders, Marketable Limit Orders, Non-Marketable Limit Orders, Other Orders);
- inaccurately identifying reported execution venues as “Unknown”
- inaccurately identifying an entity as an execution venue when that entity does not execute trades (e.g., identifying a routing broker-dealer as an execution venue, where the broker-dealer re-routes but does not execute orders; options consolidator that does not provide liquidity); and
- not posting the quarterly report on their firm’s website in both required formats (i.e., PDF and XML schema).
- Incomplete Disclosures: Not adequately describing material aspects of their relationships with disclosed venues in the Material Aspects disclosures portion of the quarterly report, such as:
- inadequate descriptions of specific terms of PFOF and other arrangements (e.g., “average” amounts of PFOF rather than specific disclosure noting the payment types, specific amount received for each type of payment, terms and conditions of each type of payment);
- ambiguous descriptions of receipt of PFOF (e.g., firm “may” receive payment);
- inadequate or incomplete descriptions of PFOF received through pass-through arrangements;
- incomplete descriptions of exchange credits or rebates; and
- incomplete descriptions of tiered pricing arrangements, including the specific pricing received by the firm.
- Incomplete Disclosure When Incorporating by Reference: Incorporating by reference another firm’s Rule 606(a)(1) quarterly report with incomplete disclosure of:
- the firm’s relationship with the referenced firm, including clearing or execution relationship;
- payment for order flow received from the referenced firm;
- the amount and type of order flow sent to the reference firm;
- payment from any profit-sharing relationship received from the referenced firm;
- transaction fees paid to the referenced firm; and
- transaction rebates received from the referenced firm.
- Deficient Communications: Not notifying customers in writing of the availability of information specified under Rule 606(b)(1), as required by Rule 606(b)(2).2
- Not Held Customer Reports: Failing to provide Rule 606(b)(3) Not Held reports to customers in a timely manner.
- Insufficient WSPs: Either not establishing or not maintaining WSPs reasonably designed to achieve compliance with the requirements of Rule 606, including:
- not updating Disclosure of Order Routing Information WSPs to include requirements detailed in Rule 606(a)(1) or Rule 606(b)(3);
- not describing the steps taken to review whether firms verified the integrity of information sent to, or received from, their vendor—or not stating how the review would be evidenced by the reviewer;
- not articulating a supervisory method of review to verify the accuracy, format, completeness, timely processing and details of the Rule 606(b)(3) report, if requested, as well as documenting the performance of that review; and
- when incorporating by reference another firm’s Rule 606(a)(1) quarterly report, not examining the report and having a reasonable basis to believe that the report does not materially misrepresent the order routing practices.
- Supervision: Conducting regular, periodic supervisory reviews of the public quarterly reports and customer-specific order disclosure reports, if applicable, for accuracy (e.g., assuring that per-venue disclosures of net aggregate PFOF and other payments are accurately calculated) and completeness (e.g., assuring that the Material Aspects section adequately describes the firm’s PFOF and other payment arrangement for each execution venue, including all material aspects that may influence the firm’s order routing decisions).
- Due Diligence on Vendors: Performing due diligence to assess the accuracy of public quarterly reports and customer-specific order disclosure reports provided by third-party vendors by, for example, reviewing content of reports, comparing order samples against vendor-provided information and confirming with the vendor that all appropriate order information is being received (particularly when the firm has complex routing arrangements with execution venues).
2 In addition to the order routing disclosures under Rule 606, Rule 607 of Regulation NMS requires firms to disclose their policies regarding PFOF and order routing when customers open accounts, and on an annual basis thereafter, so firms should consistently provide the same information in both types of disclosures.
3 See in particular SEC FAQ 12.01 regarding adopting another firm’s report by reference.