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Not Your Father’s SEC Rule 606…

Traders Magazine Online News, February 14, 2019

Chris Montagnino

Many firms are prioritizing the work to implement the changes to order routing disclosures over the Consolidated Audit Trail (CAT) work given that 606 is effective five months earlier (May 20, 2019) than CAT. The impact of the changes to 606 is significant and may implicate some of the same challenges posed by CAT as well as entirely overhauling the current 606 reporting requirements.  In this article, we will focus on the most notable changes and the difficulties that may arise for sell-side firms when attempting to implement such changes. 

So, what is changing? 

Most significantly with regard to the publicly disseminated reports, broker-dealers will now be required to report on transaction fees/rebates paid to or received from each venue to which they route orders.  The new requirements call for quarterly reporting (broken out by month) of the net, aggregate amount of all fees/rebates related to each venue.  The current rules require a written disclosure of such arrangements but the amended rules now require data to be reported in addition to the disclosures.  Perhaps even more challenging, broker-dealers will now be required to provide, upon request, a detailed report to a client about the routing of their orders during the prior six months, including specific detail on any fees/rebates passed through to the client.  Many firms likely already have fee/rebate information that can be gathered for reporting but being able to link such information on a client-by- client, order-by-order basis can prove challenging for a lot of firms.

The provision of fee/rebate information has sparked one of the more critical questions arising out of the new 606 requirements.  Which fee/rebate information are broker-dealers required to provide?  Does the rule only cover those venues with which the broker-dealer has a relationship and routes orders to directly?  Or are broker-dealers expected to report on fees/rebates passed back to them from another broker-dealer, such as an algo or smart order provider?  Based upon the SEC’s final rule release, it appears to be the latter if the broker-dealer exercises a level of “discretion” when entering the order into the algo or smart order router.  The SEC defined “discretion” in the release as choosing among trading algorithms, customizing algorithm parameters or performing  other similar tasks involving its own judgment as to how and where to route orders.  This is one of the critical areas where the industry and the Financial Information Forum are currently seeking guidance from the SEC prior to implementation.

An additional item of significance that is being added to the reports available to clients upon request is information about which of their executed shares took liquidity versus provided liquidity and the associated fees/rebates with such executions.  Broker-dealers must be able to isolate executions that provided or removed liquidity and calculate the respective fees/rebates realized by the client for such activity.  None of this data is required currently under Rule 606.

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