Disclosure of Routing Information

NEW FOR 2022

Regulatory Obligations and Related Considerations

Regulatory Obligations:

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.

Related Considerations:

• Does the 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 the firm is not required to publish a quarterly report under Rule 606(a), does the firm have an effective supervisory process to periodically confirm that the firm has no orders subject to quarterly reporting? 
• If the firm routes orders to non-exchange venues, does the firm adequately assess whether such venues are covered under Rule 606(a)?
• If the firm routes orders to non-exchange venues, does the firm obtain and retain sufficient information from such venues to properly report the material terms of its relationships with such venues, including specific quantitative and qualitative information regarding PFOF and any profit-sharing relationship?
• If the firm claims an exemption from providing not held order reports under Rule 606(b)(3) pursuant to Rule 606(b)(4) or (5), what policies and procedures does the firm have in place to determine if the firm’s or a customer’s order activity falls below the relevant de minimis thresholds?
• If the firm is required to provide customer-specific disclosures under Rule 606(b)(3), does the firm provide accurate, properly formatted disclosures for the prior six months to requesting customers within seven business days of receiving the request?

Exam Findings and Effective Practices

Exam Findings:

• Inaccurate Quarterly Reports – Publishing 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;
  • incorrectly stating that the firm does not have a profit-sharing arrangement or 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 firms as execution venues (e.g., identifying routing broker-dealer as execution venue, rather than the exchange where transactions are actually executed);
  • incorrectly listing an entity as an execution venue when that entity does not execute trades (e.g., firm that 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.
• 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).¹⁵
• Insufficient WSPs – Either not establishing or not maintaining adequate WSPs reasonably designed to achieve compliance with the new requirements of Rule 606, including:
  • not updating their Disclosure of Order Routing Information WSPs to include new requirements detailed in amended Rule 606(a)(1) or new Rule 606(b)(3);
  • not describing the steps taken to review whether firms verified the data 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 new Rule 606(b)(3) report, if requested, as well as documenting the performance of that review; and
  • not requiring the inclusion of detailed information regarding the routing and execution of the firm’s customers’ listed options orders in quarterly reports or customer-requested order routing disclosures.

Effective 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, holding periodic meetings with vendors to review 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).

Additional Resources

• SEC’s 2018 Amendments to Rule 606 of Regulation NMS
• SEC’s Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS
• SEC’s Staff Legal Bulletin No. 13A: Frequently Asked Questions About Rule 11Ac1-6
• SEC’s Order Routing and Handling Data Technical Specification