- The proposed rule change was published for notice and comment in the Federal Register on December 6, 2022.7 June 4, 2023 is 180 days from that date, and August 3, 2023 is 240 days from that date.
- FINRA finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider the proposed rule change and its comments.
- Accordingly, FINRA pursuant to section 19(b)(2) of the Act, designates August 3, 2023 as the date by which the Commission shall either approve or disapprove the proposed rule change (File No. SR-FINRA-2022-031).
What are they delaying?Purpose:
- Rule 606(a) of Regulation NMS3 (“SEC Rule 606(a)”) requires broker-dealers to publicly disclose specified information about their order routing practices for NMS Securities, including for non-directed orders in NMS stocks that are submitted on a “held” basis.
- The SEC has stated that, as a result of these disclosures, “customers—and retail investors in particular—that submit orders to their broker-dealers should be better able to assess the quality of order handling services provided by their broker-dealers and whether their broker-dealers are effectively managing potential conflicts of interest.”
"FINRA believes these same goals would be furthered by providing investors with similar order handling information for unlisted stocks, which are not covered by the existing SEC Rule 606(a) disclosure requirements."
- "Accordingly, FINRA is proposing to adopt new Rule 6470 to require members to publish quarterly order routing disclosures primarily for non-directed held orders in OTC Equity Securities, generally aligned with the SEC Rule 606(a) disclosures for NMS stocks but with modifications to account for differences between the market for NMS Securities and over-the-counter (“OTC”) markets."
- "In addition, to make both the existing SEC Rule 606(a) disclosures and the new OTC Equity Security disclosures more accessible to investors, FINRA is proposing new Rule 6151 and paragraph (d) of new Rule 6470 to require members to send both disclosures to FINRA for centralized publication on the FINRA website".
Disclosure of Order Routing Information for OTC Equity Securities:
- Proposed new Rule 6470, entitled “Disclosure of Order Routing Information for OTC Equity Securities,” would require the publication of order routing disclosures for OTC Equity Securities.
- Specifically, as is already required for broker-dealers with respect to held orders in NMS stocks under SEC Rule 606(a)(1), proposed Rule 6470(a) would require, among other things, every member to make publicly available for each calendar quarter a report on its routing of non-directed orders in OTC Equity Securities that are submitted on a held basis during that quarter, broken down by calendar month, and keep such report posted on an internet website that is free and readily accessible to the public for a period of three years from the initial date of posting on the internet website.
- Also in line with the required publication timeframe for NMS stock disclosures under SEC Rule 606(a)(2), proposed Rule 6470(c) would require that a member make the new OTC Equity Security report publicly available within one month after the end of the quarter addressed in the report.
Under Rule 606(a)(1), the SEC Rule 606(a) reports for NMS Securities are required to be broken out into separate sections for NMS stocks in the S&P 500 Index as of the first day of the quarter, other NMS stocks, and NMS Securities that are options.
- Since these categories are not relevant to the OTC market, FINRA is proposing to instead require that the new quarterly reports for OTC Equity Securities under Rule 6470(a) be separated into three sections to better reflect the OTC market. Specifically, the new reports would be required to be separated into three sections for:
- (i) domestic OTC Equity Securities;
- (ii) American Depository Receipts (“ADRs”) and foreign ordinaries that are OTC Equity Securities; and
- (iii) Canadian-listed securities trading in the United States as OTC Equity Securities.
- To provide for consistency across member reports, FINRA will publish a list of the OTC Equity Security symbols that fall under each category, and members would be required to publish reports in a manner consistent with such list.
- Under Rule 606(a)(1), the SEC Rule 606(a) reports for NMS Securities must be made available using the most recent versions of the XML schema and associated PDF renderer as published on the SEC’s website. Similarly, Rule 6470(a) would specify that the new OTC Equity Security reports must be made available using the most recent versions of the XML schema and associated PDF renderer as published on the FINRA website.
With respect to the content of the new reports, Rule 6470(a) would require that each section of the new OTC Equity Security reports include the information specified in paragraphs (a)(1) through (4) of proposed Rule 6470, specifically:
- The percentage of total orders14 for the section that were not held orders and held orders, and the percentage of held orders for the section that were non-directed orders
- The identity of the ten venues to which the largest number of total non-directed held orders for the section were routed for execution and of any venue to which five percent or more of non-directed held orders for the section were routed for execution, and the percentage of total non-directed held orders for the section routed to the venue
- For each identified venue, the net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and per order, for all nondirected held orders for the section.
- A discussion of the material aspects of the member’s relationship with each identified venue, including, without limitation, a description of any arrangement for payment for order flow and any profit-sharing relationship and a description of any terms of such arrangements, written or oral, that may influence a member’s order routing decision including, among other things: incentives for equaling or exceeding an agreed upon order flow volume threshold, such as additional payments or a higher rate of payment; disincentives for failing to meet an agreed upon minimum order flow threshold, such as lower payments or the requirement to pay a fee; volume-based tiered payment schedules; and agreements regarding the minimum amount of order flow that the member would send to a venue.
- "FINRA believes that requiring members to provide information about the relative amount of a member’s held and not held orders in the new reports proposed to be published under Rule 6470(a)(1) would provide investors, regulators, academics, and others seeking to review the reports with additional information regarding the business of brokers active in the OTC market."
- "Studies analyzing the market for NMS stocks indicate that broker-dealers may route orders to maximize order flow payments by sending market orders to venues making payments and sending limit orders to venues paying large liquidity rebates. Such routing may not always be in customers’ best interests."
- "Make-take fees may lead to agency conflicts and rebate volume pricing tiers may worsen such conflicts further."
- Theoretical models of the conflict between investors and their broker-dealers, who may be incentivized to route orders based on the take fees charged or rebates paid by exchanges, find that the conflict of interest reduces investor utility
- Using Rule 606 data, one study examined broker-dealer routing of non-marketable limit orders in NMS stocks to exchanges offering the largest rebate. This analysis combined with proprietary limit order data found that low-fee (i.e., low-rebate) exchanges fill or fill more rapidly when high-fee (i.e., high-rebate) exchanges do not fill, and non-marketable limit orders earn higher average realized spreads on low-fee than high-fee exchanges.
"In addition, in the absence of order routing and payment for order flow information, customers may not possess information necessary to assist them in forming a preference concerning their brokers’ routing choicesparticularly where customer commission charges have been reduced or eliminated."
- "Furthermore, if customers have information on how brokers route orders and are able to negotiate commissions to more closely represent the brokerdealer’s average execution cost for a particular customer’s order flow, then customers may be better able to submit the mix of liquidity-supplying and demanding orders to minimize commissions and improve order execution."
Economic Impacts/Anticipated Benefits (AGAIN, this is what they are CHOOSING to DELAY):
FINRA can kicks implementing disclosure rules for OTC
- because PFOF data is involved?
- Will consider again on August 3rd...
- Chirp on bird person app to try and get word out further