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Amended Disclosure of Order Handling Information

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Amended Disclosure of Order Handling Information SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 242 Release No. 34-84528; File No. S7-14-16 RIN 3235-AL67 Disclosure of Order Handling Information AGENCY: Securities and Exchange Commission. ACTION: Final Rule. SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is adopting amendments to Regulation National Market System (“Regulation NMS”) under the Securities Exchange Act of 1934 (“Exchange Act”) to require additional disclosures by broker-dealers to customers regarding the handling of their orders. The Commission is adding a new disclosure requirement which requires a broker-dealer, upon request of its customer, to provide specific disclosures related to the routing and execution of the customer’s NMS stock orders submitted on a not held basis for the prior six months, subject to two de minimis exceptions. The Commission also is amending the current order routing disclosures that broker-dealers must make publicly available on a quarterly basis to pertain to NMS stock orders submitted on a held basis, and the Commission is making targeted enhancements to these public disclosures. In connection with these new requirements, the Commission is amending Regulation NMS to include certain newly defined and redefined terms that are used in the amendments. The Commission also is amending Regulation NMS to require that the public order execution report be kept publicly available for a period of three years. Finally, the Commission is adopting conforming amendments and updating cross-references as a result of the rule amendments being adopted today. DATES: Effective Date: [INSERT DATE 60 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER] Compliance Date: [INSERT DATE 180 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER] FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant Director, at (202) 551-5658, Steve Kuan, Special Counsel, at (202) 551-5624, Sarah Albertson, Special Counsel, at (202) 551-5647, Michael Bradley, Special Counsel, at (202) 551-5594, Amir Katz, Special Counsel, at (202) 551-7653, Emerald Greywoode, Special Counsel, at (202) 551-7965, or Andrew Sherman, Special Counsel, at (202) 551-7255, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting: (1) amendments to 17 CFR 242.600 and 242.606 (respectively, “Rule 600” and “Rule 606” of Regulation NMS) under the Exchange Act to require additional disclosures by broker-dealers to customers about the routing of their orders; (2) amendments to 17 CFR 242.605 (“Rule 605” of Regulation NMS) to require that the public order execution reports be kept publicly available for a period of three years; and (3) conforming changes and updated cross-references in 17 CFR 240.3a51-1(a) (“Rule 3a51-1(a) under the Exchange Act”), 17 CFR 240.13h-1(a)(5) (“Rule 13h-1(a)(5) of Regulation 13D-G”), 17 CFR 242.105(b)(1) (“Rule 105(b)(1) of Regulation M”), 17 CFR 242.201(a) and 242.204(g) (“Rules 201(a) and 204(g) of Regulation SHO”), 17 CFR 242.600(b), 242.602(a)(5) and 242.611(c) ( “Rules 600(b), 602(a)(5), and 611(c) of Regulation NMS”), and 17 CFR 242.1000 (“Rule 1000 of Regulation SCI”). TABLE OF CONTENTS I. Introduction ......................................................................................................................... 6 II. Overview of Adopted Rule Amendments ........................................................................... 8 2 III. Amendments to Rule 600, Rule 605, and Rule 606 .......................................................... 14 A. Customer-Specific Order Handling Reports ......................................................... 14 1. Applicability of Customer-Specific Disclosures in Rule 606(b) ................. 14 2. Definition of Actionable Indication of Interest ............................................ 56 3. Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3) ...................... 65 4. Timing and Frequency Requirements for Customer-Specific Order Handling Report ........................................................................................... 77 5. Format of Customer-Specific Order Handling Reports ............................... 87 6. Rule 606(b)(3) Report Content .................................................................... 99 7. Rule 606(c) Quarterly Aggregated Public Report of Rule 606(b)(3) Information ................................................................................................ 117 B. Public Order Routing Report Under Rule 606(a) ............................................... 124 1. Orders Covered By Rule 606(a) Public Disclosures.................................. 126 2. Marketable Limit Orders and Non-Marketable Limit Orders.................... 131 3. Payment for Order Flow Disclosures – Rules 606(a)(1)(iii) and (iv) ........ 134 4. Format of Public Order Routing Report .................................................... 145 5. Division of Rule 606(a) Report’s Section on NMS Stocks by S&P 500 Index and Other NMS Stocks ............................................................. 150 6. Calendar Month Breakdown ...................................................................... 153 7. Execution Metrics ...................................................................................... 155 C. Amendment to Disclosure of Order Execution Information ............................... 156 IV. Paperwork Reduction Act ............................................................................................... 158 A. Summary of Collection of Information............................................................... 159 1. Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 159 2. Amendment to Current Public and Customer-Specific Disclosures .......... 160 3. Amendment to Current Disclosures under Rule 605 ................................. 161 3 B. Use of Information .............................................................................................. 161 1. Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 162 2. Amendment to Current Public and Customer-Specific Disclosures .......... 162 3. Amendment to Current Disclosures under Rule 605 ................................. 164 C. Respondents ........................................................................................................ 164 1. Initial Estimate ........................................................................................... 164 2. Estimate for Adopted Rule [Amendments to 605 and 606] ....................... 165 D. Total Initial and Annual Reporting and Recordkeeping Burdens ....................... 165 1. Customer-Specific Disclosures Under Rule 606(b)(3) .............................. 166 2. Proposed Public Aggregated Report on Orders Subject to the Customer-Specific Disclosures Under Rule 606(b) Not Adopted ............. 178 3. Proposed Requirement to Document Methodologies for Categorizing Order Routing Strategies Not Adopted ...................................................... 178 4. Amendment to Current Public and Customer-Specific Disclosures .......... 178 5. Revisions to Compliance Manuals............................................................. 189 6. Amendment to Disclosures under Rule 605 .............................................. 190 E. Collection of Information is Mandatory ............................................................. 190 F. Confidentiality of Responses to Collection of Information ................................ 190 G. Retention Period for Recordkeeping Requirements ........................................... 191 V. Economic Analysis ......................................................................................................... 191 A. Introduction ......................................................................................................... 192 B. Baseline ............................................................................................................... 194 1. Current $200,000 Threshold ...................................................................... 195 2. Current Reporting for NMS Stock Orders of $200,000 and Above .......... 196 3. Publication Period for Reports Required by Rules 605 and 606 ............... 197 4. Available Information on Conflicts of Interest .......................................... 198 4 5. Available Information on Execution Quality ............................................. 199 6. Format of Current Reports ......................................................................... 200 7. Quality of Broker-Dealer Routing Practices for Not Held NMS Stock Orders......................................................................................................... 200 8. Use of Actionable IOIs .............................................................................. 200 9. Competition, Efficiency, and Capital Formation ....................................... 201 C. Costs and Benefits............................................................................................... 205 1. Customer-Specific Order Handling Disclosures ........................................ 206 2. Public Order Handling Report ................................................................... 246 3. Disclosure of Order Execution Information .............................................. 283 4. Structured Format of Reports..................................................................... 284
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