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: IN THE FEDERAL REGISTER] Compliance Date: [INSERT DATE 180 DAYS AFTER DATE OF Effective Date: [INSERT DATE 60 DAYS AFTER DATE OF PUBLICATION 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 <ul style="display: flex;"><li style="flex:1"><a href="#6_0">I. </a></li><li style="flex:1"><a href="#6_0">Introduction......................................................................................................................... 6 </a></li></ul><ul style="display: flex;"><li style="flex:1"><a href="#8_0">II. </a></li><li style="flex:1"><a href="#8_0">Overview of Adopted Rule Amendments........................................................................... 8 </a></li></ul>2<ul style="display: flex;"><li style="flex:1"><a href="#14_0">III. </a></li><li style="flex:1"><a href="#14_0">Amendments to Rule 600, Rule 605, and Rule 606.......................................................... 14 </a></li></ul><ul style="display: flex;"><li style="flex:1"><a href="#14_1">A. </a></li><li style="flex:1"><a href="#14_1">Customer-Specific Order Handling Reports......................................................... 14 </a></li></ul><a href="#14_2">1. </a><a href="#0_0">2. </a><a href="#0_1">3. </a><a href="#0_2">4. </a> <a href="#14_2">Applicability of Customer-Specific Disclosures in Rule 606(b</a><a href="#14_2">)</a><a href="#14_2">.</a><a href="#14_2">................ 14 </a><a href="#0_0">Definition of Actionable Indication of Interest............................................ 56 </a><a href="#0_1">Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3) ...................... 65 </a><a href="#0_2">Timing and Frequency Requirements for Customer-Specific Order </a><a href="#0_2">Handling Report........................................................................................... 77 </a><a href="#0_3">5. </a><a href="#0_4">6. </a><a href="#0_0">7. </a> <a href="#0_3">Format of Customer-Specific Order Handling Report</a><a href="#0_3">s</a><a href="#0_3">.</a><a href="#0_3">.............................. 87 </a><a href="#0_4">Rule 606(b)(3) Report Conten</a><a href="#0_4">t</a><a href="#0_4">.</a><a href="#0_4">................................................................... 99 </a><a href="#0_0">Rule 606(c) Quarterly Aggregated Public Report of Rule 606(b)(3) </a><a href="#0_0">Information ................................................................................................ 117 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_5">B. </a></li><li style="flex:1"><a href="#0_5">Public Order Routing Report Under Rule 606(a) ............................................... 124 </a></li></ul><a href="#0_0">1. </a><a href="#0_5">2. </a><a href="#0_0">3. </a><a href="#0_4">4. </a><a href="#0_6">5. </a> <a href="#0_0">Orders Covered By Rule 606(a) Public Disclosures.................................. 126 </a><a href="#0_5">Marketable Limit Orders and Non-Marketable Limit Orders.................... 131 </a><a href="#0_0">Payment for Order Flow Disclosures – Rules 606(a)(1)(iii) and (iv</a><a href="#0_0">)</a><a href="#0_0">.</a><a href="#0_0">....... 134 </a><a href="#0_4">Format of Public Order Routing Report .................................................... 145 </a><a href="#0_6">Division of Rule 606(a) Report’s Section on NMS Stocks by S&P </a><a href="#0_6">500 Index and Other NMS Stock</a><a href="#0_6">s</a><a href="#0_6">.</a><a href="#0_6">............................................................ 150 </a><a href="#0_7">6. </a><a href="#0_0">7. </a> <a href="#0_7">Calendar Month Breakdow</a><a href="#0_7">n</a><a href="#0_7">.</a><a href="#0_7">..................................................................... 153 </a><a href="#0_0">Execution Metric</a><a href="#0_0">s</a><a href="#0_0">.</a><a href="#0_0">..................................................................................... 155 </a> <a href="#0_8">C. </a><a href="#0_9">Paperwork Reduction Ac</a><a href="#0_9">t</a><a href="#0_9">.</a><a href="#0_9">.............................................................................................. 158 </a><a href="#0_10">A. Summary</a><a href="#0_10"> </a><a href="#0_10">of Collection of Information............................................................... 159 </a> <a href="#0_8">Amendment to Disclosure of Order Execution Information............................... 156 </a> <a href="#0_9">IV. </a><a href="#0_11">1. </a><a href="#0_12">2. </a><a href="#0_10">3. </a> <a href="#0_11">Customer-Specific Disclosures Under Rule 606(b)(3</a><a href="#0_11">)</a><a href="#0_11">.</a><a href="#0_11">............................. 159 </a><a href="#0_12">Amendment to Current Public and Customer-Specific Disclosures.......... 160 </a><a href="#0_10">Amendment to Current Disclosures under Rule 60</a><a href="#0_10">5</a><a href="#0_10">.</a><a href="#0_10">................................ 161 </a>3<ul style="display: flex;"><li style="flex:1"><a href="#0_13">B. </a></li><li style="flex:1"><a href="#0_13">Use of Information.............................................................................................. 161 </a></li></ul><a href="#0_0">1. </a><a href="#0_14">2. </a><a href="#0_1">3. </a> <a href="#0_0">Customer-Specific Disclosures Under Rule 606(b)(3</a><a href="#0_0">)</a><a href="#0_0">.</a><a href="#0_0">............................. 162 </a><a href="#0_14">Amendment to Current Public and Customer-Specific Disclosures.......... 162 </a><a href="#0_1">Amendment to Current Disclosures under Rule 60</a><a href="#0_1">5</a><a href="#0_1">.</a><a href="#0_1">................................ 164 </a> <a href="#0_15">C. </a><a href="#0_13">D. </a> <a href="#0_15">Respondent</a><a href="#0_15">s</a><a href="#0_15">.</a><a href="#0_15">....................................................................................................... 164 </a><a href="#0_16">1. </a><a href="#0_12">2. </a> <a href="#0_16">Initial Estimat</a><a href="#0_16">e</a><a href="#0_16">.</a><a href="#0_16">.......................................................................................... 164 </a><a href="#0_12">Estimate for Adopted Rule [Amendments to 605 and 606]....................... 165 </a> <a href="#0_13">Total Initial and Annual Reporting and Recordkeeping Burdens....................... 165 </a><a href="#0_0">1. </a><a href="#0_0">2. </a> <a href="#0_0">Customer-Specific Disclosures Under Rule 606(b)(3</a><a href="#0_0">)</a><a href="#0_0">.</a><a href="#0_0">............................. 166 </a><a href="#0_0">Proposed Public Aggregated Report on Orders Subject to the </a><a href="#0_0">Customer-Specific Disclosures Under Rule 606(b) Not Adopted............. 178 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_17">3. </a></li><li style="flex:1"><a href="#0_17">Proposed Requirement to Document Methodologies for Categorizing </a></li></ul><a href="#0_17">Order Routing Strategies Not Adopted...................................................... 178 </a><a href="#0_18">4. </a><a href="#0_10">5. </a><a href="#0_19">6. </a> <a href="#0_18">Amendment to Current Public and Customer-Specific Disclosures.......... 178 </a><a href="#0_10">Revisions to Compliance Manuals............................................................. 189 </a><a href="#0_19">Amendment to Disclosures under Rule 605 .............................................. 190 </a> <a href="#0_15">E. </a><a href="#0_20">F. </a><a href="#0_9">G. </a> <a href="#0_15">Collection of Information is Mandatory ............................................................. 190 </a><a href="#0_20">Confidentiality of Responses to Collection of Information................................ 190 </a><a href="#0_9">Retention Period for Recordkeeping Requirements ........................................... 191 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_14">V. </a></li><li style="flex:1"><a href="#0_14">Economic Analysis ......................................................................................................... 191 </a></li></ul><a href="#0_21">A. </a><a href="#0_21">B. </a> <a href="#0_21">Introduction......................................................................................................... 192 </a><a href="#0_21">Baseline............................................................................................................... 194 </a><a href="#0_0">1. </a><a href="#0_22">2. </a><a href="#0_2">3. </a><a href="#0_5">4. </a> <a href="#0_0">Current $200,000 Threshol</a><a href="#0_0">d</a><a href="#0_0">.</a><a href="#0_0">..................................................................... 195 </a><a href="#0_22">Current Reporting for NMS Stock Orders of $200,000 and Above .......... 196 </a><a href="#0_2">Publication Period for Reports Required by Rules 605 and 606 ............... 197 </a><a href="#0_5">Available Information on Conflicts of Interes</a><a href="#0_5">t</a><a href="#0_5">.</a><a href="#0_5">......................................... 198 </a>4 <a href="#0_7">5. </a><a href="#0_5">6. </a><a href="#0_3">7. </a> <a href="#0_7">Available Information on Execution Quality............................................. 199 </a><a href="#0_5">Format of Current Report</a><a href="#0_5">s</a><a href="#0_5">.</a><a href="#0_5">........................................................................ 200 </a><a href="#0_3">Quality of Broker-Dealer Routing Practices for Not Held NMS Stock </a><a href="#0_3">Orders......................................................................................................... 200 </a><a href="#0_23">8. </a><a href="#0_24">9. </a> <a href="#0_23">Use of Actionable IOIs .............................................................................. 200 </a><a href="#0_24">Competition, Efficiency, and Capital Formatio</a><a href="#0_24">n</a><a href="#0_24">.</a><a href="#0_24">...................................... 201 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_25">C. </a></li><li style="flex:1"><a href="#0_25">Costs and Benefits............................................................................................... 205 </a></li></ul><a href="#0_21">1. </a><a href="#0_26">2. </a><a href="#0_0">3. </a><a href="#0_12">4. </a><a href="#0_0">5. </a> <a href="#0_21">Customer-Specific Order Handling Disclosures........................................ 206 </a><a href="#0_26">Public Order Handling Report ................................................................... 246 </a><a href="#0_0">Disclosure of Order Execution Information .............................................. 283 </a><a href="#0_12">Structured Format of Reports..................................................................... 284 </a><a href="#0_0">Other Definitions in Adopted Amendments to Rule 600........................... 287 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_27">D. </a></li><li style="flex:1"><a href="#0_27">Alternatives Considered...................................................................................... 287 </a></li></ul><a href="#0_28">1. </a><a href="#0_24">2. </a><a href="#0_9">3. </a> <a href="#0_28">Alternative Scope for the Customer-Specific Reports............................... 287 </a><a href="#0_24">Scope of Broker-Dealer’s Obligation Under Rule 606(b)(3) .................... 291 </a><a href="#0_9">Public Availability of Aggregated Rule 606(b)(3) Order Handling </a><a href="#0_9">Information ................................................................................................ 293 </a><a href="#0_0">4. </a><a href="#0_21">5. </a> <a href="#0_0">Automatic Provision of Customer-Specific Not Held Order Handling </a><a href="#0_0">Report (Adopted Rule 606(b)(3)) .............................................................. 299 </a><a href="#0_21">Submission to the Commission of Not Held NMS Stock Order </a><a href="#0_21">Handling Reports (Adopted Rule 606(b)(3))............................................. 300 </a><a href="#0_0">6. </a><a href="#0_0">7. </a> <a href="#0_0">Categories of NMS Stocks for Rule 606(a</a><a href="#0_0">)</a><a href="#0_0">.</a><a href="#0_0">.............................................. 301 </a><a href="#0_0">Disclosure of Additional Information about Not Held NMS Stock </a><a href="#0_0">Order Routing and Execution .................................................................... 302 </a><a href="#0_12">8. </a><a href="#0_11">9. </a> <a href="#0_12">Order Handling Reports at the Stock Level (Adopted Rule 606(b)(3))..... 306 </a><a href="#0_11">Alternative to Three-Year Posting Period (Adopted Amendments to </a><a href="#0_11">Rules 605(a)(2) and 606(a)(1)</a><a href="#0_11">)</a><a href="#0_11">.</a><a href="#0_11">................................................................. 306 </a>5<ul style="display: flex;"><li style="flex:1"><a href="#0_29">E. </a></li><li style="flex:1"><a href="#0_29">Economic Effects and Effects on Efficiency, Competition, and Capital </a></li></ul><a href="#0_29">Formation................................................................................................... 308 </a><a href="#0_30">1. </a><a href="#0_22">2. </a> <a href="#0_30">Effects of Adopting Amendments on Efficiency and Competitio</a><a href="#0_30">n</a><a href="#0_30">.</a><a href="#0_30">.......... 308 </a><a href="#0_22">Effects of Adopting Amendments on Capital Formation .......................... 319 </a><ul style="display: flex;"><li style="flex:1"><a href="#0_0">VI. </a></li><li style="flex:1"><a href="#0_0">Regulatory Flexibility Certification................................................................................ 321 </a></li></ul><a href="#0_31">VII. Statutory</a><a href="#0_31"> </a><a href="#0_31">Authority and Text of the Proposed Rule Amendments ................................. 322 </a><ul style="display: flex;"><li style="flex:1">I. </li><li style="flex:1">Introduction </li></ul>In July 2016, the Commission proposed to amend Rules 600 and 606 under Regulation NMS to require additional disclosures by broker-dealers to customers about the handling of their orders, to amend Rules 605 and 607 for consistency with the proposed amendments to Rule 606, and to amend other rules to update cross references as appropriate.<a href="#6_1">1 </a>As discussed below, after careful review and consideration of the comments received, the Commission is adopting these amendments with certain modifications. Transparency has long been a hallmark of the U.S. securities markets, and the Commission continuously strives to ensure that investors are provided with timely and accurate information needed to make informed investment decisions. In recent years, the Commission and its staff have undertaken a number of reviews of market structure and market events, and much of this effort has aimed to enhance transparency for investors.<a href="#6_2">2 </a>The amendments being 1See Securities Exchange Act Release No. 78309, 81 FR 49432 (July 27, 2016) (“Proposing Release” or “Proposal”). 2The Commission recently adopted amendments to Regulation ATS that enhance the operational transparency of alternative trading systems (“ATSs”) that transact in National Market System (“NMS”) stocks (“NMS Stock ATSs”).” See Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) (“ATS-N Adopting Release”). In addition, the Commission has proposed a Transaction Fee Pilot for NMS stocks to help inform the Commission, market participants and the public about the effects, if any, that transaction-based fees and rebates may have on order routing behavior, execution quality, and market quality. See Securities Exchange Act Release No. 82873 (March 14, 2018), 83 FR 13008 (March 26, 2018) (“Transaction Fee Pilot Proposing Release”). 6adopted today to Rule 606 of Regulation NMS represent the Commission’s continued commitment to enhance transparency for investors. Rule 606 encourages competition by enhancing the transparency of broker-dealer order handling and routing practices.<a href="#7_0">3 </a>Rule 606(a) requires broker-dealers to provide a publicly available quarterly report of information regarding routing of non-directed orders.<a href="#7_1">4 </a>Rule 606(b) requires broker-dealers to provide customers, upon request, certain information about the routing of their orders. Prior to the amendments being adopted today, the Rule 606(a) requirements applied to smaller dollar-value orders more typical of retail investors but did not apply to large dollar-value orders more typical of institutional investors.<a href="#7_2">5 </a>As discussed in detail in the Proposing Release, equity market structure, as well as order handling and routing practices, have changed significantly since Rule 606 was adopted in 2000, presenting a need to update the rule such that it provides transparency into broker-dealer order handling and routing practices that continues to be useful in today’s automated and vastly more complex national market system.<a href="#7_3">6 </a> As the Commission noted when it originally adopted Rule 606, in a fragmented market “the order routing decision is critically important” and “must be well-informed and fully subject 3See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594, 3602 (January 21, 2010) (“Concept Release on Equity Market Structure”). 4A “non-directed order” means any customer order other than a directed order. See 17 CFR 242.600(b)(48). A “directed order” means a customer order that the customer specifically instructed the broker-dealer to route to a particular venue for execution. See 17 CFR 242.600(b)(19). As discussed below, these definitions are being revised in connection with the amendments to Rule 606 so that they no longer only apply to “customer orders,” but otherwise are remaining the same. See infra Section <a href="#14_0">III.</a>A<a href="#14_2">.1.</a><a href="#16_0">b.</a><a href="#0_26">vii. </a>5The Commission limited the scope of Rule 606(a) to smaller dollar-value orders by defining a “customer order” to which the rule applied as an order to buy or sell an NMS security that is not for the account of a broker-dealer, but not any order for a quantity of a security having a market value of at least $50,000 for an NMS security that is an option contract and a market value of at least $200,000 for any other NMS security. See 17 CFR 242.600(b)(18). 6See Proposing Release, supra note 1, at 49433-44 for a detailed description of the history and the market developments leading to the Proposal. 7to competitive forces,”<a href="#8_1">7 </a>and, further, the public disclosure of order routing practices “could provide more vigorous competition on . . . order routing performance.”<a href="#8_2">8 </a>By updating the Rule 606 disclosure regime, the rule as amended will provide disclosures more relevant to today’s marketplace that encourage broker-dealers to provide effective and competitive order handling and routing services, and that improve the ability of their customers to determine the quality of such broker-dealer services.<a href="#8_3">9 </a><ul style="display: flex;"><li style="flex:1">II. </li><li style="flex:1">Overview of Adopted Rule Amendments </li></ul>To facilitate enhanced transparency regarding broker-dealers’ handling and routing of orders in NMS stock, the Commission proposed to amend Rules 600(b) and 606 such that all orders of any dollar value in NMS stock<a href="#8_4">10 </a>submitted by a customer to a broker-dealer would be covered by order handling and routing disclosure rules. Under the proposed amendments, new Rule 606(b)(3) would require broker-dealers to make detailed, customer-specific order handling disclosures for NMS stock orders available to institutional customers in particular, who previously were not entitled to disclosures under the rule for their order flow, or were entitled to disclosures that have become inadequate in today’s highly automated and more complex market.<a href="#8_5">11 </a>The Commission also proposed to require a broker-dealer to make publicly available a report that aggregates the information required for the detailed customer-specific order handling

Amended Disclosure of Order Handling Information

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