FINRA Launches Exam Sweep of No-Commission BDs

The letter adds that FINRA may review, “whether changing to the zero-commission model resulted in changes to a firm’s routing practices, execution quality, regular and rigorous review policies, or the level of trading rebates or payment for order flow. FINRA may also assess disclosures and advertisements related to zero commissions.”

Responses to the letter are expected within several weeks. FINRA will then evaluate the information received and determine what additional steps, if any, are appropriate.

FINRA’s exam sweep letter does not state which firms are being targeted, however, firms that are included are carefully chosen — in some cases only a few firms are included and in others, dozens, the regulator explains.

Firms are selected based on a variety of factors, including level and nature of business activity in a particular area, customer complaints and regulatory history and prior exam findings.

As part of its review, TFCE requests targeted firms provide complete and detailed responses to 31 questions with respect to the period of Jan. 1, 2019, to the present.

Five of the questions ask firms the following:

• State whether or not the firm effects customer transactions without charging the customer a commission. If yes, identify the types of customers (e.g., individual customers, broker-dealer clients, institutional customers) for which the firm effects any transactions without charging the customer a commission.
• Identify any and all types of securities (e.g., equities, options) in which the firm effects customer transactions without charging the customer a commission.
• State the date or dates on which the firm began not charging commissions for customer transactions and commenced effecting customer transactions without charging the customer a commission.
• Identify and describe any and all factors or limitations, if any, that determine whether or not the firm effects a customer transaction without charging the customer a commission, including but not limited to the liquidity or availability of the security, primary market center of the security, price of the security, type of order, type of account, or account balance.
• State the total dollar amount of commissions that the firm received from customers for effecting customer transactions for each calendar month during the review period. In responding, provide the dollar amount of commissions in total and specific to source, including, but not limited to, type of customer and type of security.

— Check out FINRA’s Top 5 Exam Priorities in 2020 on ThinkAdvisor.