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Regulation and Compliance > Federal Regulation > SEC

Is SEC Regulation Best Execution a Good Idea? Experts Weigh In

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What You Need to Know

  • FINRA's best execution rule was written decades ago and is wildly outdated, says Tyler Gellasch of the Healthy Markets Association.
  • Traders have varying ideas of what best execution means, lawyer Nicolas Morgan says.
  • A lawmaker expresses skepticism of Chairman Gary Gensler attempting to reshape markets.

Industry experts and lawmakers are weighing in with their thoughts now that the Securities and Exchange Commission has announced its plans to consider a new best-execution rule, Regulation Best Execution, for client trades.

According to the Dec. 14 open meeting notice, the new rule “would establish a best execution standard and require detailed policies and procedures for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers and more robust policies and procedures for entities engaging in certain conflicted transactions with retail customers, as well as related review and documentation requirements.”

James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, told ThinkAdvisor Thursday in an email that the Financial Industry Regulatory Authority “already has a best execution rule (5310), so the question is: What does the SEC rule add? I can’t wait to see the details.”

Angel said he’d like an update to Rule 606 of Regulation National Market System, which requires broker-dealers to disclose information regarding the handling of their customers’ orders in NMS stocks and listed options.

“That would give us better information about the execution quality from our brokers,” Angel said. “What I am concerned about is the micromanagement of market microstructure. I’m very concerned that the proposed auctions will be a field day for the flash boys, because auctions are prone to gaming and misfiring.”

FINRA Rule ‘Wildly Outdated’

Tyler Gellasch, president and CEO of Healthy Markets Association in Washington, added Friday in a phone interview that “By moving a self-regulatory organization rule over to the SEC, you’re going to dramatically improve the chances of robust enforcement — but you also need to update the rule.”

The FINRA rule “was written decades ago and it has been supplemented over time with lots of guidance that says that brokers may do or could consider or maybe should consider…it’s just wildly outdated for how the markets work today,” added Gellasch, a former counsel in the U.S. Senate as well as counsel to former SEC Commissioner Kara Stein.

“What the SEC is looking to do, and what they need to do, is not just take control of their own rule, but also update it,” Gellasch said. A lot of FINRA’s rule includes guidance that is not enforceable, Gellasch  added, “which is why we don’t see robust enforcement.”

Nicolas Morgan, a partner at Paul Hastings and former SEC attorney, added in another email that with a planned Regulation Best Execution, “the SEC should not lose track of the fact that different investors may have different preferences for how brokers handle their trades. Some may prefer execution price, some may prefer low upfront cost, some may want speed bumps (or want to avoid speed bumps).”

Morgan added: “The problem with the SEC defining directly what ‘best execution’ requires is that the SEC doesn’t know the preferences for every trader. The definition should permit traders and brokers to contractually define trading parameters by consent.”

Rep. Bill Huizenga, R-Mich., a member of the House Financial Services Committee, tweeted Thursday that “@Garygensler didn’t see the #FTX collapse coming, but now he wants to redo how our markets work … with little analysis or stakeholder engagement. I look forward to working with my colleagues to understand this soon to be released proposal.”


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