What You Need to Know
- An investor advocate called the proposal a disappointment.
- Republican commissioners pointed out that FINRA and the MSRB already have best-execution rules.
- The SEC also proposed a sweeping package of market structure changes that drew criticism from industry trade groups.
The Securities and Exchange Commission on Wednesday approved for public comment proposed Regulation Best Execution, which would set forth the agency’s best-execution standard for client trades.
Industry experts told ThinkAdvisor Wednesday that the SEC’s proposed Regulation Best Execution fails to improve upon the Financial Industry Regulatory Authority’s outdated best execution rule and continues to permit payment for order flow.
Under the SEC’s Regulation Best Execution, “specifically, in any transaction for or with a customer or a customer of another broker-dealer, a broker-dealer (or a natural person who is an associated person of the broker-dealer) would be required to use reasonable diligence to ascertain the best market for the security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions,” the agency said.
The SEC Reg Best Ex proposal would require broker-dealers to:
● Establish a best-execution standard for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers (collectively “broker-dealers”);
● Require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the best-execution standard;
● Require more robust policies and procedures for broker-dealers that engage in certain conflicted transactions for or with a retail customer;
● Require broker-dealers to review the execution quality of their customer transactions at least quarterly;
● Exempt broker-dealers that qualify as “introducing brokers” from certain requirements if they establish, maintain, and enforce specified policies and procedures; and
● Require broker-dealers to review their best execution policies and procedures at least annually and present a report detailing the results of such review to their boards of directors or equivalent governing bodies.
A ‘Huge Disappointment’
Tyler Gellasch, president and CEO of Healthy Markets Association in Washington, told ThinkAdvisor Wednesday in an email that with its proposed Regulation Best Execution, “the SEC has proposed taking control of best execution enforcement, but essentially preserving the status quo. It’s a huge disappointment for investors, who had been hoping that this SEC wouldn’t just take responsibility for best execution, but also make it work for investors.”
The SEC’s proposed best execution rule “largely mirrors rather than substantively improves upon the existing FINRA rule,” added Gellasch, a former counsel in the U.S. Senate as well as counsel to former SEC Commissioner Kara Stein. “And while that could step up enforcement, there’s a significant question about whether it would materially better protect investors.”
SEC Commissioner Hester Peirce, a Republican, noted during the SEC open meeting Wednesday that she believed confusion will ensue with three best execution rules — those of the SEC, FINRA and the Municipal Securities Rulemaking Board.