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SEC Proposes Broad Package of Requirements for Order Handling, Market Data, and Broker-Dealer Best Execution

December 16, 2022

The SEC has proposed a package of new rules and amendments as part of its efforts to modernize equity market structure. The rulemaking package, issued on December 14, would addresses order routing, broker-dealer conflicts of interest and best execution, market concentration, pricing increments, transaction fees, core market data, and disclosure of order execution quality statistics.

The IAA is reviewing the proposals to determine their implications for investment advisers, including, among other things, with respect to the enhanced disclosures, effects on affiliate arrangements, and existing best execution and order routing practices.

Disclosure of Order Execution Information. The package would amend Rule 605 under Regulation NMS (National Market System) to update the disclosure required for order executions in NMS stocks. The amended rule would: (i) cover broker-dealers with a larger number of customers as “reporting entities” that must make monthly execution quality reports available to the public; (ii) modify the definition of “covered order” to include certain orders submitted outside of regular trading hours and certain orders submitted with stop prices; (iii) modify how orders are categorized by order size and by order type; (iv) capture execution quality information for fractional-share orders, odd-lot orders, and larger-sized orders; (v) modify reporting requirements for non-marketable limit orders (NMLOs); (vi) require that time of order receipt and time of order execution be measured in increments of a millisecond or finer, and that realized spread be calculated at both 15 seconds and one minute; and (vii) make a formatted summary report publicly available. This proposed rule amendment was unanimously approved.

Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders. Another unanimous proposal would reduce the minimum pricing increment for certain NMS stocks, whether traded on an exchange, alternative trading system, or over-the-counter, to allow market participants, including investors, to better determine the prices at which they would bid or offer (i.e., adopt variable minimum pricing increments for the quoting and trading of NMS stock), reduce access fee caps to help ensure that they do not become too large in relation to the amended minimum pricing increments, and enhance the transparency of better-priced quotations.

Order Competition Rule. In a more controversial proposal, issued on a 3-2 vote, the SEC has proposed new Rule 615 under Regulation NMS to promote competition to target the “wholesaling” business, or off-exchange dealers. The proposed rule would generally require that individual investors’ orders be exposed to order-by-order competition in “fair and open” auctions before the orders could be executed internally by trading centers that restrict order-by-order competition. The proposal includes several complex requirements for determining priority of execution in the auction, including prohibiting execution priority terms for certain orders that favor the originating or routing broker-dealer, the trading center operating the auction, and any affiliates of these entities. In an effort to address the risk of “a high level of adverse selection costs on liquidity providers,” the proposal would exclude larger volume orders.

Regulation Best Execution. For the first time, the SEC has proposed specific rules for a best execution standard for broker-dealers beyond FINRA and MSRB rules. The new Regulation Best Execution, also proposed on a 3-2 vote, would require that broker-dealers adopt and implement best execution practices for all securities (equities, fixed income, crypto securities, etc.) to address: (i) how the broker-dealer will comply with the new best execution standard, including identifying material potential liquidity sources and incorporating those sources into its order handling practices, and ensuring that it can efficiently access each source; and (ii) how the broker-dealer will determine the best market for customer orders received, including assessing reasonably-accessible and timely pricing information and opportunities for price improvement. In addition, if the execution of retail customer orders by broker-dealers has certain order-handling conflicts of interest, such as payment for order flow, additional requirements would need to be met. Regular reviews and related documentation of compliance with the standard would also be required. Less onerous requirements have been proposed for introducing brokers.

Commissioner Hester Peirce’s dissenting statement raises concerns that the rule is unnecessary given the FINRA and MSRB rules already in place. She also faults the SEC for not looking at how all the rules in the package of proposals would work together holistically.

Request for Comment Related to Investment Advisers. The Commission specifically asks for comment about the impact on investment advisers, including (i) whether the proposed best execution standard would pose any challenges or burdens for advisers that are dually registered as broker-dealers, and (ii) what effect, if any, would the proposed best execution standard have on investment advisers and their duty to seek best execution? The IAA is interested in member feedback on these questions and encourages members to contact the legal team with comments.

Next Steps: Member Call and Request for Feedback

The IAA is reviewing the package of proposals and has scheduled a member call for January 20 from 1:00–2:00 p.m. ET to discuss the potential impacts of the package of proposals on the buyside. Our guest speaker is Ignacio Sandoval, partner at Morgan Lewis & Bockius LLP, who will discuss the proposals and the potential impact on advisers and their clients, including on liquidity and pricing of securities. Members with questions or comments should contact the IAA Legal Team at

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Meeting ID: 859 8533 0618
Passcode: 760721

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Meeting ID: 859 8533 0618

Final Rule: Insider Trading Arrangements and Related Disclosures

At the same open meeting, the SEC also adopted amendments to Rule 10b5-1 under the Securities Exchange Act. The rule provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5. The amendments, which were proposed in January 2022, add new conditions to the defense, including cooling-off periods for directors, officers, and persons other than issuers. The amendments also add new disclosure and filing requirements regarding issuers’ insider-trading policies and procedures, executive and director compensation, and disclosures.

Related Links:

The SEC Commissioners’ public remarks are available here.

Comments on the proposals are due by March 31, 2023, or 60 days after date of publication in the Federal Register, whichever is later.

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