Broker-Dealer Fined for Inadequate Execution Quality Reviews and Supervisory Failures

The Case

The firm’s reviews of customer execution quality failed to meet the reasonable diligence standard of FINRA Rule 5310 and the “regular and rigorous” review requirements of FINRA Rule 5310.09 from January 2014 to 2023. The firm neither admitted nor denied FINRA’s findings in resolving the matter.

The firm’s WSPs failed to reasonably describe the supervisory system in place for performing regular and rigorous reviews of execution quality. For example, the firm’s procedures failed to describe how best execution reviews should be conducted, including what execution quality statistics should be reviewed and how the firm’s supervisory reviews should be documented. The WSPs were similarly devoid of any guidance for determining the circumstances in which the firm should modify order routing arrangements.

FINRA identified the following key failures during the review period:

• Reviews of customer execution quality were ad hoc, not adequately documented, and did not consistently include all relevant execution quality factors or regularly assess competing venues.
  
  

• Failed to conduct reasonable reviews for price improvement opportunities. When the firm’s own Alternative Trading System (ATS) or two other market centers disseminated price indications of interest (IOIs) at least $0.01 better than the National Best Bid or Offer (NBBO), the firm routed its customers’ marketable orders to such venues before routing to venues that did not disseminate IOIs (non-IOI venues). The firm did so without reasonably evaluating the likelihood of obtaining greater price improvement from non-IOI venues.
  
  

• Failed to reasonably review the impact its routing to two broker-dealers that traded on a net basis had on its customers’ execution quality, including price improvement, transaction costs, speed of execution, and whether customers’ orders would have received better execution quality had the firm routed the orders directly for execution.
  
  

• Did not have a supervisory system to review whether its periodic end-of-month adjustments to its routing of customer non-marketable equity and options orders to achieve exchange volume-based rebates affected the execution quality of customers’ orders or a supervisory system reasonably designed to review whether its routing to third parties for net trading impacted execution quality.

The firm also failed to disclose material aspects of its relationships with venues. The firm’s quarterly reports under Exchange Act Rule 606 did not disclose per share or per order amounts that the firm received as trading rebates from exchanges. Instead, the reports contained general disclosures that the firm received trading rebates without specifically noting the amount per share received during the quarter.

Why Does This Matter?

The action reflects US regulators’ continued focus on best execution and the need for a fail-proof supervisory system to ensure compliance with best execution obligations. In its 2024 Annual Regulatory Oversight Report, FINRA included best execution as one of its topic areas of focus under Rule 5310. 

Specifically, FINRA’s recent findings suggest the following priority areas for fintechs to consider: 

• Does a firm conduct “regular and rigorous” reviews of execution quality?

• How does a firm prevent payments for order flow from interfering with execution quality?

• Has the firm established targeted policies and procedures to address its best execution obligations?

Notably, the action follows a fine and suspension of the Firm’s former Chief Compliance Officer over AML failures in February 2022.

InnReg's Experience

As an established outsourced compliance provider since 2013, InnReg is uniquely positioned to help you remain ahead of evolving regulations on the best execution of customer orders, order routing and other key FINRA priorities in investor protection and market integrity.

Based on our experience, we recommend fintechs should adhere to the following best practices to control compliance risks in this area:

• Develop exception and surveillance reports; 

• Regularly evaluate thresholds used to generate exceptions; 

• Review how payment-for-order-flow affects the order-handling process; 

• Conduct regular reviews. 

Learn More About This Topic

For additional insights, read InnReg’s in-depth analysis of FINRA’s Rule 5310 and what similar regulatory enforcements in this space may mean for your fintech.