SEC Staff Identifies Order Flow Disclosure Deficiencies

The SEC Division of Examinations found deficiencies in reports on how broker-dealers identified venues, classified orders and calculated aggregate net rebates, in violation of SEC Regulation NMS Rule 242.606 ("Disclosure of order routing information").

In a Risk Alert, SEC staff reported that broker-dealers routed orders to a clearing firm without providing a Rule 606 report ("Quarterly report on order routing") or incorporating the clearing firm's report, or misclassified certain routing firms as a venue on the report. Broker-dealers often misclassify order percentages, according to the alert, resulting in inaccurate disclosure of net aggregate rebates for each order type. SEC staff observed that many broker-dealers also used incorrect dates for determining inclusion of a stock in the S&P 500 index.

SEC staff found that broker-dealers failed to disclose materially important information relating to relationships with routing brokers or execution venues, including rebate arrangements. SEC staff warned against using a generic set of criteria that may not capture the full details of a particular arrangement.

SEC staff also found that many broker-dealers did not maintain written policies to ensure the accuracy of Rule 606 reports, and encouraged firms to review existing policies related to Rule 606 to ensure the completion and accuracy of the necessary disclosures.