On December 14, 2022, the U.S. Securities and Exchange Commission (SEC) proposed amendments to update the disclosures required under Rule 605 of Regulation NMS for order executions in national market system (NMS) stocks (the Proposal).1 The Proposal seeks to modernize and enhance execution quality reporting and would, among other things, (i) expand the scope of entities subject to Rule 605 to include certain broker-dealers, (ii) modify information required to be reported, and (iii) change how orders are categorized.
The comment deadline is March 31, 2023, or 60 days after publication of the Proposal in the Federal Register, whichever is later. The Proposal was made concurrently with three other SEC proposals that are interrelated and could significantly change practices related to securities order handling and executions.2 The proposals collectively appear to advance the SEC’s view that better prices for investors may result through encouragement of competition between trading venues and greater trading through certain exchanges and alternative trading systems that disseminate quotations and transaction reports rather than through over-the-counter (OTC) market makers.3
If adopted, the Proposal would increase data made available under Rule 605 to the public about securities transaction execution quality. Affected entities should review the Proposal and consider the mechanisms by which they can capture and report the newly proposed information. Under the Proposal, all broker-dealers would need to develop processes for determining how many customer accounts they introduce or carry to determine whether they are subject to Rule 605 disclosure requirements. The Proposal would modify existing order size categories to base them on round lots rather than number of shares and include additional order size categories for fractional shares, odd lots, and larger-sized orders.
Certain aspects of the Proposal also raise interpretive questions and operational challenges for broker-dealers. For example, under the Proposal, broker-dealers that execute fractional share transactions on behalf of their customers may be considered OTC market makers subject to Rule 605 — potentially subjecting such broker-dealers to Rule 605 even if they do not qualify as a “larger” broker-dealer (as described in detail below). Additionally, OTC market makers would be required to provide separate Rule 605 disclosures with respect to their single-dealer platform activities, as distinct from their OTC market-making activities. The Proposal, however, does not set forth a definition of a single-dealer platform or provide clear guidance as to how OTC market-making activity should be distinguished from single-dealer platform activity.
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