SEC Adopts Enhanced Order Routing Disclosures: Understanding Rule 606(a) and Rule 606(b)(3) Reports (Part Two of Three)

The SEC recently adopted amendments to Rule 606 of Regulation National Market System (NMS) under the Securities Exchange Act of 1934 to add a new disclosure requirement that requires broker-dealers to provide specific order routing disclosures for “not-held” orders and make targeted amendments to the publicly available disclosures that broker-dealers are already required to provide. These new disclosures will assist fund managers that trade NMS stocks to evaluate their broker-dealers’ order routing practices, quality of execution and potential conflicts of interest. Additionally, SEC examiners and institutional investors are likely to inquire into whether fund managers are incorporating this data into their best execution reviews. This second article in our three-part series discusses the specific disclosures that will be included in amended Rule 606(a) reports and new Rule 606(b)(3) reports. The first article provided background on the evolution of the equity market structure; existing Rule 606 disclosure requirements; the types of incentives that exchange and non-exchange markets provide to executing broker-dealers; and how the “pass-through” fees that some fund managers pay to their executing brokers differ from the “all-in” commission fee structure. The third article will discuss how fund managers should incorporate these new disclosures into their best execution reviews and transaction cost analyses. See “$42-Million Enforcement Action Against Merrill Lynch Reminds Fund Managers to Probe Where Broker-Dealers Are Routing Their Trades” (Aug. 2, 2018); and “Six Steps That Hedge Fund Managers Should Take to Protect Their Confidential Information When Using or Evaluating Dark Pools” (Oct. 18, 2012).

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