Compliance March 11, 2001

SEC Orders More Trade Disclosure

November 15, 2000 (PLANSPONSOR.com) - The Securities and Exchange Commission (SEC) today unanimously approved new rules that require brokers and markets to disclose more information about their trade execution practices.
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Under Rule 11Ac1-5, markets and exchanges must provide monthly, electronic disclosures of basic information on how they handle the orders they receive, detailed by order size including:

  • how fast orders get filled
  • how often limit orders get filled (orders to trade at pre-set prices)
  • how often investors get the price they sought – or a better price

Under Rule 11Ac1-6, brokers that route orders on behalf of customers will be required to produce a quarterly disclosure of:

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  • which market centers they route a significant percentage of their orders to
  • the nature of their relationships with such market centers, including payment/practice that could represent a conflict of interest with the broker’s customers

Additionally, brokers must respond to specific customer requests regarding the execution routing of their individual orders during the previous six months.

Reports must be publicly available. Brokerage firms and markets are required to post results on their Web sites and provide written copies to customers upon request.

The SEC didn’t provide the hoped-for shield against investor suits based on data from these disclosures, but did note that the rule wasn’t intended to define “best execution” – and that the statistical information disclosures would not, by itself, create a basis for legal action.

Effective Dates

The rule will be phased in beginning April 2, 2001, when markets must begin collecting data for release in June. Broker-dealer reports, covering second-quarter results, won’t be issued until late October of next year.

Excluded from the rule are:

  • stocks listed on the Nasdaq Small Cap Stock Market
  • stocks traded after hours
  • stop orders
  • orders filled at the market’s open and close
  • orders where the customer requests special handling

The SEC also unanimously approved a new rule that would encourage options market linkages by requiring disclosure when orders are routed to a market that isn’t quoting the best price (“trading through”).

The SEC’s explanation of the rules is at http://www.sec.gov/news/extra/faqmstrc.htm .

– Nevin Adams                            editors@plansponsor.com

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