SEC Proposes Regulation Best Execution

The Securities and Exchange Commission today proposed Regulation Best Execution, which would establish through Commission rules a best execution regulatory framework for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers. While a best execution rule was first established in 1968 by the National Association of Securities Dealers, Inc., the predecessor to the Financial Industry Regulatory Authority, Inc., the proposed rule, if adopted, would create the first SEC-established rule concerning best execution.

“I am pleased to support this proposal because, if adopted, it would help ensure that brokers have policies and procedures in place to uphold one of their most important obligations: to seek best execution when trading securities, whether equities, fixed income, options, crypto security tokens, or other securities,” said SEC Chair Gary Gensler. “I believe a best execution standard is too important, too central to the SEC’s mandate to protect investors, not to have on the books as Commission rule text. Today, equities often trade on off-exchange dark venues that have different business models and are less transparent than the familiar lit exchanges. Such developments in our markets make best execution that much more important. They also raise a number of questions about how brokers handle their best execution obligations in light of conflicts of interest that may lead broker-dealers to place their own interests ahead of their customers’ interests. Altogether, I believe a best execution standard at the Commission level, as well as the proposed enhancements, would lead to better execution for retail and institutional investors.”

Proposed Regulation Best Execution would require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the proposed best execution standard. Further, the proposal would require these policies and procedures to address how broker-dealers will comply with the best execution standard and how they will determine the best market and make routing or execution decisions for customer orders.

The policies and procedures would also be required to address additional factors for conflicted transactions with retail customers. With respect to such transactions, the proposal would require broker-dealers to document their compliance with the best execution standard, including all efforts to enforce their best execution policies and procedures for conflicted transactions and the basis and information relied on for their determinations that such conflicted transactions would comply with the best execution standard. Broker-dealers would also be required to document any arrangement concerning payment for order flow. Moreover, proposed Regulation Best Execution would require broker-dealers to review the execution quality of customer orders at least quarterly.

Proposed Regulation Best Execution would require broker-dealers to review their best execution policies and procedures at least annually, document such reviews, and present written reports detailing the results of such reviews to their boards of directors or equivalent governing bodies.

Broker-dealers that qualify as introducing brokers under proposed Regulation Best Execution would be exempt from many of the operative provisions of the proposed rules so long as they establish, maintain, and enforce policies and procedures that require them to regularly review the execution quality obtained from their executing brokers, compare that execution quality with the execution quality they might have obtained from other executing brokers, and revise their order handling practices accordingly. Introducing brokers would be required to document the results of this review. 

The proposing release is published on SEC.gov and will be published in the Federal Register. The public comment period will remain open until March 31, 2023, or until 60 days after the date of publication of the proposing release in the Federal Register, whichever is later.