FINRA Releases Targeted Examination Letter on Zero Commissions

Trading & Financial Compliance Examinations (“TFCE”) of the Market Regulation Department (“Market Regulation”) at the Financial Industry Regulatory Authority, Inc. (“FINRA”) is conducting a review of [FIRM] concerning the Firm’s decision not to charge commissions for customer transactions, the impact that not charging commissions has or will have on the Firm’s order routing practices and decisions, and other aspects of the Firm’s business.

As part of this review, TFCE requests that the Firm provide complete and detailed responses to the following with respect to the period of January 1, 2019 to the present (the “review period”):

1. State whether or not the Firm effects customer transactions without charging the customer a commission.  If yes, identify the types of customers (e.g., individual customers, broker-dealer clients, institutional customers) for which the Firm effects any transactions without charging the customer a commission.
2. Identify any and all types of securities (e.g., equities, options) in which the Firm effects customer transactions without charging the customer a commission.
3. State the date or dates on which the Firm began not charging commissions for customer transactions and commenced effecting customer transactions without charging the customer a commission.
4. Identify and describe any and all factors or limitations, if any, that determine whether or not the Firm effects a customer transaction without charging the customer a commission, including but not limited to the liquidity or availability of the security, primary market center of the security, price of the security, type of order, type of account, or account balance.
5. State the total dollar amount of commissions that the Firm received from customers for effecting customer transactions for each calendar month during the review period.  In responding, provide the dollar amount of commissions in total and specific to source, including, but not limited to, type of customer and type of security.
6. State whether or not the Firm charges customers any fees, expenses or other costs, exclusive of commissions, in connection with customer brokerage accounts.
7. If the answer to Item No. 6 is in the affirmative, identify and describe any and all fees, expenses or other costs, exclusive of commissions, that the Firm charges customers in connection with customer brokerage accounts and state the date or dates on which the Firm established, modified, or eliminated each such fee, expense or other cost.
8. If the answer to Item No. 6 is in the affirmative, state the manner in which the Firm disclosed to customers the nature and amount of any fees, expenses or other costs, exclusive of commissions, the Firm charges customers in connection with customer brokerage accounts and when such disclosures are made to customers.
9. Copies of any and all disclosures made to customers concerning any fees, expenses or other costs, exclusive of commissions, the Firm charges customers in connection with customer brokerage accounts.
10. State the total dollar amount of charges (i.e., fees, expenses and other costs), exclusive of commissions, that the Firm received from customers in connection with customer brokerage accounts for each calendar month during the review period. In responding, provide the dollar amount of charges in total and specific to source, including, but not limited to, type of customer and type of security.
11. Identify any and all market centers (e.g., broker-dealers, national securities exchanges, alternative trading systems, etc.) to which the Firm routed customer orders for execution.
12. Identify any and all market centers to which [FIRM NAME] routed customer orders for execution for which the Firm received remuneration, compensation, or consideration (“payment for order flow”) for routing such order or orders.¹
13. Describe in detail any and all “payment for order flow” arrangements, whether written or oral, between the Firm and any broker-dealer or alternative trading system.  In responding, the Firm should provide details concerning per share or per order rates including any tiered aspects with respect to per share or per order rates, and any expected or guaranteed execution quality to be provided by the market center or market centers. The Firm should also provide a detailed explanation concerning any and all changes to “payment for order flow” arrangements during the review period, including upon introducing a zero commission program to customers.
14. Copies of any and all contracts, agreements, memoranda of understanding, letters, or other documents concerning each of the “payment for order flow” arrangements identified and described in response to Item No. 12 or Item No. 13.
15. State the total dollar amount, dollar amount per share or per order, and total dollar amount received from each market center of “payment for order flow” that the Firm received from any and all market centers to which the Firm routed customer orders for execution for each calendar month during the review period.
16. State whether or not it was the Firm’s policy or practice to pass-through, in whole or in part, rebates, payments, or fees received from any market center to the Firm’s customers during any portion of the review period.  If so, identify whether the Firm’s elimination of commissions for customer transactions resulted in any modification to this policy or practice and describe in detail such modifications.
17. State whether or not the Firm offers a sweep program or programs in connection with customer brokerage accounts.
18. If the answer to Item No. 17 is in the affirmative, describe in detail any and all aspects of the sweep program or programs offered by the Firm in connection with customer brokerage accounts, including but not limited to, the nature and terms of the arrangements, factors or limitations that determine whether or not a customer is eligible to participate, investment options, compensation arrangements (e.g., interest rate or rates paid to the customer, interest rate or rates received by the Firm), FDIC insurance coverage, and additional services provided to the customer (e.g., check writing, debit cards, ATM withdrawals).  The Firm should also provide a detailed explanation concerning any and all changes to the sweep program or programs upon introducing a zero commission program to customers.
19. If the answer to Item No. 17 is in the affirmative, state the manner in which the Firm disclosed to customers the aspects of the sweep program or programs offered by the Firm in connection with customer brokerage accounts, including but not limited to, the nature and terms of the arrangements, factors or limitations that determine whether or not the customer is eligible to participate, investment options, compensation arrangements (e.g., interest rate or rates paid to the customer, interest rate or rates received by the Firm), FDIC insurance coverage, and additional services available to the customer (e.g., check writing, debit cards, ATM withdrawals).
20. Copies of any and all disclosures made to customers concerning the sweep program or programs offered by the Firm in connection with customer brokerage accounts.
21. State the total dollar amount of revenue that the Firm received in connection with customer brokerage accounts for each calendar month during the review period.  In responding, provide the dollar amount of revenue in total and specific to source, including, but not limited to, commissions, fees, “payment for order flow,” net interest from sweep accounts, commissions from sweep accounts, fees from sweep accounts, asset management, securities lending, and margin loans.
22. Copies of all versions of the Firm’s written supervisory procedures concerning best execution and FINRA Rule 5310 in effect during any portion of the review period.
23. Copies of any and all reports, analyses, and committee meeting agenda and minutes concerning the Firm’s reasonable diligence to ascertain the best market for orders that the Firm routed for execution to any market center so that the resultant price was as favorable as possible for its customer under prevailing market conditions.
24. Copies of all versions of the Firm’s written supervisory procedures concerning disclosure of “payment for order flow” arrangements, as required by Rule 606 of Regulation NMS under the Securities Exchange Act of 1934.  In responding, the Firm should also provide any revisions to written supervisory procedures or other documents that demonstrate how the Firm updated the procedures to comply with Rule 606 and the requirements that became effective in 2019.
25. Copies of any and all disclosures that the Firm provided to customers pursuant to Rule 607 of Regulation NMS under the Securities Exchange Act of 1934, upon opening a new account and on an annual basis thereafter concerning the Firm’s receipt of “payment for order flow.”
26. Electronic copies or transcripts of any advertisements, social media posts or other widely disseminated retail communications concerning that the Firm effects customer transactions without charging the customer a commission.  Please include a tabular list that indicates for each communication the title, internal reference number (if available), date of approval by a registered principal, name of the principal, title of the principal, date of first use, date of last use, and manner of distribution (e.g., webpage, email, search advertisement, social media post, video, commercial).

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1 Rule 10b-10(d)(8) under the Securities Exchange Act of 1934 sets forth that “[p]ayment for order flow shall mean any monetary payment, service, property, or other benefit that results in remuneration, compensation, or consideration to a broker or dealer from any broker or dealer, national securities exchange, registered securities association, or exchange member in return for the routing of customer orders by such broker or dealer to any broker or dealer, national securities exchange, registered securities association, or exchange member for execution, including but not limited to: research, clearance, custody, products or services; reciprocal agreements for the provision of order flow; adjustment of a broker or dealer’s unfavorable trading errors; offers to participate as underwriter in public offerings; stock loans or shared interest accrued thereon; discounts, rebates, or any other reductions of or credits against any fee to, or expense or other financial obligation of, the broker or dealer routing a customer order that exceeds that fee, expense or financial obligation.”