In a targeted examination, FINRA is seeking information on the practices of firms that charge zero commission on client trades and “the impact that not charging commissions has or will have on the Firm’s order routing.”
In this latest targeted exam, also referred to as a “sweep,” FINRA’s Market Regulation Department’s Trading & Financial Compliance Examinations Department issued a sample exam letter of the information requested. The letter is intended to elicit information about the scope of the trades on which no commission is charged, as well as information concerning how the firm makes money, whether clients understand how the firm makes money, and whether the firm’s revenue practices may be detrimental to customers; e.g., whether the firm is less focused on obtaining best execution for customers because it is more dependent on obtaining revenue through trade rebates or payments for order flow arrangements.
This is actually quite a significant targeted exam letter. It has relevance well beyond those firms that have a zero commission offering. FINRA is asking very detailed questions about how the firm makes money, and how the firm’s revenue stream affects the manner in which the firm does business and treats customers.
The type of information that the letter is intended to elicit includes information that would be relevant to the completion of Form CRS that is to be provided to clients.
In short, all firms, not only those that are potential recipients of the letter, should give careful consideration to how they would answer the questions raised, and as to how those answers would look to the regulators and their customers.