Ever steadfast in its mission to provide market transparency, this month the Financial Industry Regulatory Authority, Inc. announced the launch of a “targeted examination” of the sales practices of investment firms that claim to charge “zero commissions” on client trades, and “the impact that not charging commissions has or will have on the [f]irms’ order routing.”
Also referred to as a “sweep program,” FINRA’s Market Regulation Department’s Trading & Financial Compliance Examinations section issued a sample exam letter identifying the information that it is requesting from firms. Specifically, the letter, consisting of 26 questions, seeks to collect information about the scope of the trades on which no commission is charged by the investment firm, as well as information concerning how the firm profits from the trade, whether the clients understand how the firm is profiting, and whether the firm’s revenue practices may be detrimental to customers. FINRA also will examine whether “changing to the zero-commission model resulted in changes to a firm’s routing practices, execution quality, regular and rigorous review policies or the level of trading rebates or payment for order flow. FINRA “may also assess disclosures and advertisements related to zero commissions.”
At this time, it is unclear how many firms will be asked to respond or which firms are on the list to be examined.
In the last few years, it has become increasingly apparent that many well-known broker dealers are “racing to the bottom” and advertising allegedly “zero commission” trade terms to potential investor customers. Firms selected for this examination could include those that recently have received increased customer complaints and regulatory inquiries.
Troutman Sanders will continue to monitor this issue.
Troutman Sanders, which effective April 1, 2020, will combine with Pepper Hamilton to become Troutman Pepper Hamilton Sanders LLP (“Troutman Pepper”), regularly represents financial services institutions and their associated persons, including brokers, financial advisors, and other registered representatives in FINRA arbitrations, securities industry disputes, and regulatory matters involving customer, employment, and intra-industry claims.