March 15, 2012 Comments (0) Blog, Securities Fraud

Brokerage Firm Best Execution Requirements

(Last Updated On: July 17, 2015)

The SEC recently approved FINRA’s proposed rule change to adopt FINRA Rules 5310 (Best Execution and Interpositioning) and 6438 (Displaying Priced Quotations in Multiple Quotation Mediums) in the consolidated rulebook (Consolidated FINRA Rulebook).

FINRA Rule 5310 is the new consolidated rule governing members’ best execution requirements.  The Rule is tailored after NASD Rule 2320 (also dealing with broker-dealers best execution requirements).

The full text of FINRA Rule 5310 is as follows:

“(a)(1) In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among the factors that will be considered in determining whether a member has used “reasonable diligence” are:

(A) the character of the market for the security (e.g., price, volatility, relative liquidity, and pressure on available communications);

(B) the size and type of transaction;

(C) the number of markets checked;

(D) accessibility of the quotation; and

(E) the terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.

(2) In any transaction for or with a customer or a customer of another broker-dealer, no member or person associated with a member shall interject a third party between the member and the best market for the subject security in a manner inconsistent with paragraph (a)(1) of this Rule.

(b) When a member cannot execute directly with a market but must employ a broker’s broker or some other means in order to ensure an execution advantageous to the customer, the burden of showing the acceptable circumstances for doing so is on the member.

(c) Failure to maintain or adequately staff an over-the-counter order room or other department assigned to execute customers’ orders cannot be considered justification for executing away from the best available market; nor can channeling orders through a third party as described above as reciprocation for service or business operate to relieve a member of its obligations under this Rule.

(d) A member through which an order is channeled and that knowingly is a party to an arrangement whereby the initiating member has not fulfilled its obligations under this Rule, will also be deemed to have violated this Rule.

(e) The obligations described in paragraphs (a) through (d) above exist not only where the member acts as agent for the account of its customer but also where transactions are executed as principal. Such obligations are distinct from the reasonableness of commission rates, markups or markdowns, which are governed by NASD Rule 2440 and IM-2440.”

 

The primary update to FINRA Rule 5310 (from NASD Rule 2320) appears to deal with securities with limited quotation or pricing information available, foreign securities, customer instructions on routing orders, and regular and rigorous review of execution quality. FINRA Rules 5310 and 6438 become effective on May 31, 2012.

Best Execution requirements can be particular important in the margin context.  Although firms are generally permitted to sell positions to meet margin calls, FINRA Rules 5310 and 6438 (and NASD Rule 2320 before that) would still require that the trades meet the established best execution requirements (i.e. the firm still has to have the client’s interests in mind when selling positions to reduce margin).  Often times brokerage firms half-hazardly sell positions in a client’s account to meet margin calls and compound the losses suffered by the client.  In such instances, the brokerage firm may be liable for such damages as a result of its failure to meet the aforementioned best execution requirements.

If you believe that your brokerage firm failed to meet the generally accepted standard of care with respect to best execution, the securities attorneys of The White Law Group may be able to help.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.

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