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FINRA’s Rule 5310: Why the Regulatory Focus on Best Execution is Here to Stay

by InnReg

In a move that only confirms the ongoing regulatory focus on best execution, the Financial Industry Regulatory Authority (FINRA) recently announced that it fined Deutsche Bank Securities, Inc. (Deutsche Bank) $2 million for failing to comply with its obligation to seek “best execution” for its customers’ orders, according to a press release on March 8.

According to the settlement, Deutsche Bank’s reviews did not meet the standards of FINRA Rule 5310, which requires brokerage firms to seek the most favorable terms reasonably available for a customer’s orders. Firms are required to conduct reviews to evaluate both the order execution quality their customers receive as well as the execution quality their customer orders could receive through different routing arrangements.

Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts.

Deutsche Bank’s Failures to Comply with FINRA Rule 5310

Between January 2014 to May 2019, Deutsche Bank Securities owned and operated an alternative trading system (ATS) known as SuperX, which would first take customers’ marketable orders before routing any part of the order to an exchange, unless customers opted out of this routing preference.

This routing preference created an inherent delay for orders that were not fully executed in the firm’s ATS, thus subjecting orders to potentially lower fill rates.

Despite this information, Deutsche Bank did not modify its routing arrangement, nor did it consider how price improvement for SuperX orders compared to price improvement opportunities for orders routed directly to exchanges.

Further, Deutsche Bank failed to consider alternate routing arrangements even despite their potential higher execution quality, and in fact routed more orders to SuperX than any other dark pool during the period.

FINRA’s Focus on Best Execution

FINRA’s enforcement action has highlighted that Deutsche Bank’s supervisory system was not reasonably designed to achieve compliance with Rule 5310 and its best execution obligation because it failed to reasonably review certain factors set forth in the rule.

“Best execution of customer orders is one of FINRA’s core focus areas, and we closely monitor and review member firms’ compliance with this important component of investor protection and market integrity,” said Stephanie Dumont, Executive Vice President, Market Regulation and Transparency Services, whose department’s referral led to the enforcement action.

Deutsche Bank has consented to the entry of FINRA’s findings without admitting or denying them, according to the press release.

Other FINRA Best Execution Violations

This settlement is further evidence of the extent to which Rule 53410 and best execution have become a high-profile regulatory focus following the GameStop trading frenzy in January 2021. Securities and Exchange Commission Chairman Gary Gensler has ordered the agency to review whether investors are being harmed by best-execution lapses, and FINRA has included best execution under the framework of Rule 5310 as a topic in its 2022 and 2021 Report(s) on FINRA’s Examination and Risk Monitoring Program.

In June 2021, FINRA fined Robinhood $57 million and ordered the stock trading app to pay nearly $13 million in restitution to thousands of clients in a settlement related to the technical failures Robinhood experienced in March of 2020, Robinhood’s lack of due diligence before approving customers to place options trades and purveying misleading information to customers about aspects like trading on margin and order routing.

Conclusion: Staying Ahead of Evolving Regulation on Best Execution

As an outsourced compliance provider, we can help you remain ahead of evolving regulations on best execution of customer orders, order routing and other key FINRA’s priorities in investor protection and market integrity.

The Author

InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013. InnReg specializes on mitigating regulatory risk while helping clients launch and grow innovative fintech products and services.

Topics: Broker-Dealer Compliance, Compliance Issues

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