“Payment for order flow,” or PFOF, refers to compensation a broker receives from a wholesale market maker in return for routing trades to that market maker. This approach to compensation is at the heart of many digital broker-dealers’ business models. It allows them to trade profitably against client orders, while their retail clients theoretically benefit from lower or no commissions.
FINRA Rules 3110 (a) and (b) require that any brokerage firm that operates under Financial Industry Regulatory Authority have protocols to supervise all employees, from the executives to the newest employee. The brokerage must also comply with SEC Rule 17a-4(f) to properly store electronic records.
InnReg compliance experts highlighted these seven takeaways.
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Regulation S-ID, sometimes referred to as the “Red Flags Rule,” lays out specific SEC requirements for how broker-dealers should approach the risks of identity theft. Advances in electronic communications and current remote working conditions have made it easier than ever to collect, manage and transfer individuals’ private data. The ongoing challenge of protecting personal information calls for vigilant data security controls.
Suitability obligations are critical to investor protection. FINRA Suitability Rule Guidelines are included in Rule 2111 and FINRA Rule 3110. These two rules state that brokerage firms must ensure investment recommendations, including options and private placements, are suitable according to each client’s individual profile. Failure to verify customer suitability, monitor account activity, and investigate investments like private placements can result in meaningful penalties.
Smaller broker-dealers are facing intense market pressures at the moment. Fees are declining, and the big players are getting bigger. Digital broker-dealers might wonder whether they made the right move when choosing a fully-disclosed model instead of an omnibus model. Despite conventional wisdom, it is possible to convert to an omnibus model. Compliance experts can help you navigate the process. And the result? New revenue streams, and new ways to offer value.
