Better Markets filed a supplemental comment letter with the Securities and Exchange Commission regarding the SEC’s proposed Regulation Best Execution, which would require that a broker-dealer use reasonable diligence to ascertain the best market for a security and buy or sell in such a market so that the resulting price to the broker-dealer’s customer is as favorable as possible under prevailing market conditions
Why It Matters.The SEC has recognized the importance of a best execution duty since at least 1972, but it has yet to adopt a rule imposing such a duty on broker-dealers. It is time for the SEC to act. The SEC has the requisite statutory authority to adopt Regulation Best Execution. And doing so would benefit investors. Investors deserve to know that their brokers must act in their interest to obtain the best prices on all of their securities trades. An SEC best execution rule would establish an enforceable obligation and provide this protection to investors.
What We Said. There should be nothing controversial about saying that brokers must attempt to ensure that investors receive the best prices for their trades. Such a duty would seem to be fundamental to a broker’s role in the securities markets. So the SEC should adopt a best execution rule that requires brokers, on an order-by-order basis, to attempt to trade in the best market for their customers. This would help ensure that investors receive the best prices on their securities trades, as they should. Ensuring best execution will also promote both the efficient allocation of capital by contributing to the accurate pricing of securities and capital formation by instilling investor confidence in the securities markets. The fact that FINRA has a rule governing best execution is no reason to not adopt the SEC’s proposed rule. FINRA’s rule is weak and insufficient to protect investors and ensure best execution. FINRA’s rule essentially allows brokers to satisfy their duty of best execution by periodically assessing whether their order routing practices are offering customers the most favorable terms in the aggregate. But, as our comment letter shows, this is remarkably similar to how the SEC described the minimum obligations of a broker in 1979.
Bottom Line. It cannot be that, 45 years later, FINRA’s rule remains all that brokers should be required to do in furtherance of ensuring that their customers are able to execute transactions in the best market and at the best prices. An SEC rule imposing a duty of best execution on an order-by-order basis would better ensure that brokers attempt to obtain the best prices for their customers.
