03.31.2020
By John D'Antona

S3’s Davies on SEC Rule 606 Delay

The current COVID-19 pandemic has forced a change in the amended Rule 606 timeframe.

Last week the Securities and Exchange Commission (SEC) looked at the state of the industry and determined market focus and resources should be fully dedicated to keeping the market open and functioning smoothly and not putting further undue stress on the system. The Commission’s thinking is that due to the extraordinary market environment brought on by COVID-19 and the need to redeploy assets to maintain regular market function, the regulator opted to err on the side of caution and give firms additional time to comply with the updated/revised order handling disclosure rules.

The relief is as follows: one month for 606(a) compliance and two months for 606(b)(3) look through.

From the SEC:

“This order grants the following temporary exemptive relief from certain requirements of Rule 606, which is set forth in greater detail below: (1) broker-dealers are exempt from the requirement to provide the public report covering the first quarter of 2020 required by Rule 606(a) until May 29, 2020; (2) broker-dealers that engage in outsourced routing activity are exempt from the requirement to collect the monthly customer-specific data required by Rule 606(b)(3) for such activity until June 1, 2020, and are exempt until July 29, 2020, from the requirement to provide a customer-specific report of June 2020 outsourced routing data within seven business days for customer requests for such customer-specific reports that are made on or before July 17, 2020.”

Mark Davies, S3

So, what’s it all mean?

In an exclusive conversation with Traders Magazine, Mark Davies, Chief Executive of S3, a regulatory compliance services firm, explained that the main goal behind the extension is to allow firms to focus on mission-critical applications during these times of wildly fluctuating markets and unusual working conditions – which COVID-19 and the resultant work from home environment and NYSE trading floor closure – has introduced to the markets. In his view, and others, the market has enough to contend with at the moment.

TRADERS MAGAZINE: Was the delay absolutely necessary?

Mark Davies: The main goal behind the extension is to allow firms to focus on mission-critical applications during these times of wildly fluctuating markets and unusual working conditions.  Several firms have mentioned that they would rather maintain a code-freeze environment so as to not introduce any unnecessary variables into the system.  Because of this, the risk of continuing to work on getting the data ready may have the potential to adversely affect much more critical operations.

TM: Is the delay long enough? 

Davies: We’re not really sure if this is long enough – that will entirely depend on what happens in the markets and how long this current situation lasts.

TM: What assets are being diverted away from compliance and towards COVID?

Davies: Since this is a main area of our business, S3 is continuing to work on it, including helping get clients ready and adding new analyses, but some of our clients have more mission-critical areas to focus on.

Looking back, on November 2, 2018, the Commission adopted amendments to Rule 606 of Regulation NMS under the Exchange Act. Under Rule 606(a), broker-dealers must provide quarterly, aggregated public disclosure of their routing and handling of orders submitted on a held basis in NMS stock. In addition, under Rule 606(b) a broker-dealer must, upon request of its customer, provide customer-specific disclosures related to the routing and execution of the customer’s NMS stock orders submitted on a not held basis for the prior six months, subject to two de minimis exceptions.

The Commission previously revised the compliance dates for Rule 606 to provide broker dealers with additional time to implement the systems and other changes necessary to comply with Rule 606. On April 30, 2019, the Commission extended the compliance date for the amendments to Rule 606 to begin following September 30, 2019.

Then on September 4, 2019, the Commission, by the Division pursuant to delegated authority, granted temporary exemptions from amended Rule 606: (1) to all broker-dealers, from the requirement to collect the quarterly public data on held orders until January 1, 2020 (with the first quarterly report due by the end of April 2020); (2) to all broker-dealers that engage in self-routing activity, from the requirement to collect the customer-specific monthly data for not held orders until January 1, 2020 (with the first customer-specific report of such data due seven business days after February 15, 2020, for tests made on or before February 15, 2020); and (3) to all broker-dealers that engage in outsourced routing activity, from the requirement to collect the customer-specific monthly data for not held orders until April 1, 2020 (with the first customer-specific report of such data due seven business days after May 15, 2020, for customer requests made on or before May 15, 2020).

 

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