Globally, financial industry regulators are constantly introducing and updating rules designed to foster transparency, fairness and integrity in the markets. This level of attention and adaptation contributes to an industry landscape that is rapidly, and seemingly constantly, changing—and broker-dealers must remain vigilant in monitoring the latest developments to swiftly adapt their operations as needed to remain compliant.
Globally, financial industry regulators are constantly introducing and updating rules designed to foster transparency, fairness and integrity in the markets. This level of attention and adaptation contributes to an industry landscape that is rapidly, and seemingly constantly, changing—and broker-dealers must remain vigilant in monitoring the latest developments to swiftly adapt their operations as needed to remain compliant.
Rules 605 and 606 of the SEC’s Regulation NMS were originally adopted to standardize and enhance the public disclosure of execution and routing practices surrounding customer orders. The most recent proposed update is designed to enhance data disclosure for all market participants in order to fully assess market quality.
Between multiple recent enforcements, FINRA’s 2023 exam priorities and the SEC’s proposed market structure reforms, there is a clear need for discussion and debate on this trending topic. At n-Tier, we recently partnered with TRADEliance and sat down for a panel discussion on Rule 605 and 606 for a wide ranging conversation on the topic, including the differences between the existing rules and the new proposals, the creation and validation of relevant reports and some shared best practices for supervisory oversight and employee education. n-Tier Founder and CEO Peter Gargone was joined by TRADEliance co-founders Jesy LeBlanc and Kat Miller (who served as moderator).
To begin the conversation, the panel unpacked how the proposed rule changes reflect a broader theme: the need for more granular data reporting across the board. Information around timing, order types and lot size needs to be accounted for like never before. It was agreed that there is a strong likelihood that the SEC will become increasingly stringent on policing data, which will require firms to make a company-wide effort to enhance their reporting practices.
The discussion next highlighted that while the collection of these granular datasets is still in its early stages, it represents a new era of reporting that will be defined by a focus on accuracy. Rule 605/606 requires aggregated data, generated by combining and condensing individual datapoints into high-level units. This simplifies operational and analytical workflows for both firms and regulators – but it places an even greater importance on the accuracy of the underlying data. During the panel, Peter explained how the SEC is able to leverage CAT reporting data to cross-check a broker-dealer’s compliance with Rule 605/606, amounting to a substantially higher degree of oversight.
Next, the conversation turned to the ways firms can best respond to and remain compliant with the enhanced reporting scope. Here, data validation is crucial, and firms should strive toward solutions to support both validation and reporting. Conducting regular firm-wide data validation checks can ensure compliance with not just Rule 605/606, but also regulatory expansion surrounding OTC securities, tick size and best execution. At n-Tier, we arm firms with data-driven surveillance and reporting solutions, including a bundled offering encompassing all major US regulations governing broker-dealers, to minimize the risk and costs often associated with these crucial functions.
The panel closed the discussion by reviewing some best practices for Rule 605/606 compliance. Peter emphasized the importance of avoiding one-off checks – instead, broker-dealers must take the data in its native form and combine these checks into a comprehensive, ongoing oversight process with a focus on completeness and accuracy. This means firms should consider continuously auditing all relevant datasets as part of their routine compliance procedures. Looking ahead, it appears evident that major regulators will become increasingly rigorous when it comes to policing reporting data – so broker-dealers must get up to speed to avoid negative outcomes, remain competitive and maintain their financial and legal standing in the market.
At the core of n-Tier’s business is a large-scale, high-volume data-checking engine adaptable to an array of different regulations. We specialize in helping institutions manage the accuracy and completeness of their critical business data associated with regulatory reporting requirements. If you are interested in discussing our validation and reporting capabilities – and how we can help your firm maximize efficiency while staying compliant – don’t hesitate to reach out.
Thank you again to TRADEliance for facilitating an engaging discussion on the proposed changes to Rule 605/606 and the importance of data monitoring and analytics in today’s regulatory environment.