SEC Rule 606
Requires broker-dealers that route customer orders in equity and option securities to make publicly available reports on a quarterly basis that disclose the market centers to which they route customer orders for execution. In addition, this rule requires broker-dealers to disclose where individual customer orders are routed. The latter is upon request from the customer to the broker-dealer. Only the most significant centers, however, are required to be disclosed. For purposes of this rule, most significant centers are defined as the top ten centers and any other centers receiving 5% or more of the broker-dealers orders.
To view the current or previous Quarterly Reports, please call our office for a copy to be provided.
Overview of the Quarterly Report
The rule requires the quarterly report to be divided in four sections – NYSE listed securities, other exchange listed securities, OTC securities, and options, and disclosure is to be stated in percentage terms. Customers will also be notified at least annually that such a report exists and will be furnished upon request. These annual notifications are typically made during the 1st and/or 4th quarter customer mailings each year via a statement message or an insert.
Disclosure Requests by Customers
Smith, Brown & Groover, Inc. (“SBG”) will disclose to customers, upon request, the market centers to which their orders were routed for the six months prior to the request, whether orders were directed or non-directed, and the time of transactions resulting from such orders. SBG will submit such requests to the compliance area of their clearing broker, and upon receipt, will forward the resulting information back to the customer.
Order Flow Arrangements
SBG places equity orders for its clients electronically or telephonically with its clearing broker, National Financial Services. Non-directed orders comprise the majority of orders; that is, orders are entered without specifying a specific market center. As a result, SBG may (passively) receive remuneration for order flow from the various centers as they are routed by National. SBG also reviews the quarterly routing statistics that are prepared by its clearing broker. A directed order is defined by the Rule as any customer order in which the customer specifically instructs the broker-dealer to route the order to a particular venue for execution.
- No decision is made by SBG at the time of entering a non-directed order based on the order flow remuneration that may or may not occur. Therefore, SBG’s standard practice is not to route customer orders in order to earn any particular level of order flow remuneration. We believe this practice minimizes the potential for conflicts of interest between SBG and its customers. SBG’s standard practice in equity orders is to act in the capacity of agent (not buying or selling such equities from its own accounts to its customers) and to charge a commission (on non-managed accounts) or a fee (on investment advisory managed accounts). SBG’s clearing broker, however, may have acted as a market maker; this capacity is disclosed on the trade confirmations, as well as the market in which a transaction was executed. Moreover, the clearing broker’s capacity may vary over time.
- For transactions where SBG, at the customer’s request, directs an order to a particular market center for execution, SBG will receive remuneration for such direction. As stated previously, however, this is not SBG standard practice. SBG also does not accept option orders for its clients, and thus has no routing practices to disclose for option order flow.