FINRA Issues Notice on Best Execution, Payment for Order Flow, with Focus on Price

FINRA recently issued a notice reminding firms of SEC and FINRA rules and guidance concerning best execution and payment for order flow. The notice asserted that the SEC has defined best execution very broadly to refer to a wide range of practices including monetary payments and discounts, rebates, or other fee reductions or credits and that pursuant to “these rules and guidance, member firms may not let payment for order flow interfere with their duty of best execution.” An article from lawyers at McGuire Woods noted that, while the FINRA notice mainly reminds firms of existing rules and guidance, there are new concepts in the notice that warrant attention, including FINRA’s focus on price. The lawyers specify the new concepts introduced in the Finra notice as: (1) a new position that payment for order flow, or PFOF, arrangements may not be taken into account in analyzing market quality, contradicting existing guidance; (2) a prohibition on PFOF contractual arrangements that may reduce price improvement opportunities; and (3) a warning that disclosures cannot cure weak best execution compliance. The lawyers pointed out that a “theme running through each of these new assertions — as well as the rest of the notice — is that FINRA stakes price as the primary consideration, above the many other criteria, for evaluating execution quality.” FINRA acknowledged in the notice that “while the SEC and FINRA have recognized that best execution is not concerned solely with price, price is undoubtedly a key concern for most retail customers” and cautions firms that compliance with its rules requires member firms to “regularly evaluate the availability of reliable, superior prices and to assure that order flow is directed to markets providing the most beneficial terms for customer orders.” The article from McGuire Woods observed that, overall,  FINRA’s position “marks a subtle but important shift away from prior guidance that emphasized a more holistic best execution analysis, where price was only one of many factors a firm should consider in determining whether it is satisfying its obligations.”