[Federal Register Volume 83, Number 223 (Monday, November 19, 2018)]
[Rules and Regulations]
[Pages 58338-58429]
[FR Doc No: 2018-24423]

Vol. 83

Monday,

No. 223

November 19, 2018

Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 242

Disclosure of Order Handling Information; Final Rule

Federal Register / Vol. 83 , No. 223 / Monday, November 19, 2018 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-84528; File No. S7-14-16]
RIN 3235-AL67

Disclosure of Order Handling Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is adopting amendments to Regulation National Market System
(``Regulation NMS'') under the Securities Exchange Act of 1934
(``Exchange Act'') to require additional disclosures by broker-dealers
to customers regarding the handling of their orders. The Commission is
adding a new disclosure requirement which requires a broker-dealer,
upon request of its customer, to provide 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 also is amending the current
order routing disclosures that broker-dealers must make publicly
available on a quarterly basis to pertain to NMS stock orders submitted
on a held basis, and the Commission is making targeted enhancements to
these public disclosures. In connection with these new requirements,
the Commission is amending Regulation NMS to include certain newly
defined and redefined terms that are used in the amendments. The
Commission also is amending Regulation NMS to require that the public
order execution report be kept publicly available for a period of three
years. Finally, the Commission is adopting conforming amendments and
updating cross-references as a result of the rule amendments being
adopted in this rule.

DATES: Effective date: January 18, 2019.
    Compliance date: May 20, 2019.

FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant
Director, at<PHONE_NUMBER>, Steve Kuan, Special Counsel, at (202) 551-
5624, Sarah Albertson, Special Counsel, at<PHONE_NUMBER>, Michael
Bradley, Special Counsel, at<PHONE_NUMBER>, Amir Katz, Special
Counsel, at<PHONE_NUMBER>, Emerald Greywoode, Special Counsel, at
(202) 551-7965, or Andrew Sherman, Special Counsel, at<PHONE_NUMBER>,
Division of Trading and Markets, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting: (1) Amendments
to 17 CFR 242.600 and 242.606 (respectively, ``Rule 600'' and ``Rule
606'' of Regulation NMS) under the Exchange Act to require additional
disclosures by broker-dealers to customers about the routing of their
orders; (2) amendments to 17 CFR 242.605 (``Rule 605'' of Regulation
NMS) to require that the public order execution reports be kept
publicly available for a period of three years; and (3) conforming
changes and updated cross-references in 17 CFR 240.3a51-1(a) (``Rule
3a51-1(a) under the Exchange Act''), 17 CFR 240.13h-1(a)(5) (``Rule
13h-1(a)(5) of Regulation 13D-G''), 17 CFR 242.105(b)(1) (``Rule
105(b)(1) of Regulation M''), 17 CFR 242.201(a) and 242.204(g) (``Rules
201(a) and 204(g) of Regulation SHO''), 17 CFR 242.600(b),
242.602(a)(5) and 242.611(c) (``Rules 600(b), 602(a)(5), and 611(c) of
Regulation NMS''), and 17 CFR 242.1000 (``Rule 1000 of Regulation
SCI'').

Table of Contents

I. Introduction
II. Overview of Adopted Rule Amendments
III. Amendments to Rule 600, Rule 605, and Rule 606
    A. Customer-Specific Order Handling Reports
    1. Applicability of Customer-Specific Disclosures in Rule 606(b)
    2. Definition of Actionable Indication of Interest
    3. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    4. Timing and Frequency Requirements for Customer-Specific Order
Handling Report
    5. Format of Customer-Specific Order Handling Reports
    6. Rule 606(b)(3) Report Content
    7. Rule 606(c) Quarterly Aggregated Public Report of Rule
606(b)(3) Information
    B. Public Order Routing Report Under Rule 606(a)
    1. Orders Covered By Rule 606(a) Public Disclosures
    2. Marketable Limit Orders and Non-Marketable Limit Orders
    3. Payment for Order Flow Disclosures--Rules 606(a)(1)(iii) and
(iv)
    4. Format of Public Order Routing Report
    5. Division of Rule 606(a) Report's Section on NMS Stocks by S&P
500 Index and Other NMS Stocks
    6. Calendar Month Breakdown
    7. Execution Metrics
    C. Amendment to Disclosure of Order Execution Information
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Amendment to Current Public and Customer-Specific Disclosures
    3. Amendment to Current Disclosures Under Rule 605
    B. Use of Information
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Amendment to Current Public and Customer-Specific Disclosures
    3. Amendment to Current Disclosures Under Rule 605
    C. Respondents
    1. Initial Estimate
    2. Estimate for Adopted Rule [Amendments to 605 and 606]
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Customer-Specific Disclosures Under Rule 606(b)(3)
    2. Proposed Public Aggregated Report on Orders Subject to the
Customer-Specific Disclosures Under Rule 606(b) Not Adopted
    3. Proposed Requirement to Document Methodologies for
Categorizing Order Routing Strategies Not Adopted
    4. Amendment to Current Public and Customer-Specific Disclosures
    5. Revisions to Compliance Manuals
    6. Amendment to Disclosures Under Rule 605
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
V. Economic Analysis
    A. Introduction
    B. Baseline
    1. Current $200,000 Threshold
    2. Current Reporting for NMS Stock Orders of $200,000 and Above
    3. Publication Period for Reports Required by Rules 605 and 606
    4. Available Information on Conflicts of Interest
    5. Available Information on Execution Quality
    6. Format of Current Reports
    7. Quality of Broker-Dealer Routing Practices for Not Held NMS
Stock Orders
    8. Use of Actionable IOIs
    9. Competition, Efficiency, and Capital Formation
    C. Costs and Benefits
    1. Customer-Specific Order Handling Disclosures
    2. Public Order Handling Report
    3. Disclosure of Order Execution Information
    4. Structured Format of Reports
    5. Other Definitions in Adopted Amendments to Rule 600
    D. Alternatives Considered
    1. Alternative Scope for the Customer-Specific Reports
    2. Scope of Broker-Dealer's Obligation Under Rule 606(b)(3)
    3. Public Availability of Aggregated Rule 606(b)(3) Order
Handling Information
    4. Automatic Provision of Customer-Specific Not Held Order
Handling Report (Adopted Rule 606(b)(3))
    5. Submission to the Commission of Not Held NMS Stock Order
Handling Reports (Adopted Rule 606(b)(3))
    6. Categories of NMS Stocks for Rule 606(a)
    7. Disclosure of Additional Information About Not Held NMS Stock
Order Routing and Execution

    8. Order Handling Reports at the Stock Level (Adopted Rule
606(b)(3))
    9. Alternative to Three-Year Posting Period (Adopted Amendments
to Rules 605(a)(2) and 606(a)(1))
    E. Economic Effects and Effects on Efficiency, Competition, and
Capital Formation
    1. Effects of Adopting Amendments on Efficiency and Competition
    2. Effects of Adopting Amendments on Capital Formation
VI. Regulatory Flexibility Certification
VII. Statutory Authority and Text of the Proposed Rule Amendments

I. Introduction

    In July 2016, the Commission proposed to amend Rules 600 and 606
under Regulation NMS to require additional disclosures by broker-
dealers to customers about the handling of their orders, to amend Rules
605 and 607 for consistency with the proposed amendments to Rule 606,
and to amend other rules to update cross references as appropriate.\1\
As discussed below, after careful review and consideration of the
comments received, the Commission is adopting these amendments with
certain modifications.
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    \1\ See Securities Exchange Act Release No. 78309, 81 FR 49432
(July 27, 2016) (``Proposing Release'' or ``Proposal'').
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    Transparency has long been a hallmark of the U.S. securities
markets, and the Commission continuously strives to ensure that
investors are provided with timely and accurate information needed to
make informed investment decisions. In recent years, the Commission and
its staff have undertaken a number of reviews of market structure and
market events, and much of this effort has aimed to enhance
transparency for investors.\2\ The amendments being adopted today to
Rule 606 of Regulation NMS represent the Commission's continued
commitment to enhance transparency for investors.
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    \2\ The Commission recently adopted amendments to Regulation ATS
that enhance the operational transparency of alternative trading
systems (``ATSs'') that transact in National Market System (``NMS'')
stocks (``NMS Stock ATSs''). See Securities Exchange Act Release No.
83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) (``ATS-N
Adopting Release''). In addition, the Commission has proposed a
Transaction Fee Pilot for NMS stocks to help inform the Commission,
market participants and the public about the effects, if any, that
transaction-based fees and rebates may have on order routing
behavior, execution quality, and market quality. See Securities
Exchange Act Release No. 82873 (March 14, 2018), 83 FR 13008 (March
26, 2018) (``Transaction Fee Pilot Proposing Release'').
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    Rule 606 encourages competition by enhancing the transparency of
broker-dealer order handling and routing practices.\3\ Rule 606(a)
requires broker-dealers to provide a publicly available quarterly
report of information regarding routing of non-directed orders.\4\ Rule
606(b) requires broker-dealers to provide customers, upon request,
certain information about the routing of their orders. Prior to the
amendments being adopted today, the Rule 606(a) requirements applied to
smaller dollar-value orders more typical of retail investors but did
not apply to large dollar-value orders more typical of institutional
investors.\5\ As discussed in detail in the Proposing Release, equity
market structure, as well as order handling and routing practices, have
changed significantly since Rule 606 was adopted in 2000, presenting a
need to update the rule such that it provides transparency into broker-
dealer order handling and routing practices that continues to be useful
in today's automated and vastly more complex national market system.\6\
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    \3\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594, 3602 (January 21, 2010) (``Concept Release on
Equity Market Structure'').
    \4\ A ``non-directed order'' means any customer order other than
a directed order. See 17 CFR 242.600(b)(48). A ``directed order''
means a customer order that the customer specifically instructed the
broker-dealer to route to a particular venue for execution. See 17
CFR 242.600(b)(19). As discussed below, these definitions are being
revised in connection with the amendments to Rule 606 so that they
no longer only apply to ``customer orders,'' but otherwise are
remaining the same. See infra Section III.A.1.b.vii.
    \5\ The Commission limited the scope of Rule 606(a) to smaller
dollar-value orders by defining a ``customer order'' to which the
rule applied as an order to buy or sell an NMS security that is not
for the account of a broker-dealer, but not any order for a quantity
of a security having a market value of at least $50,000 for an NMS
security that is an option contract and a market value of at least
$200,000 for any other NMS security. See 17 CFR 242.600(b)(18).
    \6\ See Proposing Release, supra note 1, at 49433-44 for a
detailed description of the history and the market developments
leading to the Proposal.
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    As the Commission noted when it originally adopted Rule 606, in a
fragmented market ``the order routing decision is critically
important'' and ``must be well-informed and fully subject to
competitive forces,'' \7\ and, further, the public disclosure of order
routing practices ``could provide more vigorous competition on . . .
order routing performance.'' \8\ By updating the Rule 606 disclosure
regime, the rule as amended will provide disclosures more relevant to
today's marketplace that encourage broker-dealers to provide effective
and competitive order handling and routing services, and that improve
the ability of their customers to determine the quality of such broker-
dealer services.\9\
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    \7\ See Securities Exchange Act Release No. 43590 (November 17,
2000), 65 FR 75414, 75415 (December 1, 2000) (``Rule 606 Predecessor
Adopting Release''). For clarity, when this release references
``Predecessor Rule 606,'' it is referring to the version of the rule
adopted in the Rule 606 Predecessor Adopting Release.
    \8\ See id. at 75417.
    \9\ If any of the provisions of these rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
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II. Overview of Adopted Rule Amendments

    To facilitate enhanced transparency regarding broker-dealers'
handling and routing of orders in NMS stock, the Commission proposed to
amend Rules 600(b) and 606 such that all orders of any dollar value in
NMS stock \10\ submitted by a customer to a broker-dealer would be
covered by order handling and routing disclosure rules. Under the
proposed amendments, new Rule 606(b)(3) would require broker-dealers to
make detailed, customer-specific order handling disclosures for NMS
stock orders available to institutional customers in particular, who
previously were not entitled to disclosures under the rule for their
order flow, or were entitled to disclosures that have become inadequate
in today's highly automated and more complex market.\11\ The Commission
also proposed to require a broker-dealer to make publicly available a
report that aggregates the information required for the detailed
customer-specific order handling reports for all NMS stock orders that
it receives across all of its customers.\12\ Further, the Commission
proposed updating Rule 606(a) to provide retail customers in particular
with certain enhanced disclosures regarding a broker-dealer's order
routing practices.\13\
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    \10\ ``NMS stock'' and ``NMS security'' are defined in Rule 600
of Regulation NMS. See 17 CFR 242.600(b)(46)-(47).
    \11\ See proposed Rule 606(b)(3); see also Proposing Release,
supra note 1, at 49447.
    \12\ See proposed Rule 606(c); see also Proposing Release, supra
note 1, at 49447.
    \13\ See proposed Rule 606(a); see also Proposing Release, supra
note 1, at 49462.
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    The Commission received comments on the Proposal.\14\ The
commenters, many of which also commented on Rule 606 in connection with
the Concept Release on Equity Market Structure, overwhelmingly
supported updating the disclosures required by Rule 606. Most also
expressed support for, or offered constructive critiques of, specific
components of the Proposal, and several suggested alternatives to
specific provisions of the Proposal, but all comments received
recognized a need for enhanced transparency and

supported the goals of the Proposal.\15\ In addition, the Equity Market
Structure Advisory Committee (``EMSAC'') provided recommendations with
respect to Rules 605 and 606 on November 29, 2016, to provide
meaningful execution quality and order handling disclosures from a
retail and an institutional perspective.\16\
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    \14\ Comments received on the Proposal are available on the
Commission's website, available at https://www.sec.gov/comments/s7-14-16/s71416.htm.
    \15\ See, e.g., Letter from John A. McCarthy, General Counsel,
KCG Holdings, Inc., dated October 31, 2016 (``KCG Letter'') at 1;
Letter from Joseph Kinahan, Managing Director, Client Advocacy and
Market Structure, TD Ameritrade, Inc., dated October 18, 2016
(``Ameritrade Letter'') at 1; Letter from Tyler Gellasch, Executive
Director, Healthy Markets Association, dated September 26, 2016
(``HMA Letter'') at 3-4; Letter from Micah Hauptman, Financial
Services Council, Consumer Federation of America, dated September
26, 2016 (``CFA Letter''); Letter from Stuart J. Kaswell, Executive
Vice President and Managing Director, General Counsel, Managed Funds
Association, dated September 23, 2016 (``MFA Letter'') at 1.
    \16\ See EMSAC Recommendations Regarding Modifying Rule 605 and
Rule 606 (``EMSAC Rule 606 Recommendations''), November 29, 2016,
available at https://www.sec.gov/spotlight/emsac/emsac-recommendations-rules-605-606.pdf.
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    After careful review and consideration of the comment letters and
upon further consideration by the Commission concerning how to further
the goal of more useful and effective disclosure of order handling
information under Regulation NMS, the Commission is adopting the
proposed amendments to Rules 600 and 606 (and the other corresponding
proposed amendments) with certain modifications.\17\
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    \17\ The amendments to Rule 606 would not limit any other
obligations that broker-dealers may have under applicable federal
securities laws, rules, or regulations, including the anti-fraud
provisions of the federal securities laws.
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    Specifically, the Commission is amending Rule 606(b) of Regulation
NMS \18\ to require a broker-dealer, upon request of a customer that
places, directly or indirectly, one or more orders in NMS stock that
are submitted on a ``not held'' basis with the broker-dealer,\19\ to
provide customer-specific disclosures, for the prior six months, broken
down by calendar month, regarding: (1) Its internal handling of such
orders; (2) its routing of such orders to various trading centers; \20\
(3) the execution of such orders; and (4) the extent to which such
orders provided liquidity or removed liquidity, and the average
transaction rebates received or fees paid by the broker-dealer.\21\
Generally, the information is available upon request by customers who
submitted ``not held'' NMS stock orders through the broker-dealer, and
is required to be provided for each venue and divided into separate
sections for directed orders and non-directed orders.\22\ This new
disclosure requirement is subject to two de minimis exceptions.\23\ A
``not held'' NMS stock order that is subject to either de minimis
exception is covered by the existing customer-specific disclosures in
Rule 606(b)(1), as is any ``held'' NMS stock order submitted by a
customer to any broker-dealer.\24\ For the reasons explained below, the
Commission is not adopting the proposed requirement that the Rule
606(b)(3) disclosures be divided into passive, neutral, and aggressive
order routing strategies.
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    \18\ 17 CFR 242.606(b).
    \19\ Typically, a ``not held'' order provides the broker-dealer
with price and time discretion in handling the order, whereas a
broker-dealer must attempt to execute a ``held'' order immediately.
    \20\ A ``trading center'' is defined in Rule 600 of Regulation
NMS. See 17 CFR 242.600(b)(78).
    \21\ See Rule 606(b)(3).
    \22\ See id.
    \23\ See Rules 606(b)(4) and (b)(5).
    \24\ See Rule 606(b)(1). As discussed below, while the
amendments to Rule 606(b)(1) modify the orders that are covered by
Rule 606(b)(1), the required disclosures under Rule 606(b)(1) are
not changing. See infra Section III.A.1.b.vi.
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    In connection with the new disclosure requirement, the Commission
is amending Rule 600(b) of Regulation NMS \25\ to include definitions
of the terms ``actionable indication of interest,'' ``orders providing
liquidity,'' and ``orders removing liquidity,'' and to revise the
existing definitions of the terms ``directed order'' and ``non-directed
order.'' \26\ The Commission is not adopting the proposed defined term
``institutional order'' in Rule 600(b) and therefore also is not
adopting the proposed $200,000 market value threshold for orders to
qualify for the new customer-specific disclosures in Rule
606(b)(3).\27\
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    \25\ 17 CFR 242.600(b).
    \26\ The newly defined terms are being incorporated into Rule
600(b) in alphabetical order, in keeping with Rule 600(b)'s existing
alphabetical organization of the terms defined therein, and the
numbered provisions for existing defined terms in Rule 600(b) are
being adjusted accordingly. For ease of reference however,
throughout this release, citations to pre-existing defined terms in
Rule 600(b) are to their pre-existing numbered provisions, unless
otherwise indicated.
    \27\ See Rule 606(b)(3); see also infra Section III.A.1.b.ii.
Relatedly, the Commission also is not amending Rule 600(b) to rename
the term ``customer order'' as ``retail order,'' as was proposed.
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    As discussed in Section III.A.7, infra, the Commission is not
adopting the proposed amendment to Rule 606 of Regulation NMS to
require a broker-dealer to make publicly available, on an aggregate
basis, the order handling information required under Rule
606(b)(3).\28\
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    \28\ See proposed Rule 606(c). Because the Commission is not
adopting proposed Rule 606(c), pre-existing Rule 606(c), which
addresses ``Exemptions'' from the rule and which the Commission
proposed to renumber as Rule 606(d) under the Proposal, is not being
renumbered as such and remains unchanged as Rule 606(c).
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    The Commission is amending Rule 606(a) of Regulation NMS such that
the aggregated order routing disclosures that broker-dealers must make
publicly available on a quarterly basis pertain to orders of any dollar
value in NMS stock that are submitted on a ``held'' basis. Further, the
Commission is making targeted enhancements to these public disclosures
to: (1) Require limit order information to be split into marketable and
non-marketable categories (relatedly, the Commission is adopting a
definition of the term ``non-marketable limit order'' under Rule
600(b)); \29\ (2) require more detailed disclosure of the net aggregate
amount of any payments received from or paid to certain trading
centers; (3) require broker-dealers to describe any terms of payment
for order flow arrangements and profit-sharing relationships with
certain venues that may influence their order routing decisions; and
(4) require that broker-dealers keep the order routing reports posted
on a website that is free and readily accessible to the public for a
period of three years from the initial date of posting on the
website.\30\ In addition to what was proposed, the Commission is
replacing the Rule 606(a) requirement to group order routing
information for NMS stocks by listing market with a requirement to
group such information by stocks included in the S&P 500 Index as of
the first day of the quarter and other NMS stocks.
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    \29\ A ``marketable limit order'' is any buy order with a limit
price equal to or greater than the national best offer at the time
of order receipt, or any sell order with a limit price equal to or
less than the national best bid at the time of order receipt. 17 CFR
242.600(b)(39). ``National best bid and national best offer'' is
defined in Rule 600 of Regulation NMS. 17 CFR 242.600(b)(42). The
Commission is adopting new Rule 600(b)(54) to define ``non-
marketable limit order'' to mean ``any limit order other than a
marketable limit order,'' as discussed in more detail below. See
infra Section III.B.2.
    \30\ See Rule 606(a); see also Proposing Release, supra note 1,
at 49462. ``Payment for order flow'' has the meaning provided in 17
CFR 240.10b-10. See 17 CFR 242.600(b)(54). A ``profit-sharing
relationship'' is defined in Rule 600 of Regulation NMS. See 17 CFR
242.600(b)(56).
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    Finally, consistent with the amendments to Rule 606(a), the
Commission is amending Rule 605 to require market centers \31\ to keep
execution reports required by the rule posted on a website that is free
and readily accessible to the public for a period of three years from
the initial date of posting on the website. The Commission also is
adopting

amendments to other rules to update cross-references in connection with
the other rule amendments being adopted today.\32\
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    \31\ A ``market center'' means any exchange market maker, OTC
market maker, alternative trading system, national securities
exchange, or national securities association. See 17 CFR
242.600(b)(38).
    \32\ The Commission is adopting amendments to: Rule 3a51-1(a)
under the Exchange Act; Rule 13h-1(a)(5) of Regulation 13D-G; Rule
105(b)(1) of Regulation M; Rules 201(a) and 204(g) of Regulation
SHO; Rules 600(b), 602(a)(5), and 611(c) of Regulation NMS; and Rule
1000 of Regulation SCI.
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    Consistent with the Proposal, the Commission continues to believe
that generally requiring more detailed, standardized, baseline order
handling information to be made available to customers upon request for
orders in NMS stocks should enable those customers--and particularly
institutional customers--to more effectively assess how their broker-
dealers are carrying out their best execution obligations and the
impact of their broker-dealers' order routing decisions on the quality
of their executions, including the risks of information leakage and
potential conflicts of interest.\33\ In addition, the Commission
believes that these more detailed customer-specific disclosures will
further encourage broker-dealers to minimize information leakage,\34\
as well as better enable customers to verify that their broker-dealers
are following their order handling instructions. Unlike the Proposal
and in response to commenters' feedback, the Commission believes that
the applicability of these new order routing disclosures should be
based on order type (``not held'' orders in NMS stocks) rather than the
dollar value of an order.
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    \33\ See infra Section III.A; see also Proposing Release, supra
note 1, at 49434.
    \34\ See id.
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    Similar to the Proposal, the Commission believes that simplifying
and enhancing the current publicly available disclosures, particularly
with respect to financial inducements from trading centers, should
assist customers in evaluating better the order routing services of
their broker-dealers and how well they manage potential conflicts of
interest.\35\ Unlike the Proposal and in response to commenters'
feedback, the Commission believes that this goal would be targeted more
effectively by having these disclosures apply to ``held'' orders in NMS
stocks rather than those under $200,000.
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    \35\ See Proposing Release, supra note 1, at 49434.
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III. Amendments to Rule 600, Rule 605, and Rule 606

    Section III discusses in detail the adopted rule amendments.
Subsection A addresses the customer-specific order handling disclosures
required by new Rule 606(b)(3) and amended Rule 606(b)(1). This section
also discusses a part of the Proposal we are not adopting: Proposed
Rule 606(c)'s requirement that broker-dealers make publicly available
an aggregated report of the Rule 606(b)(3) customer-specific order
handling information across all of their customers. Subsection B
addresses the enhanced public report required under amended Rule
606(a). The newly defined and re-defined terms that the Commission is
adopting in Rule 600 in connection with the amendments to Rule 606 are
discussed where relevant in subsections A and B. The adopted amendment
to Rule 605 is discussed in subsection C.
    The staff will review these amendments, including in particular the
de minimis exceptions described in Section III.A.1.b.iv below, not
later than one year after the compliance date of the amendments, and
report to the Commission.

A. Customer-Specific Order Handling Reports

1. Applicability of Customer-Specific Disclosures in Rule 606(b)
a. Proposal
    The Commission proposed to delineate the types of orders that would
trigger a broker-dealer's obligation to provide a customer with the
order handling disclosures required by new Rule 606(b)(3) by amending
Rule 600(b) to include a definition of ``institutional order.'' \36\
Specifically, the Commission proposed to define an ``institutional
order'' as an order to buy or sell a quantity of an NMS stock having a
market value of at least $200,000, provided that such order is not for
the account of a broker-dealer.\37\ As proposed, Rule 606(b)(3) would
apply only to such ``institutional orders.''
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    \36\ See proposed Rule 600(b)(31).
    \37\ See id. The proposed definition of institutional order
applied only to orders for NMS stocks and, therefore, did not
include orders in NMS securities that are options contracts.
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    The Commission's proposed definition of ``institutional order''
dovetailed with the current definition of ``customer order,'' \38\ such
that all orders in NMS stocks routed by broker-dealers for their
customers, regardless of order dollar value, would be covered by order
routing disclosure rules.\39\ The Commission's proposed definition
maintained a dollar-value threshold analysis to identify the
``institutional orders'' for which the Rule 606(b)(3) disclosures would
be available and distinguish them from ``retail orders'' that were too
small to meet the dollar-value threshold in the definition and for
which other disclosures would be available.\40\
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    \38\ See supra note 5.
    \39\ See Proposing Release, supra note 1, at 49445. Relatedly,
the Commission proposed to rename term ``customer order'' in Rule
600(b) as ``retail order.'' See infra Section III.B.1.
    \40\ See id. The Commission preliminarily believed that this
would be an effective method of focusing the Rule 606(b)(3)
disclosures on orders from institutional customers. See Proposing
Release, supra note 1, at 49444-45 for additional detail on the
Proposal.
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    The Commission solicited comment on alternatives to a dollar-value
threshold approach. For example, the Commission asked commenters among
other things: (1) Whether dollar value is the proper criterion for
defining an institutional order, and (2) whether there are other order
characteristics the Commission should consider to distinguish between
retail and institutional orders, in addition to, or instead of, a
dollar-value threshold.\41\
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    \41\ See id. at 49445.
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    The Commission also asked whether commenters believe a de minimis
exemption from customer-specific reporting under proposed Rule
606(b)(3) is appropriate. Specifically, the Commission asked if
commenters believe that the rule should include a de minimis exemption
for broker-dealers that receive, in the aggregate, less than a certain
threshold number or dollar value of institutional orders.\42\ The
Commission also asked if the rule should be applicable, with respect to
disclosures to any particular customer, only if a broker-dealer
receives greater than a certain threshold number or dollar value of
institutional orders from that customer.\43\
---------------------------------------------------------------------------

    \42\ See id. at 49449.
    \43\ See id.
---------------------------------------------------------------------------

    The Commission received comments on the proposed dollar-value
threshold as well as comments in response to its questions regarding a
potential de minimis exemption from Rule 606(b)(3) and, after further
consideration, is modifying its approach.
b. Final Rule and Response to Comments
i. Comments Regarding Dollar-Value Threshold
    The Commission received significant comment on the proposed
definition of ``institutional order'' that criticized the proposed
$200,000 threshold as an ineffective proxy for institutional trading
interest.\44\ Many commenters

expressed concern that defining institutional order using the proposed
$200,000 threshold would be both over-inclusive by including orders
from retail investors with a market value over $200,000 and under-
inclusive by excluding orders from institutional customers with a
market value less than $200,000, and result in the misclassification of
a large number of orders.\45\ Two commenters stated that they receive
retail investor orders that exceed $200,000 in market value.\46\
---------------------------------------------------------------------------

    \44\ See, e.g., Letter from Theodore R. Lazo, Managing Director
and Associate General Counsel, The Securities Industry and Financial
Markets Association, dated October 17, 2016 (``SIFMA Letter'') at 2-
3; Letter from Mary Lou Von Kaenel, Managing Director, Financial
Information Forum, dated September 26, 2016 (``FIF Letter'') at 2-3;
Letter from Mary Lou Von Kaenel, Managing Director, Financial
Information Forum, dated November 7, 2016 (``FIF Addendum'') at 2;
Letter from David W. Blass, General Counsel, Investment Company
Institute, dated September 26, 2016 (``ICI Letter'') at 3-7; Letter
from John Russell, Chairman of the Board, and James Toes, President
and Chief Executive Officer, Security Traders Association, dated
September 26, 2016 (``STA Letter'') at 4; HMA Letter at 5-6; Letter
from Tyler Gellasch, Executive Director, and Chris Nagy, Director,
Healthy Markets Association dated January 6, 2017 (``HMA Letter
II'') at 2; CFA Letter at 6-7; Letter from Dennis M. Kelleher,
President and Chief Executive Officer, Stephen W. Hall, Legal
Director and Securities Specialist, and Lev Bagramian, Senior
Securities Policy Advisor, Better Markets, Inc., dated September 26,
2016 (``Better Markets Letter'') at 5; MFA Letter at 3.
    \45\ See, e.g., Letter from Robert J. McCarthy, Director of
Regulatory Policy, Wells Fargo Advisors, LLC, dated September 26,
2016 (``Wells Fargo Letter''); Letter from David M. Weisberger,
Managing Director, IHS Markit, dated September 26, 2016 (``Markit
Letter''); Letter from Jeff Brown, Senior Vice President,
Legislative and Regulatory Affairs, Charles Schwab & Co. Inc., dated
September 26, 2016 (``Schwab Letter'').
    \46\ See Schwab Letter at 3; Letter from Marc R. Bryant, Senior
Vice President and Deputy General Counsel, Fidelity Investments,
dated September 26, 2016 (``Fidelity Letter'') at 2-3.
---------------------------------------------------------------------------

    Several commenters stated that, for reasons such as obtaining a
better price, achieving faster execution, avoiding potential
information leakage, avoiding market effect, or the advancement in the
sophistication of institutional trading systems, many institutional
customers, before submitting their order flow to their broker-dealers,
internally divide their order flow into smaller ``child'' orders that
may not meet the proposed $200,000 dollar-value threshold.\47\ Multiple
commenters offered their own analyses of internal and external data
indicating that a large percentage of orders from institutional
customers would fall below the $200,000 threshold.\48\ One of these
commenters stated that the proposed definition of institutional order
could exclude disproportionately more orders of smaller funds, orders
in less liquid stocks that fall below the $200,000 threshold, and
larger orders that are broken up into smaller child orders by
institutional customers.\49\
---------------------------------------------------------------------------

    \47\ See Markit Letter at 6-7; Letter from Greg Babyak, Head,
Global Regulatory and Policy Group, Bloomberg LP, and Gary Stone,
Market Structure Strategy, Bloomberg Tradebook and Bloomberg LP,
dated September 26, 2016 (``Bloomberg Letter'') at 11; Letter from
Erin K. Preston, Chief Compliance Officer and Associate General
Counsel, Dash Financial LLC, dated September 26, 2016 (``Dash
Letter'') at 3; Letter from Richard Foster, Senior Vice President
and Senior Counsel for Regulatory and Legal Affairs, Financial
Services Roundtable, dated September 26, 2016 (``FSR Letter'') at 3-
4; MFA Letter at 3; FIF Letter at 3; FIF Addendum at 2; Letter from
Nathaniel N. Evarts, State Street Global Advisors, dated September
26, 2016 (``SSGA Letter'') at 1.
    \48\ See Markit Letter at 6-7; Letter from Matt D. Lyons, Global
Trading Manager, The Capital Group of Companies, Timothy J. Stark,
Market and Transactional Research, The Capital Group of Companies,
and Michael J. Triessl, Senior Vice President and Senior Counsel,
Capital Research and Management Company, dated September 30, 2016
(``Capital Group Letter'') at 2; Bloomberg Letter at 11-12.
    \49\ See Letter from Adam C. Cooper, Senior Managing Director
and Chief Legal Officer, Citadel Securities, dated October 13, 2016
(``Citadel Letter'') at 2.
---------------------------------------------------------------------------

    One commenter expressed concern that the dollar-value threshold
would exclude the majority of orders from institutions from the
enhanced institutional order handling disclosure requirements,
diminishing the value of the disclosure and forcing institutional
investors to continue individual negotiations to obtain order handling
information.\50\ Another commenter stated that excluding an unknown
portion of a large institution's orders (and perhaps all of a smaller
institution's orders) from heightened scrutiny may create opportunities
for abuse and evasion, and that investors may therefore seek to
deliberately avoid identifying their orders as institutional
orders.\51\ Another commenter stated that different securities trade
differently based on available liquidity and their capacity to move the
market.\52\ The commenter stated that the proposed definition may force
customers to choose between placing orders above the threshold to
receive disclosures but at the risk of higher market impact costs or
staying below the threshold to protect order information but
sacrificing their right to disclosures.\53\
---------------------------------------------------------------------------

    \50\ See ICI Letter at 3.
    \51\ See HMA Letter at 6.
    \52\ See CFA Letter at 7.
    \53\ See id.
---------------------------------------------------------------------------

    As illustrated by these comments, there was broad opposition to the
$200,000 dollar-value threshold in the proposed definition of
institutional order. The Commission is not adopting the proposed
definition. Rather than attempt to capture within a definition of
``institutional order'' the orders that account for most institutional
order dollar volume, the comments indicate that market participants
would prefer a different approach to order handling disclosures.\54\ In
light of these comments, the Commission believes that a modified
approach to delineating the orders covered by new Rule 606(b)(3) would
be more consistent with the expectations of market participants.
---------------------------------------------------------------------------

    \54\ See, e.g., ICI Letter at 3, 6-7 (noting that adopting a
definition of institutional order that would apply to all orders,
regardless of size, that an institutional customer submits to its
broker-dealer would best enable the Commission to accomplish the
objective of providing information necessary for institutional
investors to understand broker-dealers' order routing decisions);
Letter from Amy B.R. Lancellotta, Managing Director, Independent
Directors Council, dated September 26, 2016 (``IDC Letter'') at 2
(supporting ICI's recommendation); Capital Group Letter at 2-3; HMA
Letter II (agreeing with Capital Group, and noting that covering all
institutional orders is one of the most important aspects of the
rule).
---------------------------------------------------------------------------

ii. Commenter Recommendations Regarding a Modified Approach
    Many commenters urged the Commission to replace the proposed
dollar-value threshold with a different approach for identifying the
orders covered by the new customer-specific order routing
disclosures.\55\ They generally supported two different approaches: A
number of commenters suggested that the applicability of the new order
routing disclosures be based on order type (``held'' versus ``not
held'' orders); \56\ and a number of other commenters suggested that
their applicability be based on the characteristics (e.g., type or
regulatory status) of the entity placing the order.\57\
---------------------------------------------------------------------------

    \55\ See, e.g., MFA Letter at 3-4; CFA Letter at 6-8; FIF Letter
at 2-3, 14-15; ICI Letter at 3, 6-7; STA Letter at 3-4; SIFMA Letter
at 1-3; FIF Addendum at 2; Healthy Markets Letter at 2; Jon
Schneider, Chairman of the Board, and James Toes, President and
Chief Executive Officer, Security Traders Association, dated April
11, 2017 (``STA Letter II'') at 2.
    \56\ See, e.g., SIFMA Letter at 3; Bloomberg Letter at 12;
Citadel Letter at 2-3; FIF Letter at 2-3, 14-15; FIF Addendum at 2;
STA Letter II at 2. See also EMSAC Rule 606 Recommendations, supra
note 16.
    \57\ See SSGA Letter at 1; ICI Letter at 3, 6-7; IDC Letter at
2; MFA Letter at 3; Fidelity Letter at 3; CFA Letter at 8; Better
Markets Letter at 5.
---------------------------------------------------------------------------

    Commenters who supported an order type-based approach suggested
that the not held order type classification would be an effective proxy
for identifying orders typical of institutional investors for which the
existing customer-specific disclosures are inapplicable or inadequate
because institutional investor orders are generally not held to the
market.\58\ Commenters attributed

this to the fact that a broker-dealer has time and price discretion in
executing a not held order, and institutional investors in particular
rely on such discretion for reasons such as minimizing price impact,
whereas a broker-dealer must attempt to execute a held order
immediately, which typically better suits retail investors who seek
immediate executions and rely less on broker-dealer order handling
discretion.\59\ As one commenter put it, the Rule 606(b) disclosure
requirements should be based on whether the broker-dealer has
discretion when handling the client's order and, as a general matter,
broker-dealers have no discretion in handling retail investor held
orders but do have discretion in handling institutional investor not
held orders.\60\ One commenter also stated that the held/not held
approach would provide a targeted, deterministic solution to the issues
presented by the proposed order dollar-value-based distinction between
retail and institutional orders, and would alleviate the need to
identify certain orders as institutional and others as retail for
purposes of order routing disclosure.\61\
---------------------------------------------------------------------------

    \58\ See Ameritrade Letter at 2; Letter from Richie Prager,
Senior Managing Director, Head of Trading, Liquidity and Investments
Platform, Hubert De Jesus, Managing Director, Co-Head of Market
Structure and Electronic Trading, Supurna VedBrat, Managing
Director, Co-Head of Market Structure and Electronic Trading, and
Joanne Medero, Managing Director, Government Relations and Public
Policy, BlackRock, Inc., dated September 26, 2016 (``BlackRock
Letter'') at 2; Citadel Letter at 2-3; Markit Letter at 4; Schwab
Letter at 3; Capital Group Letter at 2-3; KCG Letter at 4; FIF
Letter at 2-3; FIF Addendum at 2; STA Letter II at 2. One commenter
noted its belief that the vast majority of orders entered by
institutional customers are with not-held instructions and the vast
majority of orders entered by retail investors are with held
instructions. See STA Letter at 4.
    \59\ See Wells Fargo Letter at 5; Markit Letter at 3 n.7;
Capital Group Letter at 3; Schwab Letter at 3; Ameritrade Letter at
2 n.2; KCG Letter at 4; FIF Addendum at 2.
    \60\ See SIFMA Letter at 3; see also Capital Group Letter at 2;
KCG Letter at 4.
    \61\ See FIF Letter at 2-3, 14-15.
---------------------------------------------------------------------------

    Several commenters also stated that basing the Rule 606(b)
disclosure requirements on whether an order is held or not held would
be straightforward and minimally burdensome because: Broker-dealers and
other market participants are very familiar with these order type
classifications; classifying orders as held or not held would be
consistent with current industry practice; and the terms held and not
held are common terms of usage in the securities markets.\62\ One of
these commenters stated that broker-dealers already must mark orders
that they execute as held or not held,\63\ and another commenter stated
that the held/not held order classifications are commonly recognized in
the FIX Protocol.\64\ Two commenters pointed out that the held and not
held order classifications are already utilized in the Commission's
definition of ``covered order'' in Rule 600(b)(15).\65\ One of these
commenters stated that not held orders are generally distinguished from
held orders in regulations and firms' monitoring processes, and
specifically noted that broker-dealers already characterize orders on a
held or not held basis to comply with Rule 605's covered order
requirement, OATS technical specifications, and other rules such as
FINRA Rule 5320.\66\
---------------------------------------------------------------------------

    \62\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \63\ See Capital Group Letter at 3.
    \64\ See Citadel Letter at 3.
    \65\ See SIFMA Letter at 3 and n. 4; Market Letter at 3 and n.
8.
    \66\ See Markit Letter at 3-4, 7.
---------------------------------------------------------------------------

    Two commenters objected to the held or not held analysis and stated
that the applicability of the new customer-specific disclosures should
not be based on order type because the held/not held classification is
within the control of the order sender.\67\ One commenter stated that
the held/not held order type-based distinction is an imprecise proxy
for the status of the underlying customer, would not cover all
institutional orders, and that the distinction may leave out many
smaller investment advisers that currently trade through or have some
portion of assets under management through ``retail'' channels.\68\
This commenter also stated that the distinction would allow for
potential gaming, and that amidst rising concerns with broker-dealers'
conflicts of interests, some institutional investors have increasingly
come to use held orders.\69\ Another commenter, however, understood
that some not held orders may come from retail customers, and that
institutional clients may send broker-dealers a small amount of held
orders, but nevertheless supported scoping the disclosures by the held
and not held order classifications.\70\
---------------------------------------------------------------------------

    \67\ See HMA Letter at 7; Dash Letter at 4.
    \68\ See HMA Letter II at 2-3.
    \69\ See id.
    \70\ See SIFMA Letter at 3; see also Markit Letter at 7-8;
Schwab Letter at 3; Letter from Manisha Kimmel, Chief Regulatory
Officer, Wealth Management, Thomson Reuters, dated September 26,
2016 (``Thomson Reuters Letter'') at 1; Citadel Letter at 3.
---------------------------------------------------------------------------

    Some commenters suggested that the applicability of the customer-
specific disclosures should be based on the type of the entity placing
the order.\71\ One commenter argued that this approach would be
preferable to an approach based on order type classification because
broker-dealers already must know whether their customers are
institutional investors.\72\ Another commenter stated that orders
should not be classified according to the unique order handling typical
of an entity, as that characteristic may change over time, whereas the
entity type itself remains constant.\73\
---------------------------------------------------------------------------

    \71\ See, e.g., ICI Letter at 6-7; MFA Letter at 3; Fidelity
Letter at 3; STA Letter at 4; CFA Letter at 8.
    \72\ See HMA Letter II at 2.
    \73\ See Better Markets Letter at 5.
---------------------------------------------------------------------------

    Most of the commenters that supported an entity-centric approach
suggested that the Commission rely on FINRA Rule 4512(c), which defines
the term ``institutional account'' for purposes of that rule, as a
source for such an approach.\74\ Two commenters also suggested as a
source FINRA Rule 2210(a)(4), which defines the term ``institutional
investor'' for purposes of that rule, and also incorporates the
definition of ``institutional account'' from FINRA Rule 4512(c).\75\
One commenter stated that, because all broker-dealers that handle
customer orders for equity securities are FINRA members, they should be
accustomed to using the standards supplied in FINRA's rules.\76\
---------------------------------------------------------------------------

    \74\ See ICI Letter at 6-7 n.19; MFA Letter at 3-4; Fidelity
Letter at 3; STA Letter at 4; CFA Letter at 8; Bloomberg Letter at
13; see also FIF Letter at 3.
    \75\ See MFA Letter at 3-4; ICI Letter at 6-7 n.19.
    \76\ See ICI Letter at 6-7 and n.19; see also CFA Letter at 8.
---------------------------------------------------------------------------

    Some commenters offered additional considerations or
recommendations regarding how an entity-based approach should be
crafted. For example, one commenter suggested that the new customer-
specific disclosures should apply to any order attributed to any entity
that is a ``large trader'' under Section 13(h) of the Exchange Act.\77\
Another commenter stated that institutional and retail investors should
be defined according to whether the investor is an entity or
individual.\78\
---------------------------------------------------------------------------

    \77\ See SSGA Letter at 1; see also 15 U.S.C. 78m(h). Another
commenter expressed concern that a large trader-based definition of
institutional order would result in considerable overlap among
retail customers that also are large traders under Rule 13h-1. See
STA Letter at 4. This is one of several examples of commenters
critiquing or supporting the views expressed by other commenters
regarding the definition of institutional order. See, e.g., IDC
Letter at 2 (supporting ICI Letter's recommendations on how to
expand the definition of ``institutional'' order); STA Letter at 4
(supporting remarks made in FIF Letter); Citadel Letter at 3 (noting
support for similar proposal from Blackrock Letter and ICI Letter);
Ameritrade Letter at 2 (noting commenter support for defining
institutional orders by the type of order submitted); HMA Letter II
at 2-3 (noting broad commenter support for not defining
institutional orders by dollar size).
    \78\ See Better Markets Letter at 5.
---------------------------------------------------------------------------

    In addition to the foregoing commenter recommendations, a few
commenters suggested that there should be no distinction between retail
and institutional customers for purposes of the new Rule 606(b)(3)
order handling reports and that all orders should be

covered by the Rule 606(b)(3) reports,\79\ or that retail and
institutional customers should receive the same disclosures.\80\ One
commenter stated that the goal with respect to both retail investor and
large institutional orders should be best execution.\81\
---------------------------------------------------------------------------

    \79\ See HMA Letter at 5; Dash Letter at 3; HMA Letter II at 1-
2; Letter from Abraham Kohen, President, AK Financial Engineering
Consultants, LLC, dated September 28, 2016 (``Kohen Letter'').
    \80\ See, e.g., Better Markets Letter at 5-7.
    \81\ See HMA Letter at 5.
---------------------------------------------------------------------------

iii. The Commission's Adopted Approach
    The Commission is not adopting a definition of ``institutional
order'' or an order dollar value-based approach to delineate the
applicability of new Rule 606(b)(3).\82\ Generally, the amendments to
Rule 606(b) are designed to apply required order handling disclosures
to any NMS stock order regardless of its dollar value and to require
more detailed disclosures regarding how broker-dealers exercise
discretion when handling and routing customers' NMS stock orders in
today's electronic markets. These disclosures are designed to provide
transparency to customers for whom the existing customer-specific
disclosures under Rule 606(b) are inapplicable or have become
inadequate. Upon further consideration and in light of the views
expressed by commenters, the Commission believes that these goals can
best be accomplished if the detailed, customer-specific, order handling
disclosures set forth in Rule 606(b)(3) generally apply to orders of
any dollar value for NMS stock that customers submit to their broker-
dealers on a ``not held'' basis. Accordingly, under Rule 606(b)(3), a
broker-dealer must provide the disclosures set forth therein, upon
customer request, to any customer that places, directly or indirectly,
one or more orders in NMS stock that are submitted on a not held basis
with the broker-dealer, subject to two de minimis exceptions discussed
below.\83\
---------------------------------------------------------------------------

    \82\ Relatedly, as discussed below, the Commission is not
renaming the term ``customer order'' as ``retail order'' in Rule
600(b). See infra Section III.B.1.
    \83\ See infra Section III.A.1.b.iv; see also Rule 606(b)(3).
Consistent with what was proposed, Rule 606(b)(3) applies only to
orders for NMS stocks and does not include orders in NMS securities
that are options contracts. Some commenters supported this approach.
See STA Letter II at 2-3; FIF Letter at 12. Other commenters
recommended that options be included in the amended order handling
disclosures being adopted today. See Dash Letter at 1-2; HMA Letter
at 12; Markit Letter at 14. The Commission continues to believe
that, as noted in the Proposing Release, due to differences in the
current market structure for NMS securities that are options
contracts--in particular the lack of an over-the-counter market in
listed options--the same market structure complexities that exist
for NMS stocks do not exist at this time for NMS securities that are
options contracts to a degree that warrants the more detailed order
handling disclosures proposed herein. See Proposing Release, supra
note 1, at 49444 n.101.
---------------------------------------------------------------------------

    We believe that basing the applicability of this requirement on
whether orders are held or not held serves the purposes of the
disclosures. A broker-dealer must attempt to execute a held order
immediately; a not held order instead provides the broker-dealer with
price and time discretion in handling the order. As a result, the Rule
606(b)(3) disclosures apply to NMS stock orders for which customers
have provided their broker-dealers with price and time order handling
discretion, and do not apply to orders that the broker-dealer must
attempt to execute immediately. The Commission believes that since the
disclosures are designed to provide greater transparency into a broker-
dealer's exercise of order handling discretion, they should be provided
for orders for which broker-dealers actually exercise such discretion.
Focusing the customer-specific report in this way will better enable
customers to understand their broker-dealers' order routing decisions
and the extent to which those decisions may be affected by conflicts of
interest or create information leakage. Customers also will be better
able to assess their broker-dealers' skill and effectiveness in
handling their orders and achieving satisfactory executions.
    Importantly, as noted by multiple commenters, broker-dealers and
other market participants are familiar with the held and not held order
type classifications, classifying orders as held or not held would be
consistent with current industry practice, and the terms ``held'' and
``not held'' are common terms of usage in the securities markets.\84\
Indeed, broker-dealers already utilize the ``held'' and ``not held''
order classifications to comply with FINRA OATS technical
specifications,\85\ and existing Commission rules, such as the
definition of ``covered order'' in Rule 600(b), rely on market
participants' ability to distinguish between ``held'' and ``not held''
orders. As such, the Commission is not adding definitions of these
terms to Rule 600(b). The Commission intends for broker-dealers to rely
on their current methods for classifying orders as ``held'' or ``not
held'' for purposes of complying with Rule 606. By leveraging the
established not held order classification, Rule 606(b)(3)'s
applicability should be easily understood by market participants and
the implementation burdens broker-dealers encounter in order to comply
with Rule 606(b)(3) should be lessened to the extent that their order
handling and routing systems are already configured for not held order
classifications.
---------------------------------------------------------------------------

    \84\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \85\ See FINRA OATS Reporting Technical Specifications,
September 12, 2016, at pp. 4-2 to 4-3, available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.
---------------------------------------------------------------------------

    Further, under the Commission's adopted approach, any customer is
entitled to receive the Rule 606(b)(3) disclosures for their not held
NMS stock orders, subject to two de minimis exceptions. The Commission
is not adopting definitions of ``institutional order'' or ``retail
order,'' and the adopted amendments make no such distinction, based on
dollar value of the order or otherwise. In this regard, the
Commission's adopted approach is consistent with comments that stated
that no such distinction is necessary. Under final Rule 606(b)(3),
customers may request the disclosures for any not held NMS stock orders
that they submit (subject to the de minimis exceptions, discussed
below), including not held NMS stock orders for less than $200,000 in
market value, which would have been defined as ``retail orders'' and
not subject to the Rule 606(b)(3) disclosures under the Proposal. The
Commission believes it is appropriate to make the Rule 606(b)(3)
disclosures available for all not held NMS stock orders (subject to the
de minimis exceptions) so customers have information sufficient to
evaluate the broker-dealers that are exercising order handling and
routing discretion.
    The Commission believes that it is appropriate for broker-dealers
to provide the Rule 606(b)(3) disclosures to those customers for whom
the existing customer-specific order routing disclosures in Rule 606(b)
are inapplicable or inadequate. Specifically, the Rule 606(b)(3)
disclosures are particularly suited to customers that submit not held
NMS stock orders because the disclosures set forth detailed order
handling information that is useful in evaluating how broker-dealers
exercise the discretion attendant to not held orders and, in the
process, carry out their best execution obligations and manage the
potential for information leakage and conflicts of interest. Moreover,
many of the commenters that criticized the Commission's proposed
definition of institutional order suggested that all or nearly all of
an institutional customer's orders should be covered by the Rule
606(b)(3) disclosures regardless of order

dollar value. Some of these commenters supported accomplishing this via
an entity-based approach to Rule 606(b)(3)'s applicability,\86\ which
the Commission has not chosen to adopt for reasons set forth below, and
some of these commenters supported the adopted approach.\87\ By using
the not held order distinction rather than the proposed $200,000
threshold, Rule 606(b)(3) as adopted will cover more order flow than
would have been covered under the Proposal.\88\ In addition, by using
the not held order distinction, Rule 606(b)(3) as adopted will likely
result in more Rule 606(b)(3) disclosures for order flow that is
typically characteristic of institutional customers--not retail
customers--and will likely cover all or nearly all of the institutional
order flow.
---------------------------------------------------------------------------

    \86\ See supra note 58.
    \87\ See supra note 56.
    \88\ See infra Section V.C.1.a.i.3.
---------------------------------------------------------------------------

    While some commenters suggested that the new customer-specific
disclosures in Rule 606(b)(3) should be available to all orders without
any limitation based on entity type or order classification or
otherwise, the Commission believes that it is appropriate to
differentiate between not held orders and held orders for purposes of
order handling information disclosure because broker-dealers generally
handle not held orders differently from held orders due to the
discretion they are afforded with not held orders but not with held
orders.\89\ As a result, the information pertinent to understanding
broker-dealers' order handling practices for not held orders is not the
same as for held orders.
---------------------------------------------------------------------------

    \89\ See, e.g., Schwab Letter at 3.
---------------------------------------------------------------------------

    Indeed, in recent years, routing and execution practices for not
held orders have become more automated, dispersed, and complex.\90\ In
today's electronic markets, broker-dealers' commonly handle such orders
by using sophisticated institutional order execution algorithms and
smart order routing systems that decide the timing, pricing, and
quantity of orders routed to a number of various trading centers, and
that may divide a large ``parent'' order into many smaller ``child''
orders, and route the child orders over time to different trading
centers in accordance with a particular strategy.\91\ The order
handling disclosures required by Rule 606(b)(3) are designed to take
this into account and provide relevant disclosures that, in the
Commission's view, will enable customers to better assess their broker-
dealers' order execution quality and order handling ability overall and
methods for complying with best execution obligations, as well as, more
specifically, the degree to which their broker-dealers' order routing
practices may involve information leakage or the potential for
conflicts of interest.
---------------------------------------------------------------------------

    \90\ See supra Section I; see also Proposing Release, supra note
1, at 49436.
    \91\ See id.
---------------------------------------------------------------------------

    By contrast, the Commission's concern regarding how broker-dealers
handle held orders is less about the difficulties posed by more
automated, dispersed and complex order routing and execution practices.
Rather, the Commission believes that enhanced disclosures for held
orders should provide customers with more detailed information
including with respect to the financial inducements that trading
centers may provide to broker-dealers to attract immediately executable
trading interest, as opposed to the different information geared
towards not held NMS stock orders that is set forth in Rule 606(b)(3).
As noted above and discussed below, the quarterly public disclosures
required under Rule 606(a) are indeed being enhanced to provide more
detail regarding financial inducements to broker-dealers, and the
Commission believes that these disclosures are more appropriately
tailored to the characteristics of held order flow and the needs of
customers that use held orders.\92\
---------------------------------------------------------------------------

    \92\ As noted supra and infra, the Commission is also is
amending Rule 606(a) such that it applies to held orders of any size
in NMS stock.
---------------------------------------------------------------------------

    Also, the Commission does not disagree with one commenter's
statement that best execution should be the goal for orders from both
institutional customers and retail investors, and that both types of
investors deserve to know how their orders are routed and executed.\93\
Best execution is the broker-dealer's legal obligation for all orders,
whether from retail or institutional customers.\94\ While meeting their
best execution obligations, broker-dealers frequently may choose to
handle orders in a variety of different ways and choose among a host of
available order routing destinations. Because the choices broker-
dealers make in this regard are informed by the type of order at hand,
for the reasons stated above, the Commission believes that separate
disclosures for not held orders and held orders are the better way to
help customers understand how their broker-dealers are handling and
routing their orders and how well their broker-dealers are performing
these functions. While this commenter also stated that the Proposal's
reforms for retail customers are inadequate, for the reasons stated
above, as well as in Section III.B infra, the Commission disagrees.
---------------------------------------------------------------------------

    \93\ See HMA Letter at 5.
    \94\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37538 (June 29, 2005) (``Regulation NMS Adopting
Release''). FINRA has codified a duty of best execution into its
rules. See FINRA Rule 5310.
---------------------------------------------------------------------------

    As noted above, other commenters suggested basing Rule 606(b)(3)'s
applicability on the characteristics of the customer that submits the
order to the broker-dealer. This entity-centric approach suggested by
commenters would require the Commission to set forth the types of
customers that may request the Rule 606(b)(3) disclosures for their NMS
stock orders, but would not entail any differentiation in the types of
orders covered by Rule 606(b)(3). As a result, NMS stock orders from
qualifying customers that are submitted on a held basis would be
covered by the Rule 606(b)(3) disclosures. This is a sub-optimal
outcome. Broker-dealers must attempt to execute held orders immediately
and are afforded no discretion in handling them; therefore, applying
the Rule 606(b)(3) disclosures to held orders would not provide insight
into how a broker-dealer exercises order handling and routing
discretion. Moreover, including a customer's held orders in the Rule
606(b)(3) report could obfuscate the reports' depiction of the
discretion actually exercised by the broker-dealer with respect to not
held orders and undermine the very purpose of these disclosures.
    An entity-based approach also would require the Commission to
prescribe institutional status criteria that customers must fit in
order to be entitled to receive the disclosures. A risk with such an
approach is that the criteria could be over-inclusive or under-
inclusive. The Commission is particularly concerned about potential
under-inclusiveness because customers that do not fit the criteria
would not be entitled to receive the disclosures. To mitigate this
risk, the Commission, as suggested by commenters, could leverage
certain existing rules that already set forth institutional status
criteria. For example, several commenters suggested as sources the
definitions of ``institutional account'' and ``institutional investor''
in FINRA Rules 2210(a)(4) and 4512(c), respectively.\95\ But these
definitions serve a purpose for the noted FINRA rules that is different
from the purpose similar prescribed criteria would serve

for the purpose of Rule 606(b)(3). Under FINRA Rule 4512, a broker-
dealer is not required to obtain for ``institutional accounts'' certain
additional information that it is required to obtain for accounts that
are not ``institutional accounts.'' \96\ Likewise, under FINRA Rule
2210(a)(4), a broker-dealer is subject to less prescriptive review
requirements for ``institutional communications'' that are solely to
``institutional investors'' than it is subject to for other, ``retail
communications.'' \97\ Under both of these FINRA rules, exclusion from
the defined ``institutional'' criteria triggers a more stringent due
diligence or review obligation for the broker-dealer. The opposite
would be true under an entity-centric approach to Rule 606(b)--if the
institutional status criteria adopted by the Commission were not met,
the market participant would be excluded from the more detailed
disclosure regime.\98\
---------------------------------------------------------------------------

    \95\ See supra notes 74 and 75 and accompanying text.
    \96\ See FINRA Rule 4512(a)(2).
    \97\ See FINRA Rule 2210.
    \98\ One commenter suggested that the ``large trader''
designation under Section 13(h) of the Exchange Act serve as the
source for the Commission's institutional status criteria (see SSGA
Letter at 1, supra note 77). This approach would, however, include
held orders from large traders within the required disclosures.
Moreover, to qualify as a large trader under Rule 13h-1, a person
must meet daily or monthly aggregate share volume or market value
thresholds for transactions in NMS securities. See 17 CFR 242013h-1.
Therefore, such an approach would exclude orders from an
institutional customer that does not meet the designated thresholds.
In addition, because the large trader definition is based on
transactions in NMS securities, it takes into account transactions
in option contracts that are NMS securities whereas the Commission's
amendments to Rule 606(b) apply only to orders for NMS stock.
Another commenter stated that institutional and retail investors
should be defined according to whether the investor is an entity or
individual (see Better Markets Letter at 5, supra note 78). This
approach similarly would include held orders within the Rule
606(b)(3) disclosures. Further, certain natural persons may take on
the characteristics of institutions in their trading behavior and
utilize not held orders to a significant degree, but they would be
categorically excluded from receiving the Rule 606(b)(3) disclosures
for such orders under an approach based on an individual versus
entity distinction.
---------------------------------------------------------------------------

    This categorical exclusion of some customer types from Rule
606(b)(3)'s purview is avoided under the Commission's adopted approach.
By basing the application of Rule 606(b)(3) on the held and not held
order classifications, no customer is categorically excluded from
receiving the Rule 606(b)(3) disclosures. The Commission acknowledges
that some commenters stated that an entity-centric approach to Rule
606(b)(3)'s coverage based on the noted FINRA rules would coincide with
familiar industry standards regarding the types of market participants
that are considered to be ``institutional.'' \99\ But adapting the
FINRA rules for the Commission's purposes in Rule 606(b) would present
challenges. For example, private funds such as hedge funds may not be
covered by the ``institutional'' definitions in FINRA Rules 2210 or
4512,\100\ yet in the Proposing Release the Commission noted, by way of
example, that ``[a]n institutional customer includes . . . hedge
funds,'' among others.\101\ If the Commission relied solely on the
FINRA rules, contrary to the Commission's contemplation in the
Proposing Release, hedge funds may not be defined as ``institutional''
for Rule 606(b) purposes and would not be entitled to the more detailed
Rule 606(b)(3) disclosures. Of course, the Commission could modify the
criteria used in the FINRA rules to better suit its purposes here, but
even then there would still be a risk of under-inclusiveness in the
adapted criteria. There also could be new types of market participants
that evolve and that trade in an institutional manner, but if they were
not covered by the Commission's prescribed institutional status
criteria, they would not be entitled to receive the Rule 606(b)(3)
disclosures under the rule.
---------------------------------------------------------------------------

    \99\ See HMA Letter II at 2; CFA Letter at 8; STA Letter at 4.
    \100\ FINRA Rule 4512(c)(3) contains a catch-all provision that
includes within the definition of ``institutional account'' the
account of any person with at least $50 million in total assets. An
entity that is not otherwise expressly covered by FINRA Rule
4512(c)(1) or (2), such as a hedge fund for example, is not covered
by the definition if it has total assets of less than $50 million.
As such, if the Commission were to rely on the FINRA rules as
suggested by some commenters, smaller entities with less than $50
million in total assets may be excluded from Rule 606(b)(3) even
though they may have less bargaining power than their larger
competitors and therefore may benefit most from required,
standardized order routing disclosures. There also could be
disparate results--for example, a registered investment company with
less than $50 million in assets would be covered because it is
expressly identified in the rule, while a hedge fund with less than
$50 million in assets would not be covered.
    \101\ See Proposing Release, supra note 1, at 49433, n.1.
---------------------------------------------------------------------------

    Moreover, as noted above, commenters also highlighted the industry
familiarity with the not held order classification.\102\ And, unlike
the ``institutional'' definitions in the referenced FINRA rules, which
apply in contexts completely different from broker-dealer order
handling, the not held order classification is already used by broker-
dealers specifically for order handling purposes, among other things.
For example, FINRA Rule 7440 requires broker-dealers to record certain
information, including any ``special handling requests,'' when an order
is received, originated, or transmitted.\103\ FINRA's OATS Reporting
Technical Specifications state that, when a FINRA member originates or
receives an order and then subsequently transmits that order to another
desk or department within the firm, the member is required to record
and report to OATS, among other things, ``special handling instructions
that are communicated by the receiving department to a desk or other
department, such as `Not Held.' '' \104\
---------------------------------------------------------------------------

    \102\ See Citadel Letter at 3; Markit Letter at 3, 7-8; KCG
Letter at 4; Capital Group Letter at 2-3; SIFMA Letter at 3.
    \103\ See FINRA Rule 7440(b)(15) and (c)(1)(G).
    \104\ See FINRA OATS Reporting Technical Specifications,
September 12, 2016, at pp. 4-2 to 4-3, available at http://www.finra.org/sites/default/files/TechSpec_9122016.pdf.
---------------------------------------------------------------------------

    Basing the applicability of Rule 606(b)(3) on customers' not held
NMS stock orders is, in the Commission's view, the most tailored
approach to aligning the orders covered by Rule 606(b)(3) with the
Commission's intent for the rule to provide more detailed disclosure
and enhanced transparency regarding how broker-dealers handle NMS stock
orders, and to provide such transparency to customers for whose NMS
stock orders the current disclosure regime is inapplicable or
inadequate. This approach also is likely to avoid the problems inherent
in an entity-centric approach. Further, many commenters, as well as
EMSAC, supported basing Rule 606(b)(3)'s application on the not held
order classification. Accordingly, under Rule 606(b)(3), a broker-
dealer must provide the disclosures set forth therein, upon customer
request, to any customer that places, directly or indirectly, one or
more orders in NMS stock that are submitted on a not held basis with
the broker-dealer, subject to the de minimis exceptions discussed
below.
iv. De Minimis Exceptions
    The Commission is adopting in new Rules 606(b)(4) and (b)(5) two de
minimis exceptions from Rule 606(b)(3)'s requirements, either of which
excepts a broker-dealer from the Rule 606(b)(3) requirements. One of
the exceptions focuses on the broker-dealer firm and the other focuses
on the individual customer. Specifically, a broker-dealer is not
obligated to provide the Rule 606(b)(3) report: (i) To any customer if
not held NMS stock orders constitute less than 5% of the total shares
of NMS stock orders that the broker-dealer receives from its customers
over the prior six months,\105\

or (ii) to a particular customer if that customer trades through the
broker-dealer, on average each month for the prior six months, less
than $1,000,000 of notional value of not held orders in NMS stock.\106\
These de minimis exceptions are designed such that the Rule 606(b)(3)
requirements apply when a broker-dealer's order flow consists primarily
of not held orders for NMS stock and when a customer's trading profile
is such that it relies heavily on the discretion of the broker-dealer
and so would sufficiently benefit from the Rule 606(b)(3) disclosures.
---------------------------------------------------------------------------

    \105\ See Rule 606(b)(4). Under the rule, the first time a
broker-dealer meets or exceeds the 5% threshold, it has a grace
period of up to three calendar months to provide the Rule 606(b)(3)
report. There is no such grace period for compliance after the first
time the threshold is met or exceeded. See id.
    \106\ See Rule 606(b)(5). As discussed below, however, when
either de minimis exception applies, the broker-dealer still must
provide, if requested, the Rule 606(b)(1) customer-specific
disclosures for not held NMS stock orders that it receives from
customers. See infra Section III.A.1.b.vi.
---------------------------------------------------------------------------

    The Commission received several comments in response to its
questions regarding a potential de minimis exception from customer-
specific reporting under proposed Rule 606(b)(3). Multiple commenters
supported an exception from Rule 606(b)(3) reporting for broker-dealers
that have either a de minimis level of institutional customers or a de
minimis amount of institutional trading activity as measured by
executed shares as a percentage of all executed shares.\107\ These
commenters also supported disclosure based on whether an order is held
or not held and generally discussed the reasoning for a de minimis
exception in that context.\108\ Commenters also suggested that firms
that receive less than 5% of orders from institutions should be exempt
from requirements to provide disclosures for institutional orders, both
at the individual investor level and in the aggregate.\109\ One
commenter stated that the de minimis threshold should be set at 5% of
not held orders received.\110\ Two commenters noted that there
currently is a 5% threshold in Rule 606(a) in connection with the
rule's requirement that broker-dealers disclose the identity of any
venue to which 5% or more of non-directed orders were routed for
execution.\111\ One of these commenters stated that the purpose of a de
minimis exception is to provide relief so that reporting obligations
for a given entity more closely match its actual core business and
targeted customer profile.\112\
---------------------------------------------------------------------------

    \107\ See, e.g., FIF Letter at 5, 10; STA Letter at 6; Citadel
Letter at 3.
    \108\ See, e.g., FIF Letter at 5, 10; STA Letter II at 2;
Citadel Letter at 3; Thomson Reuters Letter at 1; Ameritrade Letter
at 2.
    \109\ See STA Letter II at 2; Ameritrade Letter at 2; Wells
Fargo Letter at 5. See also Letter from Jeff Brown, Senior Vice
President, Legislative and Regulatory Affairs, Charles Schwab & Co.
Inc., dated October 30, 2018 (``Schwab Letter II'').
    \110\ See Schwab Letter II at 2.
    \111\ See Ameritrade Letter at 2; Wells Fargo Letter at 5.
    \112\ See Wells Fargo Letter at 5. See also Letter from Stephen
John Berger, Managing Director, Government and Regulatory Policy,
Citadel Securities, dated October 23, 2018 (``Citadel Letter II'')
at 1-2 (noting that the 5% threshold suggested by other commenters
should ensure that smaller broker dealers are not adversely affected
by the new disclosure requirement, and noting that a threshold based
on a percentage of orders or shares received could potentially be
set lower than a threshold based on a percentage of executed
shares).
---------------------------------------------------------------------------

    Some commenters stated that the costs incurred by retail broker-
dealers to create systems to generate the Rule 606(b)(3) reports would
exceed any benefits.\113\ One of these commenters stated that the Rule
606(b)(3) statistics are not relevant to retail-oriented brokers'
customer base and would provide them no added benefit, and that
requiring retail broker-dealers to generate the statistics would be an
onerous task with significant added expense.\114\ Two commenters
recommended an exemption from Rule 606(b)(3) reporting for firms with a
de minimis amount of not held order flow in light of the fact that
retail customers occasionally submit not held orders.\115\ One
commenter believed that, if broker-dealers with a de minimis amount of
not held orders are exempted, the majority of the exemptions would be
for retail brokers.\116\
---------------------------------------------------------------------------

    \113\ See Ameritrade Letter at 2; Citadel Letter at 3; FIF
Letter at 5, 10.
    \114\ See FIF Letter at 5. See also Markit Letter at 17.
    \115\ See Thomson Reuters Letter at 1; Schwab Letter at 3.
    \116\ See STA Letter at 8-9.
---------------------------------------------------------------------------

    Other commenters did not support a de minimis exception even if a
broker-dealer has limited institutional customer order flow, so that
institutional customers can compare order routing among all broker-
dealers.\117\ One commenter stated that, if a small broker-dealer is
able to effectively manage orders from institutional customers in the
current complex market environment, it should be able to provide
customers with information on their order routing practices.\118\
---------------------------------------------------------------------------

    \117\ See, e.g., Bloomberg Letter at 15; MFA Letter at 4-5. See
also Markit Letter at 28.
    \118\ See Capital Group Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that a de minimis exception from Rule
606(b)(3) reporting, as set forth in Rule 606(b)(4), presents
advantages for certain broker-dealers. Broker-dealers handle different
types of order flow, and not all broker-dealers handle a significant
amount of not held NMS stock order flow. Indeed, some broker-dealers
focus mainly on servicing customers that use held orders in NMS stock,
and as such, typically do not handle not held order flow in NMS stock.
The Commission believes that it is appropriate to relieve broker-
dealers with minimal or zero not held order flow from the obligation to
incur the costs associated with having the capability to provide the
new Rule 606(b)(3) disclosures for not held NMS stock orders. The
Commission does not believe that it would be appropriate to require
every broker-dealer, regardless of its customer base and core business,
to be compelled to incur the costs required to create the systems and
processes necessary to generate the Rule 606(b)(3) reports. The
Commission does not intend to introduce a wholesale change in order
handling and routing disclosure requirements such that broker-dealers
whose order flow consists almost entirely of held orders must also
become prepared to provide disclosures that focus on trading activity
characteristics of not held orders.
    In the Commission's view, the potential benefits of the Rule
606(b)(3) disclosures for customers of such broker-dealers do not
justify the costs to such broker-dealers of developing the necessary
systems and mechanisms for providing the disclosures. There would be no
expected benefits of Rule 606(b)(3) in circumstances where a broker-
dealer does not currently handle any not held NMS stock order flow.
Nevertheless, absent a de minimis exception, such a broker-dealer could
feel compelled to incur the costs and burdens associated with being
able to provide the Rule 606(b)(3) disclosures in order to ensure
compliance with the rule should it receive not held orders in the
future. The Commission believes that it is appropriate to relieve any
such broker-dealers of these potential costs and unnecessary burdens.
    Likewise, there would be only limited benefits of Rule 606(b)(3) in
circumstances where broker-dealers handle a minimal amount of not held
orders, and the Commission does not believe that such benefits would
justify the costs to broker-dealers in these circumstances. While some
commenters opposed a de minimis exemption on grounds that institutional
customers should be able to compare orders across all broker-dealers
and that broker-dealers capable of handling institutional customer
orders should be able to provide the Rule 606(b)(3)

information,\119\ the Commission believes that these comments rest on
an unlikely premise that it is broker-dealers that handle primarily
institutional customer orders that would be excepted under Rule
606(b)(4). To the contrary, consistent with other commenters'
views,\120\ the Commission expects the de minimis exceptions to be
relevant mainly in the context of broker-dealers that handle almost
entirely held orders from customers but may occasionally handle not
held orders from customers. Indeed, commenters noted that a small
percentage of retail customers may submit not held orders, whether for
purposes of working an order in illiquid securities or for other
purposes. In these circumstances, the Commission believes that broker-
dealers that focus on servicing such customers should not be required
to incur the costs or burdens associated with building the systems and
other capabilities necessary to provide the Rule 606(b)(3) disclosures
when they are likely to handle not held orders only occasionally and
separate from their core business of handling held orders.\121\
---------------------------------------------------------------------------

    \119\ See MFA Letter at 4-5; Capital Group Letter at 4.
    \120\ See, e.g., Ameritrade Letter at 2; Citadel Letter at 3.
    \121\ See Wells Fargo Letter at 5.
---------------------------------------------------------------------------

    Accordingly, the firm-level de minimis exception to Rule 606(b)(3),
as expressed in Rule 606(b)(4), focuses on the broker-dealer's overall
order flow across all of its customers. The Commission believes that
the scope of this exception will appropriately cover most broker-
dealers that handle almost entirely held order flow. A broker-dealer
that handles not held NMS stock order flow that is less than 5% of the
total shares of NMS stock orders in a six calendar month period that it
receives from its customers most likely does not make, as a matter of
course, the routing decisions for which Rule 606(b)(3) is designed to
provide enhanced transparency. 95% or more of such a broker-dealer's
NMS stock order flow would be held orders. The Commission does not
believe that it is appropriate to require such a broker-dealer to
expend the effort and incur the expense necessary to be able to provide
disclosures that are primarily aimed at order handling that is rarely,
if ever, employed by the broker-dealer.
    The Commission is adopting a firm-level de minimis exception that
is based on the ``percentage of shares of not held orders in NMS stocks
the broker or dealer received from its customers'' (emphasis added)
rather than the percentage of not held orders in NMS stocks or other
measures suggested by commenters.\122\ The purpose of the firm-level de
minimis exception is to except from the Rule 606(b)(3) disclosure
requirements those broker-dealers that receive zero or minimal not held
NMS stock order flow from their customers and whose core business does
not involve handling or routing such order flow. The Commission
believes that the percentage of shares of not held orders is an
appropriate measure for the calculation of the firm-level de minimis
exception because it more accurately reflects the nature of a broker-
dealer's business activities than other suggested approaches.
---------------------------------------------------------------------------

    \122\ See, e.g., Schwab Letter II at 2.
---------------------------------------------------------------------------

    The other methods that commenters suggested for calculating a firm-
level de minimis threshold--e.g., based on the percentage of not held
orders (not shares) in NMS stocks--are in the Commission's view less
accurate indicia of the broker-dealers to whom this aspect of Rule 606
is intended to apply and therefore would result in a less tailored
exception. For example, the use of a ``per order'' threshold for the
firm-wide de minimis exception would result in the equal treatment for
purposes of a firm's de minimis calculation of, on the one hand, a
single order for 10 shares of Corporation X, and on the other hand, a
single order for 100,000 shares of Corporation X. The Commission
believes that in this example, the two orders should not be afforded
equal treatment and that the order for 100,000 shares is more
indicative of the broker-dealer's business and thus should be given
greater weight than the order for 10 shares.
    Indeed, in the aforementioned example, the broker-dealer would
likely need to apply more discretion when executing the order for
100,000 shares (to minimize potential information leakage and price
impact) than for an order for 10 shares. As discussed above, the new
Rule 606(b)(3) disclosures are intended to provide customers with
detailed information concerning how broker-dealers exercise discretion,
particularly for larger orders (including those broken up into several
smaller child orders). Thus, if the firm-level de minimis threshold
were calculated in a manner that did not account for shares received,
there would be greater risk that a broker-dealer exercising discretion
in handling larger orders, potentially as a meaningful portion of its
business, would not be subject to the new Rule 606(b)(3) disclosure
requirement.
    As noted below, Commission supplemental staff analysis found that
among 342 broker-dealers that receive not held orders from customers,
about 8% (28 broker-dealers) would receive a de minimis exception from
Rule 606(b)(3) requirements pursuant to Rule 606(b)(4).\123\ 23 of the
28 broker-dealers that would be eligible for the de minimis exception
receive not held orders less than 2.5% of the total shares of their
orders in the sample and five of the 28 broker-dealers receive not held
orders greater or equal to 2.5% and less than 5% of the total shares of
their orders in the sample.\124\ Thus, the 5% threshold in Rule
606(b)(4) creates a narrow exception from Rule 606(b)(3) among broker-
dealers that receive not held orders from customers and would allow for
a reasonably small increase in not held order flow as a percentage of
total order flow before one of these broker-dealers would be subject to
the requirements of Rule 606(b)(3). Those broker-dealers covered by the
exception likely handle not held NMS stock order flow only occasionally
and separate from their core business, and therefore, in the
Commission's view, should not be subject to the requirements of Rule
606(b)(3). In addition, some commenters that supported a firm-level de
minimis exception specifically suggested that the threshold be set at
the 5% level.\125\ Accordingly, the Commission believes that the 5%
threshold for the firm-level de minimis exception is reasonable given
the goals of the rule.
---------------------------------------------------------------------------

    \123\ See infra Section V.C.1.a.ii.
    \124\ See id.
    \125\ See supra note 109.
---------------------------------------------------------------------------

    A broker-dealer is covered by the firm-level de minimis exception
as long as its customer not held NMS stock order flow continues to be
less than the 5% firm-level threshold. A broker-dealer is no longer
excepted from the purview of Rule 606(b)(3) once and as long as it
meets or surpasses the firm-level threshold of the de minimis
exception. Specifically, when a broker-dealer has equaled or exceeded
the firm-level threshold, it must comply with Rule 606(b)(3) for at
least six calendar months (``Compliance Period'') regardless of the
volume of not held NMS stock orders the broker-dealer receives from its
customers during the Compliance Period.\126\ Therefore, during the
Compliance Period, the broker-dealer must provide the Rule 606(b)(3)
report to a customer for any of the customer's not held NMS stock
orders submitted to the broker-dealer during the Compliance Period
(subject to the customer-level de minimis exception set forth in Rule
606(b)(5)). The Compliance Period begins the first

calendar day of the next calendar month immediately following the end
of the six calendar month period for which the broker-dealer equaled or
exceeded the firm-level threshold, unless it is the first time the
broker-dealer has equaled or exceeded the threshold.\127\ The first
time a broker-dealer equals or exceeds the firm-level threshold, there
is a grace period of three calendar months before the Compliance Period
begins and the broker-dealer must comply with Rule 606(b)(3)
requirements.\128\ The customer is not entitled to receive Rule
606(b)(3) reports for orders handled during the grace period, as the
grace period is not part of the Compliance Period. After the three
calendar month grace period, beginning the first calendar day of the
fourth calendar month after the end of the six calendar month period
for which the broker-dealer equaled or exceeded the firm-level
threshold, the broker-dealer must provide the Rule 606(b)(3) report
prospectively for not held NMS stock orders submitted by customers from
that date through the next six calendar months.
---------------------------------------------------------------------------

    \126\ See Rule 606(b)(4).
    \127\ See id.
    \128\ See id.
---------------------------------------------------------------------------

    The Commission believes that the limited three-month grace period
is appropriate because it will allow a firm time to come into
compliance with the Rule 606(b)(3) requirements when its not held NMS
stock order flow crosses the Rule 606(b)(4) firm-level de minimis
threshold for the first time. The grace period affords a broker-dealer
time to develop the systems and processes and organize the resources
necessary to generate the Rule 606(b)(3) reports. At the same time,
should such a broker-dealer subsequently fall below the de minimis
threshold, the Commission believes that no such grace period for Rule
606(b)(3) is necessary if and when that broker-dealer's not held NMS
stock order flow again meets or crosses the firm-level de minimis
threshold such that the broker-dealer is again subject to the Rule
606(b)(3) requirements. The broker-dealer should already have developed
the necessary systems and processes for providing the Rule 606(b)(3)
report in connection with its subjection to Rule 606(b)(3).\129\
---------------------------------------------------------------------------

    \129\ A broker-dealer whose not held NMS stock order flow from
its customers equals or exceeds the five percent threshold must be
able to provide the Rule 606(b)(3) reports to its customers
beginning on the compliance date for these rule amendments. As such,
broker-dealers will need to determine whether their customer not
held NMS stock order flow equaled or exceeded the 5% threshold for
the six calendar month period that ends in the calendar month that
includes the effective date of these rule amendments. Since the
compliance date for these rule amendments is 180 days after
publication in the Federal Register, and since the effective date is
60 days after Federal Register publication, broker-dealers that
equaled or exceeded the 5% threshold during the six calendar month
period ending in the calendar month that includes the effective date
will have nearly four months between the effective date and
compliance date to prepare to provide the Rule 606(b)(3) reports.
---------------------------------------------------------------------------

    Rule 606(b)(4) requires compliance with Rule 606(b)(3) for ``at
least'' six calendar months for a broker-dealer that equals or exceeds
the firm-level de minimis threshold. The Commission believes that it is
appropriate to require a minimum Compliance Period of six calendar
months in order to coincide with the six-month timeframe of Rule
606(b)(3). Customers of a broker-dealer that is or becomes subject to
Rule 606(b)(3) therefore will be able to request a Rule 606(b)(3)
report that contains at least one full time period of disclosures
contemplated by Rule 606(b)(3).\130\ There is no maximum period of time
that a broker-dealer may be subject to Rule 606(b)(3)--a broker-dealer
that consistently receives not held NMS stock orders from its customers
at a rate that equals or exceeds the 5% threshold will be required to
comply with Rule 606(b)(3) month after month. Rule 606(b)(4) is
designed to require broker-dealer compliance with Rule 606(b)(3) for as
long as the broker-dealer's not held NMS stock order flow from its
customers equals or exceeds the 5% threshold, subject to the minimum
Compliance Period of six calendar months.
---------------------------------------------------------------------------

    \130\ As noted above, a broker-dealer is not required to provide
the Rule 606(b)(3) report for orders received when the broker-dealer
was not subject to Rule 606(b)(3). So, for example, a broker-dealer
that is subject to Rule 606(b)(3) as of June 1 would be required to
provide the Rule 606(b)(3) information for not held NMS stock orders
received from a customer on June 1 through at least November 30 of
that calendar year (subject to the customer-level de minimis
exception and a three-month grace period if first time the firm is
required to provide a report pursuant to Rule 606(b)(3)). A customer
could request a Rule 606(b)(3) report prior to the end of that
period, but the report would only be required to include disclosures
as of June 1 (if there is no three-month grace period).
---------------------------------------------------------------------------

    Rule 606(b)(4) also is designed to enable a broker-dealer that is
subject to Rule 606(b)(3) for six calendar months (or longer)
subsequently to avail itself of the firm-level de minimis exception if
its not held NMS stock order flow no longer equals or exceeds the 5%
threshold. Specifically, under Rule 606(b)(4), if, at any time after
the end of the Compliance Period, the broker-dealer's not held NMS
stock order flow falls below the 5% threshold for the prior six
calendar months, the broker-dealer is not required to comply with Rule
606(b)(3), except with respect to orders received during the Compliance
Period.\131\ Thus, after the broker-dealer's initial Compliance Period,
Rule 606(b)(4) provides for a rolling month-to-month assessment of
whether the broker-dealer must continue to comply with Rule 606(b)(3)
or may avail itself of the Rule 606(b)(4) de minimis exception.
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    \131\ See Rule 606(b)(4). An example is set forth in the
paragraph below.
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    For example, suppose a broker-dealer has equaled or exceeded the
firm-level threshold and therefore must comply with Rule 606(b)(3) for
a six calendar month period that begins on January 1 and ends on June
30 (assuming this Compliance Period started after a three-month grace
period, if this was the first time the broker-dealer has had to comply
with Rule 606(b)(3)). If, in the beginning of July, the broker-dealer
determines that its not held NMS stock order flow equaled or exceeded
the threshold for January 1 through June 30, the broker-dealer must
continue to comply with Rule 606(b)(3) for July. If, on the other hand,
the broker-dealer determines that its not held NMS stock order flow was
below the 5% threshold for January 1 through June, the broker-dealer
would not be required to comply with Rule 606(b)(3) for July 1 through
July 31. In the beginning of August, the broker-dealer would determine
if it is subject to Rule 606(b)(3) based on its order flow for the
prior six calendar month period, which this time would be the period
from February 1 through July 31. If the broker-dealer met the threshold
for that six calendar month period, and had also met it for the period
January 1 through June 30 such that it was required to comply with Rule
606(b)(3) for July, the broker-dealer would be required to continue
complying with Rule 606(b)(3) through August. If the broker-dealer met
the threshold for the February 1 through July 31 period but had not met
it for the January 1 through June 30 period and was not required to
comply with Rule 606(b)(3) for July, the broker-dealer would start a
new Compliance Period that would run from August 1 through January 31
of the following calendar year. In this scenario, the broker-dealer
would be required to provide Rule 606(b)(3) disclosures for not held
NMS stock orders received from a customer during the prior six calendar
months, except for any such orders that the broker-dealer received
during July when the broker-dealer was not required to provide reports
pursuant to Rule 606(b)(3).
    Table A below contains an example of a broker-dealer firm that
meets or exceeds the 5% de minimis threshold

for the first time and enters a six-month Compliance Period after a
three-month grace period. Table A below also reflects that, after the
initial six-month Compliance Period, the broker-dealer's required
compliance with Rule 606(b)(3) continues on a rolling month-to-month
basis. Table B below contains an example where there is no grace period
and a previously compliant broker-dealer firm begins a new Compliance
Period after an intervening period of not meeting the 5% threshold.

     Table A--Firm Equals or Exceeds 5% Threshold for the First Time
------------------------------------------------------------------------
                               Period examined for
            Event             qualifying threshold       Obligation
------------------------------------------------------------------------
Firm determines in Jan. 2020  July 1-Dec. 31, 2019  Prepare to collect
 that it equaled/exceeded                            and report required
 threshold for first time;                           data for Compliance
 grace period begins.                                Period beginning
                                                     Apr. 1, 2020.
On Apr. 1, 2020, grace        Reporting is          Begin collection of
 period ends and six-month     mandatory during      required data for
 Compliance Period begins.     Compliance Period     orders received
                               regardless of         during Compliance
                               whether threshold     Period.
                               is equaled or
                               exceeded in prior
                               six calendar months.
May 2020....................  ....................  Provide reports for
                                                     Apr. 1 to Apr. 30,
                                                     2020
June 2020...................  ....................  Provide reports for
                                                     Apr. 1 to May 31,
                                                     2020 (continue
                                                     adding prior
                                                     month's data to
                                                     report each
                                                     successive month of
                                                     the Compliance
                                                     Period).
Initial Compliance Period     ....................  Provide reports for
 ends on Sept. 30, 2020.                             full Compliance
                                                     Period, Apr. 1 to
                                                     Sept. 30, 2020
                                                     (Sept. data not
                                                     required to be
                                                     provided before 7th
                                                     business day of
                                                     Oct.).
On Oct. 1, firm determines    Apr. 1 to Sept. 30,   Provide reports for
 that it equaled/exceed        2020.                 May 1 to Oct. 31,
 threshold; Compliance                               2020.
 Period extends through Oct.
 31, 2020.
On Nov. 1, firm determines    May 1 to Oct. 31,     Provide reports for
 that it equaled/exceed        2020.                 June 1 to Nov. 30,
 threshold; Compliance                               2020.
 Period extends through Nov.
 30, 2020.
Continue assessing, on a      Prior six calendar    Provide reports for
 rolling basis, whether        months, on a          prior six month
 equal/exceed threshold for    rolling basis.        period as long as
 prior six month period.                             threshold continues
                                                     to be met.
------------------------------------------------------------------------

 Table B--Previously Compliant Firm Equals or Exceeds 5% Threshold After
               Intervening Period of not Meeting Threshold
------------------------------------------------------------------------
                               Period examined for
            Event             qualifying threshold       Obligation
------------------------------------------------------------------------
Firm determines in Jan. 2020  July 1 to Dec. 31,    Begin collection of
 that it equaled/exceeded 5%   2019.                 required data for
 threshold (not for the                              orders received
 first time); six-month                              during Compliance
 Compliance Period begins                            Period.
 Jan. 1, 2020.
Six-month Compliance Period   Reporting is          Provide reports for
 ends on June 30, 2020.        mandatory during      full Compliance
                               Compliance Period     Period, Jan. 1 to
                               regardless of         June 30, 2020 (June
                               whether threshold     data not required
                               is equaled or         to be provided
                               exceeded in prior     before 7th business
                               six calendar months.  day of July).
Firm determines in July 2020  Jan. 1 to June 30,    Firm not required to
 that it did not equal/        2020.                 collect or report
 exceed threshold;                                   data for July 2020
 Compliance Period not                               but must continue
 extended.                                           to provide reports
                                                     for prior
                                                     Compliance Period,
                                                     Jan. 1 to June 30,
                                                     2020.
Firm determines in Aug. 2020  Feb. 1 to July 31,    Begin collection of
 that it equaled/exceeded      2020.                 required data for
 threshold; new Compliance                           orders received
 Period begins.                                      during new
                                                     Compliance Period,
                                                     Aug.-Jan. 31, 2021;
                                                     provide reports for
                                                     portion of prior
                                                     six months that is
                                                     covered by a
                                                     Compliance Period,
                                                     i.e., Feb. 1 to
                                                     June 30, 2020 (July
                                                     2020 not within
                                                     Compliance Period).
Oct. 2020...................  Reporting is          Provide reports for
                               mandatory during      Apr. 1 to June 30,
                               Compliance Period     2020; Aug. 1 to
                               regardless of         Sept. 30, 2020.
                               whether threshold
                               is equaled or
                               exceeded in prior
                               six calendar months.
Six-month Compliance Period   ....................  Provide reports for
 ends on Jan. 31, 2021.                              Aug. 1, 2020 to
                                                     Jan. 31, 2021 (Jan.
                                                     2021 data not
                                                     required to be
                                                     provided before 7th
                                                     business day of
                                                     Feb. 2021).
------------------------------------------------------------------------

    The other de minimis exception to Rule 606(b)(3) focuses on each
customer's order flow.\132\ Whereas the firm-level de minimis exception
is designed to relieve mainly broker-dealers that do not regularly
handle not

held orders of the Rule 606(b)(3) obligations, the customer-level
exception is designed to relieve broker-dealers from the obligation to
provide the Rule 606(b)(3) disclosures to particular customers that do
not trade NMS stocks in a manner that generally relies on a broker-
dealer's use of discretion over order routing and handling.
---------------------------------------------------------------------------

    \132\ See Rule 606(b)(5).
---------------------------------------------------------------------------

    The Commission expects that the benefits of the Rule 606(b)(3)
disclosures will accrue mainly for customers that trade regularly with
significant levels of not held NMS stock order flow. The new customer-
specific order handling disclosures are intended to provide such
customers with insight into how their brokers exercise order handling
discretion over a period of time. In order to accurately reflect a
broker's order handling behavior, the customer-specific disclosures
must contain ample order data. The Commission believes that $1,000,000
of notional value traded on average each month for the prior six months
is a level of order flow that would allow for meaningful order handling
disclosures. A Rule 606(b)(3) report covering a customer's prior six
months of trading activity would include at least $6 million worth of
the customer's trades. The Commission believes that such a sample of
trading activity would be large enough to not be misleadingly colored
by one-off or infrequent routing choices by the broker-dealer or order
handling requests by the customer. Therefore, such a sample size would
provide the customer with an accurate and reliable depiction of how its
broker-dealer generally handles its not held NMS stock order flow.
    The Commission also believes that the customer-level de minimis
threshold is set at a sufficiently low level such that the exception
captures customers that do not trade regularly or in significant
quantity and who would not therefore realize the benefits of the rule.
Based on the Commission's experience and understanding of the frequency
and quantities in which various market participants tend to trade, the
Commission believes that this threshold is a relatively low one for
more active traders, including customers that have an interest in
evaluating their broker-dealers' order handling services, but high
enough such that the exception will capture customers that trade
infrequently or in small quantities and for whom the detailed Rule
606(b)(3) report would not be warranted or meaningful. Indeed,
customers that trade on average each month for the prior six months
less than $1,000,000 of notional value of not held orders through the
broker-dealer are not likely to require the more complex order handling
tools offered by the broker-dealer that would warrant or make
meaningful a detailed review of the broker-dealer's order handling
decisions. Even if a customer is sufficiently sophisticated to utilize
not held orders and analyze the Rule 606(b)(3) information, unless the
customer submits not held orders to a degree that generates a
meaningful sample of order handling and routing data, the Rule
606(b)(3) report will not provide a reliable basis for assessing the
broker-dealer's activity.
    In addition, as discussed below,\133\ part of the reason why the
Rule 606(b)(3) information is provided in the aggregate for all orders
sent to each venue, and not on an order-by-order basis, is to protect
broker-dealers from potentially disclosing sensitive or proprietary
information regarding their order handling techniques. If the rule
allowed customers to request the disclosures for discrete not held
orders or a de minimis level of not held order flow, there would be
heightened risk that customers could gain insight into the broker-
dealer's order handling techniques by perhaps reverse engineering how
the broker-dealer handled a particular order. A broker-dealer's
internal process for determining how to handle and route individual
orders--such as, for example, the specific routing destinations chosen
and the timing for sending child orders--is typically highly sensitive
and proprietary information that broker-dealers guard closely. By
requiring the Rule 606(b)(3) disclosures only for non-de minimis levels
of not held trading activity, the customer-level de minimis exception
helps ensure that the aggregated information provided under Rule
606(b)(3) reflects a robust amount of trading activity from which a
customer is unable to glean this sensitive or proprietary information.
---------------------------------------------------------------------------

    \133\ See infra Section III.A.6.
---------------------------------------------------------------------------

    While broker-dealers may, by rule, be excepted from Rule 606(b)(3)
due to the firm-level de minimis exception, or excepted from providing
the Rule 606(b)(3) disclosures to certain customers due to the
customer-level de minimis exception, the Commission notes that some
broker-dealers, for business reasons, may choose to provide the new
customer-specific order handling disclosures to their customers
regardless of the de minimis exceptions and that customers below the
customer-level de minimis threshold could move their order flow to such
firms.
v. Orders for the Account of a Broker-Dealer
    As noted above, the Commission's proposed definition of
institutional order explicitly excluded orders for the account of a
broker-dealer, and such orders were not covered by proposed Rule
606(b)(3). Consistent with what was proposed, Rule 606(b)(3), as
adopted, does not apply to orders from broker-dealers. Some commenters
argued that orders for the account of a broker-dealer should be
included in the order handling reports required under Rule 606 and,
therefore, such orders should not be excluded from the proposed
definition of institutional order in Rule 600(b).\134\ The Commission
understands these comments to pertain to the proper scope of a broker-
dealer's reporting obligations under Rule 606(b)(3), and as such they
are discussed in detail in Section III.A.3, infra. As discussed in
Section III.A.3, infra, the Commission continues to believe that the
scope of a broker-dealer's obligation under Rule 606(b)(3) properly
does not extend to orders placed by a broker-dealer.
---------------------------------------------------------------------------

    \134\ See Markit Letter at 3 n.6, 18; Dash Letter at 1, 4-5; FIF
Letter at 2, 8, 16-17; SIFMA Letter at 1, 3.
---------------------------------------------------------------------------

vi. Rule 606(b)(1)
    To incorporate new Rule 606(b)(3) into the existing regulatory
structure, the Commission must make corresponding revisions to Rule
606(b)(1), which is the pre-existing customer-specific order routing
disclosure rule. Prior to today, Rule 606(b)(1) did not differentiate
between NMS stock orders from customers submitted on a held or not held
basis. As a result, absent amendment to Rule 606(b)(1), not held orders
in NMS stock that are covered by Rule 606(b)(3) also would be covered
by Rule 606(b)(1). This is not the Commission's intent. As discussed
above, the Commission is requiring Rule 606(b)(3) disclosures to be
available for not held NMS stock orders, subject to two de minimis
exceptions. For held NMS stock orders, or for instances when a de
minimis exception would except a broker-dealer from providing Rule
606(b)(3) disclosures, the existing disclosure requirements of Rule
606(b)(1) would apply.
    The Commission is amending Rule 606(b)(1) to require a broker-
dealer, upon customer request, to provide the disclosures set forth in
Rule 606(b)(1) for orders in NMS stock that are submitted on a held
basis, and for orders in NMS stock that are submitted on a not held
basis and for which the

broker-dealer is not required to provide the customer a report under
Rule 606(b)(3).\135\ As a result, any NMS stock order from a customer
triggers Rule 606(b) order handling disclosure requirements. This is
consistent with the Commission's stated intent in the Proposal for all
orders in NMS stock routed by broker-dealers for their customers to be
encompassed by order routing disclosure rules regardless of order
size.\136\
---------------------------------------------------------------------------

    \135\ See Rule 606(b)(1). Rule 606(b)(1) also requires a broker-
dealer to provide the disclosures for orders (whether held or not
held) in NMS securities that are option contracts. As explained
above (see supra note 83), the Commission is not altering Rule
606(b)'s application to orders for NMS securities that are option
contracts, and so the adopted amendments to Rule 606(b)(1) continue
the rule's prior application to option contract orders.
    \136\ See Proposing Release, supra note 1, at 49445.
---------------------------------------------------------------------------

    Because there is no dollar-value threshold in Rule 606(b) as
adopted, there are two categories of NMS stock orders that would have
been covered by Rule 606(b)(3) under the Proposal but instead are
covered by Rule 606(b)(1) under the adopted approach. First, a
customer's held NMS stock order that has a market value of at least
$200,000 will be covered by the Rule 606(b)(1) disclosures (and, as
discussed below, the Rule 606(a) public disclosures) whereas, under the
Proposal, such an order would have been covered by the Rule 606(b)(3)
disclosures.\137\ As discussed above,\138\ because broker-dealers must
attempt to execute held NMS stock orders immediately and have no price
or time routing discretion with such orders, the Commission does not
believe that the Rule 606(b)(3) disclosures are appropriate for such
orders, even if they are for $200,000 or more. Indeed, as explained
supra and infra,\139\ the Commission's concerns with respect to broker-
dealer handling of held NMS stock orders relate mainly to financial
inducements to attract held order flow from broker-dealers, and those
concerns persist regardless of the size of the held order. Held NMS
stock orders of any dollar value should therefore be covered by
disclosures designed to provide more transparency into such financial
inducements and the potential conflicts of interest faced by broker-
dealers which, as discussed infra, is what the enhancements to Rule
606(a) in particular are designed to achieve.\140\
---------------------------------------------------------------------------

    \137\ Conversely, a customer's not held order in NMS stock that
has a market value less than $200,000 will be covered by the Rule
606(b)(3) disclosures whereas, under the Proposal, such an order
would have been covered by the Rule 606(b)(1) disclosures (and the
Rule 606(a) public disclosures). The Commission believes this is the
proper result for the reasons set forth supra in Section III.A.1.b.
    \138\ See supra Section III.A.1.b.iii.
    \139\ See id.; see also infra Section III.B.1.b.
    \140\ See infra Section III.B.1.b.
---------------------------------------------------------------------------

    Second, compared to the Proposal, a not held NMS stock order for at
least $200,000 that is from a customer that does not meet the customer-
level de minimis threshold or that the customer submits to a broker-
dealer that qualifies for the firm-level de minimis exception will be
covered by Rule 606(b)(1) whereas, under the Proposal, any not held NMS
stock order for at least $200,000 would have been covered by Rule
606(b)(3). The Commission believes that it is the appropriate result
for Rule 606(b)(3) not to apply to such an order and for Rule 606(b)(1)
to apply instead. As discussed above,\141\ the firm-level de minimis
exception in Rule 606(b)(4) targets broker-dealers that mainly handle
customer held orders but may occasionally handle a not held order from
one of their customers. The Commission believes that such a broker-
dealer should be entitled to the relief from Rule 606(b)(3) provided by
the firm-level de minimis exception if it receives a large not held NMS
stock order, including one that is for $200,000 or more, yet still does
not receive aggregate not held NMS stock order flow that exceeds the
firm-level de minimis threshold.
---------------------------------------------------------------------------

    \141\ See infra Section III.A.1.b.iv.
---------------------------------------------------------------------------