Securities Litigation

FINRA issued a targeted-exam letter on February 20, 2020 seeking information on the effect of zero-commission trading upon compliance with related obligations of Best Execution, payment for order flow, and non-commission account fees.  The Exam Letter is here.

The zero-commission tide rose quickly throughout 2019, together with some industry consolidation as well.  Among those announcing no commissions:

• Ally Invest, the investment affiliate of online Ally Bank;
• E-Trade, to be acquired by Morgan Stanley, announced February 20, here.
• Fidelity
• Interactive Brokers
• Robinhood
• Schwab
• TD Ameritrade, to be acquired by Charles Schwab, as announced in late November, here.

The operative (though unstated) assumption of the letter is that declining trading commission revenues will pressure broker-dealers to increase revenue from other sources, including account fees and payment for order flow.  That would require additional disclosures, of course, and implicate best-execution issues, as well.  As the zero-commission wave swept the industry last year, some voiced those very concerns.

FINRA settled an enforcement action against Robinhood in late 2019, based upon Robinhood’s order-routing decisions based upon payment-for-order-flow, without adequate supervision and compliance around the firm’s best-execution obligations.  Both issues are discussed in the AWC.  Robinhood agreed to revamp its Best-Ex supervision and compliance under an independent consultant and to pay a $1.25 million fine.  The AWC is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2020 by Thomas K. Potter, III (all rights reserved).