NASD Issues Notice to Members Regarding Amendments to Best Execution Obligations
Today, NASD issued Notice to Members (NTM) 0658 announcing amendments and interpretive material to Rule 2320(a), NASD’s “Best Execution Rule.” The amendments to Rule 2320(a) clarify that best execution obligations generally apply to any customer of another brokerdealer as well as to the member’s own customers. In addition, the amendments modify certain terminology and provisions under Rule 2320(a) to reflect current market structure and practice. NASD also has adopted IM2320, which codifies previous interpretive guidance regarding the application of Rule 2320(a). The amendments and interpretive material become effective on November 8, 2006.
NASD Rule 2320(a) generally requires that member firms must use reasonable diligence to ascertain the best market for customer securities transactions and obtain the most favorable price possible for customer transactions under prevailing market conditions. Rule 2320(a) lists a number of specific factors that will be considered in determining whether a member firm has used reasonable diligence. As amended, Rule 2320(a) provides that the best execution obligation applies to “any transaction for or with a customer or a customer of another brokerdealer.” In NTM 0658, NASD indicated that the amendment is designed to better ensure that a customer order receives equivalent best execution protections regardless of whether the order is executed by the originating brokerdealer or routed to another brokerdealer for execution. NASD also noted, however, that the amendment to Rule 2320(a) does not change the obligations of the originating brokerdealer member to conduct a regular and rigorous review of its execution quality.
NASD also has amended certain provisions of Rule 2320(a) to recognize changes in market structure. In particular, NASD has deleted the term “interdealer” from its requirement that a member ascertain the best market for a security to clarify that member firms must consider all markets where a security is traded. Similarly, NASD has amended the diligence factors under Rule 2320(a) to provide that the number of markets checked, rather than the number of “primary” markets, and the accessibility of quotations, rather than the “location and accessibility” of quotations, will be considered in determining whether a member firm has used reasonable diligence. In addition, NASD added a new diligence factor to be considered, namely, the “terms and conditions of the order which result in the transaction, as communicated to the member and persons associated with the member.”
Finally, NASD adopted IM2320 regarding the applicability of Rule 2320(a). In particular, IM2320 provides that the term “market” or “markets” should be interpreted broadly to include a variety of different venues other than exchange markets and any other trading venues that may emerge. IM2320 also provides that Rule 2320(a) does not apply to a member firm when another brokerdealer is simply executing a customer order against that member’s quote. NTM 0658 provides further that “the duty to provide best execution to customer orders received from other brokerdealers arises only when an order is routed from the brokerdealer to the member for the purpose of order handling and execution.
Additionally, IM 2320 provides that, in the context of debt, the term “quotation” in the reasonable diligence factor as to the “accessibility of the quotations” will be considered by NASD as referring to either dollar (or other currency) pricing or yield pricing. NASD noted further, however, that “accessibility is only one of the nonexhaustive reasonable diligence factors set out in Rule 2320(a). In the absence of accessibility, members are not relieved from taking reasonable steps and employing their market expertise in achieving the best execution of customer orders.”
Securities Industry FYI is a service of the Broker-Dealer Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact one of the following Morgan Lewis attorneys:
Washington, D.C.
Mark D. Fitterman
202.739.5019
mfitterman@morganlewis.com
Theodore R. Lazo
202.739.5250
tlazo@morganlewis.com