Measuring Regulatory Influence

Firms in the financial services industry spend an enormous amount of energy measuring progress towards intended goals. At times, this intense fixation on metrics can seem counterproductive, but maintaining these disciplines proves to be beneficial in avoiding failure and achieving a successful outcome. The ability to measure progress and success as it pertains to regulation is equally as important given its increasing role in our industry, albeit finding the right metrics is more difficult.

Establishing the Baseline

In addition to identifying the metric used to measure progress on an objective one must also establish a baseline, or a set of conditions that exist at a particular point in time. Measuring progress against the baseline is simply comparing how conditions change as time goes on.  A common criticism of regulation is that it’s slow to react and that by the time a new rule is implemented the markets have already resolved whatever issue the given regulation was meant to eradicate. There is validity in this statement, although to what degree is questionable due to the fact that most times people will use a baseline that begins on the date upon which the regulation is implemented.  In other words, people underestimate or even fail to recognize the regulatory influences on market behavior in the early days of a rule’s design.

In fairness to regulators and ourselves, there are other pinnacle moments in the life cycle of a new rule which need to be considered when measuring regulatory progress towards achieving objectives. These pinnacle moments are those which send clear messages to market participants strong enough to effect a change in their behavior. These changes are often in the direction of the intended objective. In our opinion, one such pinnacle moment occurs when a rule is officially filed for public comment, which is often years before a rule’s implementation. It is at this moment that the rule moves from a concept to a more defined state with a process to move forward. Simply put, when a rule is filed for public comment, it is a strong indication that the regulator is going act. Why does this matter, you may ask? Because, if we are going accurately measure regulatory progress; success or failure, then we need to begin at a point in time when the regulation influenced behavior.  

Amended Rule 606

Last Friday, STA and our partners at Financial Information Forum, “FIF” requested additional guidance on the Amendments to SEC Rules 606 (a) and 606 (b), also known as the “Disclosure of Order Handling Information Rule.” It is our hope that by doing so the industry will have a clear path forward on implementing an important piece of regulation that will provide improved transparency for investors while also narrowing an affordability gap between large participants and small to mid-sized ones. For those who have been closely involved in this process, we understand the unique complexities of this rule and as such have concerns that whatever direction the Commission goes in with regards to providing guidance they are likely to be met by a chorus of accusations that the Commission has fallen short on achieving its goal. While we would understand such an initial response, we would beg to differ.

In fairness to regulators and ourselves, there are other pinnacle moments in the life cycle of a new rule which need to be considered when measuring regulatory progress towards achieving objectives.

An intended goal of Amended Rule 606 is to provide the ability for institutional asset managers to gain transparency into how their orders are being handled by their brokers and to have that information delivered in a standardized format. The Amended Rule provides a standardized template for brokers to fill out and the legal obligation to provide it upon request by asset managers who rely on that broker to execute trades.

In the case of Amended Rule 606, it was proposed for public comment on July 13, 2016. The Commission adopted the amendments on November 2, 2018 and its scheduled implementation date is October 1, 2019. While it is frustrating to think three years has passed and the amendment has not yet been implemented, by no means has the industry has been standing still. Industry standards on the disclosure of order handling information have improved over this period of time, the willingness of brokers to provide it upon request is occurring and the ability of broker dealers who rely on third parties for execution services to provide the information exists.

For those who have been closely involved in this process, we understand the unique complexities of this rule and as such have concerns that whatever direction the Commission goes in with regards to providing guidance they are likely to be met by a chorus of accusations that the Commission has fallen short on achieving its goal. While we would understand such an initial response, we would beg to differ.  

This does not mean we should forget about implementing Amended Rule 606. Quite the contrary, STA has long believed that benefits accrue to investors when regulators, with industry input, define industry standards in appropriate areas like disclosures of order handling information. Having defined regulatory standards ensures that information is accurate and uniformly available. In addition, such standards foster private market solutions that transcend to lower costs.

We are simply saying that any measurement of progress; success or failure by the Commission towards creating a regime with improved transparency in order handling should begin with a baseline of the conditions as they existed on July 13, 2016.