Best Execution Supporting Statement (2023 Proposed Rule)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Regulation Best Execution
[Request for New OMB Control Number]
This submission is being made pursuant to the Paperwork Reduction Act of
1995, 44 U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

Section 11A of the Securities Exchange Act of 1934 (“Exchange Act”),1 sets forth the
statutory framework for a national market system (“NMS”). Section 11A(a)(2) directs the
Commission, having due regard for the public interest, the protection of investors, and the
maintenance of fair and orderly markets, to use its authority under the Exchange Act to facilitate
the establishment of an NMS for securities in accordance with the Congressional findings and
objectives set forth in section 11A(a)(1) of the Exchange Act. In Section 11A(a)(1)(C),
Congress identified key NMS objectives, including among others, the practicability of brokers
executing investors’ orders in the best market.2
The Commission believes that the Congressional objectives set forth in Section 11A
would be better advanced by enhancing the existing regulatory framework concerning the duty
of best execution. The duty of best execution requires broker-dealers to execute customers’
trades at the most favorable terms reasonably available under the circumstances, and customers
benefit from broker-dealers’ robust consideration of execution opportunities that may provide
customers with the most favorable terms. As such, promoting the best execution of customer
orders is of fundamental importance to investors and the markets, and is an important aspect of
investor protection. Currently, the Financial Industry Regulatory Authority, Inc. (“FINRA”), a
national securities association, and the Municipal Securities Rulemaking Board (“MSRB”) have
rules and guidance directly addressing the duty of best execution. While the existing regulatory
framework has helped broker-dealers fulfill their duty to their customers, the Commission
believes that it could be made more effective. In particular, the Commission believes that
customers would benefit from consistently robust best execution practices by broker-dealers, and
the execution of retail customer orders by broker-dealers that have certain order handling
conflicts of interests warrants heightened attention by those broker-dealers.

1

15 U.S.C. 78k-1.

2

15 U.S.C. 78k-1(a)(1)(C).
1

Accordingly, the Commission proposed to amend Regulation NMS under the Exchange Act
to add new Rules 1100, 1101, and 1102 (“Regulation Best Execution”).3 Specifically, the
Commission believes that proposed Regulation Best Execution would further the Congressional
goals set forth in Exchange Act Section 11A(a)(1)(C)(iv) regarding executing investors’ orders in
the best market and reinforce broker-dealer obligations concerning the duty of best execution. In
particular, proposed Regulation Best Execution would identify specific factors that must be
addressed by a broker-dealer’s policies and procedures on best execution, impose additional
requirements for conflicted transactions, and impose best execution-specific review and
documentation requirements, all of which should better protect investors by promoting consistently
robust order handling and execution practices.
Generally, proposed Rule 1100 would set forth the standard of best execution, requiring a
broker-dealer to use reasonable diligence to ascertain the best market for a security, and buy or sell
in such market so that the resultant price to the customer is as favorable as possible under
prevailing market conditions.
As discussed in more detail below, proposed Rule 1101 would require that a broker-dealer
that engages in any transaction for or with a customer or a customer of another broker-dealer
establish, maintain, and enforce written policies and procedures reasonably designed to comply
with the proposed best execution standard. These policies and procedures would be required to
address: (1) how a broker-dealer will comply with the best execution standard; (2) how the brokerdealer will determine the best market and make routing or execution decisions for customer orders;
(3) additional considerations applicable to conflicted transactions with retail customers; and (4) to
the extent applicable, the obligations of introducing brokers that meet the definition in proposed
Rule 1101(d).
Proposed Rule 1102 would require each broker-dealer to annually assess the design and
overall effectiveness of their best execution policies and procedures and prepare an annual report
that would be provided to the broker-dealer’s governing body. The Commission believes that these
requirements would help ensure the effectiveness of broker-dealers’ best execution policies and
procedures that are adopted pursuant to the proposed rules.
Finally, the Commission is also proposing to amend OMB Control No. 3235-0279 (Rule
17a-4 under the Exchange Act)4 to include record preservation requirements for records made
under proposed Regulation Best Execution.5

3

See Regulation Best Execution, Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR
5440 (Jan. 27. 2023).

4

17 CFR 240.17a-4.

5

The Commission expects to submit a separate Supporting Statement to amend the existing
PRA for Rule 17a-4 (OMB Control No. 3235-0279).
2

Certain provisions of proposed Rules 1101 and 1102 would create new “collection of
information requirements” within the meaning of the Paperwork Reduction Act of 1995
(“PRA”).6 The title for this collection of information is “Regulation Best Execution.”
2.

Purpose and Use of the Information Collection

The collections of information required under proposed Rules 1101 and 1102, as discussed
in the proposing release, would enable a broker-dealer to comply with its obligations under
proposed Regulation Best Execution, allow the broker-dealer to identify any inadequacies and
make any revisions to its policies and procedures, including its order handling practices, as
appropriate to ensure the broker-dealer’s continued effective compliance with the best execution
standard, and create documentation that the Commission and self-regulatory organizations (SROs)
could use for purposes of examinations and investigations.

a. Required Policies and Procedures and Related Obligations
Proposed Rule 1101(a)(1) would require that a broker-dealer’s policies and procedures
address how it will comply with the best execution standard in proposed Rule 1100. In particular, a
broker-dealer’s policies and procedures would be required to address how it will: (1) obtain and
assess reasonably accessible information concerning the markets trading the relevant securities; (2)
identify markets that may be reasonably likely to provide the most favorable prices for customer
orders (“material potential liquidity sources”); and (3) incorporate the material potential liquidity
sources into its order handling practices and ensure efficient access to each such material potential
liquidity source. The Commission believes this aspect of the proposal would promote consistently
robust order handling practices by requiring each broker-dealer to establish a detailed framework to
achieve best execution, which involves an analysis of relevant information, an evaluation of the
range of liquidity sources, and the identification of and ability to efficiently access liquidity
sources.
Proposed Rule 1101(a)(2) would require a broker-dealer’s policies and procedures to
address how it will determine the best market and make routing and execution decisions for the
customer orders that it receives. In particular, a broker-dealer’s policies and procedures would be
required to address how it will: (1) assess reasonably accessible and timely information, including
information with respect to the best displayed prices, opportunities for price improvement, and
order exposure opportunities that may result in the most favorable price; (2) assess the attributes of
customer orders and consider the trading characteristics of the security, the size of the orders, the
likelihood of execution, and the accessibility of the market, and any customer instructions in
selecting the market most likely to provide the most favorable price; and (3) reasonably balance the
likelihood of obtaining a better price with the risk that delay could result in a worse price when
determining the number and sequencing of markets to be assessed. The Commission believes that
6

44 U.S.C. 3501 et seq.
3

by requiring broker-dealers’ best execution policies and procedures to explicitly address these
factors, the proposed rule would help ensure that broker-dealers have established processes in place
for considering these factors and that broker-dealers follow these processes when transacting for or
with customers, which should promote consistently robust order handling practices among brokerdealers.
Proposed Rule 1101(b) would require broker-dealers that have certain conflicts of interest
to establish additional policies and procedures to better position them to meet the best execution
standard in these circumstances. In particular, a broker-dealer’s policies and procedures for
conflicted transactions would be required to address how it will: (1) obtain and assess information
beyond that required by proposed Rule 1101(a)(1)(i) in identifying a broader range of markets
beyond the material potential liquidity sources; and (2) evaluate a broader range of markets beyond
the material potential liquidity sources. Rule 1101(b) would also require broker-dealers to
document their compliance with the best execution standard for conflicted transactions, including
all efforts taken to enforce their policies and procedures, and their basis and information relied on
for determining that their conflicted transactions would comply with the proposed best execution
standard. Such documentation would be required to be done in accordance with written
procedures. Additionally, Rule 1101(b) would require broker-dealers to document any
arrangements concerning payment for order flow. The Commission believes that these
requirements would encourage broker-dealers to exercise additional diligence with respect to
conflicted transactions in light of the incentives to handle conflicted transactions in a manner that
prioritizes their own interests over their customers’ interests and are part of the Commission’s
ongoing efforts to protect investors when conflicts of interest exist.
Proposed Rule 1101(c) would require broker-dealers to review the execution quality of
customer orders at least quarterly, and how such execution quality compares with the execution
quality that might have been obtained from other markets, and revise their best execution policies
and procedures, including order handling practices, accordingly. The Commission believes that the
proposed review requirement would further ensure that broker-dealers evaluate the effectiveness of
their current order handling practices and enable broker-dealers to make informed judgments
regarding whether their policies and procedures or practices need to be modified.
Proposed Rule 1101(d) would exempt an introducing broker that routes customer orders to
an executing broker from separately complying with proposed Rules 1101(a), (b), and (c), so long
as the introducing broker establishes, maintains, and enforces policies and procedures that require
the introducing broker to regularly review the execution quality obtained from its executing broker,
compare it with the execution quality it might have obtained from other executing brokers, and
revise its routing practices accordingly. This provision would provide a tailored exemption for
broker-dealers that do not make decisions or exercise discretion regarding the manner in which
their customer orders are handled and executed, beyond their determinations to engage the services
of executing brokers.
Any ongoing collections of information pursuant to proposed Rule 1101, including a
4

conflicted broker-dealer’s documentation of its best execution determinations and its payment for
order flow arrangements in accordance with written procedures, a broker-dealer’s documentation
of the results of its execution quality reviews, and an introducing broker’s documentation of its
executing broker execution quality reviews, would assist the broker-dealer in its ongoing efforts to
transact for or with customers consistent with its best execution policies and procedures, and in
turn ensure compliance with the best execution standard. Ongoing collections of information
would also assist the Commission and SROs in examinations and investigations by ensuring that
appropriate documentation is available to determine whether a broker-dealer is adhering to its best
execution policies and procedures and otherwise in compliance with all applicable requirements of
proposed Regulation Best Execution.
b. Annual Report
Proposed Rule 1102 would require that a broker-dealer that effects any transaction for or
with a customer or a customer of another broker-dealer, at least annually, review and assess the
design and overall effectiveness of its best execution policies and procedures, including its order
handling practices. The broker-dealer must prepare a written report detailing the results of such
review and assessment, including a description of all deficiencies found and any plan to address
deficiencies, and the report must be presented to the broker-dealer’s board of directors (or
equivalent governing body).
The collection of information pursuant to proposed Rule 1102 would provide appropriate
documentation of a broker-dealer’s continued efforts to comply with the best execution standard
and would help to ensure that the broker-dealer’s best execution policies and procedures remain
effective. In particular, the requirement of proposed Rule 1102 to document the results of a brokerdealer’s annual review of its best execution policies and procedures would enable the brokerdealer, including its governing body, to identify any inadequacies and make any changes to the
broker-dealer’s best execution policies and procedures, including its order handling practices, as
appropriate in order to further its compliance with the proposed rules. The collection of
information pursuant to proposed Rule 1102 would also create documentation of such compliance
that the Commission and SROs could use for purposes of investigations and examinations.
3.

Consideration Given to Information Technology

Based on its experience, the Commission believes that some larger broker-dealers
already maintain documentation on their transactions that exceeds what would be required under
the proposed rules, but the Commission does not know the extent to which other broker-dealers
also maintain such documentation. To provide maximum flexibility, proposed Regulation Best
Execution does not prescribe how respondents must comply with the requirements to establish
and maintain the written policies and procedures required by the rule, however the Commission
anticipates that respondents would likely use electronic systems to maintain and update, as
appropriate, their written policies and procedures.
5

4.

Duplication

The Commission believes that broker-dealers generally already have policies and
procedures in place to achieve compliance with the best execution rules of FINRA and the
MSRB, as applicable, although those policies and procedures differ based on each brokerdealer’s business model. While respondents would need to bring their best execution policies
and procedures into compliance with the proposed rule, which would impose additional and
more specific obligations, the Commission believes that the proposed rule would not result in, or
require the collection of, duplicate information that is otherwise available in a similar form.
5.

Effects on Small Entities

The proposed rules would have an effect on small entities. As discussed, the proposed rules
would require a broker-dealer to establish, maintain, and enforce written policies and procedures
reasonably designed to comply with the proposed best execution standard, as well as additional
policies and procedures for conflicted transactions and tailored policies and procedures applicable
to introducing brokers. The proposed rules would also set forth documentation requirements
related to conflicted transactions and execution quality reviews. Moreover, the proposed rules
would require a broker-dealer to at least review and assess annually, the design and overall
effectiveness of its best execution policies and procedures, including its order handling practices,
and prepare a written report.
Commission rules generally define a broker-dealer as a “small entity” for purposes of the
Exchange Act and the Regulatory Flexibility Act if the broker-dealer had a total capital of less than
$500,000 on the date in the prior fiscal year as of which its audited financial statements were
prepared and is not affiliated with any person (other than a natural person that is not a small entity).
The Commission estimates that approximately 3,498 broker-dealers would be subject to proposed
Regulation Best Execution and based on FOCUS Report data, approximately 761 of those brokerdealers may be small entities. Each of these small broker-dealers, assuming that they are not
introducing brokers (pursuant to proposed Rule 1101(d)), would be responsible for complying with
proposed Rules 1101 and 1102. The Commission believes, however, that the requirements are not
unduly burdensome for all broker-dealers, including broker-dealers that would be considered small
entities.
6.

Consequences of Not Conducting Collection

This collection of information is intended to assist broker-dealers in evaluating the quality
of execution they received for their customers and provide a documented process for handling
customer orders that a broker-dealer would use to ensure its ongoing compliance with the best
execution standard. In addition, the written policies and procedures would assist the Commission
and SROs in conducting examinations and investigations for compliance with the proposed rules,
including the proposed best execution standard. The Commission believes that without the collection
of information, the goals of the Section 11A of the Exchange Act and the proposed rule’s intended
6

benefits would not be achieved.
7.

Inconsistencies with Guidelines in 5 CFR Part 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The Commission has issued a release soliciting public comment on the “new collection
of information” requirements and associated paperwork burdens.7 A copy of the release is
attached. Comments on Commission releases are generally received from industry groups,
investors, and other market participants. In addition, the Commission and staff participate in
ongoing dialogue with representatives of various market participants through public conferences,
meetings, and informal exchanges. Any comments received on this proposed rulemaking will be
posted on the Commission’s public website and made available using the following link
http://www.sec.gov/rules/proposed.shtml. The Commission will consider all comments received
prior to publishing the final rule and will explain in any adopting release how the final rule
responds to such comments, in accordance with 5 CFR 1320.11(f).
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The Commission would not typically receive information as a result of proposed
Regulation Best Execution. To the extent that the Commission receives – through its examination
and oversight program, through an investigation, or by some other means – records or disclosures
from a broker-dealer that relate to or arise from proposed Regulation Best Execution, such
information would be kept confidential, subject to the provisions of applicable law (e.g., Freedom of
Information Act, 5 U.S.C. 552).
11.

Sensitive Questions

Not applicable. No questions of a sensitive nature are involved.
12.

Burden of Information Collection

As noted above, the proposed Rules would establish new collections of information.
The Commission anticipates that respondents will incur the following recordkeeping burden. The
7

See supra note 3 at 88 FR 5549.
7

Commission estimates the hourly burden of the information collection as summarized below.
a.

Policies and Procedures Required by Rule 1101

The respondents to this collection of information would be the estimated 3,498 brokerdealers that engage in any transaction for or with a customer or a customer of another brokerdealer. As discussed above, proposed Rule 1101 would establish recordkeeping burdens for
broker-dealers. However, certain burdens would be different depending on whether a brokerdealer engages in conflicted transactions as defined in the proposed rule. Generally, proposed Rule
1101 would require that a broker-dealer establish, maintain, and enforce written policies and
procedures addressing: (1) how a broker-dealer will comply with the best execution standard; (2)
how the broker-dealer will determine the best market and make routing or execution decisions for
customer orders; (3) additional considerations applicable to conflicted transactions with retail
customers; and (4) to the extent applicable, the obligations of introducing brokers that meet the
definition in proposed Rule 1101(d).
Proposed Rule 1101(b) would require broker-dealers that engage in conflicted transactions
to document, in accordance with written procedures, their compliance with the best execution
standard for conflicted transactions, including all efforts to enforce their best execution policies and
procedures for conflicted transactions and the basis and information relied on for their
determinations that such conflicted transactions would comply with the best execution standard, as
well as to document their payment for order flow arrangements.
Additionally, proposed Rule 1101(c) would require a broker-dealer to, no less frequently
than quarterly, review the execution quality of its transactions for or with customers or customers
of another broker-dealer and how such execution quality compares with the execution quality the
broker-dealer might have obtained from other markets, revise its best execution policies and
procedures, including its order handling practices, accordingly, and document the results of this
review.
Separately, an introducing broker, as defined in proposed Rule 1101(d), would not have to
comply with all of the requirements of proposed Rule 1101, but instead would be required to
establish, maintain, and enforce policies and procedures that require the introducing broker to
regularly review the execution quality obtained from its executing broker, compare that execution
quality with the execution quality it might have obtained from other executing brokers, and revise
its order handling practices, accordingly. An introducing broker would additionally be required to
document the results of its review.
The Commission believes that broker-dealers generally already have policies and
procedures in place to achieve compliance with the best execution rules of FINRA and the MSRB,
as applicable. The extent to which a respondent would be burdened by the new collection of
information under proposed Rule 1101 would depend on the best execution policies and procedures
that have already been established by a respondent as well as the respondent’s business model. To
8

the extent broker-dealers’ existing best execution policies and procedures already substantially
address the requirements of proposed Rule 1101, these broker-dealers likely would only require
limited updates to their policies and procedures to meet the additional obligations specified in the
proposed rule. To initially comply with this obligation, the Commission preliminarily believes that
broker-dealers would employ a combination of in-house and outside legal and compliance counsel
to update existing policies and procedures. The Commission assumes that, for purposes of this
analysis, the associated costs and burdens would differ between small and large broker-dealers, as
large broker-dealers generally offer more products and services and are more likely to engage in
conflicted transactions, and therefore would need to develop a more extensive set of policies and
procedures. Based on FOCUS Report data, the Commission estimates that, as of June 30, 2022,
approximately 761 broker-dealers are small entities under the Regulatory Flexibility Act.
Therefore, the Commission estimates that 2,737 broker-dealers would qualify as large brokerdealers.8
Burden for Large Broker-Dealer Policies and Procedures under proposed Rule 1101—
Initial and Ongoing Burdens:9 To comply with the policies and procedures required by proposed
Rule 1100, the Commission assumes large broker-dealers would need to update, review, and
approve their existing policies and procedures and that large broker-dealers are more likely to need
to satisfy the heightened requirements applicable to conflicted transactions. Specifically, the
Commission estimates an initial burden of 109 hours per large broker-dealer to review and approve
the updated policies and procedures,10 and an ongoing burden of 25 hours per year to review and
update existing policies and procedures.11 The Commission estimates that there are 2,737
respondents, resulting in an estimated initial burden of 298,333 hours12 in the first year, for an
annualized initial burden of 99,435 hours, and an ongoing burden of 68,425 hours per year
(including the first year).13

8

This calculation was made as follows: (3,498 total broker-dealers) – (761 small brokerdealers) = 2,737 large broker-dealers.

9

We are proposing the initial and ongoing burdens as separate information collections in
order to more-easily revise the number of respondents for the initial burden in the future.

10

This estimate would be broken down as follows: 67 hours for in-house legal counsel + 18
hours for in-house compliance counsel to update existing policies and procedures + 12
hours of review for general counsel + 12 hours of review for Chief Compliance Officer =
109 burden hours.

11

This estimate would be broken down as follows: 9 hours for legal personnel + 8 hours for
compliance personnel + 8 hours for business-line personnel = 25 burden hours.

12

2,737 respondents x 109 hours = 298,333 hours.

13

2,737 respondents x 25 hours = 68,425 hours.
9

Burden for Small Broker-Dealer Policies and Procedures under proposed Rule 1101 –
Initial and Ongoing Burdens: To comply with the policies and procedures required by proposed
Rule 1100, the Commission believes small broker-dealers would primarily rely on outside counsel
to update existing policies and procedures, and estimates an initial burden of 18 hours per small
broker-dealer for in-house compliance personnel to review and approve updated policies and
procedures prepared by outside counsel. Separately, the Commission estimates small brokerdealers would incur an ongoing burden of 6 hours per year for an in-house compliance manager to
review and approve the updated policies and procedures. The Commission estimates that there are
761 respondents, resulting in an estimated initial burden of 13,698 hours14 in the first year, for an
annualized initial burden of 4,566 hours, and an ongoing burden of 4,566 hours per year.15
Burden for Large Broker-Dealer Regular Review and Documentation under proposed Rule
1101(b) and (c) – Ongoing Burden: The Commission estimates that large broker-dealers would
each annually incur an ongoing burden of 100 hours16 to conduct and document their reviews of
execution quality pursuant to proposed Rule 1101(c) and document their efforts to obtain best
execution for any conflicted transactions and their payment for order flow arrangements pursuant
to proposed Rule 1101(b).17 As the Commission estimates that there are 2,737 respondents, this
would result in an ongoing quarterly burden of 68,425 hours or an ongoing annual burden of
273,700 hours.18
Burden for Small Broker-Dealer Regular Review and Documentation under proposed Rule
1101 (b) and (c) - Ongoing: The Commission estimates small broker-dealers would incur an
ongoing burden of approximately 30 hours per year for in-house business-line personnel to conduct
and document their reviews of execution quality and document their efforts to obtain best
execution for conflicted transactions and payment for order flow arrangements, and approximately
8 hours per year for in-house compliance personnel to review the execution quality reviews and
documentation of efforts to obtain best execution for conflicted transactions and payment for order
flow arrangements, totaling an estimated ongoing burden of 38 hours per respondent.19 As the
Commission estimates that there are 761 respondents, this would result in an ongoing burden of

14

761 respondents x 18 hours = 13,698 hours.

15

761 respondents x 6 hours = 4,566 hours.

16

While this is an annual estimate, the proposed rule would require not less than quarterly
review pursuant to proposed Rule 1101(c), thus 25 hours a quarter (100 hours / 4 quarters).

17

This estimate would be broken down as follows: 10 hours for legal personnel + 20 hours for
compliance personnel + 70 hours for business-line personnel = 100 burden hours.

18

2,737 respondents x 100 ongoing burden hours = 273,700 hours.

19

30 hours + 8 hours = 38 hours.
10

28,918 hours.20
b.

Annual Report Required by Rule 1102

Proposed Rule 1102 would require that a broker-dealer that effects any transaction for or
with a customer or a customer of another broker-dealer, no less frequently than annually, review
and assess the design and overall effectiveness of its best execution policies and procedures,
including its order handling practices. The broker-dealer would be required to prepare a written
report detailing the results of such review and assessment, including a description of all
deficiencies found and any plan to address deficiencies, and the report must be presented to the
broker-dealer’s board of directors (or equivalent governing body).
The Commission believes that a respondent should currently have written compliance
procedures reasonably designed to review its business activity. Proposed Rule 1102 would initially
require a respondent to update such written compliance procedures to document the method in
which the respondent plans to conduct its review and assessment pursuant to proposed Rule 1102.
Burden for Large Broker-Dealer Compliance Procedures under proposed Rule 1102 –
Initial and Ongoing Burdens: The Commission estimates that a large broker-dealer would incur an
initial burden of 15 hours for in-house legal and in-house compliance counsel to update its existing
compliance procedures for reviewing and assessing the design and overall effectiveness of its best
execution policies and procedures,21 a one-time burden of 2 hours for the general counsel, and 1
hour for a Chief Compliance Officer to review and approve the updated compliance procedures,
totaling 18 initial burden hours per respondent. Separately, the Commission estimates that large
broker-dealers would incur an ongoing burden of 40 hours to conduct and document its annual
reviews and assessments,22 and an internal burden of 8 hours23 to prepare the annual report for a
total ongoing burden of 48 hours per large broker-dealer. As the Commission estimates that there
are 2,737 large broker-dealer respondents, resulting in an estimated initial burden of 49,266 hours24
in the first year, for an annualized initial burden of 16,422 hours, and an ongoing burden of

20

761 respondents x 38 hours = 28,918 hours.

21

This estimate would be broken down as follows: 10 hours for in-house legal counsel + 5
hours for in-house compliance counsel to update existing policies and procedures = 15
burden hours.

22

This estimate would be broken down as follows: 5 hours for legal personnel, + 15 hours for
compliance personnel + 20 hours for business-line personnel = 40 hours.

23

This estimate would be broken down as follows: 4 hours for legal personnel + 4 hours for
compliance personnel = 8 hours.

24

2,737 respondents x 18 hours = 49,266 hours.
11

131,376 hours per year (including the first year).25
Burden for Small Broker-Dealer Compliance Procedures under proposed Rule 1102 –
Initial and Ongoing Burdens: As the Commission believes small broker-dealers would primarily
rely on outside counsel to update existing compliance procedures, Commission estimates an initial
burden of 5 hours to review and approve the updated compliance procedures prepared by outside
counsel. Separately, the Commission estimates that each small broker-dealer would incur an
internal burden of approximately 12 hours for business-line personnel to conduct and document the
annual reviews and assessments, and 4 hours per year for in-house compliance personnel to review
the reviews and assessments and preparation of the annual report. The Commission further
estimates small broker-dealers would incur an internal burden of approximately 2 hours for an inhouse compliance manager to review and approve the annual report. As the Commission estimates
that there are 761 small broker-dealer respondents, this would result in an estimated initial burden
of 3,805 hours26 in the first year, for an annualized initial burden of 1,263 hours, and an ongoing
burden of 13,698 hours per year (including the first year).27

25

2,737 respondents x 48 hours = 131,376 hours.

26

761 respondents x 5 hours = 3,805 hours.

27

761 respondents x 18 hours = 13,698 hours.
12

A
Number of
Respondents

B
Annual
Responses
per
Respondent

C
Initial
Burden per
Respondent

D
Initial Burden
Annualized
per
Respondent

E
Ongoing
Burden per
Respondent

F
Annual
Burden per
Respondent

G
Total
Annual
Burden per
Respondent

Recordkeeping

2,737

1

109

36.33

0

D+E
36.33

F*B
36.33

99,435

Recordkeeping

2,737

1

0

0

25

25

25

68, 425

Recordkeeping

761

1

18

6

0

6

6

4,566

Recordkeeping

761

1

0

0

6

6

6

4,566

Recordkeeping

2,737

4

0

0

25

25

100

273,700

Recordkeeping

761

4

0

0

9.5

9.5

38

28,918

Recordkeeping

2,737

1

18

6

0

6

6

16,422

Recordkeeping

2,737

1

0

0

48

48

48

131,376

Recordkeeping

761

1

5

1.66

18

1.66

1.66

1,263

Name of
Information
Collection

Type of
Burden

Large BrokerDealer Policies
and Procedures
under
proposed Rule
1101 – Initial
Large BrokerDealer Policies
and Procedures
under
proposed Rule
1101 –
Ongoing
Small BrokerDealer Policies
and Procedures
under
proposed Rule
1101 - Initial
Small BrokerDealer Policies
and Procedures
under
proposed Rule
1101 –
Ongoing
Large BrokerDealer Regular
Review and
Documentation
under
proposed Rule
1101 (b) & (c)
- Ongoing
Small BrokerDealer Regular
Review and
Documentation
under
proposed Rule
1101 (b) & (c)
– Ongoing
Large BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 - Initial
Large BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 –
Ongoing
Small BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 - Initial

C/3

13

H
Total Industry
Burden

G*A

Name of
Information
Collection

Type of
Burden

Small BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 –
Ongoing

Recordkeeping

A
Number of
Respondents

B
Annual
Responses
per
Respondent

C
Initial
Burden per
Respondent

D
Initial Burden
Annualized
per
Respondent

E
Ongoing
Burden per
Respondent

F
Annual
Burden per
Respondent

G
Total
Annual
Burden per
Respondent

761

1

0

0

18

18

18

TOTAL BURDEN FOR ALL RESPONDENTS

14

H
Total Industry
Burden

13,698

642,374

13.

Costs to Respondents
a.

Policies and Procedures Required by Rule 1101

As discussed above, proposed Rule 1101 would establish recordkeeping burdens for brokerdealers. The Commission believes that broker-dealers generally already have policies and
procedures in place to achieve compliance with the best execution rules of FINRA and the MSRB,
as applicable. The extent to which a respondent would be burdened by the proposed collection of
information under proposed Rule 1101 would depend on the best execution policies and procedures
that have already been established by a respondent as well as the respondent’s business model. To
the extent broker-dealers’ existing best execution policies and procedures already substantially
address the requirements of proposed Rule 1101, these broker-dealers likely would only require
limited updates to their policies and procedures to meet the additional obligations specified in the
proposed rule. To initially comply with this obligation, the Commission preliminarily believes that
broker-dealers would employ a combination of in-house and outside legal and compliance counsel
to update existing policies and procedures. The Commission assumes that, for purposes of this
analysis, the associated costs and burdens would differ between small and large broker-dealers, as
large broker-dealers generally offer more products and services and are more likely to engage in
conflicted transactions, and therefore would need to develop a more extensive set of policies and
procedures.
Costs for Large Broker-Dealer Policies and Procedures under proposed Rule 1101 Initial: The Commission estimates 16 hours for outside counsel to review the updated policies
and procedures on behalf of a large broker-dealer for an initial cost of approximately $7,936 .28
Because the Commission assumes that large broker-dealers would rely on internal personnel to
update their policies and procedures on an ongoing basis, to conduct and document their
execution quality reviews, and to document their efforts to obtain best execution for conflicted
transactions, the Commission estimates large broker-dealers would not incur additional ongoing
costs. Therefore, the Commission estimates that there are 2,737 respondents, resulting in an
annualized cost of $7,240,27729.
Costs for Small Broker-Dealer Policies and Procedures under proposed Rule 1101- Initial
and Ongoing Costs:30 The Commission believes small broker-dealers would primarily rely on
28

The Commission’s estimates of the relevant wage rates for outside legal services of
$496/hour take into account staff experience, a variety of sources including general
information websites, and adjustments for inflation. This cost estimate is therefore based
on the following calculation: (16 hours of review) x ($496/hour for outside counsel
services) = $7,936 in outside counsel costs.

29

$7,936 x 2,737 respondents = $21,720832. $21,720,832 / 3 = $7,240,277.

30

We are proposing the initial and ongoing costs as separate information collections in order
to more easily revise the number of respondents for the initial burden in the future.
15

outside counsel to update existing policies and procedures, as small broker-dealers generally have
fewer in-house legal and compliance personnel. Moreover, the Commission believes small
broker-dealers would be less likely to engage in conflicted transactions subject to the additional
procedural obligations of proposed Rule 1101(b) and would be more likely to qualify as
introducing brokers and be exempt from complying with proposed Rule 1101(a), (b), and (c), and
therefore would need to develop a less extensive set of policies and procedures. The Commission
estimates 65 hours of outside legal counsel services would be required to update such small
broker-dealers’ policies and procedures, for a total one-time cost of approximately $32,240 per
small broker-dealer,31 for an annualized initial cost of approximately $8,178,215 million for
all small broker-dealers.32
Additionally, the Commission estimates that outside legal counsel would require
approximately 11 hours per year to update policies and procedures, for an annual cost of
approximately $5,456 for each small broker-dealer,33 and 11 hours of outside compliance services
per year to update their policies and procedures, for an ongoing cost of approximately $3,344 per
year,34 totaling an aggregate ongoing cost of $8,800 for each small broker-dealer. Therefore, the
Commission estimates that there are 761 respondents, resulting in an ongoing cost of
$6,696,800.35
Costs for Large Broker-Dealer Regular Review and Documentation under proposed Rule
1101(b) and (c): Because the Commission assumes large broker-dealers would rely on internal
personnel to update their policies and procedure on an ongoing basis, to conduct and document
their execution quality reviews, and to document their efforts to obtain best execution for
conflicted transactions, the Commission estimates large broker-dealers would not incur additional
ongoing costs.
31

This cost estimate is based on the following calculation: (65 hours of review) x ($496/hour
for outside counsel services) = $32,240 in outside counsel costs.

32

This cost estimated is based on the following calculation: ($32,240 for outside attorney
costs per small broker-dealer) x (761 small broker-dealers) = $24.53 million in outside
counsel costs / 3 = 8,178,215.

33

This estimate is based on the following calculation: (11 hours per small broker-dealer) *
($496/hour for outside counsel services) = $5,456 in outside counsel costs.

34

The Commission believes that performance of this function will most likely be equally
allocated between a senior compliance examiner and a compliance manager. Based on
industry sources, Commission staff preliminarily estimates that the costs for these positions
in the securities industry are $264 and $344 per hour, respectively, for an average of $304
per hour. This cost estimate is based on the following calculation: (11 hours of review) *
($304/hour for outside compliance services) = $3,344 in outside compliance service costs.

35

($8,800 costs in first year) + $8,800 in second year + $8,800 in third year = $26,400.
$26,400 x 761 respondents = $20,090,400 / 3 = $6,696,800.
16

Costs for Small Broker-Dealer Regular Review and Documentation under proposed Rule
1101(b) and (c) – Ongoing Costs: The Commission estimates that small broker-dealers would
require 20 hours of outside compliance services per year to conduct and document their reviews
of execution quality and document their efforts to obtain best execution for conflicted transactions
and payment for order flow arrangements, for an ongoing cost of approximately $6,080 per year.36
Therefore, the Commission estimates that there are 761 respondents, resulting in a cost of
$4,626,880.37
b. Annual Report pursuant to purposed Rule 1102
As discussed above, proposed Rule 1102 would establish recordkeeping burdens for brokerdealers. Proposed Rule 1102 would require that a broker-dealer that effects any transaction for or
with a customer or a customer of another broker-dealer, no less frequently than annually, review
and assess the design and overall effectiveness of its best execution policies and procedures,
including its order handling practices. The broker-dealer would be required to prepare a written
report detailing the results of such review and assessment, including a description of all
deficiencies found and any plan to address deficiencies, and the report must be presented to the
broker-dealer’s board of directors (or equivalent governing body). The Commission believes that a
respondent should currently have written compliance procedures reasonably designed to review its
business activity. Proposed Rule 1102 would initially require a respondent to update such written
compliance procedures to document the method in which the respondent plans to conduct its
review and assessment pursuant to proposed Rule 1102.
Costs for Large Broker-Dealer Compliance Procedures under proposed Rule 1102 – Initial
Costs: The Commission estimates a cost of approximately $1,488 for outside counsel to review the
updated compliance procedures on behalf of a large broker-dealer,38 for an initial cost of

36

This estimate is based on the following calculation: ($6,080 in outside compliance costs per
small broker-dealer) x (761 small broker-dealers) = $4,626,880 million in the aggregate,
ongoing outside compliance costs.

37

$4,626,800 / 4 quarters = $1,156,720 a quarter.

38

The Commission’s estimates of the relevant wage rates for outside legal services of
$496/hour take into account staff experience, a variety of sources including general
information websites, and adjustments for inflation.” This cost estimate is therefore based
on the following calculation: (3 hours of review) x ($496/hour for outside counsel services)
= $1,488 in outside counsel costs.
17

approximately $4,072,656.39 Therefore, the Commission estimates that there are 2,737
respondents, resulting in an annualized cost of $1,357,552.40
Costs for Small Broker-Dealer Compliance Procedures under proposed Rule 1102 – Initial
and Ongoing Costs: The Commission estimates that a small broker-dealer would require an
average of 10 hours of outside legal counsel services to update the compliance procedures, for a
total one-time cost of approximately $4,960 per small broker-dealer,41 for an annualized initial
cost of $1,257,933.42
Additionally, the Commission estimates that outside counsel would require approximately 5
hours per year to conduct and document its annual reviews and assessments, for an annual cost of
approximately $2,480 for each small broker-dealer,43 for an estimated aggregate annual ongoing
costs of approximately $1.88 million.44 The Commission expects that small broker-dealers would
require 10 hours of outside compliance services per year to conduct and document its annual
reviews and assessments, for an ongoing cost of approximately $3,040 per small broker-dealer per
year.45 The Commission further estimates that outside counsel would require approximately 3
hours per year to prepare the annual report, for an annual cost of approximately $1,488 for each
small broker-dealer.46 In addition, the Commission estimates that each small broker-dealer would
require 3 hours of outside compliance services per year to prepare the annual report, for an ongoing
cost of approximately $912 per year.47 Collectively, the Commission estimates ongoing costs of
39

This estimate is based on the following calculation: ($1,488 for outside counsel costs per
larger broker-dealer) x (2,737 larger broker-dealers) = $4,072,656 in costs.

40

$4,072,656 / 3 = $1,357,552.

41

This cost estimate is based on the following calculation: (10 hours of review) * ($496/hour
for outside counsel services) = $4,960 in outside counsel costs.

42

This cost estimate is based on the following calculation: ($4,960 for outside attorney costs
per small broker-dealer) x (761 small broker-dealers) = $3,774,560 million in costs / 3 =
$1,257,933.

43

This estimate is based on the following calculation: (5 hours per small broker-dealer) *
($496/hour for outside counsel services) = $2,480 in outside counsel costs.

44

This estimate is based on the following calculation: ($2,480 in outside counsel costs per
small broker-dealers) x (761 small broker-dealers) = $1.88 million in aggregate ongoing
costs.

45

This cost estimate is based on the following calculation: (10 hours per small broker-dealer)
x ($304/hour for outside compliance services) = $3,040 in outside compliance service costs.

46

This estimate is based on the following calculation: (3 hours per small broker-dealer) *
($496/hour for outside counsel services) = $1,488 in outside counsel costs.

47

This cost estimate is based on the following calculation: (3 hours per small broker-dealer) *
18

$7,920.48 Therefore, the Commission estimates that there are 761 respondents, resulting in an
ongoing cost of $6,027,120.49

($304/hour for outside compliance services) = $912 in outside compliance service costs.
48

This cost estimate is based on the following calculation: $2,480 outside counsel costs +
$3,040 outside compliance costs + $1,488 outside counsel costs + $912 outside compliance
costs = $7,920.

49

$7,920 costs in first year) + $7,920 in second year + $7,920 in third year = $23,760.
$23,760 x 761 respondents = $18,081,360 / 3 = $6,027,120.
19

Summary of
Dollar Costs
Name of
Information
Collection

Large BrokerDealer Policies
and Procedures
under
proposed Rule
1101 - Initial
Small BrokerDealer Policies
and Procedures
under
proposed Rule
1101 - Initial
Small Broker
Dealer Policies
and Procedures
under
proposed Rule
1101 Ongoing
Small BrokerDealer Regular
Review and
Documentation
under
proposed Rule
1101 (b) & (c)
- Ongoing
Large BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 - Initial
Small BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 – Initial
Small BrokerDealer
Compliance
Procedures
under
proposed Rule
1102 Ongoing

Type of
Burden

A
Number of
Respondents

B
Annual
Responses
per
Respondent

C
Initial Cost
per
Respondent

D
Initial Cost
Annualized per
Respondent

E
Ongoing
Cost per
Respondent

F
Annual
Cost per
Respondent

G
Total Annual
Cost per
Respondent

H
Total Industry
Cost

0

D+E
$2,645.33

F*B
$2,645.33

G*A
$7,240,277

$10,746.67

$10,746.67

$8,178,215

Recordkeeping

2,737

1

$7,936

C/3
$2,645.33

Recordkeeping

761

1

$32,240

$10,746.67

Recordkeeping

761

1

0

0

$8,800

$8,800

$8,800

$6,696,800

Recordkeeping

761

4

0

0

$1,520

$1,520

$6,080

$4,626,880

Recordkeeping

2,737

1

$1,488

$496

0

$496

$496

$1,357,552

Recordkeeping

761

1

$4,960

$1,653

0

$1,653

$1,653

$1,257,933

Recordkeeping

761

1

0

0

$7920

$7920

$7920

$6,027,120

TOTAL COSTS FOR ALL RESPONDENTS

20

$35,385,029

14.

Costs to Federal Government

Not applicable. Proposed Rules 1101 and 1102 would not create new costs for the Federal
Government.
15.

Changes in Burden

Not applicable. The Commission is proposing Regulation Best Execution, including
proposed Rules 1101 and 1102 for the first time.
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

OMB Expiration Date Display Approval

The Commission is not seeking approval to not display the OMB approval expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements of 5 CFR 1320.9.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.

21