FINRA has adopted FINRA Rules 5310, Best Execution and Interpositioning, and 6438, Displaying Priced Quotations in Multiple Quotation Mediums.  Rule 5310 is based largely, but not entirely, on NASD Rule 2320, while Supplementary Material to Rule 5310 draws substantially from NASD IM-2320, Interpretive Guidance with Respect to Best Execution Requirements. Several new provisions address: (i) securities with limited quotation or pricing information available; (ii)  foreign securities; (iii) customer instructions on routing orders; and, (iv) regular and rigorous review of execution quality.  Rules 5310 and 6438 become effective on 5/3/12. What's Changing? The general requirements of best execution remain in effect.  Under Rule 5310(a), firms are still required - in any transaction for or with a customer or a customer of another broker-dealer - to use “reasonable diligence” to ascertain the best market for a security and to buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. Among all factors a firm can consider when determining whether it has used reasonable diligence, FINRA points to these 5 key factors:

• character of the market for the security
• size and type of transaction
• number of markets checked
• accessibility of the quotation
• terms and conditions of the order as communicated to the firm

FINRA also addresses interpositioning - i.e., interjecting a 3rd party between the firm and the best available market, use of a broker’s broker, staffing of order rooms, and application of best ex requirements to other parties. As noted above, Supplementary Material ... to Rule 5310 includes these new provisions: 1. Supplementary Material .06  (Securities with Limited Quotation or Pricing Information). NASD Rule 2320(f), which was commonly referred to as the “Three Quote Rule,” is out.  New Supplementary Material .06 emphasizes a firm’s best execution obligations when handling an order when dealing with a market for which there's limited quotations or pricing information available. FINRA stresses that a firm must be especially diligent with respect to best ex in such cases, and requires that WSP's address address the steps the firm will take to determine the best market for such a security in the absence of multiple quotations or pricing information, and to evidence in writing how the firm complied with those pols and procedures. Specifically, when handling orders for such securities, a firm should generally seek out other sources of pricing information or potential liquidity - e.g., going to other firms that the member firm previously has traded with in the security.  The Supplementary Material recognizes that contacting other broker-dealers can often be necessary for a firm to meet its best execution obligations.

[C-I Note: This last statement in the Supplementary Material sounds very much like an order - i.e., a 'must have' requirement in firm WSPs - like it or not.  Do members agree?  Your thoughts?]

2. Supplementary Material .07  (Orders for Foreign Securities with No U.S. Market). Markets in foreign jurisdictions often don't have identical best execution reqs as those in the U.S. and, in many cases, may not have comparable pre-trade or post-trade transparency standards.  Consequently, the handling of orders for foreign securities with no U.S. market can differ substantially from the handling of orders in securities that trade in the United States. Therefore, when handling orders for foreign securities, and in particular foreign securities with no U.S. market, FINRA recognizes that the standard of “reasonable diligence” required by FINRA Rule 5310(a) must be assessed by examining specific factors, including “the character of the market for the security” and the “accessibility of the quotation” - i.e., a “facts and circumstances” analysis. When handling customer orders for foreign securities that do not trade in the U.S., firms must operate according to specific pols and procedures in place in the firm WSPs re: its of customer orders for these securities that are reasonably designed to obtain the most favorable terms available for the customer, taking into account differences that may exist between the U.S. and foreign markets. As a firm’s best ex obligations evolve because market charges may give rise to improved executions, firms must be vigilant in reviewing and updating, as necessary, their WSPs. 3. Supplementary Material .08  (Customer Instrux Re: Routing of Orders). Where a firm customer has, on an unsolicited basis, specifically instructed the firm to route an order to a particular market, best ex determination is not required beyond that specific customer instruction.  The firm still has an implicit obligation to process the customer’s order promptly and in accordance with terms of the order. Where a customer has directed the firm to route an order to another broker-dealer that's also a FINRA member firm, the exception would not apply to the receiving broker-dealer to which the order was directed. 4. Supplementary Material .09  (Regular and Rigorous Review of Execution Quality). These longstanding obligations are set forth and explained in various SEC releases and NASD Notices to Members.  Supplementary Material .09 codifies this guidance and does not alter existing requirements regarding regular and rigorous review. FINRA Staff Contact. Direct questions to: Brant Brown, Office of General Counsel - (202) 728-6927. For further details, go to:  [Regulatory Notice 12-13, March 2012].