Finra has launched an sweep exam of broker-dealers offering zero commissions for customer transactions.

The industry self-regulator’s Trading & Financial Compliance Examinations unit has put out a 26-point questionnaire. With it, Finra aims to understand firms’ decisions to drop commissions, the impact of those decisions and seeks to better understand “other aspects" of each firm's business model.

Finra wants to know the types of customers eligible for zero commissions; the types of securities to which they apply; and any factors, such as security price, liquidity or client account types required for eligibility.

The self-regulator also asks whether clients get charged “any fees, expenses or other costs, exclusive of commissions, in connection with customer brokerage accounts.” If so, it asks firms to explain how they communicate those fees to investors and to provide copies of the relevant disclosures.

The questions also ask about where the firms route customer execution orders, and which if any, of those trading partners get paid through such arrangements.

The self-regualtory organization also asks, among other things, for details about whether any fees or rebates get passed on to end clients and whether sweep programs are used in connection with client accounts.


Finra also asks for copies of various internal documents, including written supervisory procedures concerning best execution,disclosure of “payment for order flow” arrangements, and “any advertisements, social media posts or other widely-disseminated retail communications" related to firm's no-transaction-fee offers.

In October, Charles Schwab was the first major broker-dealer to eliminate commissions; TD Ameritrade quickly followed suit. That set off what turned out to be a race to zero commissions across the entire financial services industry when they eliminated commissions for online trades of U.S. and Canadian stocks, ETFs and options. E*Trade and Fidelity Investments quickly followed suit.

In December Merrill Lynch extended unlimited free trading in stocks, ETFs and options to all clients on the self-directed Merrill Edge platform, and, a day later, Wells Fargo killed commissions on stocks and ETFs, but not on penny stocks or options, on its self-directed platform. Vanguard joined the club last month, extending free trading on Vanguard mutual funds — which it’s offered since 1977 — and ETFs to stocks and options.

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