In a targeted examination, the US Financial Industry Regulatory Authority is seeking information about the practices of firms that charge zero commission on client trades and 'the impact that not charging commissions has or will have on the firms' order routing.'

In this latest targeted examination, also referred to as a 'sweep,' FINRA's Market Regulation Department's Trading & Financial Compliance Examinations Department issued a sample exam letter of the information requested. The letter is intended to elicit information about the scope of the trades on which the firm in question is charging no commission, as well as information about how the firm makes money, whether clients understand how the firm makes money and whether the firm's revenue-raising practices may be detrimental to customers; e.g. whether the firm cares less than it might about obtaining 'best execution' for customers because it obtains more revenue through trade rebates or payments for order flow arrangements.

This is actually quite a significant targeted exam letter. It has relevance well beyond those firms that offer zero commissions on varous things. FINRA is asking very detailed questions about how this-or-that firm makes money and how the firm's revenue stream affects the manner in which the firm does business and treats customers.

The type of information that the letter is trying to elicit includes information that would be relevant to the completion of Form CRS, with which every firm must provide its clients.

In short, all firms, not only those that might receive the letter, should work out their own answers to the questions and ask themselves how their customers - and the regulators - would view those answers.

A 'targeted exam' generally refers to an exam/inquiry that looks at a very specific issue, often at multiple firms. It is also referred to as a 'sweep exam' because the regulators are 'sweeping the street' on a particular issue.

* Steven Lofchie can be reached on +1 212 504 6700 or at steven.lofchie@cwt.com