According to FINRA, Cantor Fitzgerald & Co. was censured and fined $100,000 on August 17, 2023.
FINRA found that the firm published public quarterly reports on its handling of customers' orders in National Market System (NMS) securities that failed to disclose required information and provided inaccurate and incomplete information. When the firm published a quarterly Rule 606(a) report, that report failed to disclose required material aspects of the firm's relationship with one of its specified execution venues, including a description of the firm's payment for order flow and profit-sharing relationship with the venue.
The venue was the firm's only execution venue for NMS stocks in that quarter, and it passed along exchange rebates and applied credits to reduce the firm's overall execution costs. The firm had previously received warnings from FINRA regarding the accuracy of its Rule 606(a) reports and had corrected the reports at issue.
After the Securities and Exchange Commission (SEC) adopted amendments to Rule 606, the firm published a Rule 606(a) report that did not provide the information required with respect to NMS securities that are options contracts. In the firm's report, tables were empty instead of providing required data, and sections labeled material aspects were blank. After the firm learned of these deficiencies from FINRA, it published an amended report that continued to be deficient in that it misidentified two execution venues, and it did not include required information on the net aggregate amount of payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received, both as a total dollar amount and on a per share basis.
FINRA also found that the firm's supervisory system, including written supervisory procedures, was not reasonably designed to achieve compliance with Rule 606(a). The firm's procedures only addressed its obligation to report orders in listed options, not NMS stocks. The firm later addressed this particular deficiency in revised procedures. Separately, the firm failed to enforce its procedures regarding Rule 606(a) in that it did not review reports prior to publishing them, which resulted in the deficiencies described above.
Rule 606 requires broker-dealers to disclose information about their order routing practices, including payment for order flow arrangements. This transparency is critical for investors to understand potential conflicts of interest and to evaluate whether their broker is seeking the best execution for their orders. Payment for order flow arrangements, where broker-dealers receive compensation from market makers or other venues for routing customer orders to them, can create incentives that may conflict with the broker's duty to seek best execution for customers.
Subsequently, the firm took remedial measures by making additional revisions to its procedures, including to address the amendments to Rule 606(a) and recent guidance from FINRA and the SEC, and by implementing additional reviews of its reports prior to publishing. Investors should review their broker's Rule 606 reports to understand where their orders are being routed and whether the broker receives payment for order flow.
