SEC Finalizes Amendments to Require Greater Execution Quality Disclosure

The Securities and Exchange Commission finalized on Wednesday amendments to Rule 605 of Regulation NMS by a unanimous 5 to 0 vote. The revised rule will require more broker/dealers to disclose quality-of-trade-execution reports to investors and to use more data to measure the quality of execution.

Broker/dealers with at least 100 customer accounts will now be required to disclose reports on their executions of stock trades. The reports must now cover orders outside of business orders and certain types of orders with stop prices. When disclosing time-to-execute information, broker/dealers must use time increments of milliseconds or smaller and must include more information on average price spreads and price improvement.

Lastly, covered broker/dealers are required to publish a summary report of their data on a monthly basis.

SEC Chairman Gary Gensler argued at Wednesday’s open hearing that the rule will “foster more competition” by improving transparency and comparability. Commissioner Hester Peirce said the rule would provide a “clearer picture of execution quality” and will have positive effects for institutional and retail traders. She added that the summary reports will be helpful for the financial press, which will also help inform the public.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

This rule was initially proposed in December 2022, along with three other proposals that are still pending. When regarded collectively, they are known as the market structure proposals. The other proposals included a best-execution standard; mandatory auctions for retail orders; and a reduction in pricing increments to sub-penny tick sizes for certain stocks.

The finalized amendments were by far the most popular within the industry of the market structure proposals, and many recommended that it come first, because it would provide additional data which would help clarify if the other three proposals would be useful. The proposal on price increments received mostly supportive feedback, while the other two were broadly opposed by industry.

The rule becomes effective 60 days after being entered into the Federal Register, and the compliance date will be 18 months after that—probably near the end of 2026.

Tags: best execution, Gary Gensler, SEC

There were 907 women- and minority-owned private equity and venture capital firms in the U.S. by the end of 2023, according to Fairview Capital’s 2023 market review. The $10 billion asset manager has conducted the annual survey of diverse managers since 2014, when there were only 100 such firms in the market.

Fairview counts women- and minority-owned firms as those that are at least 50% owned by people from these groups.

The report’s findings include:

Diverse managers in VC and PE grew to 907 at the end of 2023 from 760 at the end of 2022;
Those raising capital increased to 417 from 346;
The median fund size target of these managers was $100 million; and
50% of funds were continuing funding rounds that began in 2022.

“We find that the increase in diverse talent is continuing to drive consistent growth in the community of woman- and minority-owned firms, despite significant underrepresentation in the market overall,” said Aakar Vachhani, Fairview Capital’s managing partner, in a statement. “While the data makes it clear that the opportunity set of woman- and minority-owned firms remains dynamic, we are observing some limited partners gravitate to the perceived safety of larger, more tenured firms.”

For more stories like this, sign up for the CIO Alert newsletter. 

VC Firms Growing Fastest

“The investment opportunity with [minority]-owned firms continues to be dominated by venture capital,” the report stated. Fairview wrote that barriers to entry are lower in VC for diverse managers, leading to higher growth for these managers.

According to the report, growth in women- and minority-owned venture capital firms has outpaced growth in buyout and growth equity firms. From 2014 to 2023, the number of growth funds grew 3.7 times, which lagged behind the growth of diverse managers (9.4 times) and venture capital firms (16.7 times).

Of diverse managers listed in the report, 72% were managers of venture capital firms, with the rest working on buyout, growth and credit-related strategies.

Underrepresentation of diverse managers in buyouts and growth equity correlated to the size of the funds needed in the different strategies. Many diverse managers are raising smaller funds, while growth equity and buyout funds often write larger checks and raise larger funds and require significant up-front investment, the report stated.

According to Fairview, track records are harder to generate for diverse managers in buyouts and growth equity; the firm noted that these managers have more success building track records in VC through smaller “proof of concept” funds and through angel investing, which have lower barriers to entry, according to Fairview.

Troubles Amid a Volatile Market

While Fairview has published the annual report for a decade, it has been an active investor in diverse-managed firms for 30 years. The firm noted that diverse managers tend to be more impacted by market sentiment shifts.

“In uncertain times, [LPs] tend to take a flight to perceived safety in larger and more tenured firms; it appears this time is no different,” the report stated.