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FINRA Disclosure – Wells Fargo Commercial

Customer Order Handling Policies and General Disclosures

Wells Fargo Securities, LLC (“WFS”) is committed to providing best execution of customer orders consistent with applicable rules and regulations.  When WFS receives a customer order, it uses reasonable diligence to ascertain the best market for the subject security so that the resultant price is as favorable as possible under prevailing market conditions and the customer’s provided instructions. Please review the following general order handling disclosures.

Best Execution

WFS is committed to providing the best execution for customer orders.  The duty of best execution requires that WFS seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances.  WFS has the obligation to use reasonable diligence to ascertain the best inter-dealer market for a security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. WFS takes a number of factors into consideration in determining how to execute and where to route customer orders, including, among other things,

  • Trading characteristics of the security and character of the market for the security (e.g., price, volatility, and relative liquidity);
  • Size and type of transaction;
  • Number of primary markets checked; 
  • Transactions costs;
  • Opportunity for price improvement;
  • Accessibility of quotation sources including speed of execution; and 
  • Any special handling instructions guiding the execution of the order (i.e., VWAP, TWAP, Over the Day, etc.).

WFS conducts regular and rigorous reviews of transactions for quality of execution.  To that end, WFS regularly convenes a best execution working group which is comprised of members of the compliance, technology, and business management teams.

WFS is a member of all of the major US stock exchanges and also has direct access to a number of carefully vetted market centers such as alternative trading systems and dark pools.  WFS actively reviews and analyzes the performance of each venue and adjusts its smart order routing strategies accordingly.

FINRA Rule 5320 – Prohibition Against Trading Ahead of Customer Orders

FINRA Rule 5320 generally provides that a FINRA member firm handling a customer order in an equity security is prohibited from trading that security for its own account at a price that would satisfy the customer order unless the firm immediately executes the customer’s order up to the size of its own order at the same price or better.  The rule provides exemptions that the permit the firm to trade for their own account provided that certain conditions are met.   This disclosure outlines WFS’ practices relating to FINRA Rule 5320.

WFS engages in market making, principal customer facilitation and other similar trading activities that may require it to manage risks resulting from the facilitation or capital commitment activities.  Consistent with the no knowledge exemption under FINRA Rule 5320, WFS has implemented physical and technological information barriers to prevent trading desks engaging the aforementioned activities from obtaining knowledge of orders received outside of such trading desks.  WFS conducts surveillance to reasonably ensure the integrity of these information barriers.

WFS may trade for its own account while handling orders from institutional accounts unless the institutional customer opts-in to the FINRA Rule 5320 protection by informing their WFS sales representative.  Please be advised that all customer orders including orders from institutional accounts that have opted-in to the Rule 5320 protection will be handled in a manner consistent with FINRA best execution standards.  WFS maintains a surveillance and supervisory infrastructure to monitor execution quality.

FINRA Rule 5270 – Prohibition on Front Running Block Transactions

FINRA Rule 5270 expands the scope of its existing front running prohibitions beyond equity securities to include trades in related financial instruments (e.g., options, derivatives, security-based swaps and other financial instruments overlying a security that is the subject of an imminent block transaction).

Under  FINRA  Rule  5270,  WFS  is  generally  prohibited  from  trading  for  its  own  account  while  in possession of material, non-public market information concerning an imminent customer block transaction or providing such information to other customers for trading purposes prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete.

FINRA Rule 5270, however, recognizes three categories of permitted transactions set forth below.

  • Transactions that the firm can demonstrate are unrelated to the customer block order.  This includes transactions occurring on trading units where effective information barriers exist to prevent internal disclosure of the customer block order, transactions in the same security related to an earlier customer order and transactions to correct bona fide errors.
  • Transactions  undertaken  to  facilitate  the  execution  of  the  customer  block  order.  In these situations, WFS may engage in trading to hedge the risk of the customer block facilitation.  WFS will make every effort to minimize any potential market impact such activity may have on the order.
  • Trading activity undertaken in compliance with the rules of a national securities exchange and at least one leg of the activity is executed on that exchange.

Please note that your order will be handled in a manner that is consistent with FINRA best execution standards and that WFS maintains a surveillance and supervisory infrastructure to monitor execution quality.

Please contact your WFS sales representative if you require more information regarding how your block transactions are handled or have any questions regarding the terms and conditions mentioned above.

Guaranteed Orders

When WFS accepts a guaranteed order, it is agreeing to execute your order as principal, at a price based upon an agreed benchmark price or pricing formula (e.g., closing price or volume weighted average price). When handling guaranteed orders, WFS may trade in the security for its own account either to:

  • Facilitate the order (or the order of one or more other customers);
  • Liquidate or cover an existing position established in connection with facilitating the order (or the order of one or more other customer orders); or 
  • Engage in hedging or other risk mitigating trading activity.

You should be aware that trading activity related to the facilitation of guaranteed orders could affect the market for the subject security.  For example, if you place a large order to buy a security, WFS’ trading activity described above may cause the price of the security to increase.  However, when WFS is engaging in such activity, it is committed to executing your order in a manner that is consistent with its best execution obligations.

Extended Hours Trading for Equities and Listed Options

WFS may execute a customer order in the pre-market or post-market sessions should the customer specifically request such a facilitation. The following disclosures are provided so you can make an informed decision regarding the placement of orders for execution during extended hours trading.

  • Risk of Lower Liquidity .  Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for customers to buy and sell securities, and as a result, customers are more likely to pay or receive a competitive price for securities purchased or sold.  There may be lower liquidity in extended hours trading as compared to regular market hours. As a result, your order may only be partially executed, or not at all.
  • Risk of Higher Volatility .  Volatility refers to the changes in price that securities undergo when trading.  Generally, the higher the volatility of a security, the greater its price swings. There may be greater volatility in extended hours trading than in regular market hours.  As a result, your order may only be partially executed, or not at all, or you may receive an inferior price in extended hours trading than you would during regular market hours
  • Risk of Changing Prices .  The prices of securities traded in extended hours trading may not reflect the prices either at the end of the regular market hours, or upon the opening of the next morning. As a result, you may receive an inferior price in extended hours trading than you would during market hours.
  • Risk of Unlinked Markets . Depending on the extended hours trading system or the time of day, the prices displayed on a particular extended hours system may not reflect the prices in other concurrently operating extended hours trading systems dealing in the same securities. Accordingly, you may receive an inferior price in one extended hours trading system that you would in another extended hours trading system.
  • Risk of News Announcements .  Normally, issuers make news announcements that may affect the price of their securities after regular market hours.  Similarly, important financial information is frequently announced outside of regular market hours.  In extended hours trading, these announcements  may  occur  during  trading,  and  if  combined  with  lower  liquidity  and  higher volatility, may cause an exaggerated and unsustainable effect on the price of a security.
  • Risk of Wider Spreads .  The spread refers to the difference in price between what you can buy a security for and what you can sell it for.  Lower liquidity and higher volatility in extended hours trading may result in wider than normal spreads for a particular security.
  • Risk of Lack of Calculation or Dissemination of Underlying Index, Portfolio Value or Intraday Indicative Value (“IIV”) . For certain derivative structured products, an updated underlying index, portfolio value or IIV may not be calculated or publicly disseminated in extended trading hours. Since the underlying index value, portfolio value and IIV are not calculated or widely disseminated during the pre-market and post-market sessions and the lack of regular trading an investor who is unable to calculate implied values for certain derivative securities products in those sessions or any other may be at a disadvantage to market professionals.  Additionally, securities underlying the indexes or portfolios will not be regularly trading as they are during regular trading hours, or may not be trading at all. This may cause prices during extended trading hours to not reflect the prices of those securities when they open for trading.

Market Buy Orders in New Issue Securities

WFS does not accept or execute held market orders to purchase shares of an initial public offering until secondary market trading in such security has commenced. Limit orders and not held orders are accepted and executed regardless of whether secondary market trading has commenced.

Net Trading

A net transaction means a principal transaction in which WFS, after having received an order to buy (sell) an equity security, purchases (sells) the security at one price and then sell to (buys from) you at a different price. The price difference represents the compensation that WFS receives for facilitating your order. WFS may handle orders from intuitional customers on a net basis unless instructed otherwise on a blanket or order by order basis.

Stop Orders

On occasion, the U.S. equity markets experience periods of extraordinary volatility and price dislocation. Investors often use stop orders as a tool for managing market risk. While WFS neither encourages nor discourages the use of stop orders, investors should be aware of the following risks during these periods of market volatility:

  • Stop prices are not guaranteed execution prices.
  • Stop orders may be triggered by a short-lived, dramatic price change.
  • Sell stop orders may exacerbate price declines during times of extreme volatility.
  • Placing a “limit price” on a stop order may help manage some of the above risks.

Additional helpful information can be found in FINRA Regulatory Notice 16-19 at http://www.finra.org/sites/default/files/notice_other_file_ref/Regulatory-Notice-16-19.pdf.

Not Held Orders

WFS generally handles orders from institutional customers on a “not held” basis unless requested otherwise through your WFS sales representative or population of the “held” order tag on the FIX order or other electronic protocol message.

Indications of Interest

WFS utilizes different types of messages to communicate trading interest to its customers (i.e., indications of interest). The following types of messages may be communicated electronically through Financial Information eXchange (FIX) to market data providers such as Bloomberg or Autex.

Types of Indications of Interest:

  • Natural : A natural indication of interest is generally used to communicate trading interest related to a live customer order. Its primary purpose is to match up a customer buyer and customer seller, but a natural message may also be used when liquidating, offsetting or hedging a proprietary position resulting from facilitating a customer order.  WFS limits natural messages to these categories to minimize potential conflicts of interest between WFS and its customers.
  • Natural with “ITW” attached (In Touch With) : A natural indication of interest appended with the “ITW” tag is used to communicate potential customer trading interest. When WFS advertises natural trading interest with ITW, it is communicating that a customer has provided verbal or electronic  instructions that  they  may  be  willing  to  trade  at  the  advertised price  and  up  to  the advertised volume. Related trading activity may result in WFS establishing a long or short position that may need to be unwound in the marketplace.
  • Super : A “Super” message is used solely to communicate WFS’ principal trading interest.  Trading activity related to a “Super” message will result in WFS having a long or short position that may need to be unwound in the marketplace.

Regulation NMS (National Market System)

Regulation NMS requires broker-dealers facilitating a block of stock in a NMS security for a customer to route simultaneously with the execution an intermarket sweep order (“ISO”) to execute against the full displayed size of any protected quotation with a price superior to the block trade price.

WFS’ policy is to provide to its customer the benefits of any better priced ISO executions received within one second after being routed.  You may decline to have the ISO executions passed on to you on either a blanket or order by order basis.

SEC Regulation NMS Rule 606 – Equity Order Routing

WFS will route equity orders taking into consideration among other factors, the quality and speed of execution, as well as the credits, cash, or other payments it may receive from any exchanges, broker- dealer or market center. This may not be true if a customer has directed or placed limits on any orders.  Whenever possible, WFS will route orders in an attempt to obtain executions at prices equal or superior to the nationally displayed best bid or offer. WFS will also attempt to obtain the best execution regardless of any compensation it may receive. WFS uses the compensation received to help keep costs competitive and provide customers with quality execution services. The nature and sources of credits and payments WFS receives in connection with specific orders will be furnished to a customer upon request. WFS prepares quarterly reports describing its order routing practices for non-directed orders routed to a particular venue for execution. A printed copy of this report is available upon written request or by visiting: https://vrs.vista-one-solutions.com/sec606rule.aspx. WFS will provide more detailed information relating to the routing of any order executed within six months of the request.

Equities and Listed Options Payment for Order Flow Disclosure

WFS routes customer equity and listed options orders to national securities exchanges, alternative trading systems and other market centers (including other broker-dealers), some of which provide WFS with payment for order flow. The source and amount of any compensation received by WFS in connection with any transaction for your account is available upon written request.

Solicited Order/Auction Mechanism

WFS is required to notify customers, per International Securities Exchange (“ISE”) and (various other option exchanges) of the Firm’s intent to use the Solicited Order mechanism, which is available for members to cross customer option orders. Below is the information required to be provided to you.

ISE Rule 716(e) (3) provides:

When handling an order of 500 contracts or more on your behalf, WFS may solicit other parties to execute against your order and may thereafter execute your order using the International Securities Exchange’s Solicited Order Mechanism. This functionality provides a single-price execution only, so that your entire order may receive a better price after being exposed to the Exchange’s participants, but will not receive partial price improvement. For further details on the operation of this Mechanism, please refer to International Securities Exchange Rule 716, which is available at www.ise.com under “Membership, Rules & Fees – Regulatory – ISE Rules.”

Professional Customer Designation for Option Orders

Exchange rules require WFS to indicate whether public customer orders are from “professional customers.”  WFS review its customers’ activity on a periodic basis to determine whether such orders are from professional customers.  Under circumstances where WFS identifies a customer who has placed an average of more than 390 orders in listed options per day during any month of a calendar quarter, WFS will represent that customer’s orders as professional orders within five (5) days of the next calendar quarter.

Tied Hedge Procedures

When handling an option order of 500 contracts or more on your behalf, WFS may buy or sell security futures or futures positions following receipt of the option order but prior to announcing the option order to the trading crowd.  The option order may thereafter be executed using the tied hedge procedures of the exchange (e.g., the Chicago Board Options Exchange (“CBOE”) or the NASDAQ OMX PHLX) on which the order is executed.  The exchange procedures permit the option order and hedging position to be presented for execution as a net-priced package subject to certain requirements.  For further details on the operation of the procedures, please refer to the exchange rules for tied orders including CBOE Rule 6.74.10, which is available at www.cboe.org/Legal.

CBOE Rule 6.74B Disclosure

When handling an option order of 500 contracts or more on your behalf, WFS may solicit other parties to execute against your order and may thereafter execute your order using the CBOE’s AON (All or None) AIM (Automated Improvement Mechanism) Solicitation Mechanism.  This functionality provides a single-price execution, unless the order results in price improvement for the entire quantity, in which case multiple prices may result.  For further details on the operation of this Mechanism, please refer to CBOE Rule 6.74B, which is available at www.cboe.org/Legal.

Specialist Trading on Parity

New York Stock Exchange (“NYSE”) rules permit a specialist to trade on parity with orders in the Crowd provided that the brokers in the Crowd do not object.  WFS may route orders to Floor Brokers who may permit a NYSE specialist to trade on parity with your order under certain circumstances.  If you wish to object to this practice, please notify your WFS sales representative either as a blanket instruction or on a transaction by transaction basis.  Additional information regarding NYSE Rule 108 governing specialists trading on parity with customers is available on the NYSE website.

Potential Conflicts of Interest Related to Exchange Traded Funds (“ETFs”)

WFS may have potential conflicts of interest relating to ETFs that you may purchase from or sell to us.  The following sets forth a non-inclusive list of potential conflicts:

  • WFS can act as an authorized participant in the purchase or sale of shares from an ETF. WFS may, from time to time, receive a fee in connection with its role as an authorized participant. WFS may have information about pending creations or redemptions of ETF shares.
  • WFS may seed the formation of an ETF using its own capital resulting in WFS having a position in the ETF prior to the ETF being available to the public.
  • WFS can act as a market maker or block positioner in ETFs.  As a result, WFS may buy or sell ETF shares for other customers as agent or for its own account in conjunction with your ETF order.
  • WFS can receive remuneration in the form of commissions, mark-ups/mark-downs, or other charges and fees from ETF transactions and, when acting as principal, may also benefit from a dealer spread.
  • WFS may have a large ownership interest (both long and short) in certain ETFs or related derivatives and effect transactions such instruments for hedging purposes.

Prior to entering into any transactions in ETFs, you should carefully read the prospectus and other related documents that are publically at www.sec.gov or ETF issuer websites.

SEC Exchange Act Rule 13h-1 (Large Trader Rule)

The Large Trader Rule requires large traders to register with the SEC and obtain a large trader ID (“LTID”).  The Large Trader Rule defines a large trader as any person that:

  • Directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security for or on behalf of such accounts, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than:
    • During a calendar day, either two million shares or shares with a fair market value of $20 million; or
    • During a calendar month, either twenty million shares or shares with a fair market value of $200 million; or
  • Voluntarily registers as a large trader by filing electronically with the Commission Form 13H.

Please consult with your legal counsel to determine the applicability of the Large Trader Rule your activities.

Telephone Recording Disclosure

As part of our compliance with applicable laws and regulations, certain telephone lines in our sales and trading desk may be recorded.  Please note that these recordings may be made with or without the use of any notification such as a verbal disclosure or audible tone.

Disclosure for Canadian Customers

WFS trades directly with Canadian resident clients in reliance upon the international dealer exemption under NI 31-103.  As such, WFS is subject to trading restrictions, including, among other things, that WFS is only permitted to trade “foreign securities” with “permitted clients” resident in Canada.  A foreign security is a security issued by an issuer incorporated, formed or created under the laws of a foreign (i.e., non-Canadian) jurisdiction or a security issued by a government of a foreign jurisdiction.  This serves to put you on notice that Canadian resident clients should only place orders with WFS for non-Canadian securities in accordance with NI 31-103.

Canada’s Anti-Spam Legislation ("CASL")

CASL sets forth the requirements for sending any commercial electronic messages to the electronic address of a person within Canada.  Pursuant to CASL, any commercial electronic messages sent to you by WFS are exempt from CASL under the exemption provided for inter-business commercial electronic messages.