FINRA updates its Frequently Asked Questions on new mark-up and mark-down disclosure rules for transactions in fixed income securities

Broker-Dealer Compliance + Regulation

On March 19, 2018, FINRA updated its guidance on its recent amendments to Rule 2232. The new requirements, which are currently scheduled to take effect on May 14, 2018, apply to transactions with retail customers (not institutional accounts, as defined in Rule 4512(c)[1]) in corporate and agency debt securities. Beginning on the effective date, FINRA will require confirmation disclosure of additional transaction-related information, including mark-ups and mark-downs, time of execution, and a hyperlink to a web page containing information about the securities being traded. The goal of these new rules is to help retail customers better understand and compare the costs of these transactions.

By way of reminder, the amended rule provides that, if a member firm executes an offsetting principal trade in a particular security, the firm must disclose the amount of mark-up and mark-down from the prevailing market price for trades with retail customers on the same trading day in the same corporate or agency debt securities. This requirement applies only where the firm’s offsetting principal trade(s) equal or exceed the size of its trade with the retail customer. Additionally, for all retail customer transactions in corporate and agency debt securities, Rule 2232 will require disclosure of a reference and hyperlink when confirmation is electronic to FINRA’s Trade Reporting and Compliance Engine (TRACE) containing the publicly available trading data for the relevant securities. Finally, the execution time, expressed to the second, must be disclosed for all transactions with retail customers in corporate and agency fixed income securities.

In order to help member firms understand these new disclosure requirements, FINRA has published its answers to Frequently Asked Questions (FAQ) about the forthcoming changes. The initial FAQ were published in July 2017. The updated FAQ cover a number of different subject areas concerning the new rules, including:

  • FAQ 1.2.1 confirms that moves of securities from one desk to another is not considered a “transaction.”
  • FAQ 1.4 addresses the circumstances under which a transaction is considered “arm’s-length.”
  • FAQ 1.10.1 addresses the treatment of certain hybrid securities.
  • Other topics addressed by the updated FAQ include:
    • the treatment of exchange-traded securities;
    • the number of decimals that should be used when showing a mark-up;
    • per a variety of practical questions that have been raised by market participants, the methodology for determining the “prevailing market price”; and
    • the nature of the URL that must be provided on the customer’s confirmation.

FINRA previously indicated that it plans to update the FAQ from time to time. FINRA is also accepting suggestions for additional topics and questions to be included in the FAQ in the future.

The FAQ can be accessed on FINRA’s website here.

[1] Generally, institutional accounts are held by financial institutions or other persons and contain at least $50 million in assets.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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