The Securities and Exchange Commission has approved amendments to Financial Industry Regulatory Authority (FINRA) Rule 2232 (Customer Confirmations) that require FINRA-member firms to disclose additional information to retail customers with respect to transactions in certain fixed income securities (the “Final Rules”). The Final Rules require the disclosure in customer confirmations of (1) the mark-up or mark-down applicable to certain transactions in corporate or agency debt securities; (2) a reference and hyperlink (if the confirmation is electronic) to the website established by FINRA, which contains publicly available trade data; and (3) the execution time of the transaction such that a customer may locate its individual transactions when accessing FINRA’s website.
More specifically, the Final Rules require that a firm disclose to a non-institutional customer the amount of mark-up or mark-down paid by such customer on a transaction in corporate or agency debt securities if such firm executes one or more offsetting principal transactions in the same security on the same trading day which in the aggregate meet or exceed the size of the customer transaction. A non-institutional customer is a customer that is not a bank, savings and loan association, insurance company, registered investment company, registered investment adviser (either at the state or federal level), or a person with total assets of at least $50 million. This disclosure obligation also may be triggered to the extent that the offsetting principal transaction is executed by a firm’s affiliated broker-dealer if such transaction did not occur at arm’s length.
There are two exceptions to the mark-up or mark-down disclosure requirement. Principal transactions executed on a trading desk separate from the trading desk that executes customer transactions would not trigger a mark-up or mark-down disclosure as long as the firm has policies and procedures reasonably designed to ensure that the trading desk that executes principal transactions does not have knowledge of the customer transactions. The mark-up or mark-down disclosure also is not triggered by bonds acquired by a firm in a fixed-price offering. FINRA notes the applicable mark-up or mark-down should be calculated consistent with FINRA Rule 2121 (Fair Prices and Commission) and supplementary material thereunder and should include the mark-up or mark-down both as a dollar amount and a percentage of the prevailing market price. Disclosures required under (2) and (3) above apply to all transactions in corporate and agency debt securities, regardless of whether the requirement to disclose the amount of mark-up or mark-down is triggered.
The Final Rules become effective May 14, 2018. FINRA’s Regulatory Notice is available here.