Fixed Income Mark-up Disclosure

Regulatory Obligations and Related Considerations

Regulatory Obligations

Since 2018, FINRA’s and the Municipal Securities Rulemaking Board’s (MSRB) amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15 have required firms to provide additional transaction-related information to retail customers for certain trades in corporate, agency and municipal debt securities (other than municipal fund securities). Disclosed mark-ups and mark-downs must be expressed as both a total dollar amount for the transaction and a percentage of prevailing market price (PMP). In addition, for all retail customer trades in corporate, agency and municipal debt securities (other than municipal fund securities), firms must disclose on the confirmation the time of execution and a security-specific link to the FINRA or MSRB website where additional information about the transaction is available, along with a brief description of the information available on the website.

Related Considerations

  • What are the frequency, scope and depth of your firm’s review of the accuracy of your firm’s confirmations, and does it include reviewing samples of confirmations?
  • How does your firm work with its clearing firm(s) to ensure the accuracy of your firm’s confirmations?
  • Is the process to ensure mark-up disclosures appear on confirmations manual or automated?
  • What is the scope of diligence and oversight your firm conducts on customer confirmation vendors?
  • Has your firm considered how to maintain consistent and correct disclosures for fixed income transactions executed across different vendors, platforms or trading desks?

Exam Findings and Effective Practices

Exam Findings

  • Incorrect PMP Determinations – Adjusting the PMP in firms’ order entry systems to subtract registered representatives’ concession or sales credit from the mark-up; PMP not presumptively relying on the dealer's contemporaneous cost or proceeds; deciding that firms’ costs or proceeds were no longer “contemporaneous” without sufficient evidence as required by FINRA Rule 2121.02(b)(4) and using other pricing information to determine the PMP.
  • Incorrect Compensation Disclosures – Disclosing additional charges separately from disclosed mark-ups or mark-downs, even when such charges reflected firm compensation; disclosing registered representatives’ sales credits or concessions as separate line items on confirmations, in addition to the mark-up or mark-down, without clear and accurate labeling; inaccurately labeling only the sales credits or concessions portion as the total mark-up or mark-down.
  • Failure to Provide Accurate Time of Execution – Disclosing times of execution on customer confirmations that did not match the times of execution disseminated by the Electronic Municipal Market Access system (EMMA) or Trade Reporting and Compliance Engine (TRACE).
  • Disclosure for Structured Notes – Failing to provide disclosures on customer confirmations for trades in TRACE-reportable structured notes because firms did not realize the notes were subject to FINRA Rule 2232 or did not receive the PMP from the structured note distributors.
  • Incorrect Designation of Institutional Accounts – Failing to provide disclosures to certain customers because the firm identified those customers’ accounts as “institutional,” even though the customers did not meet the “institutional” definition in FINRA Rule 4512(c) (Customer Account Information) or MSRB Rule G-8(a)(xi).

Effective Practices

  • Confirmation Review – Performing regular reviews of confirmations, including samples of confirmations, to confirm the accuracy of all disclosures, including all of the required disclosure elements, including the mark-up or mark-down, the time of execution and the security-specific link (with CUSIP).
  • Collaborating With Clearing Firms – For correspondent firms, engaging with clearing firms to understand their policies and processes for providing mark-up disclosure.
  • Due Diligence of Vendors – Conducting due diligence into customer confirmation vendors’ processes and methodology to determine PMP.
  • Product and Customer Review – Reviewing firm confirmation systems and processes to confirm that they cover all products and customers subject to FINRA Rule 2232 (in particular, whether they accurately categorize “institutional” customers using the definition in FINRA Rule 4512(c) or MSRB Rule G-8(a)(xi)).

Additional Resources

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