FINRA Rule 2232 requires firms to provide retail customers with mark-up disclosure (and other related disclosures) for trades in corporate and agency debt securities that firms offset on the same day with other principal trades in the same security. Disclosed mark-ups must be calculated from a security’s Prevailing Market Price (PMP), consistent with FINRA Rule 2121 and applicable FAQ guidance. On April 24, 2020 FINRA released a very valuable FAQ on Fixed Income Mark-up Disclosure with important updates related to disclosure requirements for broker dealers. Broker dealers and their employees are braving a whole new world with various work from home and virtual meeting and operations challenges. FINRA makes updates to the FAQ’s so it is important to check back often for the most up to date information.
Q: How might volatile market conditions, due to the coronavirus disease (COVID-19) pandemic, impact a firm’s process for providing customers with fixed income mark-up disclosure under FINRA Rule 2232?
“FINRA recognizes that the volatile market conditions due to the COVID-19 pandemic may make it more difficult to determine PMP according to a firm’s existing procedures. In particular, where customer trades are not tied to immediately offsetting principal trades, it may be more difficult for a firm to evaluate whether its offsetting principal trades remain reasonably indicative of PMP, based on the factors identified in Rule 2121 and applicable guidance, given such volatile market conditions. Accordingly, while these current market conditions persist, FINRA understands that firms may generate a higher number of exceptions that they evaluate as part of their supervisory review process.
FINRA believes its existing guidance may be helpful for firms to consider as they work through any exception review processes that they employ in connection with mark-up disclosure requirements. Specifically, under Rule 2232 and SEA Rule 10b-10, confirmations must be given or sent at or before the completion of a transaction, and FAQ 3.8.1 discusses the potential for reviewing PMP determinations before or after confirmations are sent to customers. While FAQ 3.8.1 states that FINRA expects it will be rare for the PMP of a security to be corrected based on exception reporting, FINRA understands that volatile market conditions resulting from the COVID-19 pandemic may impact the rate at which such corrections occur. Firms that perform an exception review process after they issue confirmations with mark-up disclosure should continue to follow existing guidance, including FAQs 3.5.1 and 3.8.1, on providing corrected confirmations when needed. In all cases, firms should take particular care to document the basis for correcting a PMP and to apply their policies and procedures consistently, in line with applicable guidance.”
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