As summarized below, the SEC has recently approved amendments to FINRA Rule 2232 (Customer Confirmations) that require firms to disclose additional transaction-related information to retail customers for trades in certain fixed income securities.
These amendments will become effective on May 14, 2018.
When Disclosure is Required
New FINRA Rule 2232(c) requires firms to disclose to a non-institutional customer the amount of mark-up or mark-down the customer paid for a trade in a corporate or agency debt security, if the firm also executes one or more offsetting principal trades in the same security on the same trading day which in the aggregate meet or exceed the size of the customer trade.
FINRA notes that a disclosure obligation under Rule 2232(c) could also be triggered by an offsetting principal trade executed by a firm’s affiliate. Specifically, if a firm’s offsetting principal trade is executed with a broker-dealer affiliate and did not occur at arm’s length, the firm is required to “look through” to the time and terms of the affiliate’s trade to comply with the rule.
New FINRA Rule 2232(d) contains two exceptions to the mark-up disclosure requirements of FINRA Rule 2232(c). First, mark-up disclosure is not triggered by principal trades that a firm executes on a trading desk that is functionally separate from a trading desk that executes customer trades, provided the firm maintains policies and procedures reasonably designed to ensure that the functionally separate trading desk has no knowledge of the customer trades.
Second, mark-up disclosure does not need to be provided for bonds that are acquired by a firm in a fixed-price offering and sold to non-institutional customers at the same offering price on the same day the firm acquired the bonds.
Methods to Calculate and Disclose Mark-Ups
Firms need to calculate the mark-up that is disclosed on a customer confirmation from the prevailing market price (PMP) for the security, consistent with existing FINRA Rule 2121 (Fair Prices and Commissions) and the supplementary material thereunder, particularly Supplementary Material .02 (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities). Firms may base their mark-up calculations for confirmation disclosure purposes on the information they have available to them as a result of reasonable diligence at the time they input relevant transaction information into systems to generate confirmations.
Firms may engage third-party service providers to facilitate mark-up disclosure consistent with FINRA Rule 2232; however, firms retain compliance responsibility and are expected to exercise due diligence and oversight over third party relationships. Where mark-up disclosure is provided on customer confirmations, FINRA Rule 2232(c) requires firms to express the disclosed mark-up as both a dollar amount and a percentage of PMP.
Requirement to Disclose a Reference or Link to Security-Specific Trade Data
For all trades with non-institutional customers in corporate and agency debt securities, whether mark-up disclosure is triggered or not, new FINRA Rule 2232(e) requires firms to provide a reference, and a hyperlink if the confirmation is electronic, to a web page hosted by FINRA that contains TRACE publicly available trading data for the specific security that was traded, along with a brief description of the type of information available on that page.
FINRA has established the following URL: http://bondfacts.finra.org/<CUSIP>. Paper confirmations would be required to include this URL in print form; electronic confirmations would be required to include this URL as a hyperlink to the web page.
Time of Execution Disclosure Requirement
FINRA Rule 2232(e) further requires firms to disclose the time of execution, expressed to the second, for all non-institutional customer trades in corporate and agency debt securities. As with the URL requirement, trade time disclosure is required even in cases where mark-up disclosure is not triggered.
Implementation Period
As mentioned above, the effective date for the above-described amendments to FINRA Rule 2232 is May 14, 2018. This effective date, which is eighteen months from when the amendments were approved by the SEC, is the same as the effective date for the MSRB’s parallel confirmation disclosure requirements.
For further guidance, please refer to FINRA Regulatory Notice 2017-08.
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