American broker/dealers will need to increase their disclosure to close bond transactions.
That is the effect of an enhancement to a rule to take effect on May 14 by FINRA, the Financial Industry Regulatory Authority.
“FINRA recently adopted enhanced confirmation disclosure requirements for corporate and agency bonds.” FINRA noted in announcing the guidance. “As discussed in greater detail throughout this guidance, beginning on May 14, 2018, members will be subject to requirements in Rule 2232 concerning confirmation disclosure of mark-ups and mark-downs, time of execution, and a security-specific URL for webpages that contain relevant information about the traded securities. The MSRB adopted substantially similar requirements.
“FINRA worked with the MSRB to produce this guidance and consulted with SEC staff. While each has published its own version to refer to FINRA and MSRB rules and materials, respectively, the versions are materially the same and reflect the organizations’ coordinated approach to enhanced confirmation disclosure for debt securities.””
What is Rule 2232?
Rule 2232 require proper disclosures sent by the broker/dealer sent to the customer.
What does this addendum say?
This addendum deals directly with bond transactions, and specifically with mark up, “refers both to mark-ups applied to sales to customers and mark-downs applied to purchases from customers; the term ‘contemporaneous cost’ refers both to contemporaneous cost in the context of sales to customers and contemporaneous proceeds in the context of purchases from customers.
Some Highlights of the Addendum to the Rule
FINRA noted: “A member is required to disclose on a customer confirmation the mark-up on a transaction in corporate and agency debt securities with a non-institutional customer if the dealer also executes one or more offsetting principal transaction(s) on the same trading day as the customer transaction in an aggregate trading size that meets or exceeds the size of the customer trade.”
It also noted that mark-up disclosure required only where the sizes of same-day customer and principal trades offset each other, stating: “Yes. Mark-up disclosure is required only where a customer trade offsets a same-day principal trade in whole or in part. For example, if a dealer purchased 100 bonds at 9:30 a.m., and then, as principal, satisfied three non-institutional customer buy orders for 50 bonds each in the same security on the same trading day without making any other purchases of the bonds that day, mark-up disclosure would be required only on two of the three customer purchases, since one of the trades would need to be satisfied out of the dealer’s prior inventory rather than offset by the dealer’s same-day principal transaction.”
The full details of the addendum can be found here.
What is FINRA
FINRA is what is referred to as a self-regulatory authorization. It was formed when the regulatory bodies for the NASDAQ and NYSE merged.
It is responsible for licensing for investment professionals who want to trade on behalf of others. Without that license- or if it is suspended or revoked by FINRA- trades cannot be made legally on behalf of others.
FINRA and Debt Securities
On its site, FINRA explained its role in oversight of debt securities.
“FINRA plays an important role in regulating and providing transparency to the fixed income securities markets. For example, we operate and enforce FINRA rules regarding the Trade Reporting and Compliance Engine (TRACE®, and enforce, for our member firms, federal securities regulations governing fixed income, including those promulgated by the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB).
“Most recently, the SEC designated FINRA as the examination and enforcement authority for municipal advisors that are FINRA members. Firms selling municipal securities or performing municipal advisory services must register with the MSRB.
“FINRA Member Regulation is responsible for examining all FINRA members involved in the fixed income markets for compliance with applicable rules and regulations. Among other things, Member Regulation reviews firms’ fixed-income sales practices to determine whether they have dealt fairly with customers and that their registered representatives are properly qualified and supervised, and ensures they are in compliance with net capital requirements.”
