2016 Small Firm Compliance, FINRA Approves Enhanced Price Disclosure to Retail Investors in Fixed Income Securities
SMALL FIRM COMPLIANCE CORNER
FINRA RULE PROPOSAL UPDATE
FINRA APPROVES ENHANCED PRICE DISCLOSURE TO RETAIL INVESTORS IN FIXED-INCOME SECURITIES
Below is the most recent update on a rule proposal that a number of us have been working on for close to two years with the regulators. FINRA has one version of this proposed rule and the MSRB has been working on another version that will apply to municipal securities. While, in my opinion, both rule proposals continue to miss the mark, if providing meaningful pricing information to retail customers in order to facilitate their assessment of whether they bought or sold fixed income securities at market prices is the objective, both FINRA and the MSRB are clearly following the SEC's lead on this subject, and the SEC apparently wants markup disclosure for retail.
The proposal process has been a long one, including two separate comment periods, and if you had seen the first draft delivered to our working group you would know how much work has been done to get it where it is today. Do many of us who have worked on these rule proposals continue to believe this is the wrong approach to providing useful price disclosure tools to retail customers? The answer to that is a resounding YES, but as it became apparent a rule was coming out one way or another, it must be said that this version is vastly improved over the multiple iterations presented by FINRA.
The Financial Industry Regulatory Authority's (FINRA's) Board of Governors approved a proposal last week designed to help retail customers understand and compare transactions costs in fixed-income securities. The proposal, subject to the approval of the Securities and Exchange Commission (SEC), would require member firms to disclose on retail customer confirmations the "mark-up" or "mark-down" for most transactions in corporate and agency debt securities.
The proposal would require that if a firm sells or buys a corporate or agency fixed-income security from a retail customer and on the same day buys or sells the same security as principal from another party, the firm would have to disclose on the customer confirmation the firm's mark-up or mark-down from the prevailing market price for the security. The confirmation would also have to include a reference (and hyperlink if the confirmation is electronic) to trade-price data in the same security from TRACE, FINRA's Trade Reporting and Compliance Engine.
The disclosure requirement will not apply to transactions in fixed-price new issues, or in situations where the bonds sold to the retail customer (or bought from the customer) were held by the firm longer than one day.
FINRA will submit the rule proposal to the SEC and the SEC will open up a final comment period. I encourage firms that have retail customer accounts who do business in fixed income securities to consider writing a comment letter. The number of comment letters received on rule proposals matters to the regulators, as much as the content of those letters, and only when we participate in the process do we have the opportunity to affect the outcome.
If there are any questions regarding this update, please feel free to contact me and I will do my best to answer your question.
All the best,
PAIGE W. PIERCE