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Fixed Income Mark-up Disclosure

Regulatory Obligations

FINRA’s and the Municipal Securities Rulemaking Board’s (MSRB) amendments to FINRA Rule 2232 (Customer Confirmations) and MSRB Rule G-15 require firms to provide additional transaction-related pricing information to retail customers for certain trades in corporate, agency and municipal debt securities (other than municipal fund securities).12

Noteworthy Examination Findings

FINRA identified many of the issues previously discussed in the Fixed Income Mark-up Disclosure section of the 2018 Report, as well as the following additional issues.

  • Excluding Charges from Mark-Up/Mark-Down Disclosure – Some firms disclosed additional charges separately from disclosed mark-ups or mark-downs, even when such charges reflected firm compensation. Firm compensation should not be mischaracterized, for example, as miscellaneous or fixed transaction fees; it should instead be included in the reported price of the transaction and accounted for when calculating mark-ups and mark-downs, consistent with applicable rules and guidance.13
  • Unclear or Inaccurate Labels for Sales Credits or Concessions – Some firms disclosed 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, creating confusion about the actual disclosed mark-up and therefore diminishing its utility.14 Similarly, some firms inaccurately labeled only the sales credits or concessions portion as the total mark-up or mark-down.
  • Incorrect Prevailing Market Price (PMP) Determinations –Some firms did not determine the PMP as set forth in FINRA Rule 2121.02(b) (Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities) for their fixed income transactions. Some firms’ PMP determinations did not presumptively rely on the dealer's contemporaneous cost or proceeds, as required by Rule 2121. Other firms decided that their cost or proceeds were no longer “contemporaneous” without sufficient evidence as required by Rule 2121.02(b)(4) and used other pricing information to determine the PMP.
  • Inaccurate Time of Execution – Some firms disclosed 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).15 The time of execution on confirmations must match the trade times disseminated by EMMA and TRACE to allow customers to identify their specific transactions, consistent with the intent of the disclosure requirement.

Additional Resources

 

12 Specifically, the amendments require firms to disclose the mark-up or mark-down for principal trades with retail customers that a firm offsets on the same day with other principal trades in the same security. Disclosed mark-ups and mark-downs must be expressed as both a total dollar amount for the transaction and a percentage of 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.

13 See, e.g., Frequently Asked Questions (FAQ) About the Trade Reporting and Compliance Engine (TRACE) FAQ 3.1.33 (stating that prices reported to TRACE should be inclusive of mark-ups and mark-downs).