FINRA proposed amending FINRA Rule 2232 (Customer Confirmation) to require members to disclose markups on certain transactions in corporate debt or agency securities with retail customers (i.e., customers that are not institutional accounts as defined in FINRA Rule 4512(c)). FINRA reports that it expects the MSRB to propose a similar requirement with respect to trades in municipal securities.

The disclosure requirement would apply where (i) the firm traded with a retail customer in a specified type of security and (ii) the firm executed an offsetting transaction in the same security, on the same day, in a size at least equal to the size of the customer's trade.

In general, a firm would be required to "look-through" certain trades with affiliates; i.e., the price that an affiliate paid for the relevant security could be deemed to set the base by which a markup should be calculated. In certain instances where trading desks of the same firm operated independently, a firm could treat these trading desks as if they were entirely separate entities and not disclose the markup.

Commentary / Steven Lofchie

From a systems and compliance standpoint, this could be a fairly complicated rule change; e.g.:

  • it will require firms to compare prices and report price differentials on two trades that are in the same security and that may not have been done in contemplation of each other (this may make it more difficult to generate confirmations the next day as the price differentials must be calculated before the confirmations can be generated);
  • it will require firms to determine which of their accounts are institutional (or else make the required disclosures);
  • it will require, in some cases, the sharing of pricing information between affiliated firms; and
  • it may require additional information barriers between separate trading desks, at the same firm, trading the same securities.

Firms should review this detailed rule change carefully in light of potential operational difficulties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.