United States: SEC Expands To Retail Customer Debt Transactions Disclosure Of Broker-Dealer Mark-Ups And Mark-Downs

Currently, U.S. broker-dealers are not required to disclose their compensation in respect of fixed-income transactions effected as principal. In November 2016, the SEC approved a rule proposal of the U.S. Financial Industry Regulatory Authority, or "FINRA," that will require such disclosure for the first time for transactions conducted by FINRA members with non-institutional customers.1 The revised rule's mechanisms for determining, first, to which debt transactions the disclosure requirement applies, and second, how the mark-up/mark-down is to be calculated are detailed and in some respects complex.

The SEC simultaneously approved similar requirements for municipal securities.2 The MSRB rule amendments will be effective May 14, 2018. FINRA has not yet announced an effective date for the amendments to Rule 2232, but it must be no later than May 23, 2018.

The Mark-Up/Mark-Down Disclosure Requirement

Covered Transactions: Overview

The disclosure requirement is limited to certain principal transactions with non-institutional customers3 in corporate debt4 or agency debt securities. The requirement is triggered only if the firm purchased (or sold) the same security in one or more offsetting transactions on the same trading day in an aggregate trading size meeting or exceeding the size of such customer sale (or purchase).

The disclosure requirement applies even if the customer transaction occurred earlier in the trading day than the offsetting marketplace transaction.

Covered Transactions: Affiliate Look-Through Requirement

If any such offsetting transaction is entered into with an affiliate, and if the affiliate transaction was not on an arms-length basis,5 then the firm must look through to the time and terms of its affiliate's purchase from or sale to a third party to determine whether the mark-up disclosure requirement is triggered.
One hypothetical scenario set forth by the SEC's Investor Advocate illustrates how the affiliate look-through requirement would operate between two affiliated dealers:6

  • Dealer A1 purchases a bond from an unaffiliated third-party for $90 ("Transaction 1")
    • Dealer A1 then displays the bond for sale for $93 on Dealer A2's customer-facing platform
    • During the day, no other dealers display any price for the bond
    • Retail Investor sees the bond listed for $93 and places an order with Dealer A2 to purchase it at the displayed price
  • Dealer A2 purchases the bond from Dealer A1 at $93 ("Transaction 2")
  • Dealer A2 sells the bond to Retail Investor for $93 + $1 trading fee

In this scenario, Transaction 2 would not in the SEC Investor Advocate's view be an arms-length transaction for purposes of the rule, and as such, the Prevailing Market Price (the basis for the mark-up disclosure, as discussed below) would be determined based on Transaction 1's price rather than Transaction 2's price. Note that this analysis assumes that mark-up disclosure was required, which assumes that Dealer A2 purchased as much or more of the bond on the trading day than it sold in Transaction 2.

FINRA has provided guidance in Regulatory Notice 14-52 and in its response to comments as to whether the disclosure requirement is triggered in several scenarios.7 For example, if a firm purchased 100 bonds from a dealer at 9:30 AM, and sold 50 of the same bonds to three customers on the same day without purchasing any more of the bonds, only two of the three customer confirmations would be required to have the mark-up/mark-down disclosure, as one of the customer trades would have been satisfied out of the firm's prior inventory.

Firms will need to establish systems to determine for which of its principal transactions mark-up disclosure is required. For introducing firms, this will require coordinating with their clearing firm(s). FINRA noted that firms may voluntarily provide the mark-up/mark-down disclosure more broadly than Rule 2232 will require if they find it beneficial to do so.

Exceptions to Disclosure Requirement

The revised rule's mark-up/mark-down disclosure requirement will not apply in the following scenarios:

  • Sales of securities acquired in fixed-price offering: The firm acquires the security in a fixed-price offering and sells the security to non-institutional customers at the fixed price offering price on the day the securities were acquired; or,
  • Transactions by separate trading desks: The non-institutional customer transaction is executed by a principal trading desk that is functionally separate from the principal trading desk within the same firm that executed the offsetting purchase, and the firm has in place policies and procedures reasonably designed to ensure that the trading desk through which the firm purchase/sale is executed had no knowledge of the customer transaction.8

Calculation of Prevailing Market Price

Under the revised rule, the mark-up/mark-down will be calculated with reference to the Prevailing Market Price as calculated pursuant to FINRA Rule 2121. The analysis required under Rule 2121 is outside the scope of this note, but several commenters noted the difficulty in automating processes to calculate Prevailing Market Price, given the subjective nature of some of Rule 2121's analyses. FINRA in response noted that it recognized the potential challenges involved in implementing the rule changes, and that it will provide firms with interpretive guidance during the implementation process as necessary.9

Revised Rule 2232 will require disclosure of mark-ups/mark-downs both as a total dollar amount (the dollar difference between the customer's price and the security's Prevailing Market Price) and as a percentage amount (the mark-up/mark-down's percentage of the security's Prevailing Market Price).

Confirmation Disclosures

In response to commenters' inquiries as to whether FINRA members may add explanatory or qualifying descriptions of the mark-up/mark-down figure, FINRA stated that it does not believe that members should be permitted to label the mark-up/mark-down disclosure as an estimate or approximate figure, but that firms would not be prohibited as a regulatory matter from including language that explains Prevailing Market Price as a concept or providing details regarding the firm's methodology for determining Prevailing Market Price, provided that such disclosures are accurate.10

Introducing Firms

Introducing firms' customer confirmations are generally prepared and sent by their clearing firms, and introducing and clearing firms will need to work to ensure availability of information regarding principal transactions necessary to comply with the rule.

Rule 2232(e): TRACE Link and Execution Time

Rule 2232(e) will also require that the firms provide on all confirmations for corporate or agency debt securities in transactions with non-institutional customers (i) a reference, and 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, in a format specified by FINRA, along with a brief description of the type of information available on that page; and (ii) the execution time of the customer transaction, expressed to the second. The 2232(e) requirements apply regardless of whether the 2232(c) mark-up/mark-down disclosure requirement is triggered.


The revised rule will require substantial operational changes to existing broker-dealer systems. Firms will need to work quickly to establish processes that will permit compliance with the rule by its anticipated effective date.


1.  FINRA is the principal US self-regulatory organization for the US securities dealer community; virtually all US-registered broker-dealers, and all US-registered broker-dealers holding retail accounts, are FINRA members. Certain US banks also provide securities brokerage and dealing services to US retail customers pursuant to various statutory and regulatory provisions that exempt specified bank activities from broker-dealer registration. FINRA rules do not apply to a bank operating pursuant to such statutory and/or regulatory exemptions.

2.  This publication cites the provisions of FINRA Rule 2232 for convenience, as MSRB rule G-15(a) will largely parallel FINRA Rule 2232.

3.  A non-institutional customer is any customer with an account other than an institutional account, as defined in FINRA Rule 4512(c). Examples of institutional accounts under Rule 4512 are accounts of registered investment advisers, registered investment companies, banks, and any person with total assets of greater than $50 million.

4.  Rule 2232 will define corporate debt securities as a debt security that is U.S. dollar-denominated and issued by a U.S. or foreign private issuer and, if a "restricted security' as defined in Securities Act Rule 144(a)(3), sold pursuant to Securities Act Rule 144A.  The only exclusions from the definition are for securities that are money market instruments as defined in FINRA Rule 6710(o) and asset-backed securities as defined in FINRA Rule 6710(cc).

5. Rule 2232 will define arms-length transaction as a transaction that was conducted through a competitive process in which non-affiliate firms could also participate, and where the affiliate relationship did not influence the price paid or proceeds received by the firm.

6.  Investor Advocate's letter dated Nov. 7, 2016, at pp. 9–10, available at https://www.sec.gov/comments/sr-finra-2016-032/finra2016032-10.pdf.

7.  Regulatory Notice 14-52 is available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_14-52.pdf. While the version of Rule 2232 approved by the SEC differs in some respects from that discussed in the regulatory notice, most of the guidance set forth in the notice's thirteen scenarios would seem to continue to be applicable. See also FINRA's responses to comments dated November 14, 2016 at page 5, available at http://www.finra.org/sites/default/files/SR-FINRA-2016-032-response-to-comments.pdf [hereinafter FINRA Response to Comments].

8.  It is unclear what standards of separation will emerge for purposes of this rule. Similar concepts exist, and are already implemented, in SEC rules relating to short selling. For additional information regarding such concepts, please see "SEC Regulation SHO Takes Effect, Implementing a Mixed Bag of Changes to Short Sale Rules" (March 2005), available at: http://www.shearman.com/~/media/files/newsinsights/publications/2005/03/sec-regulation-sho-takes-effect-implementing-a-m__/files/view-full-text/fileattachment/cm_0305.pdf and "Short Sales: SEC Adopts Amendments to Rule 105 of Regulation M, Including Important Exceptions For Purchasers," available at: http://www.shearman.com/~/media/files/newsinsights/publications/2007/10/short-sales--sec-adopts-amendments-to-rule-105-o__/files/view-full-text/fileattachment/cm_103007.pdf.

9.  See FINRA Response to Comments at page 7.

10.  See FINRA Response to Comments at page 10.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.