The Financial Regulatory Authority (FINRA) recently issued a detailed report on compliance issues noted in its examination program (the "Report"). The Report may be found here. Our summary of a variety of issues raised in the Report may be found here.
In this alert, we discuss FINRA's observations relating to Rule 2232 (Customer Confirmations), and the market for structured notes.
FINRA's Rule 2232 requires broker-dealers to provide additional transaction-related information to retail customers for certain types of trades in debt securities. Under FINRA Rule 2232, disclosure must be provided as to mark-ups and markdowns, both as a total dollar amount for the transaction and a percentage of the prevailing market price (the "PMP").
In the Report, FINRA noted that some broker-dealers had failed to provide disclosures on customer confirmations for trades in TRACE-reportable structured notes. The Report stated that this was due to the fact that firms did not realize that the notes were subject to FINRA Rule 2232, or because they did not receive the PMP from the relevant structured note distributors.
FINRA's findings reflect the continuing challenges that some broker-dealers face in complying with these rules. For example, FINRA made similar findings in its 2018 examination findings report, available here.
This section of FINRA's Report concludes with several recommendations from FINRA for complying with Rule 2232, including performing regular reviews of confirmations (including samples of confirmations), to confirm the accuracy of all disclosures, and that all of the required disclosure elements have been included. FINRA also recommends that members review firm confirmation systems and processes to confirm that they cover all relevant product types, including structured notes that are subject to the rule.
Originally Published by Morrison & Foerster, February 2021
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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