The most common problem among broker-dealer firms trying to comply with their markup disclosure obligations is a lack of understanding on how to provide the necessary information on the confirmations when executing a trade, the Financial Industry Regulatory Authority found.
At a FINRA conference on Thursday, FINRA and the Municipal Securities Rulemaking Board discussed the regulatory group’s findings after examinations of compliance with MSRB Rule G-15 on confirmation. Tuesday marked
The amendments require dealers to disclose markups and markdowns as a total dollar amount and as a percentage of the prevailing market price, or the “PMP” to retail investors. The requirements apply to the markup or markdown that a firm charges on principal trades with a retail customer that the firm also offsets on the same day.
But FINRA found instances of traders not entering in all the necessary information, such as the PMP, creating inaccurate disclosures on the confirmations.
“That’s probably the most common issue,” said Michael Nouri, principal analyst in fixed income regulation with FINRA Member Supervision. “It can be more systematic in nature or it could be limited.”
Some introducing firms assumed that their clearing firms were going to take care of everything for them, said Cynthia Friedlander, FINRA senior director of fixed income regulation, regulatory operations.
Other issues arose when the hyperlink that takes a customer to the security specific page was broken. Some firms are also misclassifying accounts as institutional versus retail, Nouri said.
The MSRB rules were harmonized with FINRA rules that also capture the corporate bond market, but it was important for the MSRB to tailor it to the municipal market, said Michael Post, MSRB general counsel. So the groups had separate sets of FAQs about the markup disclosure requirements.
“It was very important to the MSRB board to attend to some of the unique characteristics of the municipal market and not to sacrifice that attention needed in the name of harmony,” Post said.
The Rule G-15 amendments established a “waterfall” of factors for determining the PMP beginning with contemporaneous trades of the same security and followed by a series of other considerations.
Firms in the municipal market may move more quickly down the waterfall than the corporate market, Post said.
