Firms are providing inaccurate information and excluding charges in their mark-up and mark-down disclosures, the Financial Industry Regulatory Authority found, violating a rule requiring dealers to disclose their compensation for retail customer transactions.
In a new report on FINRA’s examination findings and observations, the self-regulatory group revealed it found violations of the Municipal Securities Rulemaking Board’s Rule G-15 on confirmation. FINRA found firms excluding charges from mark-up and mark-down disclosure such as firms disclosing additional charges separately, even when those charges reflected the firm’s 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,” FINRA said in the report.
Recent amendments to Rules G-15 and G-30 on prices and commissions are just over a year old. Those amendments established the markup disclosure requirements, which require dealers to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers.
FINRA also found that firms had unclear or inaccurate labels for registered representatives' sales credits or concessions.
Firms disclosed those sales credits or concessions as separate line items on confirmations in addition to the mark-up or mark-down, FINRA said. They also didn’t have clear and accurate labeling, creating confusion about the actual disclosed mark-up.
FINRA also found that some firms inaccurately disclosed the time of execution on customer confirmations, not matching those on the MSRB’s EMMA site or FINRA’s Trade Reporting and Compliance Engine, or TRACE.
“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,” FINRA said.
In the report, FINRA found that some firms did not determine the percentage of the prevailing market prices, or PMP, for their fixed income transactions and relied on dealer’s contemporaneous costs or proceeds. Other firms decided that their costs or proceeds were no longer contemporaneous, without providing evidence, and instead used other pricing information to determine the PMP.
Under the rules, firms have to provide markup disclosure both as a total dollar amount and as a percentage of PMP. The amendments established a “waterfall” of factors for determining the PMP, beginning with the contemporaneous trades of the same security and followed by a series of other considerations.
Calculating the PMP vexed the market before the markup rule’s effective date and months after and many firms hired one of several third-party vendors to provide PMP calculation products for them, while others chose to build solutions in-house.
The recent amendments to Rule G-15 and Rule G-30 have since improved transparency without disrupting trading practices, the MSRB has said.The rule caused some headache for many dealers firms, but the MSRB has said there have not been unintended consequences.
In July, the
