Customer order handling and fair pricing of fixed income securities – including findings and effective practices observed in those areas – are among the municipal securities-related topics addressed in the Financial Industry Regulatory Authority's most recent annual regulatory oversight report, published Tuesday.
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"Our 2026 FINRA Regulatory Oversight Report captures important findings and translates them into practical guidance our member firms can act on immediately," Greg Ruppert, executive vice president and chief regulatory operations officer at FINRA, said in the release. "Ultimately, this report is essential because member firm compliance protects investors and safeguards the integrity of our markets."
In response to member firm feedback regarding how valuable the report is for the firms' annual compliance planning and also in order to support a key "FINRA Forward" initiative – empowering member firm compliance – the report was published earlier than usual, the release said. In the past, the FINRA Annual Regulatory Oversight Report typically has been released in January of the corresponding year, a FINRA spokesperson confirmed.
FINRA, a self-regulatory organization, is responsible for examining FINRA members that are municipal securities dealers or municipal advisors and for enforcing Municipal Securities Rulemaking Board rules.
In a section called "Customer Order Handling: Best Execution and Order Routing Disclosures," the report noted that FINRA Rule 5310 requires that in any transaction involving a customer or a customer of another broker-dealer, a firm must "use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions."
A firm is required to have procedures in place to ensure it performs "regular and rigorous" reviews of the execution quality of its customers' orders if it doesn't undertake an order-by-order review, FINRA's report said. MSRB Rule G-18, which also relates to best execution, sets forth similar obligations with regard to municipal securities transactions, the report said.
According to the report, FINRA's findings relating to best execution included failure to compare the execution quality obtained through firms' existing order-routing and execution arrangements against the quality of execution they might have obtained from competing markets, including alternative trading systems.
The findings regarding best execution also cited the failure to conduct "regular and rigorous reviews," or, when performing such reviews, "not considering certain execution quality factors set forth in FINRA Rule 5310, Supplementary Material .09."
The report's "Fixed Income – Fair Pricing" section said the fair pricing obligations under FINRA Rule 2121 apply to transactions in all securities – including fixed-income securities – and that MSRB Rule G-30 sets forth similar obligations with respect to municipal securities transactions.
"These rules generally require a dealer that is acting in a principal capacity in a debt security
transaction with a customer, and charging a mark-up or mark-down, to mark up or mark down the transaction from the prevailing market price," the report said.
The prevailing market price – or PMP – "is presumptively established by referring to the dealer's contemporaneous cost as incurred or proceeds as obtained," FINRA's report said.
"Where the dealer's cost is no longer contemporaneous, or the dealer has overcome the contemporaneous cost presumption, firms are required to continue down the 'waterfall' within FINRA Rule 2121 or MSRB Rule G-30, as applicable, to determine the PMP," the report said.
Incorrect determination of the PMP was among the findings discussed in the report's fair pricing section. One example cited involved not following the contemporaneous cost presumption or the waterfall required by FINRA Rule 2121 and MSRB Rule G-30 but instead using different methods "such as obtaining quotations from a limited number of market participants without considering contemporaneous inter-dealer or institutional transaction prices."
Another example the report highlighted was a reliance on third–party software to determine the PMP, while "not subsequently considering trades flagged by the software for compliance or supervisory review based on the amount of mark-up or mark-down from the determined PMP."
