In October 2015, FINRA released Regulatory Notice 15-36,1 which sets forth proposed rules for broker-dealers to disclose additional information on customer confirmations. The new notice modifies the rules initially proposed by Regulatory Notice 14-52,2 which was issued in November 2014. The proposed rule would govern retail-sized customer trades in corporate and agency debt securities. The proposal would require that, if a FINRA member sells to a customer as principal, and on the same day buys the same security as principal from another party, the firm would have to disclose on the customer confirmation: (i) the price to the customer, (ii) the price to the firm of the same-day trade (reference price) and (iii) the difference between those two prices.
The prior proposal limited the disclosure to retail customer trades of 100 bonds or less or a value of $100K or less. The revised rule would, in lieu of the size requirement, require the information to be set forth in connection with sales to “retail accounts,” which are accounts other than “institutional accounts” (as defined in FINRA Rule 4512(c)).
The revised proposal also provides for alternative methodologies to calculate the reference price required for the disclosure, and outlines guidelines for firms to follow in determining this figure. These guidelines provide more flexibility than Notice 14-52 by permitting firms engaged in “complex transactions,” where there are multiple firm trades equalling or exceeding a customer trade, a potentially more cost-efficient alternative to calculate the reference price. The proposed rule creates an exception to the required disclosure, where there was an unusual and material change in the market price for reasons beyond typical market fluctuations. In these circumstances, firms can opt either to not disclose the reference price or to disclose the figure with further clarifying information. Lastly, in addition to the aforementioned reference price, FINRA proposes requiring firms to include links to publicly available TRACE data in their confirmation disclosure, in order to provide statistics to customers about market activity, measuring the number of securities, total par amount, most active bonds by day, and 52-week highs and lows, among other metrics.
FINRA seeks comment on the potential costs that the proposed regulation will have on firms and whether these requirements would have a negative impact on firm behavior. Notice 15-36 substantially revises the prior rule proposal; however, the new proposed rule’s application to structured notes remains significant, as many structured notes would be covered. The “corporate debt securities” covered by the proposed rule continue to exclude “money market instruments,” which are debt securities (including structured notes) that have a maturity of one year or less, such as some types of structured notes.
The comment period will expire December 11, 2015.