United States: SEC Approves Bond Mark-Up Disclosure Rules

On November 17, 2016, the Securities and Exchange Commission (SEC or Commission) approved new rules requiring dealers to disclose on retail customer confirmations their mark- ups and mark-downs on most municipal and corporate bond transactions, calculated from the bond's prevailing market price (PMP).1 The controversial new requirements—first considered by the SEC more than 40 years ago2—will have major implications for dealers in the fixed income markets.


By May 2018, broker-dealers for the entire range of debt securities must design and implement new policies, procedures and systems for disclosing their mark-ups and mark-downs on offsetting retail customer transactions, calculated from the bond's PMP. To determine PMP, firms must conduct a "waterfall" analysis as set forth in existing Financial Industry Regulatory Authority (FINRA) rules and adopted by the Municipal Securities Rulemaking Board (MSRB) as part of this rulemaking.

In developing their disclosure systems, firms must decide whether to (a) employ various manual techniques to perform the waterfall analysis on each retail trade, or (b) create, test and implement an automated system that fully and accurately captures the demands of the waterfall. The 18-month implementation period is an aggressive schedule in light of the work required.


Following multiple rounds of rule proposals over the past two years, FINRA and the MSRB filed parallel rule amendments with the Commission in September 2016.3

Specifically, FINRA proposed to amend FINRA Rule 2232 and the MSRB proposed to amend MSRB Rule G-15 to require dealers to disclose on retail customer confirmations the amount of any mark-up/mark-down, calculated from the PMP, for certain transactions in fixed income securities. Additionally, the MSRB proposed to amend MSRB Rule G-30 to provide guidance on the calculation of PMP that is generally harmonized with the existing guidance contained in FINRA Rule 2121.02.

The Commission approved both proposals on November 17, 2016. The effective date of the proposed rules, which has yet to be announced, will be no later than 18 months following Commission approval.

Overview of the Disclosure Requirement

Scope. Subject to certain exceptions, FINRA Rule 2232 and MSRB Rule G-15 will require disclosure of a dealer's mark-up/mark-down if the dealer:

  • effects a transaction on a principal basis in a corporate or agency debt security (under the FINRA rule) or in a municipal security (under the MSRB rule) with a retail customer;4 and
  • engages in one or more offsetting principal transaction(s), in an aggregate trading size that meets or exceeds the size of the retail customer trade, on the same trading day as the retail customer.

If the offsetting transaction occurs with an affiliate and is not an arms-length transaction, the dealer must "look through" to the time and terms of the affiliate's transaction with a third party to determine whether the disclosure requirement is triggered.

"Offsetting" Transactions. As stated in the new rules, there must be "offsetting" customer and principal trades in order to trigger the mark-up disclosure requirement. To illustrate this concept, both FINRA and the MSRB provided the following example:

[I]f a member (dealer) purchased 100 bonds at 9:30 AM, and then satisfied three customer orders for 50 bonds each in the same security on the same day without purchasing any more of the bonds, the proposal would require mark-up disclosure on two of the three trades, since one of the trades would have been satisfied by selling out of the member's (dealer's) inventory rather than through an offsetting principal transaction by the member (dealer).5

Exceptions. The mark-up disclosure requirement will not be triggered by an offsetting same- day principal trade executed by a trading desk that is "functionally separate" from the dealer's trading desk that executed the retail transaction. To qualify for this exception, the dealer must have in place policies and procedures reasonably designed to ensure that the "functionally separate" trading desk had no knowledge of the customer transaction.

In addition, the FINRA disclosure requirement will not apply if the member acquired the security in a fixed-price offering and sold the security to retail customers at the fixed-price offering price on the day the securities were acquired,6 and the MSRB's disclosure requirement will not apply to list-offering price transactions or transactions in municipal fund securities.7

Calculation of the Mark-up/Mark-down. As described in more detail below, FINRA Rule 2232 and MSRB Rule G-15 will require dealers to calculate their mark-up/mark-down in accordance with the PMP guidance contained in FINRA Rule 2121 and MSRB Rule G-30, respectively.

Presentation on Confirmations. The mark-up/mark-down disclosure must be expressed both as a total dollar amount (i.e., the dollar difference between the customer's price and the security's PMP) and as a percentage amount (i.e., the mark-up's percentage of the security's PMP).

Firms will be permitted to include on confirmations explanatory language or disclosures regarding how the disclosure was derived; however, labeling the required mark-up/mark-down disclosure itself as an "estimate" or "approximate" figure is prohibited.8 In this regard, dealers will have the flexibility to craft their own language "that explains PMP as a concept, or that details the . . . methodology for determining PMP, or notes the availability of information about methodology upon request," provided such statements are accurate and not misleading.9 FINRA suggested that it will evaluate the potential need to provide standardized or sample disclosures that would be appropriate under the rule.10

Link to TRACE/EMMA and Time of Execution. Irrespective of whether mark-up/mark-down disclosure is required for a particular transaction, both FINRA and the MSRB will require that dealers provide on all trade confirmations:

  • a reference, and security-specific hyperlink if the confirmation is electronic, to a webpage hosted by FINRA or the MSRB that contains publicly available trading data for the specific security from FINRA's Trade Reporting and Compliance Engine (TRACE) or the MSRB's Electronic Municipal Market Access (EMMA) system, along with a brief description of the type of information available on that page; and
  • the execution time of the customer transaction.

The FINRA rule requires the time of execution to be expressed to the second.11 The MSRB rule does not set forth such a specific requirement; however, the Commission's approval order states that the time of execution must be expressed to the minute.12

MSRB Rule G-30—PMP Guidance

To support its mark-up disclosure requirement, the MSRB is adding new supplementary material to Rule G-30 to provide guidance on determining PMP. The MSRB's new guidance is substantially similar to the "waterfall" of factors for determining PMP provided in FINRA Rule 2121.02.

In general, under MSRB Rule G-30, Supplementary Material .06, PMP is presumptively determined by referring to the dealer's contemporaneous cost (or proceeds). This presumption may be overcome by showing that interest rates have changed "to a degree that such change would reasonably cause a change in municipal securities pricing," the credit quality of the security has "changed significantly," or news was issued that "had an effect on the perceived value of the municipal security."13 If the dealer's cost is (or proceeds are) not contemporaneous, or if the presumption is overcome, a dealer must consider, in order (1) a hierarchy of pricing factors, including contemporaneous inter-dealer transaction prices; (2) prices or yields from contemporaneous inter-dealer or institutional transactions and quotations in "similar" securities; and (3) economic models.

Notably, although the MSRB's PMP guidance originated for the purpose of the mark-up disclosure requirement, it is being adopted as an overarching fair pricing methodology under Rule G-30 and will apply to transactions with institutional as well as retail customers.

Determination of PMP for the Purpose of Mark-Up Disclosure

Automation. In response to the proposed rule amendments, commenters raised concerns that PMP determinations will need to be automated at the time of trade. These commenters argued that it is not practicable to automate the subjective "waterfall" methodology and requested the flexibility to adopt alternative, automated methodologies to estimate PMP.

The Commission, FINRA and the MSRB rejected this premise. The Commission stated its belief that "it is feasible to automate the determination of PMP in accordance with the [PMP guidance] to the extent a dealer chooses to do so."14 The Commission further stated that "a dealer's election to use automated processes to support pricing of retail trades, and thus determine the PMP, would not justify departure from" the requirement to price securities in accordance with the applicable PMP guidance.15

Accordingly, under the new rules, dealers will be required to adopt reasonable policies and procedures to determine PMP, and such policies and procedures must be designed to implement fully the guidance in FINRA Rule 2121 and MSRB Rule G-30. Alternative methods of estimating PMP for disclosure purposes will be prohibited.

Reasonable Policies and Procedures. Both FINRA and the MSRB acknowledged that the determination of PMP for a particular security "may not be identical" across dealers.16 Firms may rely on "reasonable policies and procedures" to determine PMP in a manner consistent with FINRA Rule 2121 and MSRB Rule G-30, applied consistently across customers.17

In this regard, FINRA stated that members could "make reasonable judgments about how they apply FINRA Rule 2121," and that "there are ways for members to represent subjective judgments with objective logic that could be documented and applied consistently through reasonable policies and procedures."18 For example, "certain judgments could be documented up front with the requisite assumptions explained in a member's procedures," such as whether a transaction is "contemporaneous," whether securities are similar, and what economic models provide about the price of an illiquid security.19

Similarly, the MSRB stated its expectation that such policies and procedures "will be reasonably designed to implement all applicable components of the PMP determination."20 Accordingly, "it may be reasonable for a dealer that chooses largely to automate the [PMP] determination to establish in its policies and procedures objective criteria reasonably designed to implement aspects of the waterfall that are not prescribed and as to which dealers would have discretion to exercise a degree of subjectivity if the determination were not automated."21 For example, in determining its contemporaneous cost in connection with a sale to a customer, a dealer's policies and procedures could consistently apply a "last in, last out" approach.22 With respect to determining whether securities are similar, "the security must be at least highly similar to the subject security with respect to nearly all of the listed similar security factors that are relevant to the subject security at issue."23

Adjustments to Contemporaneous Cost. According to both FINRA and the MSRB, where a dealer's contemporaneous cost is derived from a retail customer transaction, the dealer may establish a methodology to adjust contemporaneous cost to account for any mark-up or mark- down charged in the retail customer transaction.24 Nevertheless, FINRA stated that additional adjustments to contemporaneous cost determinations, such as adjustments to reflect the size or side of a contemporaneous trade, would be inconsistent with Rule 2121.25

Intra-Day Confirmations. Under FINRA and MSRB guidance, dealers will not be expected to cancel and resend a confirmation to revise the mark-up or mark-down disclosure "solely based on the occurrence of a subsequent transaction or event that would otherwise be relevant to" the PMP calculation.26 Accordingly, dealers may determine PMP, as a final matter for disclosure purposes, based on the information available "at the time the member inputs the PMP and associated mark-up information into its systems to generate a confirmation."27

Third-Party Pricing Services. Both FINRA and the MSRB stated that dealers will not be prohibited from using third-party pricing services to document and perform the steps of the FINRA Rule 2121 or MSRB Rule G-30 analysis.28 Nevertheless, dealers that elect to use such pricing services will retain the ultimate compliance responsibility and must conduct the due diligence necessary to ensure that the third-party service providers produce calculations consistent with the PMP guidance.29


FINRA and the MSRB will announce when the new rules will take effect in an upcoming regulatory notice. Consistent with the rule proposals, the effective date will be no later than 18 months following Commission approval. Recognizing that dealers may have additional, specific implementation questions, FINRA stated that it will work closely with the industry and the MSRB to issue further guidance as necessary.30


 1 Exchange Act Release No. 79346 (Nov. 17, 2016), 81 Fed. Reg. 84659 (Nov. 23, 2016) (SR-FINRA-2016-032) (FINRA Approval Order); Exchange Act Release No. 79347 (Nov. 17, 2016), 81 Fed. Reg. 84637 (Nov. 23, 2016) (SR-MSRB-2016-12) (MSRB Approval Order).

2 See Securities Confirmations, Exchange Act Release No. 12806, 41 Fed. Reg. 41432 (Sept. 22, 1976).

3 Exchange Act Release No. 78573 (Aug. 15, 2016), 81 Fed. Reg. 55500 (Aug. 19, 2016) (SR-FINRA-2016-032) (FINRA Proposed Rule Change); Exchange Act Release No. 78777 (Sept. 7, 2016), 81 Fed. Reg. 62947 (Sept. 13, 2016) (SR-MSRB-2016-12) (MSRB Proposed Rule Change).

4 Both the FINRA and the MSRB rules apply to transactions with "non-institutional" customers—i.e., a customer account that is not an institutional account, as defined in FINRA Rule 4512(c) or MSRB Rule G-8(a)(xi).

5 FINRA Approval Order at 18; MSRB Approval Order at 29.

6 See proposed FINRA Rule 2232(d)(2).

7 See proposed MSRB Rule G-15(a)(i)(F)(2).

8 FINRA Approval Order at 47-48; MSRB Approval Order at 51-52.

9 FINRA Approval Order at 48; MSRB Approval Order at 51-52.

10 FINRA Approval Order at 30.

11 See proposed FINRA Rule 2232(e); FINRA Approval Order at 8.

12 MSRB Approval Order at 16.

13 See proposed MSRB Rule G-30, Supplementary Material .06.

14 MSRB Approval Order at 49.

15 MSRB Approval Order at 49.

16 FINRA Approval Order at 29; MSRB Approval Order at 15.

17 FINRA Approval Order at 29-30; MSRB Approval Order at 15.

18 FINRA Approval Order at 24-25.

19 FINRA Approval Order at 25.

20 MSRB Approval Order at 33.

21 Letter from Michael L. Post, General Counsel—Regulatory Affairs, MSRB, to Brent J. Fields, Secretary, Commission, dated November 14, 2016, 11 (MSRB Response Letter).

22 MSRB Response Letter at 12.

23 MSRB Response Letter at 13.

24 FINRA Approval Order at 24; MSRB Approval Order at 19.

25 Letter from Alexander Ellenberg, Associate General Counsel, FINRA, to Brent J. Fields, Secretary, Commission, dated November 14, 2016, 8 (FINRA Response Letter).

26 FINRA Approval Order at 28; MSRB Approval Order at 48.

27 FINRA Approval Order at 28.

28 FINRA Approval Order at 26; MSRB Approval Order at 32.

29 FINRA Approval Order at 26; MSRB Approval Order at 32.

30 FINRA Approval Order at 26.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions