Clinic Students Submit Comment Letter on Proposed FINRA Rule Change

On September 8, 2016, the Investor Rights Clinic (“IRC”) submitted a comment letter to the Securities and Exchange Commission (“SEC”) to share its opinion regarding a proposed change to FINRA Rule 2232. The proposed rule change would require broker-dealers to disclose mark-up and/or mark-down pricing information on retail customer confirmations for certain fixed-income securities when that broker-dealer executes the customer’s order using its proprietary account and then executes an offsetting sale or purchase in the same trading day.

When customers buy or sell certain fixed-income securities, such as bonds, brokerage firms sometimes buy or sell the security from their own proprietary account and charge the customer a mark-up or a mark-down.  A mark-up occurs when a broker-dealer sells a customer a fixed-income security at a price above the prevailing market price. A mark-down occurs when a broker-dealer buys a fixed-income security from a customer below the prevailing market price. Broker-dealers can then either purchase additional securities to cover what it has sold out of its proprietary account or sell the securities it bought from customers out of its proprietary account and pocket the mark-up or mark-down difference from the prevailing market price.

The IRC supports the proposed rule change because the new disclosure requirements would help many of the IRC’s clients who are retired or near retirement age and look to fixed-income securities to meet their investment goals and objectives.  Many investors are unaware that the actual market price of the security may be different than the amount they pay or receive. This lack of information has led to some customers paying more for trades in fixed-income securities than other similar customer trades.  The proposed rule change would protect the interests of those who need that protection the most – the less sophisticated investors who invest in fixed-income securities but may not have the level of trading expertise required to investigate undisclosed mark-up or mark-down pricing schemes.  Theoretically, investors could use a sophisticated trade statistics database such as the Trade Reporting and Compliance Engine (“TRACE”). However, this platform requires a level of trading knowledge far beyond that of the average retail investor.  The IRC believes average retail investors should not be at a disadvantage solely because they cannot utilize a complex online database such as TRACE.

Requiring firms to disclose the true cost of fixed-income securities transactions will further the objectives of the SEC because this rule change would protect the average retail investor from being adversely affected in these types of trades. Furthermore, consumers would be armed with the knowledge needed to select broker-dealers whose services will not impose undue costs on investors.