{"id":134,"date":"2019-01-16T05:23:52","date_gmt":"2019-01-16T05:23:52","guid":{"rendered":"http:\/\/securitiesregslawyer.com\/blog\/?p=134"},"modified":"2019-01-16T05:33:32","modified_gmt":"2019-01-16T05:33:32","slug":"has-finra-enforcement-revoked-the-5-mark-up-policy","status":"publish","type":"post","link":"https:\/\/securitiesregslawyer.com\/blog\/has-finra-enforcement-revoked-the-5-mark-up-policy\/","title":{"rendered":"HAS FINRA ENFORCEMENT REVOKED THE 5% MARK-UP POLICY?"},"content":{"rendered":"\n

The 5%\nmark-up policy has been in the NASD and FINRA rule books since 1943, now part\nof Rule 2121, Fair Prices and Commissions. But a recent settled FINRA\nenforcement case suggests that FINRA Enforcement no longer honors it. <\/p>\n\n\n\n

A version of this blog was provided to FINRA Enforcement for their review and comment. Their comments are reflected in bold italics. FINRA Enforcement notes that they have brought proceedings involving mark-ups of less than 5%<\/em><\/strong>.<\/em>
<\/p>\n\n\n\n

What does this mean?<\/strong><\/p>\n\n\n\n

To avoid an\nenforcement action, brokers trading with their customers as a principal,\nincluding as riskless principal, must justify their mark-ups based on the\nrelevant factors in Rule 2121.01(b):<\/p>\n\n\n\n

  1. Type of security;<\/li>
  2. Availability in the market;<\/li>
  3. Price of the security;<\/li>
  4. Amount of money involved  in the trade;<\/li>
  5. Pattern of mark-ups; and<\/li>
  6. The nature of the member\u2019s business.<\/li><\/ol>\n\n\n\n

    If the trade\nis in a bond, other than a municipal bond, additional factors under Rule 2121.02\nthat must also be considered include:<\/p>\n\n\n\n

    1. Dealer\u2019s contemporaneous cost;<\/li>
    2. The prevailing market price;<\/li>
    3. Prices of contemporary inter-dealer trades; and<\/li>
    4. If none of the above are available, the contemporaneous transactions in similar securities.<\/li><\/ol>\n\n\n\n

      The Enforcement Case: facts presented.<\/strong><\/p>\n\n\n\n

      In a\nrecently settled Enforcement Case (NTB Financial Corporation, Acceptance,\nWaiver and Consent (AWC) Case No. 2015047738901, December 10, 2018) FINRA censured\nand fined the firm $45,000 for violating Rule 2121. The case involved 71\nprincipal transactions in the third quarter of 2015 with customers involving\none corporate bond. The total mark-up in these trades was $43,142.06 that the\nfirm returned to these customers in anticipation of this action. <\/p>\n\n\n\n

      The 71\ntransactions occurred on 7 of the 65 trading days in the quarter. The table\nbelow lists the trade dates, the period of time between when NTB bought the\nbond on that day and when it sold the bond to its customers on the same day,\nand the mark-up percentages. <\/p>\n\n\n\n
      \n Trade Date\n <\/td>\n
      Number of Trades<\/center>\n <\/td>
      		\n Time between Purchase and Sale to Customer- hour and minutes \n <\/td>\n Mark-Up percentage \n <\/td><\/tr>
      \n August 27, 2015\n <\/td>\n 5\n <\/td>\n 1:12\n <\/td>\n 4.64%\n <\/td><\/tr>
      \n August 27\n <\/td>\n 2\n <\/td>\n 1:12\n <\/td>\n 4.84%\n <\/td><\/tr>
      \n September 3\n <\/td>\n 1\n <\/td>\n 2:52\n <\/td>\n 4.83\n <\/td><\/tr>
      \n September 4\n <\/td>\n 17\n <\/td>\n 1:31\n <\/td>\n 4.72\n <\/td><\/tr>
      \n September 8\n <\/td>\n 3\n <\/td>\n 1:12\n <\/td>\n 4.84\n <\/td><\/tr>
      \n September 17\n <\/td>\n 11\n <\/td>\n 6:15\n <\/td>\n 4.66%\n <\/td><\/tr>
      \n September 22\n <\/td>\n 6\n <\/td>\n 0:12\n <\/td>\n 5.02%\n <\/td><\/tr>
      \n September 22\n <\/td>\n 12\n <\/td>\n 6:22\n <\/td>\n 5.07%\n <\/td><\/tr>
      \n September 25\n <\/td>\n 14\n <\/td>\n 3:48\n <\/td>\n 5.01%\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

      The Enforcement Case: facts omitted<\/strong><\/p>\n\n\n\n

      There was no\ndata or discussion of the contemporaneous prices of trades in the bond by other\nbrokers.<\/p>\n\n\n\n

      NTB cleared\non a fully disclosed basis through another broker. No information as to what,\nif any, compliance and other reports from the clearing broker required under\nFINRA Rule 4311 were made available to or utilized by NTB. There was no\ndiscussion of NTB\u2019s Written Supervisory Procedures or compliance policies\nregarding mark-ups. There was no discussion of the market for the subject\ncorporate bond\u2014e.g. number of trades per day, execution prices, bids and asked\nat the time of these trades, NTB\u2019s role in this market, etc. Nor was there any\ninformation as to any prior FINRA exams where principal trading by NTB was an\nissue. <\/p>\n\n\n\n

      FINRA\nEnforcement notes that a review of publicly available TRACE data on the unnamed\nbond showed that the next highest mark- up in a subsequent contemporaneous\ntrade by another broker-dealer was 1.44%.<\/em><\/strong><\/p>\n\n\n\n

      Instead, the\nAWC focused on the five (5) factors in Rule 2121.01(a) sets forth above. It did\nso without any discussion of their relevance to the fact that all the trades\ninvolved were slightly above or below the 5% mark-up policy.<\/p>\n\n\n\n

      If FINRA\nwanted to sanction the firm, but not de\nfacto<\/em> revoke the 5% policy it could just as easily brought the case as a\nviolation of the best execution rule, Rule 5310. <\/p>\n\n\n\n

      FINRA\nEnforcement noted that it has brought cases involving mark-ups of less than 5%.<\/em><\/strong><\/p>\n\n\n\n

      Takeaway<\/strong><\/p>\n\n\n\n

      The FINRA\nrulebook continues to acknowledge the 5% mark-up rule. However, in a principal\ntrade with a customer, brokers would be prudent to compare their mark-ups with\nthose in contemporaneously executed trades as publicly reported- e.g. on TRACE.<\/p>\n\n\n\n

      Discussion<\/strong><\/p>\n\n\n\n

      Please feel\nfree to contact me (phone 914 646 8035 or email msimkin@securitiesregslawyer.com<\/a>)\nwith any questions or to discuss this further.<\/p>\n\n\n\n

      January 15,\n2019<\/p>\n","protected":false},"excerpt":{"rendered":"

      The 5% mark-up policy has been in the NASD and FINRA rule books since 1943, now part of Rule 2121, Fair Prices and Commissions. But a recent settled FINRA enforcement case suggests that FINRA Enforcement no longer honors it. A version of this blog was provided to FINRA Enforcement for their review and comment. Their … Continue reading HAS FINRA ENFORCEMENT REVOKED THE 5% MARK-UP POLICY?<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-134","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/134","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/comments?post=134"}],"version-history":[{"count":11,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/134\/revisions"}],"predecessor-version":[{"id":153,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/posts\/134\/revisions\/153"}],"wp:attachment":[{"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/media?parent=134"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/categories?post=134"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/securitiesregslawyer.com\/blog\/wp-json\/wp\/v2\/tags?post=134"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}