Download Fixed Income Securities Mark-Ups

September 24, 2014
Presented by:
Daniel Nathan
Jonathan Stein
©2014 Morrison & Foerster LLP | All Rights Reserved | mofo.com
Fixed Income
Securities Mark-Ups
Introduction
• Fixed Income Pricing is the last frontier of compliance
• FINRA and SEC Guidance tends to be in the form of
“regulation by enforcement”
• FINRA often falls back on bringing charges for failure to
supervise
• FINRA, SEC Regulatory Priorities
2
Mark-ups, Generally
• Fact-specific inquiry
• Definition of mark-up
• These types of transactions:
• Riskless principal
• A transaction in which the member sells a security to a customer
from inventory
• A transaction in which a member purchases a security from a
customer
• A transaction in which the member acts as agent
• Exception for QIBs
• Municipal Securities – MSRB Rule G-30 “Prices and
Commissions”
3
Statutory Framework
• Federal Securities Laws
• Anti-fraud provisions
• Shingle theory
• SEC fraud actions
• FINRA Rule 2121, Fair Prices and Commissions
• FINRA 5% Policy
• Rule 2010 and Rule 2121 are violated by entering into any
transaction with a customer in any security at any price not
reasonably related to the current market price of the security or to
charge a commission which is not reasonable.
• May not justify mark-ups on the basis of expenses which are
excessive.
• Look at each individual transaction, not the average mark-up per
customer.
4
Fixed Income Securities – Additional
Mark-up Policies
• Prevailing Market Price
• "Similar" Securities
5
Non-Investment Grade Debt
• “Customer” does not include a qualified institutional buyer
("QIB") as defined in Rule 144A
• Rule 144A definition Non-investment grade debt
• Distressed debt
6
Legal Standard for Whether
a Markup is Excessive
•
•
•
•
What is reasonable?
In FINRA enforcement proceedings
In courts/SEC proceedings
Examples of ~3% Markups Described As Excessive or
Unfair
7
Municipal Securities
• MSRB Rule G-30
• “Fair and reasonable” defined
• Dealer’s responsibility to exercise diligence
8
Supervision
A firm should have procedures for weighing and applying
(including how to weigh and apply) the various factors in
Rule 2121.
9
Practices on Retail Desk
• Exception Reports
• Treatment of Customers
10
Contact Us
Daniel A. Nathan
Morrison & Foerster LLP
Partner
Washington D.C., (202) 887-1687
New York, (212) 486-8146
Jonathan H. Stein Esq.
Raymond James Financial, Inc.
Vice President and Managing Attorney
St. Petersburg, FL, (727) 567-5181
11