An irreverent Wall Street Blog
Donald Trump, Boeing, And FINRA Fixed Income Fair Charges
December 12, 2016
Although Wall Street is the epitome of Capitalism,
there are rules about how much a brokerage firm may charge for executing a
customer's order. Depending upon whether you are a public customer or an
industry advocate, you likely have very different positions on what's a fair
price for a commission and what's a fair price for a mark-up or mark-down.
Competing views aside, the industry's self-regulatory organization, the
Financial Industry Regulatory Authority, has a specific rule addressing fair
prices and commissions. As with so many aspects of regulation, the written
words used to express what you can and cannot do tend to resort to broad
concepts and aspirational goals, which does not necessarily result in bright
lines and clear-cut guidance. Consider a recent FINRA regulatory settlement
involving the pricing of fixed-income trades and note how President-elect
Donald Trump inadvertently captured the
essence of the issue.
Case In
Point
For the purpose of proposing a
settlement of rule violations alleged by the Financial Industry Regulatory
Authority ("FINRA"), without admitting or denying the findings, prior
to a regulatory hearing, and without an adjudication of any issue, Vision
Brokerage Services, LLC submitted a Letter of Acceptance, Waiver and Consent
("AWC"), which FINRA accepted. In the Matter of Vision
Brokerage Services, LLC Vision Brokerage Services, LLC,
Respondent (AWC 2012034743101, December 6,
2016).
Vision Brokerage Services has
been a FINRA member firm since 2000 and the AWC asserts that the firm had no
prior relevant disciplinary history.
Corporate Bond
Pricing
The AWC asserts that the
Fixed Income staff of FINRA's Market Regulation Department's
reviewed Vision's pricing of corporate bond transactions for the relevant
period of January 1, 2012, through December 31, 2013, and determined that 26
transactions involved the failure to sell bonds at a fair price. FINRA deemed
such conduct to constitute a violation of NASD Rules 2440 and IM-2440; and
FINRA Rule 2010. As more fully set forth in the
AWC:
[I]n each transaction, the firm's affiliated clearing firm purchased the bonds from the street and sold them to the firm at a markup, and the firm then sold the bonds to its customers at its own markup. Because the same dually registered personnel at both firms were responsible for setting the markups on each leg of a transaction, the firm should have aggregated the markups charged on both legs of the transaction in determining whether the firm sold the bonds to its customers at fair prices. The conduct described in this paragraph constitutes separate and distinct violations of NASD Rules 2440 and IM-2440, and FINRA Rule 2010.
Supervision
Further, the AWC alleges that
Vision's supervisory system did take into consideration the "total" markup
charged to its customers, as would be reflected by both the firm's and its
affiliate's markups. FINRA deemed such conduct to constitute a violation of
NASD Rule 3010 and FINRA Rule 2010.
Sanctions
In accordance with the terms of
the AWC, FINRA imposed upon Vision a $175,000 fine of the fair-pricing
violations; a $35,000 fine for the supervisory violation; and a Censure.
Additionally, Vision will pay $89,120.14 in restitution to investors and
undertake to revised its written supervisory procedures to address the issues
cited in he AWC.
Bill Singer's
Comment
Compliments to FINRA for this
AWC, which is presented via a straight-forward fact pattern with an Attachment
setting forth the specifics of the cited trades. See full-text AWC with Attachment at FINRA.org.
What industry participants need
to focus on in today's featured AWC is that Vision utilized an
affiliated clearing firm, which employed
staff who were dually
registered with the introducing firm/broker-dealer. As a result of
that construct, the clearing firm and the introducing firm no longer function
as purely separate and independent entities in terms of filling the customer's
orders, and that issue takes on a particularly acute concern when those two
related entities are each adding a mark-up. Keep in mind that the clearing firm
marked up its purchase of the bonds that it bought from the Street and sold to
its affiliated introducing firm, and that the introducing firm tacked on yet
another mark-up on its sale of the bonds to its customer.
In a sense, Vision got to make a
double-dip when its clearing firm charged its own affiliated broker-dealer a mark-up (which takes on the
hue of a bit of an interpositioning to the detriment of the ultimate public
customer) and, thereafter, when its broker-dealer charges yet another mark-up to the public customer.
Although somewhat counter-intuitive and perhaps a tad unsettling, if the exact same
transactions cited in the AWC were handled by non-affiliates, the customer may well have been
charged the two mark-ups without any regulatory consequences. That puzzler aside, FINRA is standing on sound ethical grounds
when it points out that a public customer is not a piñata to be hit up for every charge and that some reasonable aggregation of costs is necessary in furtherance of an industry member's obligations as an agent of its customer.
Perhaps President-elect Donald Trump best explained FINRA's underlying regulatory position when he commented on Boeing's proposed charges for a new Air Force One: "We want
Boeing to make a lot of money, but not that much
money."
Finally, NASD Rule
2440 was superseded by FINRA
Rule 2121, which provides in pertinent
part:
FINRA Rule 2121. Fair Prices and CommissionsIn securities transactions, whether in "listed" or "unlisted" securities, if a member buys for his own account from his customer, or sells for his own account to his customer, he shall buy or sell at a price which is fair, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense involved, and the fact that he is entitled to a profit; and if he acts as agent for his customer in any such transaction, he shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the market therefor.