Disclosing What a Transaction Really Costs

A principal trade's price already includes the firm's mark-up or mark-down, and a customer cannot see it without help. This condition makes that embedded cost visible on the confirmation itself.

When Must a Confirmation Disclose the Mark-Up or Mark-Down?

• Beyond the confirmation delivery itself, a confirmation must disclose the firm's mark-up or mark-down for the transaction, calculated under the fair-price and commission rule covered in the best-interest and suitability unit, expressed as both a total dollar amount and a percentage of the prevailing market price, when both of the following are true:
  • The firm effects the transaction in a principal capacity, in a corporate or agency debt security, with a non-institutional customer: an account that does not meet the institutional-account test covered in the account-opening unit; and
  • The firm bought (or sold) that same security in one or more offsetting transactions, in an aggregate size at least equal to the customer's transaction, on the same trading day as the customer's transaction.
• An arms-length transaction, for this purpose, is one conducted through a competitive process in which non-affiliate firms could also take part, and where the affiliate relationship did not influence the price the firm paid or the proceeds it received.
• If that offsetting transaction is with an affiliate of the firm and is not an arms-length transaction, the firm must look through to the time and terms of the affiliate's own transaction with a third party in the security to determine whether this condition is met.

When Is This Disclosure Not Required?

• The customer trade was executed by a principal trading desk functionally separate from the desk that executed the firm's own offsetting trade, and policies and procedures were reasonably designed to keep that offsetting-trade desk unaware of the customer transaction.
• The firm sold the security to the customer at the fixed price of a fixed-price offering, on the day it acquired the security.

Exam Tip: Gotchas

• The dollar-and-percentage mark-up or mark-down disclosure applies to a specific fact pattern: a principal trade in corporate or agency debt, with a non-institutional customer, offset by the firm on the same trading day. It is not a universal disclosure required on every transaction or every customer type.

What Else Must a Debt Confirmation Show a Non-Institutional Customer?

• For all corporate and agency debt transactions with non-institutional customers, the confirmation must also reference, and hyperlink to if the confirmation is electronic, FINRA's public trade-data page for that security, briefly describe the kind of information that page holds, and state the execution time of the transaction to the second.
• This requirement is broader than the dollar-and-percentage mark-up disclosure above. It applies to every corporate or agency debt confirmation sent to a non-institutional customer, not only the ones that also trigger the mark-up disclosure.

Exam Tip: Gotchas

• The trade-data-page reference and the execution-time-to-the-second requirement travel with the debt security type and the customer type alone. They do not depend on the same-day offsetting trade that the dollar-and-percentage mark-up disclosure needs.

Why Does This Disclosure Belong to a Unit About Portfolio Cost?

• A principal transaction's mark-up or mark-down is a cost the customer bears beyond any stated commission, and it is not always obvious from the price alone. This disclosure makes that embedded cost visible, as both a dollar figure and a percentage, tying to this unit's theme that a security's real cost is not only its price.
• The rest of what a confirmation must disclose is covered in a later unit of this course. This lesson covers the mark-up and mark-down cost disclosure and the trade-data-page and execution-time requirement that travels with it.

What Should You Check on Exam Day?

• Confirm all four triggers before requiring the dollar-and-percentage disclosure: principal capacity, corporate or agency debt, non-institutional customer, and a same-day offsetting trade.
• Separate the narrow mark-up disclosure from the broader trade-data-page and execution-time requirement, which covers every non-institutional debt confirmation.
• Check for either exception before requiring the disclosure: functionally separate trading desks, or a fixed-price offering sold at the acquisition-day price.
• Treat full confirmation content beyond this cost disclosure as a later unit's topic, not this one's.