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Portfolio > Economy & Markets > Fixed Income

How Advisors Can Comply With FINRA’s Stricter Fixed Income Governance

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When the Financial Industry Regulatory Authority recently published its 2019 Report on Examination Findings and Observations, the regulator signaled a significant change was afoot. In this year’s examination report, FINRA revealed it is now much more serious about ensuring financial institutions and advisors comply with its rules regarding the use of technology systems — including those involving best execution and markup disclosures for fixed income securities.

FINRA Rule 5310 (Best Execution and Interpositioning) requires advisory firms to conduct “regular and rigorous” reviews of customer orders to make sure the best possible prices for the securities were achieved, and all trades can be justified to be in investors’ best interest. In its 2019 examination, FINRA found some firms did not compare their existing execution and routing arrangements with those of other venues to see if prices and quality could be improved.

The advent and proliferation of electronic trading platforms has made price discovery for fixed income much easier, and FINRA has made clear that firms should not solely rely on their clearing partners’ trading systems to execute every trade. As technology continues to improve, FINRA expects the institutions under its purview to leverage it to enhance their best execution programs — and integrate markets beyond their pre-existing clearing relationships in order to satisfy best execution.

For example, electronic communication networks (ECNs) generally display all available publicly listed prices for a particular security. However, that may not be the best price available and there may be additional negotiations that could derive a better price. The process could be compared to buying a car — the best deal you can get probably isn’t the one you find right off the internet. To obtain a better price, you search for offers from multiple local car dealers, check the reputations of the different dealers, see what other features come with the car, and then you visit one of the vendors and begin to haggle.

Financial advisors and institutions can strengthen their best execution programs by partnering with technology providers that combine human capital with technological innovation. In addition to aggregating and comparing prices from different bond market sources, prospective vendors should have capital markets teams that actually engage with institutional market sources, and reach out to various sources of liquidity (including those that don’t publish offers on electronic platforms), to negotiate and conduct deeper price discovery.

Furthermore, while market orders can make sense for ease of execution, in today’s fast-moving marketplace advisors and institutions need to make sure execution isn’t compromised, and clients don’t receive less than they expect.

An electronic trading algorithm can locate the lowest price, but applying fixed income market expertise to evaluate the best offer is the “X factor.”

Advisors and institutions should also make sure the fixed income technology providers they consider partnering with prepare comprehensive documentation on best execution. As technology becomes more accessible and thus more commonplace, the days when firms can just pick up the phone and call three market-makers to prove they checked for best execution are over. To increase the chances of successful audits, brokers and advisors can work with a technology provider that compiles reports demonstrating how best execution was achieved for every single trade, and makes them readily accessible.

Leveraging Technology to Overcome Markup Disclosure Challenges

In its 2019 report, FINRA found that some firms excluded additional charges from disclosed markups and markdowns, even when those fees reflected compensation. Other firms did not determine the prevailing market price for fixed income transactions as ordered in FINRA Rule 2121, or disclosed times of execution on customer confirmations that did not match those determined by the Trade Reporting and Compliance Engine (TRACE) or the Electronic Municipal Market Access (EMMA) system. Meanwhile, FINRA also reported that some firms were unclear or inaccurate in their labeling of registered representatives’ sales credits or concessions on customer confirmations, leading to confusion about the actual markups.

Advisors and institutions can solve for these challenges by utilizing a trade cost analysis (TCA) solution from a vendor that:

  • Comprehensively specifies, and communicates, the markup costs to investors.
  • Aggregates data from multiple market sources in order to ensure a more accurate prevailing market price.
  • Accurately tracks, logs and organizes time of execution, as well as representatives’ sales credits and concessions.

FINRA is well aware of the proliferation of electronic trading systems and other technological innovations in the financial services arena, and wishes to encourage more of the firms under its supervision to adopt them in order to comply with its rules, including those related to fixed income securities.

But, as with everything in the regulatory world, there are caveats. Blindly relying on technology as the panacea to these findings is not a good thing, either. A well-balanced compliance program should incorporate technology, but should also incorporate human experience to interpret the red flags that the technology raises. Put another way, it takes a human to see the “forest through the trees” and decipher meaningful insights from the data.

As long as they work with a vendor that combines human expertise with technology, and provides tools to solve for compliance challenges outlined by FINRA, advisors and institutions can achieve peace of mind that they are doing right by their clients as well as their regulatory requirements.

David Hsu is chief compliance officer of 280 CapMarkets (, an innovation-driven fixed income technology marketplace providing best execution support and price transparency to advisors, institutions and issuers through its BondNav platform. 


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