Series 7: 17.6.4.2 Fair Prices And Commissions

17.6.4.2  Fair Prices and Commissions

A standard FINRA rule of thumb for determining pricing fairness has been the 5% Policy, according to which markups, markdowns, and commissions should hover in the neighborhood of 5% of sales. (That said, depending on the security a pattern of markups of 5% or less may be considered unfair or unreasonable.) While the 5% Policy is a generally accepted practice, FINRA adds some relevant factors to determine whether a markup or markdown is fair and reasonable. They are:

• • The type of security involved—the greater the risk, the higher the allowable markup (e.g., AAA corporate bonds would have a lower markup than BBB corporate bonds because AAA bonds carry a lower risk than BBB bonds)
• • The availability of the security in the market—thinly traded stocks typically have higher markups
• • The price of the security—the higher the price of the stock, the lower the markup
• • The amount of money involved in a transaction—the higher the value of the total transaction, the lower the markup
• • Disclosure—disclosure of fees ahead of time is encouraged, especially for transactions without any precedence
• • The pattern of markups—an established pattern of unreasonable markups is espec