2.8.6. Fair Prices and Commissions
A standard FINRA rule of thumb for determining pricing fairness has been the 5% Policy, a policy that markups, markdowns, and commissions should hover in the neighborhood of 5% of sales. While the 5% Policy is a generally accepted practice, FINRA adds some relevant factors that will determine whether a markup or markdown is fair and reasonable. They are:
• 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).
• Availability of the security in the market. Thinly traded stocks have typically higher markups.
• Price of the security. The higher the price of the stock, the lower the markup.
• 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.
• Pattern of markups. An established pattern of unreasonable markups is especially frowned upon.
• Nature of the member’s business. If a member provides additional services and facilities to the customer, a higher markup may be justified.
FINRA also provides some general considerations when determining commissions, markups, and markdowns.
• The 5% Policy is a guide, not a rule.
• A member may not justify markups on the basis of expenses that are excessive.
• Markups on principal transactions a