Series 14: 2.8.6. Fair Prices And Commissions

Taken from our Series 14 Online Guide

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

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