Series 24: Fair Prices And Commissions

Fair Prices and Commissions

When a member buys from a customer from their own account or sells to a customer from their own account (acts as a dealer), the price at which the transaction takes place must be fair. When a member acts as an agent, any commissions charged must be fair.

A standard FINRA rule of thumb for determining pricing fairness has been the 5% Rule, a policy that markups, markdowns, and commissions should hover in the neighborhood of 5% of sales. While the 5% Rule is a generally accepted practice, FINRA adds some relevant factors that will 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 have typically 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