Series 24: Fair Prices And Commissions

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.