Chapter 8.3

Question 1

5% Mark-up Policy

Answer 1

It is a guide, not a rule. The percentage markup is only one factor in the determination of the fairness of mark-ups. The determination is based on the consideration of all the relevant factors.

Question 2

5% Mark-up Policy applies to what kind of trades?

Answer 2

All OTC principal and/or agency trades

Question 3

Relevant factors which justify a higher percentage mark-up include:

Answer 3

• Type of security
• Availability of the security in the market
• Price of the securities
• Amount of money in the transaction
• Disclosure - If a FINRA member informs a customer in advance that the mark-up on a particular transaction is going to be high, such disclosure will be looked upon favorably by the regulator but will not, by itself, justify the high mark-up.
• Patterns of mark-ups: Each mark-up by itself must be fair but FINRA will give attention to the general pattern of mark-ups charged by the firm.
• Nature of member’s business

**Excessive expenses of the B/D or market volatility are NOT a justification for a higher mark-up.

Question 4

The Mark-up is determined by what?

Answer 4

The current market value of a security

Question 5

Transactions to which the Mark-up policy applies:

Answer 5

• A transaction in which a member buys a security to fill an order for the same security, which was received from a customer. This is called a “Riskless and simultaneous” transaction.
• A transaction in which the member sells a security to a customer from its own inventory.
• A transaction in which a member purchases a security from a customer and puts it into its own inventory.
• A transaction in which the member acts as an agent by bringing a buyer and seller together and charges a commission. The commission must be fair and reasonable.
• Government Securities transactions

Question 6

The Mark-up Policy does not apply to:

Answer 6

• Securities which are listed and traded on the floor of a stock exchange
• Securities where a prospectus or offering circular must be delivered and the securities are sold at a specific public offering price. This includes new issues, a registered secondary distribution, and open-end investment companies’ shares.
• Regulation “A” offerings.

Question 7

Agency transactions

Answer 7

Trading on Exchanges.

Capacity: Agent acting as a broker and charging a commission

Question 8

Principal Transactions

Answer 8

Trading Over the Counter

Capacity: Principal Transactions acting as a dealer

Question 9

Riskless principal or net transactions

Answer 9

Where a member that is not a market maker in the security receives a customer’s order to buy, and then purchases the security as principal from another member to satisfy the order to buy, OR after receiving a customer’s order to sell, sells the security as principal to another member or customer to satisfy the sell.

Question 10

Riskless principal or net transactions rules

Answer 10

• The trade will be reported as one transaction excluding the mark-up or mark-down
• A Riskless principal transaction in which a member purchases or sells the shares on an exchange to satisfy a customer’s order will be reported by the exchange and not by the member
• When a non-market maker sells stock to a customer in a Riskless principal trade, the mark-up is determined from the member’s cost
• Prior to executing such a transaction, a member must disclose to and obtain consent from the customer on an order by order basis. Customers may not sign a negative consent letter. Institutions may provide the firm with a negative consent letter to avoid order by order consent
• If a mark-up is charged it must be disclosed to the customer