Flashcards in Chapter 8.3 Deck (10):
5% Mark-up Policy
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.
5% Mark-up Policy applies to what kind of trades?
All OTC principal and/or agency trades
Relevant factors which justify a higher percentage mark-up include:
-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.
The Mark-up is determined by what?
The current market value of a security
Transactions to which the Mark-up policy applies:
-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
The Mark-up Policy does not apply to:
-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.
Trading on Exchanges.
Capacity: Agent acting as a broker and charging a commission
Trading Over the Counter
Capacity: Principal Transactions acting as a dealer
Riskless principal or net transactions
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.