Excessive Markups/Markdowns


The Financial Industry Regulatory Authority (FINRA) has recently proposed rule changes concerning markups and markdowns charged to investors in securities transactions. The FINRA “5% Markup” rule which has been in place for decades has become outdated and does not always reflect the realities of today’s securities markets. The costs related to the access of information, execution and communications have all been reduced by advancements in computer technology. The new FINRA guidelines are intended to provide direction for the securities industry concerning the costs and fees charged to investors to execute transactions.

The securities exchanges are considered efficient which means that current market prices are deemed to reflect all relevant information which results in securities that are fairly priced. Therefore, the prices paid by investors for securities transactions, at a particular point in time, vary according to the differences in the fees and costs charged by financial brokerage firms and financial advisors to facilitate transactions. The FINRA guidelines detail various factors that should be considered in the application of the sales practice rules for determining fair and reasonable pricing for securities transactions. FINRA provides a list of relevant factors that should take into consideration for determining if a markup, markdown or commission is fair and reasonable (municipal securities). The factors to be considered are:

  • (1) type of security involved;
  • (2) availability of the security in the market;
  • (3) price of the security;
  • (4) amount of money involved in a transaction;
  • (5) disclosure;
  • (6) pattern of markups; and
  • (7) nature of the firm’s business.

The securities markets encompass a wide range of securities across many different industries which can help explain the differences in the markup and markdown percentages between different types of securities. The following securities tend to have greater costs and fees associated with transactions; low-priced stock, inactive securities, OTCBB stock, municipal bonds, and trades executed by smaller financial brokerage firms. The FINRA “5% Markup” rule does not apply to securities sold through the use of a prospectus, offering circular or an initial public offering. The financial advisor dealer transactions affected by the FINRA “markup” rule guidelines include:

  • Riskless or simultaneous transactions;
  • Orders filled from inventory, principal transactions;
  • Order filled from another financial advisor dealer’s inventory, agency transaction; and
  • Orders filled from security purchased from another customer.

Klayman & Toskes, P.A. can help you determine whether an investment loss is the result of a brokerage firm and financial advisor’s excessive markups and/or markdowns of securities your brokerage account. If an investor suffers losses as a result of excessive markups and/or markdowns they may be able recover their losses in a FINRA arbitration claim for damages.

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