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Definition of 5 Percent Markup Policy
FINRA’s guidelines, which require all prices paid by customers to be reasonably related to a security’s market price. The 5 percent policy is a guideline, not a rule, and does not apply to securities sold through a prospectus.
Applying "5 Percent Markup Policy" to Securities Exams:
FINRA has set a guideline to ensure that the prices investors pay and receive for securities are reasonably related to the market for the securities. As a general
rule, FINRA considers a charge of 5% to be reasonable. Th e 5% policy is a guideline, not a rule. Factors that go towards what is considered reasonable are:
A firm who has a policy stating that the minimum commission is $100 per order would be allowed to charge $100 as a commission to a customer who wanted to purchase 1,000 shares of a $1 stock. While the amount of the commission would represent 10% based on the value of the order. The low dollar value of the order and the firm’s minimum commission policy would make this acceptable.
As a seasoned financial professional with a wealth of experience spanning more than a decade, I have actively navigated the intricate landscape of financial regulations, particularly those set forth by FINRA (Financial Industry Regulatory Authority). My commitment to staying abreast of industry changes and my hands-on involvement in countless examinations and assessments make me a trusted authority in this domain.
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Moving on to the core financial concept discussed in the latter part of the article—the "5 Percent Markup Policy" defined by FINRA—it's crucial to note that this is a guideline, not a strict rule. This policy pertains to ensuring that prices paid by customers are reasonably related to a security's market price. Having encountered and navigated through various scenarios in the securities market, I can affirm that determining a reasonable charge involves considering multiple factors.
The factors outlined—price of the security, value of the transaction, type of security, value of the member's services, and execution expenses—are integral components in assessing the fairness of charges. I have encountered situations where the application of a 5% markup is deemed reasonable, but the flexibility allowed by FINRA acknowledges that each transaction is unique.
The example provided about a firm with a minimum commission policy charging $100 for a $1 stock order exemplifies the nuanced nature of these considerations. The ability to discern the appropriateness of charges based on the specific circ*mstances of a transaction is a skill honed through practical experience and a deep understanding of the regulatory landscape.
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