Finra proposes marking up its markup guideline

Finra is proposing to drop its 5% markup-markdown guideline, which can be traced back to the 1940s.

In a notice for comment published last week, the Financial Industry Regulatory Authority Inc. proposed rule changes that would eliminate the 5% policy.

The policy established a general guideline for brokers, the thrust of which was that charging customers more than 5% on a trade could be deemed excessive.

The policy was “based on the execution practices and market efficiencies of nearly 70 years ago” and therefore is outdated, Finra said in its notice.

The regulator noted that brokerage firms have interpreted the guideline to mean that a markup, markdown or commission exceeding 5% is prohibited. Conversely, anything under 5% is allowable.

But the policy was never a rule — just a rule of thumb.

The regulator won’t be setting a new, lower percentage as a guideline, however, “as this may encourage members to artificially peg (or cap) their markups, markdowns and commissions based upon the new percentage,” Finra noted.

The new rule would incorporate existing factors firms are supposed to use in determining fair trading costs, including a security’s liquidity, price and size of the transaction.

“I’ve seen [Finra] attack a 3%” markup, said Robert Beers, an industry attorney and compliance consultant.

He would like to see more guidance from Finra regarding transaction costs. Determining what is excessive “can come down to a gut feeling” by Finra as to what is proper, Mr. Beers said.

The notice “may be an opportunity for commentators to force them to be more precise,” he said.

Finra also wants to require firms to provide an equity commission schedule to retail customers.

Giving customers the ability to compare commission rates may result in more competition and lower transaction costs, Finra said.

The proposal is part of Finra’s continuing consolidation of legacy NASD and New York Stock Exchange rules. Finra wants to transfer NASD Rule 2440, NASD Interpretive Memo 2440-1 and NYSE Rule 375 into a new Finra Rule 2121.

The deadline for comments on the rejiggering of the 5% proposal is March 28.

E-mail Dan Jamieson at [email protected].