IM-2440-1. Mark-Up Policy | (2024)

This rule is no longer applicable. NASD IM-2440-1 has been superseded by FINRA Rule 2121. Please consult the appropriate FINRA Rule.

The question of fair mark-ups or spreads is one which has been raised from the earliest days of the Association. No definitive answer can be given and no interpretation can be all-inclusive for the obvious reason that what might be considered fair in one transaction could be unfair in another transaction because of different circ*mstances. In 1943, the Association's Board adopted what has become known as the "5% Policy" to be applied to transactions executed for customers. It was based upon studies demonstrating that the large majority of customer transactions were effected at a mark-up of 5% or less. The Policy has been reviewed by the Board of Governors on numerous occasions and each time the Board has reaffirmed the philosophy expressed in 1943. Pursuant thereto, and in accordance with Article VII, Section 1(a)(ii) of the By-Laws, the Board has adopted the following interpretation under

Rule 2440


It shall be deemed a violation of Rule 2110 and

Rule 2440

for a member to enter into any transaction with a customer in any security at any price not reasonably related to the current market price of the security or to charge a commission which is not reasonable.

(a) General Considerations

Since the adoption of the "5% Policy" the Board has determined that:

(1) The "5% Policy" is a guide, not a rule.

(2) A member may not justify mark-ups on the basis of expenses which are excessive.

(3) The mark-up over the prevailing market price is the significant spread from the point of view of fairness of dealings with customers in principal transactions. In the absence of other bona fide evidence of the prevailing market, a member's own contemporaneous cost is the best indication of the prevailing market price of a security.

(4) A mark-up pattern of 5% or even less may be considered unfair or unreasonable under the "5% Policy."

(5) Determination of the fairness of mark-ups must be based on a consideration of all the relevant factors, of which the percentage of mark-up is only one.

(b) Relevant Factors

Some of the factors which the Board believes that members and the Association's committees should take into consideration in determining the fairness of a mark-up are as follows:

(1) The Type of Security Involved

Some securities customarily carry a higher mark-up than others. For example, a higher percentage of mark-up customarily applies to a common stock transaction than to a bond transaction of the same size. Likewise, a higher percentage applies to sales of units of direct participation programs and condominium securities than to sales of common stock.

(2) The Availability of the Security in the Market

In the case of an inactive security the effort and cost of buying or selling the security, or any other unusual circ*mstances connected with its acquisition or sale, may have a bearing on the amount of mark-up justified.

(3) The Price of the Security

While there is no direct correlation, the percentage of mark-up or rate of commission generally increases as the price of the security decreases. Even where the amount of money is substantial, transactions in lower priced securities may require more handling and expense and may warrant a wider spread.

(4) The Amount of Money Involved in a Transaction

A transaction which involves a small amount of money may warrant a higher percentage of mark-up to cover the expenses of handling.

(5) Disclosure

Any disclosure to the customer, before the transaction is effected, of information which would indicate (A) the amount of commission charged in an agency transaction or (B) mark-up made in a principal transaction is a factor to be considered. Disclosure itself, however, does not justify a commission or mark-up which is unfair or excessive in light of all other relevant circ*mstances.

(6) The Pattern of Mark-Ups

While each transaction must meet the test of fairness, the Board believes that particular attention should be given to the pattern of a member's mark-ups.

(7) The Nature of the Member's Business

The Board is aware of the differences in the services and facilities which are needed by, and provided for, customers of members. If not excessive, the cost of providing such services and facilities, particularly when they are of a continuing nature, may properly be considered in determining the fairness of a member's mark-ups.

(c) Transactions to Which the Policy is Applicable

The Policy applies to all securities, whether oil royalties or any other security, in the following types of transactions:

(1) A transaction in which a member buys a security to fill an order for the same security previously received from a customer. This transaction would include the so-called "riskless" or "simultaneous" transaction.

(2) A transaction in which the member sells a security to a customer from inventory. In such a case the amount of the mark-up would be determined on the basis of the mark-up over the bona fide representative current market. The amount of profit or loss to the member from market appreciation or depreciation before, or after, the date of the transaction with the customer would not ordinarily enter into the determination of the amount or fairness of the mark-up.

(3) A transaction in which a member purchases a security from a customer. The price paid to the customer or the mark-down applied by the member must be reasonably related to the prevailing market price of the security.

(4) A transaction in which the member acts as agent. In such a case, the commission charged the customer must be fair in light of all relevant circ*mstances.

(5) Transactions wherein a customer sells securities to, or through, a broker/dealer, the proceeds from which are utilized to pay for other securities purchased from, or through, the broker/dealer at or about the same time. In such instances, the mark-up shall be computed in the same way as if the customer had purchased for cash and in computing the mark-up there shall be included any profit or commission realized by the dealer on the securities being liquidated, the proceeds of which are used to pay for securities being purchased.

(d) Transactions to Which the Policy is Not Applicable

The Mark-Up Policy is not applicable to the sale of securities where a prospectus or offering circular is required to be delivered and the securities are sold at the specific public offering price.

Amended by SR-NASD-2006-005 eff. June 13, 2008.
Amended by SR-NASD-2003-141 eff. July 5, 2007.
Amended by SR-NASD-98-86 eff. Nov. 19, 1998.
Adopted eff. Oct. 31, 1943, see SEC Release No. 3574 (June 1, 1944) and SEC Release No. 3623 (Nov. 25, 1944).

Selected Notices to Members:

75-65, 89-20, 91-69, 92-16, 93-81, 94-62, 08-36.
IM-2440-1. Mark-Up Policy | (2024)


What is the markup rule for finra? ›

(1) The "5% Policy" is a guide, not a rule. (2) A member may not justify mark-ups on the basis of expenses which are excessive. (3) The mark-up over the prevailing market price is the significant spread from the point of view of fairness of dealings with customers in principal transactions.

What is the finra rule 2440? ›

In securities transactions, whether in "listed" or "unlisted" securities, if a member buys for his own account from his customer, or sells for his own account to his customer, he shall buy or sell at a price which is fair, taking into consideration all relevant circ*mstances, including market conditions with respect to ...

What is the markup policy? ›

Definition of Markup Policy

FINRA's guideline, which states that the price that is paid or received by an investor must be reasonably related to the market price for that security. FINRA offers 5% as a guideline for what is reasonable to charge an investor when they purchase or sell securities.

What is an exemption from the 5% markup policy applies to? ›

What Is Exempt From the 5% Markup Policy? Anything that is being offered under a prospectus is exempt from the 5% markup policy. This is because all of the commissions and charges are all detailed in the prospectus. This extends to open end mutual funds or offering of securities.

What is FINRA's 5% markup policy? ›

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.

What is a markup violation? ›

The SEC Rule. The SEC views markups in excess of 10% above the prevailing market price in equity securities without disclosure of same to be a per se violation of the 1934 Act's Section 10b-5 and Rule 10b-5.

What is the markup on a proceeds transaction? ›

In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.

What is the good faith margin? ›

A quick definition of good-faith margin:

It is the cash or collateral that an investor must pay to a securities broker to protect the broker against losses from securities bought on credit.

What is FINRA Rule 2242? ›

FINRA Rule 2242 - Debt Research Analysts and Debt Research Reports. This rule governs conflicts of interest in connection with the publication of debt research reports and public appearances by debt research analysts.

How is markup determined? ›

Simply take the sales price minus the unit cost, and divide that number by the unit cost. Then, multiply by 100 to determine the markup percentage. For example, if your product costs $50 to make and the selling price is $75, then the markup percentage would be 50%: ( $75 – $50) / $50 = .50 x 100 = 50%.

How does markup work? ›

Markup is the difference between a product's selling price and cost as a percentage of the cost. For example, if a product sells for $125 and costs $100, the additional price increase is ($125 – $100) / $100) x 100 = 25%.

What is the formula for markup? ›

Markup % = (selling price – cost) / cost x 100

Learn more in CFI's financial analysis courses online!

Which of the following transactions would not be subject to the 5% markup policy? ›

Which of the following transactions would NOT be subject to the 5% markup policy? Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule.

What does the 5% markup policy apply to quizlet? ›

The 5% markup policy applies to which transactions? The 5% markup policy applies to all secondary market transactions. It does not apply to exempt transactions, transactions requiring the delivery of a prospectus, or issues sold at a fixed offering price.

What does the finra 5% policy apply to quizlet? ›

The 5% Policy applies to all over-the-counter and exchange transactions, except for transactions in municipal securities, which are covered by a similar MSRB rule. It only applies to secondary market transactions, not to primary market (new issue) transactions.

What is the 3x markup rule? ›

You will often hear the recommendation to markup your products with 3x. If you pay $10 for a product, you will sell it for $30. The 3x markup is a good rule of thumb.

Who does the 5% markup policy apply to? ›

A broker is an agent, acts for someone else, and receives a commission when a trade is executed. A dealer is a principal, acts for his own account, and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy which is a guide that broker-dealers must follow.

What is the rule 1070 for FINRA? ›

(e) Any person associated with a member who fails to pass a qualification examination prescribed by the Association shall be permitted to take the examination again after either a period of 30 calendar days has elapsed from the date of the prior examination or the next administration of an examination administered on a ...

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