Habits can be tough to break. In 2011, FINRA attempted to break the broker-dealer industry’s habit of relying upon a 5% ceiling for equity markups by proposing a new FINRA Rule 2121 that would eliminate the so-called “5% policy” currently embodied in NASD IM-2440-1. Last week, at the two-year anniversary of that proposal, and following its processing of comments on the proposal, FINRA chose to maintain the 5% policy, probably as much for its usefulness to FINRA in regulating fair pricing as for the member firms’ reliance on a bright line standard to supervise their practices.
Most commenters opposed FINRA’s plan to eliminate the 5% policy, stating that the policy is effective in investor protection, and helps firms in establishing effective supervisory and compliance procedures. FINRA’s bold attempt to break the 5% habit might have failed because FINRA did not provide a substitute standard that might have provided the industry with a similar level of certainty.
FINRA’s proposed Rule 2121 would make certain minor changes to the current Rule 2440 and IM-2440’s considerations and factors: FINRA would give further credit in determining the markup to the effort and cost of buying or selling an inactive security. The revised proposal also states that if a transaction involves a large amount of money, it could warrant a lower percentage markup. In addition, if a member is relying on disclosure of the commission or markup to a customer to support the conclusion that the member dealt fairly with the customer, such disclosure must provide the total dollar amount and percentage.
FINRA is also proposing to eliminate the requirement it proposed two years ago that firms establish and make available to retail customers schedule(s) of standard commission charges for transactions in equity securities with retail customers, responding to concerns that the requirement would duplicate information already provided to customers, that posting the information would set a floor instead of fostering competition, and that providing a schedule would defeat the common practice of negotiating commissions.
Finally, FINRA proposes to toughen the standard, in evaluating markups charged on transactions in debt securities, for determining whether a customer is a qualified institutional buyer, or QIB. The revised proposal requires that a dealer have a reasonable basis to believe that a QIB is capable of evaluating investment risk independently, and the QIB must affirmatively indicate that it is exercising independent judgment in deciding to enter into the transaction.