Now that you understand the types of broker-dealer compensation, the next question is: how much is too much? The fair-pricing standard provides the framework for evaluating fairness.
The Core Rule
- A broker-dealer must buy or sell securities at fair prices and charge fair commissions or markups, taking into account all relevant circumstances
- It is a violation to enter into any transaction with a customer at a price not reasonably related to the current market price of the security
- It is a violation to charge a commission that is not reasonable
- The standard applies to both agency transactions (commissions) and principal transactions (markups/markdowns)
Fairness Depends on the Circumstances
- There is no fixed percentage that automatically makes a charge fair or unfair
- A low markup can still be unfair, and a higher markup can be fair, depending on the circumstances
- What matters is whether the price is reasonably related to the security's current market value and whether the compensation is reasonable given all relevant facts
- The standard applies to all securities transactions with customers, including both listed and OTC securities
Exam Tip: Gotchas
- Fairness is not decided by a fixed percentage. A low markup can be unfair; the test is the relationship to current market value and the reasonableness of the charge.
- Disclosure does not cure an excessive markup. Telling a customer in advance about a high markup does not make it fair.
- The standard applies to all securities, not just OTC or unlisted securities.