Fair Pricing and Anti-Intimidation Standards

What Does Fair Pricing and Commissions Require?

• A member acting as principal must buy or sell at a fair price, weighing market conditions, the expense involved, and its entitlement to a profit.
• A member acting as agent must charge no more than a fair commission, weighing market conditions, the expense of executing the order, and the value of any service it gave through its own experience with the security and its market.
• Both tests turn on all relevant circumstances. What separates them is the last factor. Only the principal test counts the member's entitlement to a profit. Only the agent test counts the value of the service the member gave through its own knowledge of the security and its market.
• The expense factor has a limit of its own. A member may not justify a markup on the basis of expenses that are excessive. A high cost is a factor to weigh, not a cost the member may pass through without limit.
• Relevant factors go beyond the markup percentage itself: the type of security, its availability in the market, its price, the dollar amount of the transaction, disclosure to the customer, the pattern of the member's markups, and the nature of the member's business.
• The long-standing 5% Policy is a guide, not a rule. A markup pattern of 5% or less can still be unfair. Disclosing a markup or commission to the customer is a relevant factor, but disclosure alone does not make an unfair markup or commission fair.

Does Fair Pricing Apply to a Private Placement?

• Yes. The Mark-Up Policy's one exclusion needs two conditions together: a prospectus or offering circular must be required, and the security must sell at the specific public offering price.
• A private placement satisfies neither condition. It uses a private placement memorandum rather than a prospectus or an offering circular, and it has no public offering price, so the exclusion never reaches it.

Exam Tip: Gotchas

• The exclusion does reach a Regulation A offering sold at its stated price, because Regulation A uses an offering circular. Regulation A is excluded; a Regulation D private placement is not. Read which offering type the question is describing.

What Does the Anti-Intimidation Rule Prohibit, and What Does It Allow?

• The anti-intimidation rule prohibits a member or associated person from:
  • Coordinating prices, quotations, trades, or trade reports with another member or person.
  • Directing or requesting that another member alter a price or quotation.
  • Threatening, harassing, coercing, intimidating, or otherwise improperly influencing another member or market participant, including refusing to trade with, or retaliating against, a competing market participant.
• Provided the conduct otherwise complies with applicable law, the rule names seven things it does not restrict. A member or an associated person stays free to:
  • Set its own bid, ask, or quantity unilaterally.
  • Set its own dealer spread, quote increment, or quotation size unilaterally, including any relationship it sets between or among its dealer spread, its inside spread, and the size of any quote increment.
  • Communicate its own bid or ask to explore or negotiate a purchase or sale.
  • Communicate its own bid or ask to retain another person as an agent or subagent for the member or for a customer of the member, or to seek to be retained as one.
  • Participate in an underwriting or underwriting syndicate, so far as the federal securities laws allow it.
  • Decide unilaterally which market makers it will trade with, and on what terms, unless the prohibitions above already forbid that action.
  • Deliver an order to another member for handling.

Exam Tip: Gotchas

• The anti-intimidation rule governs how a member deals with other members and market participants, not how a representative treats a customer. It has no private-placement-specific application; do not invent one for a customer-facing scenario.

What Should You Check on Exam Day?

• Confirm both exclusion conditions before treating a security as outside the Mark-Up Policy: a required prospectus or offering circular, and a fixed public offering price.
• Remember a private placement memorandum is not a prospectus or offering circular, so a private placement never qualifies for the exclusion.
• Reject any answer that lets a member recover an excessive expense through the markup. Expense is a factor; an excessive expense justifies nothing.
• Recognize the seven listed freedoms under the anti-intimidation rule before assuming any inter-member communication is prohibited. They belong to an associated person as well as to the member.
• Keep the anti-intimidation rule scoped to inter-member and inter-market-participant conduct, not representative-to-customer conduct.