From the May 01, 2011 issue of Futures Magazine • Subscribe!

Finra updating B/D rulebook

Out With the old

The Financial Industry Regulatory Authority (Finra) recently sought comments on a proposal to update a number of policies regulating broker/dealers. Among those proposals was a repeal of the "5% policy" on markups, markdowns and commissions.

Under the current rule, broker/dealers are able to sell securities they already own to clients with an additional premium of up to 5% over the best bid, and buy them up to 5% below the best bid in order to make a profit.

Finra proposed to remove the 5% cap, citing a 2004 study that the average markup was 2%-2.2% and average markdown was 1.9%-1.3%.

Comments received generally were supportive of updating the rules, but many were concerned about deleting the 5% policy and putting nothing in its place. "This Notice proposes replacing clear NASD rules in favor of lesser standards denoted in NYSE rules by removing the 5% cap on commissions and markups," said Rex Staples, general counsel at the North American Securities Administrators Association (NASAA), in a comment letter. "Clear guidance in this arena is needed for purposes of litigation, enforcement, compliance, and general clarity. The industry often asks regulators for clear guidance, and this is an example of an existing rule that is very clear in its application."

The comment period for the proposal has closed and Finra now will review the comments before making a recommendation to the SEC. Finra did not return a call for comment.

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