Finra backtracks on plan to end 5% markup rule

Majority of comments to proposal back policy, call it effective

Feb 4, 2013 @ 4:05 pm

By Dan Jamieson

finra, brokers, regulation, broker-dealers
+ Zoom

The Financial Industry Regulatory Authority Inc. is backtracking on a controversial plan to end its 5% markup rule.

In a regulatory notice posted last Thursday on its website, Finra asked for comment on an updated proposal that would keep the 5% guideline in place.

The action follows complaints about an earlier proposal to eliminate the 5% rule for markups and markdowns.

“A majority of the comments received on the initial proposal opposed the elimination of the 5% policy,” Finra said in the notice. “These commenters stated that the 5% policy generally has been effective in regulating broker-dealers for over 70 years and eliminating it would reduce investor protection.”

In its initial proposal — floated nearly two years ago — Finra had promised updated guidance to replace the 5% threshold, but commenters warned against eliminating it without setting a new standard.

Nevertheless, industry attorneys don't like the old 5% limit, which dates from 1943.

“You know [Finra is] not going to [use] 5%, because we've seen enough settlements at 3% [markups] where Finra has found them to be excessive,” said Elizabeth Baird, a partner at Bingham McCutchen LLP and a former bond trader.

“It really is sending a bad message to member firms” that a 5% markup or markdown is generally OK, she said.

Finra examiners actually use something closer to a 2% to 3% markup, observers say, and Finra has consistently said the 5% rule is a guideline only.

“It's like charades; you don't know what they're looking for,” Ms. Baird said.

“As a compliance officer, you spend time talking to the trading desk [about] markups, and you'll say, 'You should be thinking a 2% [threshold] because examiners are honing in on that,'” said David Rosedahl, an attorney at Briggs and Morgan PA.

Finra spokeswoman Michelle Ong declined to comment.

In its most recent notice, Finra said it also wanted to do away with a “proceeds” rule that applies the markup guidance to round-trip transactions, as well as a proposed requirement that firms provide equity-commission-rate schedules to retail customers.

Finra wants comments on the new proposal by April 1.

The changes, part of the Finra's ongoing rule consolidation process, would be part of Finra's new Rule 2121 covering markups and markdowns.

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