Interpretive Letter to Name Not Public
May 2, 1996
|Re:||Proposed Commission Limits; Conduct Rule 2440 of the Association|
|(formerly Article III, Section 4 of the NASD's Rules of Fair Practice)|
We are in receipt of your letter requesting guidance of whether your proposed commission limit is in compliance with NASD guidelines. Specifically, you request whether a "minimum commission of up to $100.00 per trade or a per share minimum of 5 cents" is within the NASD guidelines, "even if this rate results in a commission greater than 5% of Principal".
In response to your request, it is important to first state that the use by members of standardized commission schedules or "minimum commissions" in arriving at fair prices and commissions to customers is inconsistent with NASD policy. The NASD guidelines require a member to evaluate each transaction with a customer in determining a fair price and commission. These guidelines and member requirements are set forth in Conduct Rule 2440 of the Association (formerly Article III, Section 4 of the NASD's Rules of Fair Practice).
In particular, Rule 2440 is supplemented with a Board Interpretation that established a "5% Policy" as to equity securities. Under the 5% Policy, a member should evaluate all "relevant factors" in determining the fairness of a mark up transaction, and "a mark up pattern of 5% or even less may be considered unfair or unreasonable under this policy". Therefore, utilizing standardized or minimum commission charges of $100 of .05 cents per share without an analysis of the relevant factors would not appear to conform to the 5% Policy.
Further, the NASD mark up or commission guidelines, as stated above, should not be confused with other informal guidelines that the NASD staff or others may use in determining whether a member's pricing and commission charges could be subject to a disciplinary action by the NASD.
To assist you with additional information regarding the NASD's mark up and commission guidelines, please review Notice to Members 92-16 and 93-81. If you have any questions, please call me at (202) 728-8014.
David A. Spotts