NASD Regulation does not provide interpretive guidance on the appropriateness of a commission or mark-up schedule under Rule 2440, relating to fair prices and commissions, and the related mark-up policy, IM-2440. Further, NASD Regulation does not provide any assurance in the interpretive process that a firm's absolute reliance on a schedule for determining a commission or a mark-up is appropriate.
January 23, 2001
Bishop, Rosen & Co., Inc.
100 Broadway, 16th Floor
New York, NY 10005
Re: Commission Schedules
Dear Mr. Schlesinger:
I am writing in response to your letter dated January 4, 2001 and our phone conversation on January 11, 2001. You asked to receive specific written guidance on a commission schedule included in your letter, or an interpretation that your member firm would fall within a safe harbor under Rule 2440, Fair Prices and Commissions, if your firm charges such commissions.
For the reasons discussed below, NASD Regulation, Inc. ("NASD Regulation") does not approve or disapprove a commission or mark-up schedule, nor indicate that commissions or mark-ups set forth in a schedule would fall within a safe harbor. As a preliminary matter, the NASD’s rule relating to fair prices and commissions, Rule 2440, and the related mark-up policy, IM-2440, do not contain safe harbor provisions for prices, commissions, or mark-ups. Instead, Rule 2440 provides that a member "shall not charge his customer more than a fair commission or service charge, taking into consideration all relevant circumstances, including market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service he may have rendered by reason of his experience in and knowledge of such security and the market therefor."
Under Rule 2440 and the mark-up policy set forth in IM-2440, a member is required to determine whether a commission or mark-up is fair and reasonable based on the relevant facts and circumstances of a particular transaction. See Notices To Members ("NTMs") 93-81 and 92-16 for additional guidance.1 Accordingly, NASD Regulation does not provide interpretive guidance on the appropriateness of amounts (stated either as a percentage or a dollar amount) of a commission or mark-up contained in a schedule because these amounts do not take into account the unique facts and circumstances that may apply to any given transaction. Similarly, NASD Regulation does not provide any assurance that a firm’s absolute reliance on a schedule to determine the amount of a commission or mark-up is appropriate because such reliance may indicate that the firm is not undertaking the facts and circumstances analysis required under Rule 2440 and IM-2440 to determine that a commission or mark-up is fair and reasonable. Rather, we are concerned that such absolute reliance could lead to violations of Rule 2440 and IM-2440. In this regard, we urge representatives of Bishop Rosen to carefully review the referenced NTMs.
The opinions expressed in this letter are those of the staff and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
If you have any further questions , please contact me at 202-728-8985.
Very truly yours,
Sharon K. Zackula
David Leibowitz, Senior Vice President
1 Current NASD Rule 2440 was formerly Article III, Section 4 at the time NTMs 93-81 and 92-16 were published.