FINRA Rule 2120

FINRA Rule 2120 sits within the 2100 Transactions with Customers subsection, immediately following FINRA Rule 2114's Recommendations to Customers in OTC Equity Securities and immediately preceding FINRA Rule 2121's Fair Prices and Commissions provisions — the first and most substantively important child rule of the 2120 sub-grouping.

The Commissions, Mark Ups and Charges Framework in Historical Context

FINRA Rule 2120's sub-grouping organizes the successor rules to a long lineage of NASD markup and commission standards. 

The predecessor NASD Rule 2440 (Fair Prices and Commissions) established the foundational principal-transaction fair pricing and agency-transaction fair commission standard that FINRA Rule 2121 now carries. NASD Interpretive Material IM-2440-1 established the 5% Policy — the general position that markups, markdowns, and commissions should not exceed 5% of the price of the security involved, though the Policy was always a guideline rather than a bright-line rule — which FINRA Rule 2121's Supplementary Material .01 now houses. And NASD IM-2440-2 established the additional markup policy for debt securities transactions, now housed in FINRA Rule 2121's Supplementary Material .02.

The consolidation of these pricing standards into FINRA Rule 2121 — which FINRA transferred from NASD Rule 2440 and its Interpretive Materials through SR-FINRA-2014-023 — represented a significant modernization of the markup and commission framework. 

The consolidation addressed longstanding questions about whether the 5% Policy should be retained (ultimately, FINRA retained it in Supplementary Material .01 following significant industry and investor comment), how the prevailing market price waterfall for debt securities transactions should be structured, and whether commission schedules should be required to be provided to retail customers (FINRA ultimately decided not to require this).

The Three Child Rules of the 2120 Sub-Grouping

FINRA Rule 2121, Fair Prices and Commissions, is the foundational pricing standard — requiring that in principal transactions with customers, a member shall buy or sell at a price that is fair and reasonable, taking into consideration all relevant facts and circumstances including the best judgment of the member as to the fair market value of the security at the time of the transaction, the expense involved in effecting the transaction, the fact that the member is entitled to a profit, and the total dollar amount of the transaction. In agency transactions, a member shall not charge a commission that is not fair and reasonable, taking into consideration all relevant facts and circumstances including the same factors.

FINRA Rule 2121's Supplementary Material .01 — the 5% Policy — establishes that, as a general position, markups, markdowns, commissions and other charges in excess of 5% of the market value of a security are considered unfair, though the Policy explicitly states that 5% is not a rule — it is a guide. The fairness of any markup or commission depends on the specific facts and circumstances of the transaction, including the type of security, availability of the security in the market, price of the security, the dollar amount of the transaction, and services rendered by the member. The Policy applies to both equity and debt securities in both principal and agency capacities.

FINRA Rule 2121's Supplementary Material .02 — the Additional Mark-Up Policy for Transactions in Debt Securities, Except Municipal Securities — establishes the prevailing market price (PMP) concept and waterfall applicable to principal capacity debt securities transactions with customers. Under the waterfall, the PMP is presumptively established by the dealer's contemporaneous cost as incurred (for a purchase) or proceeds as obtained (for a sale). Where contemporaneous cost is no longer current or has been overcome, the firm proceeds to the next level of the waterfall: bona fide third-party transactions, contemporaneous bona fide interdealer quotations, or if those are unavailable, the price derived from a pricing model or alternative methodology. FINRA's Annual Regulatory Oversight Reports have consistently identified incorrect PMP determination — including failure to follow the waterfall, improper manual overrides, and reliance on outdated markup grids — as a recurring area of examination concern.

FINRA Rule 2122, Charges for Services Performed, governs charges and fees that are not transaction-specific markups or commissions — fees for safekeeping, collecting dividends or interest, for the transfer of securities, and similar service charges. Under Rule 2122, a member may charge a customer for services rendered, provided the charge bears a reasonable relationship to the cost of the service or represents a fair compensation for the service.

FINRA Rule 2124, Net Transactions with Customers, requires members to obtain disclosure to and consent from customers before executing transactions on a net basis — a basis under which the member, having received an order from a customer to buy or sell an equity security, simultaneously executes offsetting transactions and charges the customer a price that reflects both the market transaction and the member's spread or markup without separately charging a commission. Because net transactions do not involve a separately disclosed commission, the disclosure and consent requirements of FINRA Rule 2124 ensure customers understand the economic character of the transactions they are executing.

The Prevailing Market Price Waterfall and Fixed Income Examination Focus

FINRA's examination findings across multiple consecutive Annual Regulatory Oversight Reports have highlighted fixed income fair pricing under FINRA Rule 2121 as a recurring area of concern — making the Commissions, Mark Ups and Charges sub-grouping's practical application particularly exam-relevant for the Series 7 and Series 24. The most frequently cited deficiencies include failure to follow the PMP waterfall prescribed by Supplementary Material .02, sole reliance on markup grids without performing the required facts-and-circumstances analysis, failure to account for the cumulative customer impact of proceeds transactions (where the combined markdown on a sale and markup on a purchase in close proximity should be considered together), and inadequate documentation of PMP determinations.

These examination findings confirm that FINRA Rule 2121 is not merely a disclosure obligation or a general-principle rule — it is an active supervisory obligation requiring member firms to maintain written supervisory procedures specifically addressing how PMP is determined for different types of debt securities, how exception reports are configured and reviewed, and how manual overrides of automated PMP determinations are supervised and documented.

The 5% Policy — Guide, Not Rule

One of the most exam-relevant aspects of FINRA Rule 2121 is the nature and application of the 5% Policy. The Policy's origins — adopted by the NASD Board in 1943 based on studies showing the large majority of customer transactions were effected at markups of 5% or less — give it historical authority, but its explicitly non-rule character is equally important. A markup that is less than 5% is not automatically fair, and a markup that exceeds 5% is not automatically unfair — the facts and circumstances of the specific transaction always govern.

The Policy further identifies specific factors bearing on markup fairness that examiners and adjudicators apply in practice: the type of security involved, availability of the security in the market, the price of the security, the dollar amount of the transaction, disclosure to the customer, the pattern of a member's markups, the nature of the member's business, and the services rendered by the member. These factors, taken together, provide the analytical framework through which any markup or commission is assessed for fairness under the 5% Policy — confirming that the Policy is a multi-factor, context-dependent standard rather than a mechanical percentage threshold.

Connection to FINRA Rules 2010, 2090, 2100, 2110, 2121, 2122, 2124, 2232, 3110, and MSRB Rule G-30

FINRA Rule 2120 connects to FINRA Rule 2010 — as the foundational commercial honor standard whose specific pricing expression the Commissions, Mark Ups and Charges sub-grouping represents, with excessive markups and commissions historically among the most common bases for FINRA Rule 2010 disciplinary actions. It connects to FINRA Rule 2090 — as the know-your-customer foundation that, in combination with the suitability standard of FINRA Rule 2111, informs whether a particular pricing structure is appropriate for a specific customer. It connects to FINRA Rule 2100 and FINRA Rule 2110 — as the parent organizational markers within which FINRA Rule 2120's sub-grouping sits. It connects directly to FINRA Rules 2121, 2122, and 2124 — the three child rules whose operative content gives FINRA Rule 2120's sub-grouping its substantive meaning. It connects to FINRA Rule 2232 — whose customer confirmation disclosure requirements for markups and markdowns on corporate and agency bond transactions with retail investors (adopted through amendments effective May 14, 2018) operationalize the transparency objectives underlying FINRA Rule 2121's fair pricing standard. It connects to FINRA Rule 3110 — whose supervisory system requirements must specifically address the pricing fairness and PMP-determination obligations FINRA Rule 2121 establishes, with member firms required to have WSPs addressing how markup and commission fairness is monitored. And it connects to MSRB Rule G-30 — the parallel fair pricing standard applicable to municipal securities transactions, which FINRA Rule 2121's fixed-income markup framework frequently parallels in examination findings and supervisory expectations.

Examination Relevance and Key Takeaways

FINRA Rule 2120 is tested on the Series 7 and Series 24 examinations as the series sub-marker for the Commissions, Mark Ups and Charges sub-grouping — the organizational framework grouping the fair pricing, service charges, and net transaction rules that govern the economic dimension of member-customer transactions.

The key points to retain are these: FINRA Rule 2120 has no operative text — it serves as the organizational sub-marker for the Commissions, Mark Ups and Charges sub-grouping within FINRA Rule 2100's Transactions with Customers subsection; its three child rules are FINRA Rule 2121 (Fair Prices and Commissions — the foundational fair-and-reasonable pricing standard for both principal and agency transactions, housing the 5% Policy in Supplementary Material .01 and the debt securities PMP waterfall in Supplementary Material .02), FINRA Rule 2122 (Charges for Services Performed — governing non-transaction-specific service charges), and FINRA Rule 2124 (Net Transactions with Customers — requiring disclosure and consent before executing transactions on a net basis); the 5% Policy is a guide, not a rule — markups below 5% are not automatically fair and those above 5% are not automatically unfair, with the multi-factor facts-and-circumstances analysis always governing; the PMP waterfall for debt securities transactions under FINRA Rule 2121 Supplementary Material .02 — starting with contemporaneous cost, proceeding through third-party transactions, interdealer quotations, and pricing models — is a recurring FINRA examination focus across multiple Annual Regulatory Oversight Reports; and the Commissions, Mark Ups and Charges sub-grouping operates alongside the Recommendations sub-grouping under FINRA Rule 2110 as the two central pillars of FINRA Rule 2100's Transactions with Customers framework.