A customer asks whether a trade is free because the confirmation shows no commission. Your answer depends on how the broker-dealer traded and where its compensation appears.
You need to understand the firm's role before explaining its charges. A broker-dealer is a securities business that executes transactions for customers or trades for its own account. You represent that firm as an agent. The firm can earn different forms of compensation depending on the service and transaction.
When the broker-dealer arranges a trade for the customer, it acts in agency capacity, meaning it acts on someone else's behalf. When the firm itself buys from or sells to the customer, it acts in principal capacity, using its own account. Your registration as an agent does not mean every transaction your firm handles is an agency transaction.
Compensation rules address both the charge and the customer's understanding. A reasonable amount still needs the applicable disclosures. Conversely, explaining a charge does not establish that its amount is reasonable.
Common mistakes
- Treating service fees as exempt. A $140 custody charge still faces the reasonable-and-equitable standard even when the account has no trades.
- Using historical inventory cost. In Example 1, $1,040 includes appreciation. The customer markup is $240.
- Turning 5% into automatic clearance. “Permitted because it is 4%” skips the required fairness assessment; a signature does not cure an excessive charge.
Bottom line
- Broker-dealer service fees must be reasonable, equitable, and free from unfair discrimination among customers.
- Agency commissions must be reasonable in light of services and relevant circumstances.
- NASAA's model permits agent compensation splits only with registered agents of the same or commonly controlled broker-dealers.
- Markups and markdowns are measured against prevailing market price.
Exam shortcut
Start with the firm's action: arranging a trade, selling its own securities, buying the customer's securities, or servicing the account. That identifies the compensation category. For percentage problems, circle prevailing market price before calculating. Set aside old inventory cost unless the question specifically asks about the firm's total gain. When a stem offers a percentage and a signature as its entire justification, look for the missing circumstances.
The full lesson (about 4,011 words, 27 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- H19
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