Markup/Markdown

B is correct. The FINRA 5% Policy is a guideline, not a firm rule, and markups exceeding 5% may be justified by factors such as the security being thinly traded, the small transaction size, the dealer's research effort, and difficulty accessing the security. The markup must be disclosed and evaluated for reasonableness based on all circumstances. A is incorrect because the 5% Policy is not an absolute maximum—it's a guideline that can be exceeded with proper justification. C is incorrect for the same reason; there is no requirement to reduce the markup to exactly 5%. D is incorrect because disclosure of markup/markdown is required regardless of the dollar amount involved.

B is correct. The FINRA 5% Policy is a guideline (not a firm rule) suggesting that total transaction costs, including markups, markdowns, and commissions, should typically not exceed 5% of the prevailing market price. However, this percentage may be exceeded if justified by factors such as the nature of the security, transaction size, or dealer services. A is incorrect because the 5% Policy is a guideline, not an absolute prohibition—markups can exceed 5% in appropriate circumstances. C is incorrect because dealers are not required to charge exactly 5%; the policy sets a reasonableness guideline, not a fixed rate. D is incorrect because the 5% Policy applies to both markups (when dealers sell) and markdowns (when dealers buy).

C is correct. Calculate the markup percentage: ($42.50 - $40.00) / $40.00 = $2.50 / $40.00 = 0.0625 = 6.25%. The markup is the difference between the dealer's cost ($40) and the customer price ($42.50), divided by the dealer's cost. A is incorrect (2.5% would result from an incorrect calculation). B is incorrect (5.0% would be the markup if the customer paid $42 per share: $2/$40 = 5%). D is incorrect (10% would require a much larger price difference). When evaluating reasonableness under the 5% Policy, note that this 6.25% markup exceeds the guideline and would need to be justified by factors such as the security type, transaction size, or market conditions.

C is correct (the EXCEPT answer). The statement is FALSE. The 5% Policy is a guideline, not an absolute maximum—markups and markdowns may exceed 5% if justified by factors such as the security being thinly traded, small transaction size, dealer research effort, or market conditions. A is accurate: markups occur when dealers sell at a price above their cost. B is accurate: markdowns occur when dealers buy from customers at a price below prevailing market. D is accurate: disclosure is required and markups/markdowns must be reasonable based on current market prices and other factors.

C is correct (I, II, and IV). Statement I is TRUE: The $1.50 markup on a $25 dealer cost equals 6% ($1.50 / $25 = 0.06 = 6%). Statement II is TRUE: markups must be disclosed to customers on the trade confirmation. Statement III is FALSE: exceeding the 5% Policy guideline does not automatically make a transaction prohibited. The 5% Policy is a guideline, not a firm rule, and markups above 5% may be justified by factors such as thinly traded securities, small transaction size, dealer research effort, or difficult market conditions. Statement IV is TRUE: the reasonableness of any markup depends on multiple factors including the nature of the security (liquid vs. thinly traded), transaction size, expense to the dealer, services provided, and prevailing market conditions.