Excessive Markup & Markdown
What Constitutes Excessive Markup or Markdown?
There are different rules and regulations governing markups and markdowns on fixed income securities or bonds.
For transactions involving municipal bonds, there is the Municipal Securities Rulemaking Board Rule G-30, which prohibits unfair and unreasonable markups. The markup or markdown on a bond that we’re talking about is the difference between the price charged to the customer and the prevailing market price. The difficulty is often determining what the prevailing “market price” is.
Although there is no question that the broker/dealer is entitled to add a markup to the price it pays for the securities, the markup must be fair and reasonable. Whether that markup is fair and reasonable is determined on a case-by-case basis. A markup may be “excessive” when it bears no reasonable relation to the prevailing market price.
We Have Extensive Experience With Securities Cases
If you think you were charged excessive markups or markdowns, contact our experienced lawyers to learn more about your rights and whether the broker/dealer may be held liable. The attorneys of Mihalek Law have more than 50 years of combined experience handling securities cases and arbitration matters. We protect the rights of investors in Lexington, Kentucky, and throughout the country, recovering the millions of dollars from brokers and the firms that employ them.
Excessive Markups And Markdowns On Bonds
We are seeing widespread abuse in the purchase and sale of bonds. Victims are often sophisticated, institutional-sized investors. The reason: undisclosed, excessive markups and markdowns.
Even sophisticated investors — like regional banks in Kentucky and elsewhere — are being charged excessive markups and markdowns on their fixed income portfolios. These excessive charges directly (and negatively) impact a customer’s yield on their fixed income portfolio.
Contact Our Attorneys To Learn More
So back to the question: What is an excessive markup/markdown? Or conversely: What is fair and reasonable? Based on the regulatory actions of FINRA, it is clear that markups and markdowns as low as 2.75 percent and perhaps even lower may be deemed excessive in the eyes of the regulators. How much are you paying for your fixed-income portfolio?
If you have questions or concerns concerning the fixed income securities or other investments in your portfolio, call us to schedule a free consultation. We can be reached through our online form or by calling RED FLAGS: SIGNS OF BROKER MISCONDUCT
Let’s say that you’ve been a cautious investor and mindful of your portfolio. But, still, something about your account doesn’t feel right. Something seems to be amiss, but you can’t put your finger on it.
Here are some things to look for:
Unsuitable recommendations: Your broker has a responsibility to recommend investments based on your investment needs and goals, and your appetite for risk, if any. If you don’t want to make investments that place your principal at substantial risk of loss, they shouldn’t be recommended to you. For example, elderly people living on fixed incomes should not have a lot of their money put into risky investments, structured products, non-traded REITs, or other investments that don’t provide ready access to funds if needed for an emergency.
Unauthorized trading: A stockbroker is not allowed to buy or sell securities on your behalf without your prior authorization, unless you specifically grant them the authority to trade at their own discretion. Many brokerage firms will not even allow their financial advisers to undertake such discretionary authority. Neither is he or she allowed to purchase more of the securities you order. For example, when you agree to purchase 1,000 shares of stock, your stockbroker should not purchase 1,100 shares. Review your statements upon receipt to ensure there are no unauthorized transactions.
Churning: This involves trading an account excessively for the sole purpose of generating commissions for the broker. Be on the lookout for repeated recommendations to buy and sell securities. The transactions costs can add up quickly and negatively impact your account’s performance more than you may expect.
Unauthorized accounts: A stockbroker may not without your express authorization open up an option, margin or any other type of account for you. This activity often involves forgery or misrepresentations about the nature of such accounts, and is a huge red flag to watch out for.
Unauthorized use of margin: Margin is borrowing funds from the brokerage firm, usually to invest in more securities. Stated simply, you are borrowing money to invest. The broker-dealer charges interest on the money you borrow; and if the value of the securities in your margin account drops, the firm has the right to sell out your entire account to protect its capital. The use of margin increases the risk of the account and is generally not appropriate for retired investors who want to minimize their risk of loss of principal. Review your periodic account statements. If you see a negative cash balance, you are on margin, that is you owe that money to the firm and are paying interest on the amount owed.
Sudden losses/high volatility: The stockbroker must disclose all material information, including the risks of the investments he or she is recommending. Concealing the true risk of an investment, misstating facts about an investment (like it is 100% protected against loss of principal); or failing to disclose, i.e., omitting material information (i.e., the company is insolvent or has not earned a profit in the past three quarters) are examples of misrepresentations and omissions. These are often reflected is sudden losses or large swings in the value of the investments.
Always Save And Review Your Statements
To discover if your broker has engaged in these or other unlawful practices, you must examine your monthly statements for unauthorized transactions, excessive trading, or a sudden drop in value. You should save your statements for easy reference and comparison over time.
Contact Our Kentucky Attorneys If You Have Suffered Due To Broker Misconduct
If you want additional information on how you can protect yourself and your portfolio, or if you believe you have suffered from stockbroker misconduct, call our lawyers toll free at 859-233-1805 or contact us online for a free consultation. From our Lexington offices, we provide representation to people throughout the country.