Excessive Commission Lawyer: Fight Back Against Broker Overcharges

Excessive commissions, markups, and hidden fees silently drain investment returns, often without investors realizing they’re being overcharged. When your broker charges unreasonable markups on bonds, collects undisclosed 12b-1 fees, or generates excessive trading commissions, you’re not just losing money to market fluctuations—you’re losing it to misconduct. Securities laws require brokers and brokerage firms to charge only fair and reasonable compensation, yet regulatory enforcement actions reveal a troubling pattern of firms prioritizing profits over fairness.

If you’ve suffered losses due to excessive fees, markups, or commissions, you have legal rights to recover those costs through FINRA arbitration. This page explains how to identify excessive charges, the legal standards that protect investors, and how an experienced investment fraud lawyer can help you fight back against broker overcharges.

What Are Excessive Commissions, Markups, and Markdowns?

Understanding excessive commissions requires knowing how brokers get paid for securities transactions. Broker compensation comes in three primary forms, each with different disclosure requirements and opportunities for abuse.

Commissions: Agent Transactions

When your brokerage firm acts as an agent, it executes your trade through another market maker or exchange and charges you a commission. According to FINRA Rule 2121(a), this commission must be “fair and reasonable.” It appears as a separate line item on your trade confirmation, making it relatively transparent.

Markups and Markdowns: Principal Transactions

When your firm acts as a principal, it sells securities to you from its own inventory (markup) or buys from you into its inventory (markdown). The markup or markdown is the difference between what the firm paid for the security and what it charges you—or between what it pays you and what it can sell for on the open market.

This compensation method is far less transparent. The markup is embedded in the price you pay, not listed as a separate charge. Your trade confirmation might simply state “principal capacity” without disclosing the $ amount or percentage of the markup. This opacity creates opportunities for abuse.

Riskless Principal Transactions

A particularly problematic practice involves “riskless principal” transactions. The brokerage firm receives your order, immediately purchases the security from another dealer at the prevailing market price, then sells it to you at a marked-up price—all within seconds. The firm takes on virtually no market risk but charges you a markup that may far exceed what a commission would have been.

For example, if a municipal bond trades at $100 in the institutional market, your broker might buy it at $100 and immediately sell it to you at $105, pocketing a 5% markup. If the same transaction were executed on a commission basis, a reasonable commission might be 0.5% to 1%. The difference represents excessive profit at your expense.

FINRA’s 5% Policy: Rule 2121

The primary legal standard governing commission fairness is FINRA Rule 2121, commonly known as the “5% policy.” Despite its name, this rule does not establish a rigid 5% ceiling on commissions and markups. Rather, FINRA Rule 2121(a) provides a framework for evaluating whether charges are “fair and reasonable” based on the totality of circumstances.

Under FINRA Rule 2121, a member firm violates both that rule and FINRA Rule 2010 when it enters into any transaction with a customer at a price not reasonably related to the current market price of the security, or charges a commission that is not reasonable. The rule’s supplementary material (IM-2121-1) elaborates the violation standard and the factors FINRA applies. FINRA Rule 2010(a) requires that members “observe high standards of commercial honor and just and equitable principles of trade” in the conduct of their business — an obligation violated whenever markups or commissions fall outside the bounds of fair dealing.

Since June 30, 2020, broker-dealers must also comply with Regulation Best Interest (17 C.F.R. § 240.15l-1), which requires them to act in the retail customer’s best interest when recommending any securities transaction or investment strategy. Reg BI’s Care Obligation independently requires consideration of the costs associated with a recommendation. For transactions on or after June 2020, excessive commissions that violate Rule 2121 will typically also independently violate the Reg BI Care Obligation—meaning claimants should plead both grounds.

The 5% Guideline Is Not a Safe Harbor

FINRA has explicitly clarified that member firms should not view the 5% provision as establishing a specific ceiling below which markups will not be questioned. A charge of 4.9% is not automatically lawful simply because it falls below 5%—the guideline imposes no floor. In fact, as the 2024 enforcement actions below demonstrate, FINRA has brought proceedings involving markups as low as 2.30% on liquid bonds.

This stricter enforcement reflects modern market realities. Since the 5% policy was established in 1943, technological advances have dramatically reduced execution costs. Online trading, improved market access, and increased competition have driven down typical markups and commissions across the industry. What might have been reasonable 80 years ago is now considered excessive.

Factors FINRA Considers

When evaluating whether a markup or commission is excessive, FINRA considers multiple factors including:

• Type of security: Thinly-traded securities may justify higher markups than liquid, actively-traded stocks
• Availability of the security: Harder-to-find securities may warrant higher compensation
• Price of the security: Lower-priced securities may support higher percentage markups
• Amount of money involved: Smaller transactions sometimes justify higher percentage fees
• Disclosure: Whether the customer received adequate disclosure of the markup or commission
• Pattern of markups: A pattern of high markups, even if individually under 5%, may indicate systematic overcharging
• Nature of the broker’s business: Full-service advisory relationships versus execution-only services
• Whether the member is acting as agent or as principal: Principal transactions (markups) and agent transactions (commissions) are analyzed differently—the broker’s capacity affects what constitutes fair compensation for the service rendered

Hidden Fees: 12b-1 Fees and Revenue Sharing

Beyond direct commissions and markups, brokers and financial advisors often receive hidden compensation that inflates your costs without your knowledge. Two of the most problematic forms are 12b-1 fees and revenue sharing arrangements.

12b-1 Fees: The “Hidden” Distribution Charges

These fees — codified at 17 C.F.R. § 270.12b-1 — are annual charges levied by mutual funds to cover distribution and marketing expenses, ranging from 0.25% to 1% of fund assets. While mutual fund prospectuses disclose that these fees exist, they typically do not reveal who receives the money — and in many cases, your financial advisor is collecting a portion as indirect compensation.

The SEC has consistently brought enforcement actions against investment advisers who receive 12b-1 fees (governed by SEC Division of Investment Management Guidance Update No. 2018-05) without proper disclosure, finding that undisclosed receipt of these fees breaches the adviser’s fiduciary duty to clients. In its IM Guidance Update on mutual fund distribution and sub-accounting fees, the SEC made clear that advisers must fully and fairly disclose compensation arrangements — including 12b-1 fees and revenue sharing — that create conflicts of interest.

Important distinction: Investment advisers registered under the Investment Advisers Act of 1940 (RIAs) owe a fiduciary duty to fully disclose 12b-1 fee conflicts. Broker-dealers are held to a different standard: since June 2020, they must satisfy Reg BI’s Conflict of Interest Obligation under 17 C.F.R. § 240.15l-1(a)(2)(iii), which requires policies to identify and address conflicts of interest—but does not impose the full fiduciary duty that applies to RIAs. If your financial professional is dually registered as both a broker-dealer and an RIA, both standards may apply depending on the capacity in which they acted.

The problem with 12b-1 fees is the inherent conflict of interest. When your advisor recommends Fund A over Fund B, is it because Fund A is better for you—or because Fund A pays your advisor a 0.75% annual 12b-1 fee while Fund B charges nothing? Without full disclosure, you can’t know whether recommendations serve your interests or your advisor’s compensation.

Revenue Sharing: Even More Hidden

Revenue sharing arrangements are even less transparent than 12b-1 fees. Under these agreements, mutual fund companies pay brokers or custodians for “shelf space”—preferential placement on recommended fund lists or easier access for advisors. As one securities law professor explained to the SEC, revenue sharing represents “hidden marketing, hidden distribution” that doesn’t appear in fee tables or account statements.

The SEC has made clear that advisers receiving revenue sharing payments must fully disclose these arrangements and the resulting conflicts of interest. Yet many firms continue to collect these payments while providing inadequate disclosure to clients.

Recent Enforcement Actions Prove These Claims Are Winnable

Regulatory enforcement in 2024 demonstrates that excessive commission claims are viable and that investors can recover significant damages. Both the SEC and FINRA have prioritized unfair pricing cases, securing millions in restitution for harmed investors.

Municipal Bond Markup Cases

In October 2024, the SEC charged A.G.P./Alliance Global Partners for publishing above-market daily price quotes for thousands of municipal bonds on behalf of a customer, and for purchasing municipal bonds from that customer at above-market prices—then reselling those bonds at further inflated prices to other dealers, with the inflated costs ultimately flowing downstream to bond purchasers. The broker-dealer relied on a customer’s “Sophisticated Municipal Market Professional” status instead of conducting independent price assessments, and the misconduct extended across thousands of bond quotes published daily over approximately two years.

The SEC found violations of multiple Municipal Securities Rulemaking Board (MSRB) rules, including MSRB Rule G-13 (quotations), MSRB Rule G-17 (fair dealing), and MSRB Rule G-30(a) governing “Prices and Commissions,” as well as Securities Exchange Act of 1934 Section 15B(c)(1), 15 U.S.C. § 78o-4(c)(1), which requires broker-dealers to comply with applicable MSRB rules. This case illustrates how municipal bond pricing misconduct often escapes investor scrutiny because markups are embedded in the purchase price rather than shown as separate line items.

Corporate Bond Excessive Markup Cases

In September 2024, The Oak Ridge Financial Services Group settled FINRA charges for excessive markups on corporate bonds. The firm failed to correctly assess prevailing market prices in 89 corporate bond transactions, causing customers to pay unfair prices. FINRA identified an additional 27 transactions with unreasonable markups compared to similar contemporaneous bond trades. Customer harm totaled approximately $68,857, which the firm was ordered to pay in restitution.

Earlier in 2024, in June, GlobaLink Securities Inc. was censured and fined $200,000 for unfair markups and markdowns on corporate bonds ranging from 2.30% to 9.34%. The firm was also ordered to pay $397,862 in restitution and retain an independent consultant. Notably, the violations included markups well below the 5% “guideline,” confirming that FINRA enforces fairness standards more stringent than the historical 5% policy suggests.

Warning Signs of Excessive Commissions and Markups

Identifying excessive charges requires careful review of your account statements and trade confirmations. According to FINRA’s investor guidance, here are the red flags to watch for:

How to Identify Excessive Charges in Your Brokerage Statements

Armed with knowledge of what constitutes excessive fees, you can conduct your own audit of brokerage account statements. Here’s a step-by-step process:

Recovering Excessive Fees Through FINRA Arbitration

When you discover you’ve been charged excessive commissions, markups, or hidden fees, you have legal recourse through FINRA arbitration. This forum provides an efficient alternative to court litigation for resolving disputes with broker-dealers.

Why Varnavides Law’s Approach Is Different

Excessive commission cases require an attorney who understands both sides of the dispute—the investor’s perspective and the brokerage firm’s defenses. Gary Varnavides brings a unique insider advantage from spending 10 years at Sichenzia Ross Ference LLP defending broker-dealers in securities litigation and arbitration. Today, Varnavides Law exclusively represents investors—never broker-dealers.

We Know the Defense Playbook

When brokerage firms are accused of excessive markups, they deploy predictable defenses:

• “The securities were thinly traded, justifying higher markups”
• “The customer is sophisticated and understood the pricing”
• “Our markups were consistent with industry practice”
• “The customer agreed to our fee schedule in the account agreement”

With a decade defending broker-dealers and now representing investors exclusively on behalf of claimants, Gary understands the arguments firms use and how to counter them. We know which defenses have merit and which are pretextual. We know what evidence brokerage firms will try to hide during discovery and how to compel its production. This perspective allows us to anticipate and address the arguments firms typically deploy on behalf of investors.

Track Record Recognized by Peers

Gary Varnavides has been selected for Super Lawyers Rising Stars every year from 2015-2023, recognizing him among the top 2.5% of attorneys in the New York Metro area. He is licensed to practice in California and New York, allowing us to represent investors nationwide through FINRA arbitration, which has no geographic limitations.

Fee Structure

Varnavides Law offers a free consultation. Fee arrangements vary by matter and are discussed during consultation.

Case costs: You remain responsible for case costs, which may include filing fees, expert witnesses, and deposition transcripts. We can discuss cost estimates and payment arrangements during your consultation.

Schedule a free consultation to discuss your case and fee arrangement. Call (310) 367-3654 or contact us online.

Take Action Against Excessive Commissions

Excessive commissions, markups, and hidden fees violate FINRA conduct rules, including FINRA Rule 2010(a) (Standards of Commercial Honor), which requires ethical conduct in all securities transactions, and Rule 2121(a)’s fair-pricing mandate—and in egregious cases involving intentional concealment, may also give rise to securities fraud claims under Rule 10b-5 of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), which prohibits deceptive devices and manipulative schemes in connection with securities transactions. You don’t have to accept overcharging as the cost of doing business with a broker. In 2024 and into 2025, FINRA and the SEC have continued to prioritize unfair pricing enforcement — demonstrating that these cases are viable and that investors can recover significant damages through FINRA arbitration.

If you believe you’ve been charged excessive fees, don’t wait. Statutes of limitations restrict how long you have to file a claim. Review your brokerage statements, calculate your total fees, and consult with an experienced securities attorney to evaluate whether you have a viable claim.

Contact Varnavides Law, PC for a free consultation. Call (310) 367-3654 or contact us online. We represent investors nationwide in FINRA arbitration.