Final answer:
The FINRA 5% rule applies to the fairness of pricing in secondary market transactions, where securities are traded among investors, and not the primary market where securities are originally issued. Therefore, the correct answer to the question is B) False.
Step-by-step explanation:
The Financial Industry Regulatory Authority (FINRA) 5% rule pertains to the fairness of pricing in security transactions. However, the rule primarily applies to transactions in the secondary market, where securities are traded among investors, as opposed to the primary market where securities are issued and sold to the public directly by the issuer for the first time. The 5% rule is designed to prevent excessive markups, markdowns, and commissions, and it suggests that brokers should not charge their clients more than a 5% markup or markdown on transactions in the secondary market.
Considering government bonds and IRAs, they do typically participate in the primary market where they are issued by governments or financial institutions and are non-transferable. Similarly, small CDs can be considered part of this category because they have the option for early redemption before maturity. However, since the FINRA 5% rule is not applied to primary market transactions but to trades on the secondary market, the correct answer is B) False.