Rule 401 Business Conduct
This rule is no longer applicable. Incorporated NYSE Rule Interpretations have been superseded by Temporary Dual FINRA-NYSE member Rule Series. Please consult the appropriate FINRA Rule.
/01 Trading Against Firm Recommendations
Transactions in a security by a member organization or its personnel shortly before or after the firm issues a purchase or sale recommendation raise questions of motive. Firm personnel who participate in making the recommendation or have any pre-publication knowledge of it should refrain from any action in contemplation of the report, such as making a transaction for their own account or accounts in which they have an interest or discretion or passing on advance information concerning the report to persons outside the firm.
At the time that customers generally learn of the recommendation, firm personnel (except "research analysts" as defined in Rule 472.40) should be free to act for unaffiliated discretionary accounts but should refrain from acting for accounts in which they have an interest, either in accordance with or in a manner inconsistent to the recommendation, until the market has absorbed the effect of the recommendation.
The time duration of the market effect is very difficult to determine and varies greatly with circumstances. Some firms have lessened the difficulty of individual decisions by selecting a minimum period following a recommendation during which firm personnel are restricted from acting for accounts in which they have an interest.
The period of time which elapses before customers generally learn of the recommendation is also difficult to determine and, therefore, it is advisable that a similar policy be adopted with respect to the accounts over which personnel have discretion but in which they have no interest.
"Research analysts" as defined in Rule 472.40 are also subject to personal trading restrictions specified in Rule 472(e).
Transactions in a security by a member organization or its personnel shortly before or after the firm issues a purchase or sale recommendation raise questions of motive. Firm personnel who participate in making the recommendation or have any pre-publication knowledge of it should refrain from any action in contemplation of the report, such as making a transaction for their own account or accounts in which they have an interest or discretion or passing on advance information concerning the report to persons outside the firm.
At the time that customers generally learn of the recommendation, firm personnel (except "research analysts" as defined in Rule 472.40) should be free to act for unaffiliated discretionary accounts but should refrain from acting for accounts in which they have an interest, either in accordance with or in a manner inconsistent to the recommendation, until the market has absorbed the effect of the recommendation.
The time duration of the market effect is very difficult to determine and varies greatly with circumstances. Some firms have lessened the difficulty of individual decisions by selecting a minimum period following a recommendation during which firm personnel are restricted from acting for accounts in which they have an interest.
The period of time which elapses before customers generally learn of the recommendation is also difficult to determine and, therefore, it is advisable that a similar policy be adopted with respect to the accounts over which personnel have discretion but in which they have no interest.
"Research analysts" as defined in Rule 472.40 are also subject to personal trading restrictions specified in Rule 472(e).
/02 Private Sales
Member organizatio ns must monitor the activities of their associated personnel in regard to their marketing of securities through private sales. The SEC has stated that:
"(W)here employees effect transactions for customers outside of the normal channels and without disclosure to the employer, the public is deprived of protection which it is entitled to expect. Moreover the employer may also thus be exposed to risks to which it should not be exposed. Thus, such conduct is not only potentially harmful to public investors, but inconsistent with the obligation of an employee to serve his employer faithfully."
(Securities Exchange Act Release No. 10265 June 29, 1973)
Member organizatio ns must monitor the activities of their associated personnel in regard to their marketing of securities through private sales. The SEC has stated that:
"(W)here employees effect transactions for customers outside of the normal channels and without disclosure to the employer, the public is deprived of protection which it is entitled to expect. Moreover the employer may also thus be exposed to risks to which it should not be exposed. Thus, such conduct is not only potentially harmful to public investors, but inconsistent with the obligation of an employee to serve his employer faithfully."
(Securities Exchange Act Release No. 10265 June 29, 1973)
/03 Conversions, Acquisitions and Changes in Business Activities
Member organizations are expected to notify the Exchange when planning important organizational or operational changes, such as mergers with or acquisitions of other broker/dealers or the acquisition of a significant electronic data processing system conversion or a change in business activity involving the addition of new product lines such as municipal bonds, government securities, options or commodities, etc. By discussing these proposals with the Exchange well in advance of implementation, member organizations will have the benefit of the Exchange's insight and experience which may serve to aid in avoiding financial and operational problems.
Member organizations are expected to notify the Exchange when planning important organizational or operational changes, such as mergers with or acquisitions of other broker/dealers or the acquisition of a significant electronic data processing system conversion or a change in business activity involving the addition of new product lines such as municipal bonds, government securities, options or commodities, etc. By discussing these proposals with the Exchange well in advance of implementation, member organizations will have the benefit of the Exchange's insight and experience which may serve to aid in avoiding financial and operational problems.
/04 Early Reporting of Developing Problems
Exchange and SEC regulations presently require member organizations to give certain "early warning" notices when conditions fall outside of specified parameters. However, it has been our experience that in many cases an earlier informal notice can help resolve the difficulty before any formal notification would be required. The Exchange, therefore, expects notification from a member organization immediately upon discovery of any existing or impending condition(s) which it reasonably believes could lead to capital, liquidity or operational problems or impairment of record-keeping, clearance or control functions.
A list of the kind of potential problems on which early notification is expected follows. It should be realized that this list is not intended to be all inclusive and that your coordinator may be of further assistance with regard to situations not specifically covered.
Capital Problems
Concentrations in securities or commodities positions, commitments or other contingencies wherein adverse results could reasonably be expected to create a loss or net capital deduction that would result in a violation of the net capital requirements.
Accruals of expenses, deficits in customers' or brokers' accounts, liabilities, "Don't Know" trades, short security positions and similar items for which adequate reserves have not been provided and which, individually or in the aggregate, could have a material adverse effect on net capital.
An acceleration clause or other default provision in a loan or subordinated loan agreement is expected to or has become operative.
Reserve Requirements Problems
Any condition that could result in a material failure to make a required deposit or cause a deficiency in the balance on deposit in the Special Reserve Bank Account for the Exclusive Benefit of Customers as required under SEA Rule 15c3-3.
Liquidity Problems
Any problem with liquidity, profitability or a cash or other asset shortage which could materially inhibit a broker or dealer from promptly meeting its obligations to customers, other broker/dealers or creditors.
Impending circumstances which cause or might cause a bank to call its loans or to refuse to carry the firm's accounts in a normal fashion.
Developing situations which cause or might cause a clearing corporation to limit the firm to cash settlements.
Impending or actual inability to complete daily deliveries without the creation of deficit conditions pursuant to possession and control requirements under SEA Rule 15c3-3 for customers' securities.
Recordkeeping Problems
Any situation which may materially impair accurate maintenance of the member organization's Books and Records or the ability to account for possession or control of securities or commodities. This could be a computer breakdown, service agency problems, loss of key personnel, systems conversions, continuous inability to complete daily activities because of volume or personnel difficulties or similar reasons.
Reputation Problems
Loss of confidence in a broker-dealer may cause immediate returns of stock loans, refusals to trade or buy- ins by other broker-dealers, calling of bank loans or tightening of collateral requirements, customer account delivery requests and eventual profit deterioration.
Reputation may be impaired either by direct events such as announcements of disciplinary actions or litigation against a member organization, or by indirect unfavorable developments such as personal bankruptcies or criminal prosecution of key personnel, or financial problems of other associated organizations for whom the member organization has no legal responsibility.
Exchange and SEC regulations presently require member organizations to give certain "early warning" notices when conditions fall outside of specified parameters. However, it has been our experience that in many cases an earlier informal notice can help resolve the difficulty before any formal notification would be required. The Exchange, therefore, expects notification from a member organization immediately upon discovery of any existing or impending condition(s) which it reasonably believes could lead to capital, liquidity or operational problems or impairment of record-keeping, clearance or control functions.
A list of the kind of potential problems on which early notification is expected follows. It should be realized that this list is not intended to be all inclusive and that your coordinator may be of further assistance with regard to situations not specifically covered.
Capital Problems
Concentrations in securities or commodities positions, commitments or other contingencies wherein adverse results could reasonably be expected to create a loss or net capital deduction that would result in a violation of the net capital requirements.
Accruals of expenses, deficits in customers' or brokers' accounts, liabilities, "Don't Know" trades, short security positions and similar items for which adequate reserves have not been provided and which, individually or in the aggregate, could have a material adverse effect on net capital.
An acceleration clause or other default provision in a loan or subordinated loan agreement is expected to or has become operative.
Reserve Requirements Problems
Any condition that could result in a material failure to make a required deposit or cause a deficiency in the balance on deposit in the Special Reserve Bank Account for the Exclusive Benefit of Customers as required under SEA Rule 15c3-3.
Liquidity Problems
Any problem with liquidity, profitability or a cash or other asset shortage which could materially inhibit a broker or dealer from promptly meeting its obligations to customers, other broker/dealers or creditors.
Impending circumstances which cause or might cause a bank to call its loans or to refuse to carry the firm's accounts in a normal fashion.
Developing situations which cause or might cause a clearing corporation to limit the firm to cash settlements.
Impending or actual inability to complete daily deliveries without the creation of deficit conditions pursuant to possession and control requirements under SEA Rule 15c3-3 for customers' securities.
Recordkeeping Problems
Any situation which may materially impair accurate maintenance of the member organization's Books and Records or the ability to account for possession or control of securities or commodities. This could be a computer breakdown, service agency problems, loss of key personnel, systems conversions, continuous inability to complete daily activities because of volume or personnel difficulties or similar reasons.
Reputation Problems
Loss of confidence in a broker-dealer may cause immediate returns of stock loans, refusals to trade or buy- ins by other broker-dealers, calling of bank loans or tightening of collateral requirements, customer account delivery requests and eventual profit deterioration.
Reputation may be impaired either by direct events such as announcements of disciplinary actions or litigation against a member organization, or by indirect unfavorable developments such as personal bankruptcies or criminal prosecution of key personnel, or financial problems of other associated organizations for whom the member organization has no legal responsibility.
| Amendment. Amended by SR-FINRA-2008-028 eff. Dec. 15, 2008. Selected Notice: 08-57. |