Rule 405 Diligence as to Accounts
This rule is no longer applicable. Incorporated NYSE Rule Interpretation 405 has been superseded by FINRA Rule 2090. Please consult the appropriate FINRA Rule.
/01 Credit Reference — Business Background
The Exchange recommends that credit references and business backgrounds of new accounts be cleared by persons other than the actual registered representative opening the account.
The Exchange recommends that credit references and business backgrounds of new accounts be cleared by persons other than the actual registered representative opening the account.
/02 Approval of New Accounts/Branch Offices
Rule 405(3) provides that a Branch Office Manager may approve the opening of new customer accounts but that such action, within a reasonable period of time, must be approved by a principal executive or a person or person(s) designated under the provisions of Rule 342(b)(1). Branch Office Managers may be among the parties designated with authority to make final firm determinations as to the opening of new accounts, at the discretion of the member organization acting on an individual basis.
It is important to note that Rule 342 requires a separate system of follow-up and review to determine that all delegated authority is being properly exercised.
Rule 405(3) provides that a Branch Office Manager may approve the opening of new customer accounts but that such action, within a reasonable period of time, must be approved by a principal executive or a person or person(s) designated under the provisions of Rule 342(b)(1). Branch Office Managers may be among the parties designated with authority to make final firm determinations as to the opening of new accounts, at the discretion of the member organization acting on an individual basis.
It is important to note that Rule 342 requires a separate system of follow-up and review to determine that all delegated authority is being properly exercised.
/03 Fictitious Orders
On occasion, fictitious orders for listed securities have been placed with member organizations. The execution of such orders could expose the member organization to financial loss and could artificially affect prices on the Exchange. Therefore, member organization personnel opening accounts and/or accepting orders for new or existing accounts should make every effort to verify the legitimacy of the account and the validity of every order. Questionable accounts and/or orders should be brought to the attention of the appropriate supervisory person prior to opening or entry.
Fictitious orders reported to the Exchange indicate patterns which occur most frequently. In one pattern, the caller impersonates an executive of the member organization and claims to be opening the account and/or placing the order for a third party reported to be a friend of either that executive or another executive of the member organization. The individual appears to be generally familiar with the essential facts about the individual being impersonated and evidently is aware that this person is not available to verify the order.
In another pattern, the caller impersonates a professional, such as a doctor, is generally familiar with essential facts about the professional, including bank references, and is also aware that the person is not available for callback verification.
On occasion, fictitious orders for listed securities have been placed with member organizations. The execution of such orders could expose the member organization to financial loss and could artificially affect prices on the Exchange. Therefore, member organization personnel opening accounts and/or accepting orders for new or existing accounts should make every effort to verify the legitimacy of the account and the validity of every order. Questionable accounts and/or orders should be brought to the attention of the appropriate supervisory person prior to opening or entry.
Fictitious orders reported to the Exchange indicate patterns which occur most frequently. In one pattern, the caller impersonates an executive of the member organization and claims to be opening the account and/or placing the order for a third party reported to be a friend of either that executive or another executive of the member organization. The individual appears to be generally familiar with the essential facts about the individual being impersonated and evidently is aware that this person is not available to verify the order.
In another pattern, the caller impersonates a professional, such as a doctor, is generally familiar with essential facts about the professional, including bank references, and is also aware that the person is not available for callback verification.
/04 Accounts in which Member Organizations have an Interest
Transactions for an account in which a member organization has an interest may not be initiated "on the Floor" of the Exchange unless the member organization is trading either, (a) as a Specialist in one of its registered specialty stocks; (b) as a Registered Competitive Market Maker; (c) as a Competitive Trader; or (d) within the scope of a specific exemption from the Exchange's Floor trading rules, such as the exemptions for bona fide arbitrage and for error transactions. See also Section 11(a) of the Securities Exchange Act of 1934 and the rules thereunder.
Transactions for an account in which a member organization has an interest may not be initiated "on the Floor" of the Exchange unless the member organization is trading either, (a) as a Specialist in one of its registered specialty stocks; (b) as a Registered Competitive Market Maker; (c) as a Competitive Trader; or (d) within the scope of a specific exemption from the Exchange's Floor trading rules, such as the exemptions for bona fide arbitrage and for error transactions. See also Section 11(a) of the Securities Exchange Act of 1934 and the rules thereunder.
| Amendment. Amended by SR-FINRA-2008-036 eff. Nov. 11, 2008. Selected Notice: 08-64. |