Series 7

Securities Markets - Rules Regulating SROs

In addition to knowing the NYSE rules, you will need to know some key regulations governing FINRA, the Municipal Securities Rulemaking Board (MSRB) and the Chicago Board Options Exchange (CBOE).

Rules of Fair Practice
From the registered representative's perspective, the most important part of FINRA's code is a set of regulations commonly known as the Rules of Fair Practice.
  • These are the standard rules for account supervision and record keeping, and they are similar to those of the NYSE. FINRA's Rule 2120 is the catch-all for prohibiting "manipulative, deceptive, or other fraudulent devices".

  • Another fair practice rule states that members cannot rig the bid-ask process by publicly reporting a fallacious purchase or sale price (FINRA Rule 3310) or by bidding up a security's price without intending to buy it.
MRSB Rules
The MSRB also has rules similar to those of the NYSE governing record keeping, fraudulent behavior, adequate supervision of employees and accounts, suitability of recommendations, accounts of employees of other financial institutions, sending confirmations, and appropriate behavior in discretionary accounts.

Its rules governing false price quotation and bidding up prices are very much like those of FINRA. However, the MSRB has some very specific procedural rules of its own:
  • When submitting an order, every syndicate member must disclose if the securities are being purchased on its own account; syndicate managers must promptly disclose how the securities will be allocated to syndicate members (MSRB Rule G-11).

  • Settlement for cash transactions is on the trade date, and settlement for regular-way transactions is the third business day following the trade. (MSRB Rule G-12).

  • No dealer can give a gift or gratuity in excess of $100 per year to a person other than an employee or partner if the payment relates to municipal securities activities; exceptions include occasional gifts of meals or theater or sports tickets (MSRB Rule G-20).

  • Each underwriter who acquires new municipal securities from the issuer must apply in writing to the MSRB for assignment of a Committee on Uniform Securities Identification Procedures (CUSIP) number to identify and record all buy and sell orders (MSRB Rule G-34).
CBOE Rules
The CBOE has rules similar to those of the NYSE regarding fraud, manipulation and rumor-mongering.
  • Also, CBOE Rule 4.11 prohibits having an excessive aggregate position in the options of any one stock.

  • On the most thinly traded options, that position limit is 13,500 contracts of 100 underlying shares each;

  • On the most densely traded it is 75,000 contracts, with gradations in between.

  • What that means is that one CBOE member cannot have a net position (long minus short or short minus long) of 75,000 contracts.

  • According to related Rule 4.12, a CBOE member must observe an exercise limit and cannot exercise options in the same quantities over a five-business-day span.




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