A self-regulatory organization (SRO) is a private group that polices itself under the auspices of the Securities and Exchange Commission, instead of being subject to the direct scrutiny of the SEC. The exchanges are SROs.

For the purposes of the Series 7 exam, the most important SRO is, without question, the New York Stock Exchange (NYSE). Why? It is the dominant stock exchange where the overwhelming majority of U.S. equity capital is traded; it is the only stock exchange left in the country that can properly call itself a national market; it is the only pretender to the title "The Big Board"; and, finally, it is the organization that produces the Series 7 exam.

Here are some of the most important Big Board rules:

  • Employees of member firms are prohibited from front-running: trading on one's own account before processing a potentially market-moving trade on behalf of a client (NYSE Rule 92: Limitations on Members' Trading Because of Customers' Orders).

  • All members' offices must be under adequate approval, supervision and control of the members' headquarters (NYSE Rule 342: Offices Approval, Supervision and Control).

  • Acceptance and execution of all orders must follow standard procedures, including confirmation and settlement through a depository (NYSE Rule 387: COD Orders).

  • Management must exercise due diligence in approving and supervising accounts, which requires knowing essential facts about every customer, account and order (NYSE Rule 405: Diligence as to Accounts).

  • Numbered or coded accounts are permitted, provided the member has a customer-signed statement on file attesting to the ownership of the account (NYSE Rule 406: Designation of Accounts).

  • Employees of members can open up accounts at other member firms only with the written permission of their employers; in such cases, duplicate confirmations must be sent to the employer (NYSE Rule 407: Transactions - Employees of Members, Member Organizations, and the Exchange).

  • Similar to what is stated in the Securities Exchange Act of 1934 (which will be discussed under the "Secondary marketplace" heading later in this chapter), no employee of any member may exercise discretionary power over the selection of securities, the determination of quantities of shares to be traded or the decision whether to buy or sell without first obtaining written authorization from the customer and from management, nor may the employee engage in churning (NYSE Rule 408: Discretionary Power in Customers' Accounts).

  • Members must send customers a statement of accounts, stating quantities of shares and their dollar values, at least quarterly. Confirmations of all trades - regardless of whether they traded on the NYSE - must indicate settlement dates and identify the market where the trade was made; these confirmations must be sent at or prior to settlement (NYSE Rule 409: Statement of Accounts to Customers).

  • Every member must preserve every order transmitted or carried by the member to the floor of the Exchange, every order entered by the member into the Off-Hours Trading Facility, and the time of the entry of every order cancellation (NYSE Rule 410: Records of Orders).

  • The price at which an order is executed is binding even if an erroneous report is rendered (NYSE Rule 411: Erroneous Reports).


Prohibited Activities

Related Articles
  1. Financial Advisor

    What Advisors Need to Know About Rule 3210

    Here's what advisors and brokers need to know about FINRA Rule 3210.
  2. Insights

    The NYSE and Nasdaq: How They Work

    Learn some of the important differences in the way these exchanges operate and the securities that trade on them.
  3. Financial Advisor

    Investigating The Securities Police

    Learn about the history of FINRA and how this organization protects investors.
  4. Insights

    Closing Down The NYSE: What Does It Take?

    The New York Stock Exchange has shut its doors multiple times in its long and storied history. We’ll look at when and why the NYSE in this article.
  5. Financial Advisor

    FINRA Rule 2273: Your Recruiting Questions Answered

    An in-depth look at and Q&A on FINRA's new recruiting practices rule, which goes into effect in November.
  6. Insights

    Learn About the New York Stock Exchange

    The New York Stock Exchange (NYSE) is nicknamed the “Big Board,” and for good reason. It’s the largest, oldest and best-known stock exchange in the world.
  7. Insights

    Getting to Know the Stock Exchanges

    Here are the answers to all the questions you have about stock exchanges but are too afraid to ask.
  8. Investing

    Why Companies Change Exchanges

    Companies don't elect to leave an exchange so much as they're asked. Find out why.
  9. Insights

    The Birth of Stock Exchanges

    Learn how British coffeehouses helped give rise to the juggernaut that is the NYSE.
  10. Investing

    Why Do Companies Choose NASDAQ for Their IPO?

    The NYSE is known for its prestige so why do some companies opt to list on the NASDAQ instead?
Frequently Asked Questions
  1. What is arbitrage?

    Arbitrage is basically buying a security in one market and simultaneously selling it in another market at a higher price, ...
  2. What is the difference between upstream and downstream oil and gas operations?

    The closer to the end user a function or firm is, the further downstream it is said to be. Raw material extraction or production ...
  3. What is the difference between a capital expenditure and a revenue expenditure?

    Capital expenditures represent major investments of capital that a company makes to expand its business and generate additional ...
  4. What is the difference between revenue and income?

    Revenue is simply the total amount of cash generated by the sale of products or services associated with the company's primary ...
Trading Center