Series 7

AAA

Securities Markets - Self-Regulatory Organization (SROs)

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
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