Additional FINRA, SEC, and NYSE rules

FINRA Rule 2165: Financial exploitation of specified adults

Certain clients may be at risk of being exploited. Think of the stories of people and their Nigerian princes. Make sure to focus on specific adults, these are only adults, as tests like to try and mess with students on that. Generally it is adults aged 65 or older, but also included would be adults, those 18 or older, with certain medical conditions or other impairments that make it difficult or impossible to protect their own interests. A 16 year with autism would not qualify, as not an adult, but a 35 year old with autism might.

When one of these clients are discovered, the representative must make reasonable effort to have a “trusted contact person” on file for the client. This is not a tying them to a chair and refusing the release them until they give you a name. If they don’t feel like giving you a name, you make a note, and next meeting, you ask again. Keep repeating until they give you the name, or the relationship ends. Nothing pushy. But you definitely don’t want to make someone who just turned 66 feel like you think they are completely losing their mind and fully demented. Many people are very aware well into their 80s. It is not simply a number directly.

When a client who has been designated a “specified adult” makes a weird request, “I need $25,000 or my grandson in Mexico is going to be killed by the cartels”, we can put a 15-day temporary hold on the account to investigate. During this time, the company reaches out to the trusted contact person, and then the trusted contact person contacts the client. Perhaps their grandson really is a captive in Mexico, maybe they were at the mall and have absolutely no idea why someone would claim they were in Mexico, other than to get money from the grandmother.

The firm also continues to investigate, and no later than 2 business days after the date that the member first placed the temporary hold, must notify all parties authorized to transact business in the account (excluding any party who might be responsible for the exploitation) and the trusted contact person (again, excluding any party that might be responsible for the exploitation).

If the internal review supports the belief in exploitation taking place, the 15-day hold can be extended for no longer than 10 business days following the first hold. After that, provided the review is still confirming the reasonable belief in some form of exploitation, and has reported it to the appropriate regulators, agency, or court, the firm can extend at most an additional 30 days following the second hold. After that, the regulators, agencies, or courts would extend if needed.

Market Access (SEC Rule 15c3-5)

Broker dealers are able to provide direct and sponsored market access to customers. Market access is defined as;

1. Access to trading in securities on an exchange or alternative system as a result of being a member or subscriber of that exchange or system, or
2. Access to trading in securities on an alternative system provided by a broker-dealer operator of an alternative system to a non-broker-dealer.

Providing direct or sponsored access means that both the broker-dealer’s proprietary accounts and their specified clients can send orders directly to exchanges or the alternative trading systems. These customers are often institutional or some other form of high-frequency traders (HFT). The broker-dealer, having their own market participant identifier (MPID), provided the customer with their own. This allows them to directly trade with the exchanges. Direct access means the customer uses the back office of the broker-dealer, and orders pass through the broker-dealer. Sponsored access means the customer uses their own back office or systems, and orders do not go through the broker-dealer’s system.

Financial risk management controls and supervisory procedures. The broker dealer is ultimately responsible for both direct and sponsored access, and therefore is required by the SEC to have certain procedures and supervision to ensure that;

• Preventing entry of orders that exceed appropriate pre-set credit or capital limits.
• Preventing entry of erroneous orders, by reflecting orders that exceed appropriate price or size parameters.
• General regulatory rules are followed; Prevent orders that aren’t in compliance with regulatory requirements, prevent orders in securities from persons restricted from trading those securities, restrict access to systems/technology that provide market access to persons/accounts pre-approved and authorized by the broker-dealer, and assure appropriate surveillance personnel receive immediate post-trade execution reports resulting from market access.
• The financial and risk management controls are under direct and exclusive control of the broker-dealer.

NYSE Rules

There are certain almost mechanical aspects of the markets, created by rules that we don’t necessarily need to know the specific name or number, just the effect. Circuit breakers, also known as trading curbs, are one of those things. If certain things happen, BAM, markets stop working totally for a certain amount of time, to hopefully let things cool off. Check your history books, the circuit breaker started January of 1988, months after October 19, 1987, “Black Monday”. The DJIA dropped 508 points, which seems pretty insignificant (barely 1% drop with Jan’26 DJIA value). In 1988 though, that was 22.6% drop. Poof, just gone. In one day.

To prevent that they put these circuit breakers to completely stop trading if certain drops occur, to let traders breathe, talk, get some water, or coffee, and hopefully let cooler heads prevail. Originally, as illustrated, the circuit breakers were on the DJIA index but are now based on the S&P 500.

Level 1 is a 7% drop, Level 2 is 13%, and level 3 is 20% drop, relative to the close of the preceding day. Like baseball, 3 strikes and trading is done. No matter what time, if there are 3 halts in a day, trading stops for the remainder of the day. This way, it is extremely unlikely any day will ever beat Oct 1987 for the “single worst percentage drop”. Thankfully. Level 1 and Level 2 triggers, each result in a 15-minute “chill out and breathe” break in trading across the markets, unless they occur after 3:25pm in the trading day, and then there is no halt. No matter what time, 3 strikes, and trading stops for the day, even after 3:25pm.

Circuit breakers, or again trading curbs, are market wide. There are similar security-specific circuit breakers known as Limit Up-Limit Down Plans, or LULD. While circuit breakers only prevent dramatic losses, LULD actually both prevent dramatic losses, but also speculative gains. The thresholds for individual securities;

• 10% change in the value of the security if it is included in the S&P 500 index, Russel 1000 index, or Invesco PowerShares QQQ ETF (tracks the NASDAQ 100)
• 30% change in the value of the security if it has a price of at least $1
• 50% change in the value of the security if it has a price of less than $1.

The percentage change has to occur within a 5-minute window for the halt to be enacted. The previous day’s closing price is used to determine if the security is considered to have a price of at least $1, or of less than $1 the day the halt might occur.

Erroneous things

This industry is full of humans, and if you can be sure of one things, even with computers, and AI, humans will make mistakes.

Erroneous reports

Relatively small, but the idea is sometimes notifications, reports, are sent out by mistake, or with incorrect information. Maybe a client was notified they got one price on a trade, but it was actually executed at a different price, the report is not binding. If a report says a transaction occurred, when it in fact had not, that is not binding anymore than if the report had said the transaction had not occurred, when it if fact did. In that second case, the client is still bound by the transaction, even if the report said it didn’t happen.

Clearly erroneous transactions

Sometimes a transactions happens that is so dramatically different than current market conditions at the time, that it is clearly erroneous and something needs to be done to fix the situation. The resulting trades would be stopped as soon as possible, as they do not reflect the true price of the security, and could create issues in other markets. An exchange can break the trade if the price differs from the consolidated price by more than a certain percentage.

Reference Price	Normal Market Hours	After Hours
Greater than $0 up to $25.00	10%	20%
At least $25.01 up to $50.00	5%	10%
At least $50.01 and up	3%	6%

Handling Errors

Sometimes the broker-dealer or a representative makes a mistake when handling an order, and the firm will then use an error account to fix it. Errors could include things like buying the wrong security for the account, or the wrong number of a security for an account, to the detriment of the client. For example, the client places an order to buy 100 shares of a stock, but instead 1000 shares are placed, or 2 identical orders of 100 are placed. Either way, the client’s account will reflect the proper 100 shares, and the extras will be moved the the firm’s error account, and sold at its earliest convenience. Any use of error accounts will require a qualified principal designated by the firm to authorize.

Rules for research reports

Non-equivalent recommendations (Rule 138)

In this world, convertibles aren’t exactly the same as the common stock they convert into, but they are “substantially identical” in the industry. Firms involved in underwritings can’t make recommendations on “substantially identical” securities to what they are helping underwrite. If the firm is participating in a non-convertible offering of preferred stocks or bonds, they may make recommendations on the common stock, as they are not “substantially identical”. If the firm instead is participating in a convertible offering, or an offering directly involving common stock, they would only be able to make recommendations on the non-convertible securities the company has.

Publication of research reports by firms in the distribution (Rule 139)

Simply put, if firms have been doing research on a specific company on a reasonably regular basis, they can continue to do so if they are involved in the distribution. The specific company would have to be a large reporting company under the Securities Exchange Act of 1934. They are not able to be more positive than previous reports, however.

Waiting Periods (FINRA Rule 2241)

Waiting periods, or “quiet periods”, are when the publication of research reports and appearances by managers, co-managers, and underwriters cannot be done within time periods of an offering, to try and prevent influencing the price. Doing so would be “gun jumping” or “trading ahead of research reports” or other manipulatory act.

For IPOs, no research reports can be published for 10 days following the IPO date. This goes for managers and co-managers, along with syndicate and selling group members. For subsequent offerings, the manager and co-manager are prohibited from publishing reports for 3 days following the subsequent offering date. Syndicate and selling group members involved in the subsequent offering have no prohibition or waiting period