(NEW) Customer Order Handling, Margin and Liquidity

FINRA issued this Notice to remind member firms of their obligations during extreme market conditions with respect to handling customer orders, maintaining appropriate margin requirements and effectively managing their liquidity.

FINRA Regulatory Notice 21-12 (March 18, 2021): FINRA Reminds Member Firms of Their Obligations Regarding Customer Order Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions


Amendments to NYSE Rule 7.12 Concerning the Resumption of Trading Following a Level 3 Market-Wide Circuit Breaker

Upon feedback from industry participants, the Exchange has been working with other national securities exchanges and FINRA to establish a standardized approach for resuming trading in all NMS Stocks following a Level 3 halt. The proposed approach would allow for the opening of all securities the next trading day after a Level 3 halt as a regular trading day, and is designed to ensure that Level 3 MWCB events are handled in a more consistent manner that is transparent for market participants. As proposed, a Level 3 halt would end at the end of the trading day on which it is declared. This proposed change would allow for next-day trading to resume in all NMS Stocks no differently from any other trading day. In other words, an exchange could resume trading in any security when it first begins trading under its rules and would not need to wait for the primary listing market to re-open trading in a security before it could start trading such security. Accordingly, under the proposal, the Exchange could begin trading all UTP Securities at the beginning of the Exchange’s Early Trading Session at 7:00 a.m. ET, regardless of whether the primary listing markets for those securities have actually opened.

Securities Exchange Act Release No. 34-88402 (March 17, 2020), 85 FR 16436 (March 23, 2020) (File No. SR-NYSE-2020-20): Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Amending Rule 7.12 Concerning the Resumption of Trade Following a Level 3 Market-Wide Circuit Breaker Halt


Best Execution Rule

In light of the increasingly automated market for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets, FINRA issued Regulatory Notice 15-46 to reiterate the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA reminds firms of their obligations, as previously articulated by the SEC and FINRA, to regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security.

• FINRA Regulatory Notice 15-46 (November 2015):  Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets


Limit Up/Limit Down Plan Program

On May 31, 2012, the SEC approved the NMS Plan to Address Extraordinary Market Volatility (Plan), which was filed by FINRA and the other SROs and is designed to address the type of sudden price movements that the market experienced on the afternoon of May 6, 2010. The Plan provides for a market-wide limit up and limit down (LULD) mechanism to prevent trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses to accommodate more fundamental price moves. The Plan is designed, among other things, to protect investors and promote fair and orderly markets. 

• FINRA Alert on Limit Up/Limit Down (LULD) Plan

FINRA Regulatory Notice 16-26 (July 2016):  FINRA Adopts Amendments Relating to the Regulation NMS Plans to Address Extraordinary Market Volitality

• FINRA has published two charts to assist members in identifying the types of transactions that are excluded from the price bands under the LULD Plan and FAQs to provide guidance on LULD

The Participants filed the Plan to Address Extraordinary Market Volatility (the “Limit Up-Limit Down Plan” or the “Plan”) with the Commission on April 5, 2011 to create a market-wide limit up-limit down mechanism intended to address extraordinary market volatility in NMS Stocks, as defined in Rule 600(b)(47) of Regulation NMS under the Exchange Act. The Plan sets forth procedures that provide for market-wide limit up-limit down requirements to prevent trades in individual NMS Stocks from occurring outside of the specified Price Bands. These limit up-limit down requirements are coupled with Trading Pauses, as defined in Section I(Y) of the Plan, to accommodate more fundamental price moves. In particular, the Participants adopted this Plan to address extraordinary volatility in the securities markets, i.e., significant fluctuations in individual securities’ prices over a short period of time, such as those experienced during the “Flash Crash” on the afternoon of May 6, 2010. The Plan was originally approved on a pilot basis to allow the public, the Participants, and the Commission to assess the operation of the Plan and whether the Plan should be modified prior to consideration of approval on a permanent basis. The Commission recently approved an amendment to the Plan to allow the Plan to operate on a permanent basis.

Securities Exchange Act Release No. 85723 (April 25, 2019), 84 FR 18618 (May 1, 2019) (File No. SR-NYSENAT-2019-10): Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend Rule 7.11, Limit Up-Limit Down Plan and Trading Pauses in Individual Securities Due to Extraordinary Market Volatility


Publication or Submission of Quotes Without Specific Information

The SEC adopted amendments to Rule 15c2-11 under the Securities Exchange Act of 1934, which governs the publication of quotations for securities in a quotation medium other than a national securities exchange, i.e., over-the-counter (“OTC”) securities. The amendments are designed to modernize the Rule, promote investor protection, and curb incidents of fraud and manipulation by, among other things: requiring information about issuers to be current and publicly available for broker-dealers to quote their securities in the OTC market; narrowing reliance on certain exceptions from the Rule’s requirements, including the piggyback exception; adding new exceptions for the quotations of securities that may be less susceptible to fraud and manipulation; removing obsolete provisions; adding new definitions; and making technical amendments. The effective date was December 28, 2020.

SEC Release No. 33-10842 (September 16, 2020)85 FR 68124 (October 27, 2020): Publication or Submission of Quotations Without Specified Information (Final Rule)


Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), SEC, and Commodity Futures Trading Commission (CFTC) are adopting amendments to the regulations implementing section 13 of the Bank Holding Company Act (BHCA Act). Section 13 contains certain restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. These final amendments are intended to improve and streamline the regulations implementing section 13 of the BHC Act by modifying and clarifying requirements related to the covered fund provisions of the rules. 

The effective date for amendatory instructions 1 through 14 (OCC), 16 through 29 (Board), 31 through 44 (FDIC), and 46 through 58 (CFTC) is January 1, 2020; the effective date for amendatory instructions 60 through 73 (SEC) is January 13, 2020; and the effective date for the addition of appendices Z at amendatory instructions 15 (OCC), 30 (Board), and 45 (FDIC) is January 1, 2020, through December 31, 2020, except for amendatory instruction 74 (SEC), which is effective January 13, 2020, through December 31, 2020.

SEC Release No. BHCA-9 (June 25, 2020), 85 FR 46422 (July 31, 2020): Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Final Rule)

SEC Release No. BHCA-7 (September 18, 2019), 84 FR 61974 (November 14, 2019): Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (Final Rule)


ATS Supervision Obligations

FINRA issued this Notice to remind Alternative Trading Systems (ATSs) of their supervision obligations. As registered broker-dealers and FINRA members, ATSs—like other broker-dealer trading platforms—are required to maintain supervisory systems that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules, including, for example, rules on disruptive or manipulative quoting and trading activity.

FINRA Regulatory Notice 18-25 (August 13, 2018): FINRA Reminds Alternative Trading Systems of Their Obligations to Supervise Activity on Their Platforms


Cross Market Equities Supervision: Potential Manipulation Report

This report assists firms with monitoring their supervision for trading behaviors that may be designed to manipulate the market by displaying exceptions around two behaviors—layering and spoofing—concerns highlighted in FINRA’s 2016 Regulatory Examination Priorities Letter.

• Cross Market Equities Supervision Video


Equity Trading Initiatives: Supervision and Control Practices for Algorithmic Trading Strategies

As algorithmic trading strategies, including high frequency trading strategies, have grown to compose a substantial portion of activity on U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has likewise grown. Although a reasonable supervision and control program may not foresee every potential failure or prevent every undesirable consequence, in an effort to reduce the future occurrence of such potential issues, FINRA is provided guidance on effective supervision and control practices for member firms and market participants that use algorithmic strategies. These effective practices are focused on five general areas: General Risk Assessment and Response; Software/Code Development and Implementation; Software Testing and System Validation; Trading Systems; and Compliance.

FINRA Regulatory Notice 15-09 (March 2015): Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies


Insider Trading

FINRA Rule 3110 (Supervision) includes a provision to help firms comply with their obligation under Section 15(g) of the Securities Exchange Act of 1934 to have policies and procedures in place reasonably designed to prevent potential insider trading. Rule 3110(d) requires that firms include in their supervisory procedures a process for reviewing securities transactions in certain types of accounts that is reasonably designed to identify trades that may violate insider trading prohibitions. When implementing these policies and procedures, firms may take a risk-based approach to monitoring transactions that takes into account their specific business models, and firms are encouraged to tailor their policies and procedures to their specific business models.

• FINRA Regulatory Notice 14-10 (March 2014): SEC Approves New Supervision Rules

• SEC Fast Answers:  Insider Trading