The filing that carried the Uniform Practice Code from the NASD rulebook into the Consolidated FINRA Rulebook did something else at the same time. What?

It renumbered the series to avoid collision with rules already in the FINRA rulebook

It deleted the corresponding Incorporated NYSE Rules that addressed the same subject matter

It suspended the series' operation until the corresponding NYSE provisions had been reviewed

It preserved both bodies of rules, leaving members to elect which framework would govern

How is the Uniform Practice Code organised, and on what basis are its parts divided?

Into nine subsections spanning Rules 11100 to 11900, each a distinct functional area of transaction processing

Into two halves, the first governing trade documentation and the second governing delivery, failures and remedies

Into subsections organised by security type, each one covering a single instrument's full transaction lifecycle

Into a numbered sequence with no functional grouping, the numbering simply reflecting the order of adoption

The Uniform Practice Code is a set of operational standards administered by its own committee rather than a disciplinary code. Can a failure to follow its procedures still attract discipline?

No, its committee's rulings are the only consequence, and they bind only the parties before it

Yes, where the failure amounts to a violation of the just and equitable principles of trade standard

No, operational failures are remedied through buy-in and sell-out rather than through discipline

Yes, but only where the member has previously been the subject of a committee ruling on the point

The Uniform Practice Code originated in an era of physical certificates and bilateral settlement arrangements. Which part of it is among the most actively used provisions in the FINRA rulebook today?

The units of delivery framework, which still fixes the quantities every delivery must satisfy

The comparison and confirmation framework, which every transaction between members still generates

The clearly erroneous transactions framework, through which trades at erroneous prices are reviewed

The reclamations framework, through which defective deliveries are returned to the delivering member

An equity trade between two members is compared, cleared and settled through NSCC's continuous net settlement system. How does that trade stand in relation to the Uniform Practice Code?

Within the Code, the UPC Committee retaining authority to review how NSCC settled it at a member's request

Outside the Code entirely, NSCC's settlement rules having been written wholly independently of the Code and its concepts

Within the Code, whose comparison rules still require the two members to confirm it to each other directly

Two members, both participants in a registered clearing agency, trade an equity security over the counter that the agency does not accept for comparison, clearance or settlement. Is the Uniform Practice Code the framework that governs how the trade is compared and settled?

Yes, because clearing agency facilities are not available for that particular trade

No, because a security the agency will not accept cannot be traded between its participants

No, because both members participate in the agency, whose rules govern every trade they make

Yes, but only once both members have elected in writing to adopt the Code for that trade

Most equity trades now settle through clearing agency processing rather than bilateral delivery between firms. What role do the Uniform Practice Code's buy-in and sell-out procedures still play?

They have been absorbed into the clearly erroneous framework and are now applied through its reviews

They reach only the trades that failed before physical certificates gave way to book-entry settlement

They serve as guidance alone, clearing agency close-outs now binding every member for every fail

Alder Securities sells Birch Capital shares that are restricted securities under Securities Act Rule 144(a)(3). The trade is over the counter, and the two members settle it between themselves without any clearing agency. Birch then fails to pay for the shares as delivered. How does the Uniform Practice Code bear on Alder's position?

The trade is outside the Code until Rule 144's resale conditions are met, so no Code remedy yet reaches it

The trade is within the Code, and Alder's remedy is to buy the shares in under FINRA Rule 11810

The trade is within the Code, and Alder's remedy is to sell the shares out under FINRA Rule 11820

The trade is outside the Code, restricted shares being excluded, so Alder must pursue Birch in FINRA arbitration

Two members compare an over-the-counter trade through the facilities of a registered clearing agency, whose rules make no provision for other organizations' rules to apply, and then settle it directly with each other. Does the Uniform Practice Code's general scope reach the trade?

Yes, because the direct settlement shows that the agency's facilities were not used for the trade

Yes, the exclusion reaching only trades that are compared, cleared and settled all through the agency

Yes as to its settlement, the Code governing whichever stages were handled outside the agency

No, a trade compared through the agency's facilities being excluded even though it was settled directly

Alder sells Birch unlisted limited partnership units, Direct Participation Program securities that are not on deposit at any securities depository, and Alder fails to deliver. The Code excludes such securities except as otherwise provided in it. Which describes the position?

The transfer must use the standard transfer forms, but Birch has no buy-in under the Code's buy-in rule

The standard transfer forms are optional for unlisted units, but Birch may buy in under the Code's buy-in rule

The transfer must use the standard transfer forms, and Birch may also buy in under the Code's buy-in rule

The exclusion takes the units wholly outside the Code, so neither the forms rule nor the buy-in applies

On a Monday, Alder executes a customer's collect-on-delivery purchase and, separately, an over-the-counter trade with Birch that the two members will settle directly without any clearing organization. By when must Alder send the customer's confirmation and its Uniform Comparison or Confirmation to Birch?

Birch's by the end of the Monday; the customer's within one business day of execution

Both by the end of the day on the Monday, the trade date

The customer's by the end of the Monday; Birch's by the end of the Tuesday

Both within one business day of execution, by the end of the Tuesday

The book-entry rule, FINRA Rule 11310, uses its paragraph (e) to carve out any transaction whose settlement takes place abroad. Alder sells shares to Birch over the counter, and the two members settle the trade directly between themselves in London. How does the Uniform Practice Code stand toward the trade?

The trade leaves the Code altogether, the book-entry rule's limitation carrying the whole Code with it

The book-entry rule does not apply, and the Code itself reaches only trades settled in the United States

The book-entry rule does not apply, but the trade remains within the Code's general scope

The trade remains within both, the book-entry rule following a member's trades wherever they settle

Two members, each a participant in a registered clearing agency for clearing over-the-counter transactions, trade an eligible corporate bond with each other. Neither the carrying-member exception nor any FINRA exemption applies. How do the Code's clearance and comparison rules apply to the trade?

They must clear it through the agency, and each must also send a Uniform Comparison to the other

They may settle it directly, and the Code's comparison rule does not apply to it either way

They may settle it directly, and the Code's comparison rule applies to it only if they do so

They must clear it through the agency, and the Code's comparison rule does not then apply to it

FINRA Rule 11320(h) provides for delivery at the office of the purchaser. Alder sells Birch, another member, a depository eligible security that is already on deposit at a securities depository, and no exclusion from the book-entry rule applies. Alder proposes to bring certificates to Birch's office on the delivery date. How must the trade be settled?

By certificates delivered at Birch's own office, the Code's place-of-delivery provision governing every delivery between two members

By book-entry through a securities depository, even though the Code also provides for delivery at the purchaser's office

By either method at Alder's own election, book-entry and office delivery being equal alternatives under the Code

By certificates at Birch's office, unless Birch asks Alder in writing for book-entry settlement before the delivery date

A seller's delivery obligation under a securities contract falls due on a Saturday, and every weekday of the following week is a business day. The seller has not delivered. What is the earliest day on which the buyer may close the contract by buy-in?

Monday, the day the contract matures, the seller's failure itself opening the buy-in at once

Wednesday, the three business days being counted from the Saturday on which the contract fell due

Thursday, the contract maturing on the Monday and the buy-in waiting three business days from then

Tuesday, the contract maturing on the Monday and the buy-in opening on the next business day

A buy-in by Birch against Alder is scheduled to execute on a Tuesday. Alder is itself waiting for those securities from Cedar and passes the notice on to it, and Cedar is in turn owed them by Dunmore Securities. The Monday is a business day. By when must Cedar get its re-transmitted notice to Dunmore, and what delivery time may that notice specify?

By 12 noon ET on the Tuesday, specifying an earlier delivery time so that it can pass the securities on

By 12 noon ET on the Monday, specifying an earlier delivery time so that it can pass the securities on

By 12 noon ET on the Tuesday, specifying a delivery time no earlier than the one in Birch's notice

By 12 noon ET on the Monday, specifying a delivery time no earlier than the one in Birch's notice

Alder receives Birch's buy-in notice on a Monday morning. That afternoon it telephones Birch to say that it rejects the notice, but it sends nothing in writing. What is the status of the notice?

Deemed accepted at 6:00 p.m. ET on the Monday, a rejection having to be a signed, written response

Rejected, provided Alder confirms the call in writing at any time before the buy-in's effective date

Rejected, the call having reached Birch before 6:00 p.m. ET on the day the notice was issued

Deemed accepted at the close of business on the Tuesday, the rejection having to reach Birch by then

A seller is deemed to have accepted a buy-in notice because it did not reject it. Which of its protections survive that deemed acceptance?

Its right to request proof of the fail obligation survives, but the cap at its liability under the contract lapses

Both the right to request proof of the fail obligation and the cap at its liability under the contract

Neither of them, a deemed acceptance waiving every objection the seller could otherwise have raised against the buy-in

The cap at its liability under the contract survives, but its right to request proof of the fail obligation lapses

Birch sends Alder its buy-in notice by facsimile transmission, and Alder's facsimile returns a confirmation that the notice has been received. What must happen to that confirmation of receipt?

Birch must send it back to Alder countersigned, which completes delivery of the notice

Alder must maintain it with its copy of the notice, as part of Alder's own books and records

Birch must maintain it with the notice itself, as part of Birch's own books and records

Birch must file it with FINRA before the proposed buy-in date, as proof that notice was given

Alder presents two lots of certificates to Birch. Birch refuses the first lot for a valid reason at the moment it is presented. It accepts the second lot and sends it back two days later. Which lot must travel with a properly executed Uniform Reclamation Form?

Neither lot, the form being required only once the deliverer has disputed a return

The first lot only, a refusal at presentation being the step the form documents

Both lots, every security refused or sent back to its deliverer needing the form

The second lot only, which as a return after acceptance is a reclamation

Twenty days after Alder's original deliveries to Birch, Birch finds two problems. One lot duplicates securities Alder had already delivered to it. The other lot, a security issued under the jurisdiction of the United States, was delivered in a form no longer current in the market, and that is its only irregularity. Which lot can Birch still reclaim?

The duplicate only, a duplicate being an irregular delivery with 30 months from settlement to reclaim it

The currency-affected lot only, its 15 days running from discovery while the duplicate's shorter period has lapsed

Both of them, each being an irregular delivery that may be reclaimed within 30 months after settlement

Neither of them, every reclamation of a security having to be made within 15 days of original delivery

One of Birch's trades printed at a price containing an obvious error. On another, the seller simply never delivered. How does the Uniform Practice Code treat the two trades?

The first stands at the erroneous price as executed; the second may be declared null and void for the seller's failure

The first may be declared null and void as clearly erroneous; the second stays binding, to be closed out by buy-in

Both may be declared null and void, each being a trade that cannot be settled on the terms the parties agreed

Both stay binding, the first corrected by a buy-in at the proper price and the second closed out by buy-in likewise

A buy-in notice warns that unless delivery is effected at or before 3:00 p.m. ET on its effective date, the security may be bought in for the seller's account. The seller cannot deliver by then, but before that hour it obtains a stay of the buy-in. May the buyer close the contract on the date the notice specifies?

Yes, a stay suspending a buy-in only where the seller has also delivered part of the securities in time

Yes, a failure to deliver by 3:00 p.m. ET being by itself enough to let the buyer close the contract

No, the buyer's right to close arising only where the seller has neither delivered nor obtained a stay

Yes, a stay protecting the seller only where it was obtained before the buy-in notice was issued

Birch is owed shares by Alder that are the subject of a tender offer, and the last day for surrendering them falls after the contract's settlement date. Birch is not a participant in any registered clearing agency. Under the offer's terms, surrenders close at 5:30 p.m. ET on the expiration date. What is the latest time at which Birch may send Alder a Liability Notice and still obtain the protection the notice provides?

5:30 p.m. ET on the business day before the expiration date

5:30 p.m. ET on the expiration date itself

3:30 p.m. ET on the business day before the expiration date

3:30 p.m. ET on the expiration date itself

Alder ships bonds to Birch with a draft attached, and Birch accepts and pays the draft on 2 March. On 23 March Birch finds that the draft charged more interest than was due, and that one bond was delivered after publication of a notice calling part of the issue for redemption. The two members had not dealt in the bonds as called bonds. If Birch acts on 23 March, which describes its position?

The interest claim is late, coming over ten days after payment; the called bond can still be reclaimed at any time

The interest claim is in time, its ten days running from discovery; the called bond can still be reclaimed at any time

The interest claim is late, coming over ten days after payment; the called bond is late too, under the same ten-day limit

The interest claim is in time, its ten days running from discovery; the called bond cannot be reclaimed, the call being partial

Birch and Elm Securities both participate in a registered clearing agency with automated customer account transfer capabilities and a facility for transmitting transfer instructions electronically. Birch, as the receiving member, transmits a transfer request through that facility for the account of one of Elm's customers. What does Birch represent by transmitting the request?

That the account at Elm carries no debit balance or restricted position that would prevent its transfer to Birch

That it already holds the customer's properly executed transfer instruction form or some other actual authority for the transfer

That the clearing agency has checked the customer's signature against the records Elm keeps for the account

That Elm has reviewed the customer's account and agreed to deliver its positions on the clearing agency's schedule

Birch issues a buy-in notice to Alder. Alder, which is awaiting the same securities from Cedar, passes the notice on to Cedar as a re-transmitted notice. Cedar does not accept the re-transmitted notice. To whom must Cedar give its response rejecting it?

To both Alder and Birch, each being a party to the notice Cedar received

To Birch, the buyer whose original notice of buy-in started the chain

To Alder, the member from which Cedar received the re-transmitted notice

To the UPC Committee, which then passes it back along the chain of members

A customer's whole account moved from Fir Securities to Birch four months ago. A cash dividend on a position that was in the account is now credited to the account at Fir. Fir does not use automated customer account transfer facilities. What is Fir's obligation for that credit balance?

None, any duty over later credits having ended once the whole-account transfer was completed

To transfer it to Birch by the end of the next business day after it accrues

None, the duty over later credits binding only members that use automated transfer facilities

FINRA Rule 11000 | Financial Regulation Courses

Uniform Practice Code

SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES

FINRA Rule 11000 is the top-level organizational marker for the Uniform Practice Code — the body of FINRA rules governing the operational mechanics of over-the-counter securities transactions between members, including how trades are compared and confirmed, how securities are delivered, what units of delivery apply to different security types, how reclamations and rejections are handled, and how close-out procedures including buy-ins, sell-outs, and clearly erroneous transaction reviews operate.

Its title — Uniform Practice Code — reflects the rule series' core function: establishing uniform operational standards that apply across the entire FINRA membership for the day-to-day mechanics of settling securities transactions, so that every member firm follows the same delivery timelines, the same units of delivery, the same procedures for handling failed deliveries, and the same close-out mechanisms regardless of which member firms are on either side of a given transaction. FINRA Rule 11000 has no operative text. Its FINRA.org page returns no rule text under

The Rule tab and shows only the complete hierarchical table of contents for the entire Uniform Practice Code, organized into nine major subsections spanning from FINRA Rule 11100 through FINRA Rule 11900.

FINRA Rule 11000 was adopted into the Consolidated FINRA Rulebook through SR-FINRA-2010-030, approved by the SEC as Release No. 34-62842, with the Uniform Practice Code series taking effect December 15, 2010 as announced in Regulatory Notice 10-49; the rule histories of the Clearly Erroneous Transactions rules, FINRA Rules 11891 through 11894, do not list that filing and record SR-FINRA-2009-068, effective February 15, 2010, instead.

The series was transferred from the predecessor NASD Rule 11000 Series — the Uniform Practice Code that NASD had maintained for decades — with certain changes to update references and terminology for the consolidated FINRA framework. One selected notice is associated with FINRA Rule 11000 — Regulatory Notice 10-49, SEC Approval and Effective Date for New Consolidated FINRA Rules, dated October 15, 2010.

The Historical Origins: NASD's Uniform Practice Code

The Uniform Practice Code predates FINRA itself by decades. As the National Association of Securities Dealers, NASD maintained the Uniform Practice Code as the operational rulebook governing how member firms transact business with each other in the over-the-counter markets — the markets that, before the rise of electronic clearing and settlement infrastructure, depended on bilateral arrangements between broker-dealers for the physical or book-entry delivery of securities certificates against payment.

The Uniform Practice Code's defining purpose, as confirmed in Regulatory Notice 10-49, is to prescribe the manner in which over-the-counter securities transactions other than those cleared through a registered clearing agency are compared, cleared and settled between member firms. This framing is critical to understanding the entire 11000 series — the Uniform Practice Code is fundamentally a backstop and supplementary framework for transactions that fall outside the highly automated processing of registered clearing agencies such as the National Securities Clearing Corporation and the Depository Trust Company. For the overwhelming majority of equity and corporate bond transactions in the modern market, clearing agency facilities handle comparison, clearance, and settlement automatically, and the clearing agency's own rules govern those mechanics. The Uniform Practice Code becomes operative precisely in those circumstances where clearing agency facilities are not used, are not available, or where the clearing agency's rules expressly defer to other organizations' rules.

When the Consolidated FINRA Rulebook was developed following the 2007 merger of NASD and NYSE Regulation into FINRA, the Uniform Practice Code was one of the bodies of rules transferred from the NASD rulebook into the new FINRA rulebook. SR-FINRA-2010-030 effected this transfer, adopting the NASD Rule 11000 Series as the FINRA Rule 11000 Series with certain changes — and simultaneously deleting several corresponding provisions in the Incorporated NYSE Rules and Interpretations that addressed the same subject matter from the NYSE side of FINRA's dual regulatory heritage, including former NYSE Rules 176, 180, 282, 291, 292, 293, 294, 387, and 430 and their associated interpretations and supplementary materials.

The Scope Limitation: What the Uniform Practice Code Does and Does Not Cover

FINRA Rule 11100 — the first substantive rule of the series, discussed in its own entry — establishes the Uniform Practice Code's scope through a set of exceptions that define what falls outside the Code's coverage. Confirmed from the predecessor NASD Rule 11100 text, the Code applies to over-the-counter secondary market transactions in securities between members — including the rights and liabilities of members participating in the transaction and operational procedures affecting members' day-to-day business — except: transactions compared, cleared, or settled through a registered clearing agency, except to the extent the clearing agency's rules provide that other organizations' rules apply; and transactions in securities exempted under Exchange Act Section 3(a)(12). Regulatory Notice 10-49 further confirmed additional categorical exclusions carried into the FINRA version — transactions exempted under Exchange Act Section 3(a)(12) or involving municipal securities as defined in Exchange Act Section 3(a)(29); transactions in redeemable securities issued by registered investment companies under the Investment Company Act of 1940, except for secondary market transactions between members in unit investment trusts; and transactions in Direct Participation Program securities, except as otherwise provided in the Uniform Practice Code.

This scope framework means that the Uniform Practice Code is, in the modern market structure, a specialized rather than universal set of rules. Most retail and institutional equity transactions clear through NSCC's continuous net settlement system and are therefore outside the Uniform Practice Code's direct operation — though NSCC's own rules may incorporate or reference Uniform Practice Code concepts and the Uniform Practice Code remains the default framework for any transaction that, for whatever reason, falls outside clearing agency processing.

The Nine Major Subsections

The complete FINRA Rule 11000 Uniform Practice Code, confirmed from the FINRA.org table of contents, is organized into nine major numbered subsections, each addressing a distinct functional area of transaction processing.

FINRA Rule 11100 — Scope of Uniform Practice Code — establishes the scope and exceptions discussed above, and encompasses the governance structure of the series through FINRA Rules 11110 through 11112 addressing UPC Committees, the consequences of refusing to abide by Committee rulings, and review by panels of the UPC Committee; the definitional framework through FINRA Rule 11120; the trade date concept through FINRA Rule 11121; when-, as-, and if-issued or distributed contracts through FINRA Rule 11130; and a cluster of specialized transaction-type rules through FINRA Rules 11140 (ex-dividend, ex-rights, ex-warrants transactions), 11150 (ex-interest transactions in bonds dealt flat), 11160 (ex liquidating payments), 11170 (part-redeemed bonds), and 11190 (reconfirmation and pricing service participants).

FINRA Rule 11200 — Comparisons or Confirmations and Don't Know Notices — addresses the trade confirmation process through FINRA Rule 11210 governing confirmations sent by each party, and FINRA Rule 11220 governing the description of securities required in those confirmations.

FINRA Rule 11300 — Delivery of Securities — is one of the largest subsections, addressing the mechanics of physical and book-entry delivery through FINRA Rule 11310 (book-entry settlement), FINRA Rule 11320 (dates of delivery), FINRA Rule 11330 (payment), FINRA Rule 11340 (stamp taxes), FINRA Rule 11350 (part delivery), and an extensive cluster of units-of-delivery rules through FINRA Rules 11360 through 11365 addressing the standard delivery units for stocks, bonds, unit investment trust securities, certificates of deposit for bonds, and securities traded as units or bonds with stock attached.

FINRA Rule 11400 — Delivery of Securities with Draft Attached — addresses the specialized mechanics of draft-attached delivery through FINRA Rule 11410's acceptance of draft provisions.

FINRA Rule 11500 — Delivery of Securities with Restrictions — is the largest subsection by rule count, addressing the delivery of temporary certificates, mutilated securities, called or worthless securities, securities subject to government regulation restrictions, assignments and powers of substitution for registered securities, certificates of companies whose transfer books are closed, and an extensive cluster of rules under FINRA Rule 11570 through FINRA Rule 11574 addressing certificates registered in various names — corporations, firms, dissolved firms succeeded by new firms, and deceased persons or trustees — plus FINRA Rules 11580 and 11581 addressing the transfer of limited partnership securities and the associated transfer forms.

FINRA Rule 11600 — Delivery of Bonds and Other Evidences of Indebtedness — addresses bond-specific delivery mechanics through FINRA Rule 11610 (liability for expenses), FINRA Rule 11620 (computation of interest), FINRA Rule 11630 (due-bills and due-bill checks), FINRA Rule 11640 (claims for dividends, rights, and interest), and FINRA Rule 11650 (transfer fees).

FINRA Rule 11700 — Reclamations and Rejections — addresses the procedures for reclaiming or rejecting improperly delivered securities through FINRA Rule 11710 (general provisions), FINRA Rule 11720 (irregular delivery, transfer refusal, and lost or stolen securities), FINRA Rule 11721 (obligations of members who discover securities to which they are not entitled), FINRA Rule 11730 (called securities), and FINRA Rule 11740 (marking to the market).

FINRA Rule 11800 — Close-Out Procedures — is the subsection most directly relevant to modern trading practice and contains the Uniform Practice Code's most operationally significant provisions for current market participants. It encompasses FINRA Rule 11810 (buy-in procedures and requirements), FINRA Rule 11820 (selling-out), FINRA Rule 11830 (reserved — currently containing no substantive provisions), FINRA Rule 11840 (rights and warrants), FINRA Rule 11860 (COD orders), FINRA Rule 11870 (customer account transfer contracts), FINRA Rule 11880 (settlement of syndicate accounts), and the Clearly Erroneous Transactions framework spanning FINRA Rules 11890 through 11894 — general provisions, clearly erroneous transactions in exchange-listed securities, clearly erroneous transactions in OTC equity securities, and review by the UPC Committee.

FINRA Rule 11900 — Clearance of Corporate Debt Securities — is the series' final rule, a standalone provision requiring members or their agents that participate in a registered clearing agency for clearing over-the-counter securities transactions to use the registered clearing agency's facilities for clearing eligible corporate debt securities transactions between members, subject to FINRA Rule 9600 series exemptive relief for special circumstances.

The UPC Committee Governance Structure

A distinctive feature of the Uniform Practice Code, evident from its earliest rules in FINRA Rule 11110 through FINRA Rule 11112, is its committee-based governance structure. The Uniform Practice Code Committee — referenced throughout the series and particularly in the Clearly Erroneous Transactions framework's FINRA Rule 11894 review provision — functions as the specialized governance body for Uniform Practice Code matters, distinct from the National Adjudicatory Council that governs disciplinary appeals under the 9000 series. This committee structure reflects the Uniform Practice Code's character as fundamentally a set of operational and commercial practice standards — closer in character to a trade association's operational rulebook than to a disciplinary code — even though violations of Uniform Practice Code provisions can and do give rise to disciplinary consequences under the 9000 series framework when a member's failure to follow Uniform Practice Code procedures constitutes a violation of FINRA Rule 2010's just and equitable principles of trade standard.

The Modern Relevance of the Uniform Practice Code

Despite its origins in an era of physical securities certificates and bilateral settlement arrangements that predate modern electronic clearing infrastructure by decades, the Uniform Practice Code remains operationally relevant in the modern market in several specific contexts. The Clearly Erroneous Transactions framework under FINRA Rules 11890 through 11894 is among the most actively used provisions in the entire FINRA rulebook, providing the mechanism through which FINRA reviews and potentially nullifies trades executed at clearly erroneous prices — a critical market integrity function during periods of extreme volatility, flash crashes, or technological malfunctions. The buy-in and sell-out procedures under FINRA Rules 11810 and 11820 remain the operative framework for addressing failed deliveries in the over-the-counter context. And FINRA Rule 11870's customer account transfer contract provisions interact with the broader ACATS account transfer framework that remains fundamental to how customer accounts move between broker-dealers.

Applying the Scope Test to Particular Trades

FINRA Rule 11100(a) makes all over-the-counter secondary market transactions in securities between members subject to the Uniform Practice Code, and it names restricted securities, as defined in Rule 144(a)(3) under the Securities Act, as included. Five exclusions follow. Deciding whether the Code governs a particular trade means taking the trade's own facts through that paragraph, and then through the rule that would supply the answer.

Suppose Alder Securities sells restricted shares to Birch Capital over the counter and the two members settle the trade directly with each other. The trade is within the Code. If Birch then fails to pay for the shares as delivered, the failure does not cancel the contract. FINRA Rule 11100(c) gives the seller its remedy through FINRA Rule 11820, the sell-out rule, unless the two members mutually consent to cancel the trade.

Change the security to a municipal security, as defined in Section 3(a)(29) of the Exchange Act, and the answer changes. FINRA Rule 11100(a)(3) excludes transactions in municipal securities from the Code, and the buy-in rule repeats the exclusion for itself: FINRA Rule 11810(a)(3) states that the rule does not apply to transactions in municipal securities. So if the seller of a municipal bond fails to deliver to a buying member, the buyer has no buy-in under FINRA Rule 11810.

The clearing agency exclusion in FINRA Rule 11100(a)(1) covers transactions between members "which are compared, cleared or settled through the facilities of a registered clearing agency". The three stages are joined by "or". A trade that two members compare through a registered clearing agency's facilities is therefore within the exclusion even if they then settle it directly with each other, unless the clearing agency's rules provide that the rules of other organizations apply.

Unit Investment Trusts and Limited Partnerships: Exclusions With Carve-Backs

FINRA Rule 11100(a)(4) excludes transactions in redeemable securities issued by registered investment companies, but applies the Code to secondary market transactions between members in unit investment trust securities. The same paragraph then provides that a redemption of securities directly by the trustee of the unit investment trust is not a transaction between members for the purposes of that paragraph. The sentence makes no exception for any kind of trustee. So when Birch presents units to the trust's trustee for redemption, the carve-back does not bring the redemption within the Code, even if the trustee is itself a member firm.

Direct Participation Program securities, as defined in FINRA Rule 2310, are excluded by FINRA Rule 11100(a)(5) "except as otherwise provided in this Code". Each rule decides for itself whether it provides otherwise. FINRA Rule 11580(a) does: each member that participates in the transfer of limited partnership securities must use standard transfer forms in the same form as set out in FINRA Rule 11581, unless the securities are traded on a national securities exchange or are on deposit in a registered securities depository and settle regular way. FINRA Rule 11810 does not: its paragraph (a)(5) states that the buy-in rule does not apply to transactions in Direct Participation Program securities, and it adds no carve-back.

Suppose Alder sells Birch unlisted limited partnership units that are not on deposit at any depository, and Alder fails to deliver. When the transfer does take place, both members must use the standard transfer forms. But Birch cannot close the contract by a buy-in under FINRA Rule 11810.

Rules That Reach Past Trades Between Members

FINRA Rule 11100(b) provides that the scope of coverage in paragraph (a) may be expanded or limited in any rule of the Code if the rule specifically provides for it. Paragraph (a) speaks of transactions between members. Some rules of the Code specifically reach further, and some specifically draw their own coverage back.

FINRA Rule 11310(b) is one that reaches further. A member may not effect a delivery-versus-payment or receipt-versus-payment transaction in a depository eligible security with a customer unless the transaction is settled by book-entry using the facilities of a securities depository. Suppose Alder sells a depository eligible security to an institutional customer on delivery-versus-payment terms. The customer is not a member, but the sale must still settle by book-entry through a securities depository.

FINRA Rule 11860 also speaks to customers. A member may accept a collect-on-delivery or payment-on-delivery order only if it follows all of the rule's procedures, and one of them is to deliver to the customer a confirmation, or all relevant data customarily contained in a confirmation, no later than the end of the day on the trade date. Between members, FINRA Rule 11210(a)(1) requires each party to a transaction to send a Uniform Comparison or Confirmation by the end of the day on the trade date, for trades that do not clear through the National Securities Clearing Corporation or another registered clearing organization. Suppose Alder, on a Monday, executes a customer's collect-on-delivery purchase and, separately, a trade with Birch that the two will settle directly. Alder owes the customer's confirmation and its Uniform Comparison or Confirmation to Birch by the end of that Monday.

A rule can also draw its own coverage back. FINRA Rule 11310(e) provides that the book-entry rule does not apply to transactions settled outside of the United States. That removes such a trade from FINRA Rule 11310, and from nothing else. Suppose Alder sells shares to Birch and the two settle the trade directly between themselves outside the United States. The book-entry rule does not apply, but FINRA Rule 11100(a) contains no exclusion for trades settled abroad, so the trade remains within the Code. If Alder fails to deliver, the contract still stands under FINRA Rule 11100(c).

Code Rules Addressed to Clearing Agency Participants

Trades compared, cleared or settled through a registered clearing agency fall outside the Code's general scope. That does not put a member that clears through such an agency outside the Code altogether. Several rules of the Code are addressed to members precisely because they participate in a registered clearing agency.

FINRA Rule 11190(a) requires each member or its agent that is a participant in a registered clearing agency, for purposes of clearing over-the-counter securities transactions, to participate in fail reconfirmation and pricing services when offered. Suppose Cedar Markets clears all of its over-the-counter trades through a registered clearing agency and concludes that the Uniform Practice Code imposes nothing on it. The conclusion is wrong. Once the agency offers a fail reconfirmation and pricing service, Cedar must participate in it.

FINRA Rule 11900(a) requires the same class of participant to use the facilities of a registered clearing agency for the clearance of eligible transactions between members in corporate debt securities, subject to the carrying-member exception in paragraph (b) and any exemption FINRA grants under paragraph (c). When two such members trade an eligible corporate bond, they must clear it through the agency. The trade then clears through a registered clearing organization, and FINRA Rule 11210(a)(3) provides that the Code's comparison rule is not applicable to transactions which clear through the National Securities Clearing Corporation or other clearing organizations registered under the Exchange Act.

Customer account transfers work the same way. Under FINRA Rule 11870(m)(1), when both the carrying member and the receiving member are participants in a registered clearing agency having automated customer securities account asset transfer capabilities, and are eligible to use them, the transfer, including the establishing and closing out of fail contracts, must be accomplished pursuant to the rules of and through that clearing agency. The exception is specifically designated assets transferred under a customer's authorized alternate instructions to the carrying member. Two such members cannot agree between themselves to move a customer's whole account by delivering the positions directly instead.

From Trade Date to Delivery: One Trade Across the Subsections

Regular way delivery is fixed by reference to the date of the transaction, so the Code's trade date rules and its dates-of-delivery rule work together. Under FINRA Rule 11120(g), and the Committee's ruling set out in FINRA Rule 11121, where a bid or offer is accepted in a later time zone than that of the originator, the correct trade date is the day on which the dealer in the later time zone accepts, even though the acceptance may not reach the originator until the following day. Under FINRA Rule 11320(b), delivery on a regular way transaction is made on, but not before, the first business day following the date of the transaction.

Suppose a Western dealer accepts an Eastern dealer's regular way bid on a Monday, and the acceptance reaches the Eastern dealer on the Tuesday. Both days are business days. The trade date is the Monday, so delivery is due on the Tuesday, the same day on which the Eastern dealer learns that it has a trade.

Where the security is depository eligible, the method of delivery displaces the place. FINRA Rule 11320(h) provides for delivery at the office of the purchaser. FINRA Rule 11310(a) requires a member to use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another member, and FINRA Rule 11310(f) provides that its requirements supersede any inconsistent requirements under other rules in the Code. So a seller of a depository eligible security to another member cannot insist on delivering certificates at the purchaser's office instead of settling by book-entry, unless an exclusion in FINRA Rule 11310 applies, such as paragraph (g)'s case of securities not on deposit that the deliverer cannot deposit before the depository's cut-off.

Payment is the other half of the exchange. FINRA Rule 11330 gives the party making delivery the right to require the purchase money to be paid upon delivery by certified check, cashier's check, bank draft or cash. Suppose Alder delivers certificates at Birch's office in a trade outside the book-entry rule and requires a certified check, and Birch offers its own uncertified company check instead. Alder is entitled to insist on one of the four forms the rule names.

When Delivery Fails: Timing the Buy-In

A contract that falls due on a day other than a business day matures on the next business day under FINRA Rule 11320(e), and the buy-in clock runs from the date delivery was due. Under FINRA Rule 11810(a), a securities contract that the seller has not completed according to its terms may be closed by the buyer not sooner than the third business day following the date delivery was due. Suppose a contract falls due on a Saturday, and the Monday through Thursday that follow are all business days. The contract matures on the Monday, and the buyer may close it by buy-in no sooner than the Thursday.

Buy-ins can run down a chain of members. Under FINRA Rule 11810(b)(5), a member that receives a buy-in notice redelivers it immediately, as a re-transmitted notice, to other parties from which the securities are due. A re-transmitted notice received by a member is delivered to subsequent parties not later than 12 noon ET on the business day preceding the time and date of execution of the proposed buy-in, and the time it specifies for delivery may not be earlier than the time in the original notice. Suppose Birch's buy-in against Alder is set for execution on a Tuesday. Alder, awaiting the same securities from Cedar, re-transmits the notice to Cedar, and Cedar in turn awaits them from Dunmore Securities. Cedar must deliver the re-transmitted notice to Dunmore not later than 12 noon ET on the Monday, and it cannot specify a delivery time earlier than the one in Birch's original notice.

The notice itself tells the seller its last chance to deliver. Under FINRA Rule 11810(c), every buy-in notice states that unless delivery is effected at or before 3:00 p.m. ET on the effective date of the notice, the security may be bought in on the date specified for the account of the seller. The buyer may close the contract only on the seller's failure to deliver in accordance with the notice, or to obtain a stay. A seller that delivers the full quantity at 2:30 p.m. ET on the effective date has therefore delivered in time, and the buy-in is not executed.

The Buy-In Notice in Practice

Under FINRA Rule 11810(b)(2), written notice of buy-in includes an electronic notice through a medium that provides for an immediate return receipt capability, such as facsimile transmission, a computerized network facility or the electronic functionality of a registered clearing agency. FINRA Rule 11810(b)(3) then requires the confirmation of the seller's receipt of the notice to be maintained with the notice as part of the buyer's books and records. So a buyer that sends its notice by facsimile keeps the seller's confirmation of receipt with the notice in its own books and records.

A seller that does not accept a buy-in notice must send a signed, written response to the buyer stating its rejection no later than 6:00 p.m. ET on the date the notice was issued. If it does not, the notice is deemed accepted. Suppose Alder receives Birch's notice on a Monday morning and telephones Birch that afternoon to say that it rejects the notice, but sends nothing in writing. A telephone call is not a signed, written response, so at 6:00 p.m. ET that Monday the notice is deemed accepted.

Deemed acceptance does not end the seller's protections. The same paragraph provides that before the proposed effective date of the buy-in, the seller has a right to request proof of fail obligation from the buyer, and the buyer must deliver that proof before that date. A buyer may not execute a buy-in notice to the extent that it fails to deliver the proof. Nor is a buyer entitled to a buy-in that exceeds the seller's liability under the unsettled contract because the seller failed to reject the notice. So a seller deemed to have accepted may still ask for proof of the fail obligation, and a buyer that does not provide it cannot execute the buy-in to that extent.

Returning a Delivery: Rejection or Reclamation

FINRA Rule 11710(a) draws the line at acceptance. A reclamation is a claim for the right to return, or the right to demand the return of, a security which has been previously accepted. Securities presented for delivery and refused for a valid reason are deemed a rejection for the purposes of FINRA Rules 11710 and 11720. Suppose Birch refuses certificates for a valid reason at the moment Alder presents them. That is a rejection. Suppose instead that Birch accepts them and sends them back on a later day. That is a reclamation, and under FINRA Rule 11710(b)(1) a properly executed Uniform Reclamation Form must accompany the securities.

The time allowed for a reclamation depends on what went wrong. FINRA Rule 11710(d) allows 15 days from the day of original delivery, or 45 days for a security issued under the jurisdiction of a foreign country, where the irregularity affects only the currency of the security in the market. FINRA Rule 11720(a) allows 30 months after the settlement date of the contract for an irregular delivery, which includes wrong, duplicate, misdirected or over-deliveries. Suppose Birch discovers four months after settlement that Alder delivered the same securities to it twice. The duplicate is an irregular delivery, and Birch's reclamation is within the 30-month period.

Clearly Erroneous Review and the Committee in Practice

The Code treats two kinds of bad trade differently. A trade on which the seller fails to deliver is not cancelled: FINRA Rule 11100(c) keeps the contract in force and sends the buyer to the buy-in rule. A trade whose terms contain an obvious error, such as in the price, the number of shares or other unit of trading, or the identification of the security, is clearly erroneous under FINRA Rule 11891, and a FINRA officer's determination under FINRA Rule 11892 or FINRA Rule 11893 may declare it null and void. Suppose one of Birch's trades printed at a price containing an obvious error, and on another the seller simply never delivered. The first may be declared null and void through the clearly erroneous process. The second remains a binding contract, to be closed out by buy-in.

A decision of the UPC Committee on an appeal, or a FINRA officer's determination that is not appealed, is final and binding upon all parties and constitutes final action on the matter in issue. The same paragraph provides that such determinations and decisions are rendered without prejudice to the rights of the parties to the transaction to submit their dispute to arbitration. Suppose the Committee affirms the nullification of a trade between Alder and Birch. The nullification stands, and Birch may still submit its dispute with Alder to arbitration.

A decision of the UPC Committee may be rendered by a panel of three or more members of the Committee. No more than 50 percent of a panel's members may be directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues. A four-member panel with two such members is at exactly 50 percent and so is permitted. A four-member panel with three is not.

Liability Notices for Securities Facing an Expiring Event

FINRA Rule 11810(j) gives a receiving member an alternative to the buy-in close-out procedures where the securities it is owed face a deadline. It applies where a contract is for warrants, rights, convertible securities or other securities which have been called for redemption, are due to expire by their terms, are the subject of a tender or exchange offer, or are subject to other expiring events such as a record date for the underlying security. It also requires that the last day on which the securities must be delivered or surrendered, the expiration date, is the settlement date of the contract or later. In that case the receiving member may deliver a Liability Notice to the delivering member as an alternative to the close-out procedures of paragraphs (b) through (h). If the delivering member fails to deliver the securities on the expiration date, it is liable for any damages which may accrue thereby. A Liability Notice serves as notification by the receiving member of the existence of a claim for damages.

How the notice travels depends on whether both members participate in a registered clearing agency. When both parties to the contract are participants in a registered clearing agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, the Liability Notice must be transmitted through that automated notification service. Suppose Birch Capital has bought from Alder Securities shares that are the subject of a tender offer. The last day on which the shares must be surrendered under the offer falls after the contract's settlement date, and Alder has not delivered. Both members are participants in a registered clearing agency that has such an automated service. If Birch gives a Liability Notice, it must send it through the agency's automated service. Sending its own facsimile or letter instead does not meet the rule.

When the parties are not both participants in such a clearing agency, the notice must be issued using written or comparable electronic media having immediate receipt capabilities. It must be sent as soon as practicable, and not later than two hours prior to the cutoff time set forth in the instructions on the specific offer or other event, in order to obtain the protection the rule provides. Suppose instead that Birch is not a participant in any registered clearing agency, and the tender offer's instructions set a cutoff time of 5:30 p.m. ET on the expiration date. To obtain the rule's protection, Birch must send its Liability Notice as soon as practicable, and not later than 3:30 p.m. ET that day.

Instruments that can be exercised on any day have their own clock. Paragraph (j)(1)(B) applies where the contract is for a deliverable instrument with an exercise provision, the exercise may be accomplished on a daily basis, and the settlement date of the contract to purchase the instrument is on or before the requested exercise date. The receiving member may then deliver a Liability Notice to the delivering member no later than 11:00 a.m. ET on the day the exercise is to be effected. The notice may be redelivered immediately to another member, but no later than noon ET on the same day. Suppose Birch bought from Alder warrants that can be exercised on any day. The contract's settlement date was a Tuesday, and Birch wants to exercise on the Thursday. Alder has not delivered, and it is itself awaiting the warrants from Cedar Markets. Birch may deliver its Liability Notice to Alder no later than 11:00 a.m. ET on the Thursday. Alder may redeliver it to Cedar immediately, and no later than noon ET that Thursday.

Answering a Buy-In Notice Along a Chain

A member that receives a re-transmitted buy-in notice is subject to the same receipt-confirmation and rejection provisions as a seller receiving the original notice, but its answer goes back one link. Under FINRA Rule 11810(b)(5), each party receiving a re-transmitted notice is subject to paragraphs (b)(3) and (b)(4). However, the written response required by paragraph (b)(4) must be given to the party from which the re-transmitted notice was received. Suppose Birch issues a buy-in notice to Alder, and Alder, which is awaiting the same securities from Cedar, re-transmits it to Cedar. If Cedar does not accept the re-transmitted notice, its rejection goes to Alder, from which it received the notice, and not to Birch.

Execution of the buy-in closes the chain, with one exception for a re-transmitted notice that arrives late. Under FINRA Rule 11810(d)(1)(B), execution of the buy-in by the buyer against the seller also operates to close out all contracts covered under re-transmitted notices issued pursuant to the original notice. However, a re-transmitted notice may be sent before the buy-in is executed and not reach its recipient until after the execution. In that case the member that sent it may, unless otherwise agreed, promptly re-establish, by a new sale, the contract with respect to which the notice was sent. Suppose Alder sends its re-transmitted notice to Cedar before Birch executes the buy-in against Alder, but the notice does not reach Cedar until after the execution. Alder may promptly re-establish its contract with Cedar by a new sale, unless the two have agreed otherwise.

A seller can also answer a notice by telling the buyer that it holds the securities. Under FINRA Rule 11810(d)(1)(A), suppose the buyer is notified by the seller, before executing the buy-in, that some or all of the securities, but not less than one trading unit, are in the seller's physical possession and will be promptly delivered. Then the order to buy-in is not executed with respect to those securities, and the buyer must accept and pay for them if they are delivered promptly. Suppose Birch's buy-in notice covers 300 shares of a stock that trades in units of 100 shares. Before execution, Alder notifies Birch that 50 of the shares are in its physical possession and will be promptly delivered. Fifty shares are less than one trading unit, so this notification does not bring the paragraph's protection into play for them.

Draft Shipments and the Reclamation Rules

FINRA Rule 11410(f) sets a ten-day deadline for claims arising from irregularities in draft shipments, and exempts reclamations from it. Claims with respect to such items as price, interest, protest fees or wire charges and items of a similar nature, arising from the acceptance of draft shipments in which irregularities exist, must be presented not later than ten days after payment. That limitation does not apply to matters covered under "Reclamations" in FINRA Rules 11710 to 11730. FINRA Rule 11730, one of those rules, provides that reclamation because a security was delivered after publication of notice of call for its redemption may be made without limit of time. It does not apply when an entire issue is called for redemption, or when the security was dealt in specifically as a "called" security.

Suppose Alder ships bonds to Birch with a draft attached, and Birch accepts the draft and pays it on 2 March. On 23 March Birch finds two problems. The draft charged more interest than was due. And one of the bonds was delivered after notice of its call for redemption had been published. Only part of the issue had been called, and the two members had not dealt in the bonds as called bonds. If Birch presents its claim over the interest on 23 March, that is more than ten days after payment, so the claim comes too late under FINRA Rule 11410(f). Its reclamation of the called bond is not subject to that deadline and may be made without limit of time.

Account Transfers Through and Outside the Clearing Agency

FINRA Rule 11870(m)(4) governs members that both participate in a registered clearing agency having automated customer account transfer capabilities, with a facility permitting the electronic transmittal of transfer instructions. One of its conditions concerns the receiving member. The transmittal of a transfer request through such electronic facilities constitutes a representation by the receiving member that it has received a properly executed transfer instruction form or other actual authority to receive the customer's securities and funds. Suppose Birch and Elm Securities are both participants in such a clearing agency. A customer of Elm writes to Birch by e-mail that she is thinking of moving her account. Birch has received no transfer instruction form or other authority from her, but it transmits a transfer request through the agency's facility. By transmitting the request, Birch has represented that it has received a properly executed transfer instruction form or other actual authority, and it has received neither.

A member that is not in a registered clearing agency still processes account transfers under the rule, but the fail contracts are handled outside the clearing corporation. Under FINRA Rule 11870(n)(1), this applies if one or both of the members processing a customer account transfer under the rule is not a member of a registered clearing agency. The fail-to-receive and fail-to-deliver contracts required under paragraph (e) must then be established outside a clearing corporation, on an "ex-clearing house" basis. Settlement of the fail contracts and any close-out executions must also be made ex-clearing house. Suppose a customer moves her whole account to Birch from Fir Securities, a member that is not a member of any registered clearing agency. The fail contracts against positions not yet delivered are established, settled and closed out ex-clearing house.

Credit balances can reach an account after it has moved. Under FINRA Rule 11870(n)(2), each member, including members that do not use automated customer account transfer facilities, must transfer such credit balances. The duty runs for a minimum period of six months after a transfer of account assets in whole is completed. It covers credit balances, both cash and securities, that occur in the transferred account assets, and they must be transferred within ten business days after they accrue to the account. Suppose that four months after the customer's whole account has moved from Fir to Birch, a cash dividend on a position that was in the account is credited at Fir. Fir must transfer that credit balance to Birch within ten business days after it accrues, although Fir does not use automated transfer facilities.

Examination Relevance and Key Takeaways

FINRA Rule 11000 is tested on the Series 7 and Series 24 examinations as the top-level organizational marker for the Uniform Practice Code — the operational rulebook governing securities transaction comparison, delivery, and settlement mechanics between FINRA members.

The key points to retain are these: FINRA Rule 11000 is the top-level marker for the Uniform Practice Code — it has no operative text but organizes nine major subsections spanning FINRA Rules 11100 through 11900; the Uniform Practice Code governs over-the-counter secondary market transactions between members that are not compared, cleared, or settled through a registered clearing agency, with additional categorical exclusions for Section 3(a)(12) exempted transactions, municipal securities, most investment company redeemable securities, and most Direct Participation Program securities; the series was transferred from the predecessor NASD Rule 11000 Series into the Consolidated FINRA Rulebook through SR-FINRA-2010-030 effective December 15, 2010 as announced in Regulatory Notice 10-49, with corresponding NYSE rule provisions simultaneously deleted; the nine major subsections cover scope and governance (11100), comparisons and confirmations (11200), delivery of securities (11300), delivery with draft attached (11400), delivery with restrictions (11500), delivery of bonds and other evidences of indebtedness (11600), reclamations and rejections (11700), close-out procedures including the Clearly Erroneous Transactions framework (11800), and clearance of corporate debt securities (11900); the Uniform Practice Code Committee provides specialized governance for Uniform Practice Code matters distinct from the NAC; and the most operationally significant modern provisions are the Clearly Erroneous Transactions framework under FINRA Rules 11890 through 11894 and the buy-in and sell-out close-out procedures under FINRA Rules 11810 and 11820.