Why does the UPC Committee need a panel mechanism at all, rather than deciding every matter as a full body?

Its members are drawn from firms that would otherwise face a conflict on most of the questions arising

It may be too large to convene in full for every question, and many need prompt resolution

The Board of Governors requires that operational questions be decided at a lower level

Decisions of the full Committee would bind FINRA staff, which panels' decisions do not

FINRA Rule 11112 provides that a panel shall consist of three or more members of the Committee. What does the rule say about a maximum?

Nothing — three is a floor, so panel size can scale with the matter's significance

Seven, matching the maximum the clearly erroneous review framework permits

Five, above which a matter must be referred to the full Committee for decision

A maximum equal to half of the Committee's membership at the time the panel is appointed

The minimum panel size under FINRA Rule 11112 is an odd number rather than an even one. What does that avoid?

The need for a chair with a casting vote, for which the rule makes no provision at all

A deadlock on a binary question, which a two-member panel could produce

A tie between the market making and non-market making members sitting on the panel

A quorum failure where one appointed member proves unable to sit on the matter

A prospective panellist does no market making personally but is employed by a firm whose market making revenue is twelve percent of its total revenues. Does FINRA Rule 11112's composition safeguard count them?

No, the institutional threshold being set at twenty-five percent of total revenues

No, the safeguard reaching only those directly engaged in market making themselves

Only where such panellists would otherwise make up more than half of the panel

What conflict of interest does FINRA Rule 11112's composition ceiling address?

Panellists may hold positions in the securities whose delivery standards they are ruling on

Committee members are appointed by the Board of Governors rather than elected by the membership

A panel's decision binds firms that had no opportunity to be heard before it was made

Clearly erroneous determinations directly affect the market makers whose executions are at issue

FINRA Rule 11112 is identified as Adopted, where FINRA Rules 11110 and 11111 are identified as Amended. What does that label show?

It entered the rulebook as a new rule, not as an amended NASD provision

It was renumbered from an NASD rule with the same content when the Code was transferred

The rule took effect immediately rather than on the date the wider transfer became operative

The rule was adopted by the Board of Governors rather than filed with the Commission

Does FINRA Rule 11112's panel mechanism reach the UPC Committee's interpretive rulings under the Code, where no FINRA officer's decision is under review?

No — panels exist to review FINRA officers' decisions, so an interpretive ruling needs the full Committee to sit

Yes — panels reach the Committee's interpretive and ruling authority under the Code, not only its review of FINRA decisions

No — an interpretive ruling binds every member, which a panel may not do without the Board of Governors' approval

Yes, but only after the full Committee has failed to convene on the question within the time the Code allows

A prospective panellist personally makes markets as part of her job, but her employer's market making revenue is four percent of its total revenues. Does she count toward FINRA Rule 11112's composition ceiling?

Only if the panel is reviewing a transaction in a security in which she herself makes a market for her employer

No — her employer's market making revenue is too small a share of its total revenues for the safeguard to reach her

Yes — being directly engaged in market making personally brings her within the safeguard, whatever her employer earns from it

No — personal market making counts only where the employer also passes the revenue threshold set for the employer

FINRA Rule 11112 limits how many market-making-affiliated members may sit on a panel rather than excluding them altogether. What does the rule's design gain by admitting them at all?

Compliance with a Board requirement that panels mirror the business mix of the Committee's membership

Representation of the firms whose trades are under review, so that those firms are heard through their peers

A check on FINRA staff, whose views would otherwise go unchallenged in the panel's deliberations

The operational expertise such members bring to the market questions the panel has to decide

A flash crash generates hundreds of clearly erroneous review requests across many securities within minutes. How does FINRA Rule 11112 let the UPC Committee handle them?

Several panels can sit in parallel, each one separately meeting the size minimum and the composition safeguard

Several panels can sit in parallel, the composition safeguard being met across the panels taken together

Panels may sit with FINRA staff in place of Committee members for as long as the disruption lasts

The requests are pooled for one full-Committee sitting, a market-wide event being too significant for panels

FINRA Rule 11111 attaches consequences to a member's refusal to abide by a final decision of the UPC Committee. Does it reach a member's refusal to carry out a final decision rendered by a three-member panel of that Committee?

No — a refusal to carry out a panel's decision is left to arbitration between the members concerned

Yes — a panel's decision is a decision of the Committee itself, with the same binding force as the full body's

Yes, but solely where the member took part in the panel proceeding and so agreed to be bound by its outcome

No — a panel's decision stays provisional until the full Committee confirms it or sets it aside at its next sitting

A seven-member UPC Committee panel includes four members who each meet one of FINRA Rule 11112's two composition descriptions: two make markets personally, and two make no markets but work for a member above the revenue threshold. The other three meet neither. Is the panel properly constituted?

Yes — employer-based members are counted only where no personal market maker sits on the same panel with them

Yes — each description carries its own separate ceiling, and neither group of two is more than half the panel

No — the two groups are added into one count, and four of seven is more than half the panel

No — a panel may not combine members from both descriptions at all, whatever the numbers on each side

A three-member UPC Committee panel includes one member who makes markets personally and also works for a member that earns thirty percent of its total revenues from market making. The other two members have no market making connection of any kind. Is the panel within FINRA Rule 11112's composition limit?

No — he meets both descriptions, so he is counted once for each of them against the limit

Yes, provided he stands aside from any question involving his own employer's trades

No — a member who meets both descriptions may not sit on a panel of the minimum size

Yes — he counts as one member however many of the descriptions he happens to meet

A FINRA officer makes a decision under a FINRA rule that provides for no review by the UPC Committee. A member asks for a panel of the Committee to review it under FINRA Rule 11112. Does FINRA Rule 11112 open the decision to panel review?

Yes — the rule lets a panel review any FINRA decision a member asks it to reconsider, whichever rule it was made under

Yes, provided the panel meets the three-member minimum and the limit on market-making-affiliated members

No — the rule settles who may render a decision the Committee can make, and gives it nothing new to decide

No — such a review must be heard by the full Committee sitting together, as only the full body may take up a decision no rule makes reviewable

To which panels of the UPC Committee does FINRA Rule 11112's limit on market-making-affiliated members apply?

To panels sitting because the full Committee could not be convened in time, not to panels the Committee simply chooses to use

To panels deciding clearly erroneous appeals, where the market makers' own quotes and executions are directly at issue

To panels reviewing FINRA decisions, the limit not reaching the Committee's interpretive rulings under the Code

To any panel, whether it is deciding a clearly erroneous appeal, a good delivery question or another matter

A prospective panellist does no market making herself. Market making brings her employer eight percent of its revenues, but because it is one of the firm's most profitable lines it produces thirty percent of the firm's profits. Does FINRA Rule 11112's composition safeguard count her?

No — the test is written in revenues, so the share of profits that market making produces plays no part

Yes — thirty percent of profits shows market making is a significant line for her employer, which is what the test captures

Yes — the test is met where market making passes ten percent of either the employer's revenues or its profits

No — the employer description reaches a panellist only where the employer is a registered market maker in the security under review

A panel member who makes no markets himself can still be counted under FINRA Rule 11112's composition safeguard on the basis of market making figures. Whose figures does the rule examine?

His employer together with any firm that clears its trades, the two firms' figures combined

The firm that actually employs him, both figures in the comparison being that firm's own

Whichever firm is a party to the matter the panel has been convened to decide

His employer's whole corporate group, the market making of firms under common ownership combined

A UPC Committee panel member makes no markets personally. His employer has not been admitted to FINRA membership, and market making provides twenty percent of that firm's total revenues. On its wording, does FINRA Rule 11112's employer description count him?

Yes — a firm outside FINRA membership is counted on any market making revenue, FINRA having no oversight of that business

Yes — the description turns on the employer's revenue share alone, FINRA membership playing no part in the test

No — the description reaches employment by a member, and his employer has not been admitted to FINRA membership

No — a firm outside FINRA membership is treated as earning no market making revenues for the purposes of the test

A three-member UPC Committee panel rules on a question about a "when, as and if issued" contract. None of its members makes markets or works for a member above the revenue threshold. The member that lost argues the ruling is invalid because nobody on the panel had a market making connection. Does FINRA Rule 11112 support the objection?

No — an objection of that kind could succeed only if raised before the panel began deliberating, and this one came too late

Yes — the rule requires at least one such member on every panel, so that the expertise justifying their admission is always present

Yes — such members must fill exactly half of the seats, so that they balance the members who have no market making connection

No — the rule caps how many such members may sit and sets no minimum, so a panel with none of them complies

A FINRA officer acting alone declares a member's trade in an OTC Equity Security null and void under FINRA Rule 11893. The member argues the determination is invalid because it was not made by a panel of three or more UPC Committee members. Is the argument sound?

No — the officer's determination is not a decision of the Committee, so the panel requirements do not govern it

Yes — every determination voiding a trade must be made by a panel meeting the size minimum and the composition limit

Yes — an officer may act alone only when the full Committee cannot be convened in time to constitute a panel

No — the panel requirements reach an officer's determination only where it voids trades in more than one security

A data-feed fault causes several hundred trades in one OTC Equity Security to print at aberrant prices. A FINRA officer declares them null and void and also determines that the number of affected trades makes immediate finality necessary. A member asks for a panel of the UPC Committee to hear its appeal. What follows?

A panel can hear it once trading in the security has resumed, the finality determination lapsing at that point in the trading day

No panel can hear it — no appeal lies from that determination, so there is no appeal decision for a panel to render

A panel can hear it, provided the member's written appeal reaches FINRA within thirty minutes of the member being notified of the determination

A panel can hear it, but only on whether immediate finality was truly necessary, not on whether the trades were clearly erroneous

A panel of the UPC Committee decides a clearly erroneous appeal. FINRA Rule 11894(e) carries a panel provision of its own, and FINRA Rule 11112 also reaches the appeal. How do the two provisions' size and composition requirements relate?

They split the work, FINRA Rule 11894(e) setting the panel's size and FINRA Rule 11112 its composition

They are cumulative, FINRA Rule 11894(e) adding a stricter composition limit for clearly erroneous appeals

They differ, and the Committee elects which provision's limits will govern when it convenes the panel

They are in the same terms, so the panel meets one set of size and composition requirements

The UPC Committee convenes four of its members, none of whom has any market making connection, as a panel to rule on a good delivery question. Does FINRA Rule 11112 require the panel to have an odd number of members instead?

No — three is a minimum rather than a fixed size, the rule sets no maximum, and a panel of four members is permitted

Yes — every panel must have an odd number of members, so that it can always reach a majority on a yes-or-no question

Yes — above the minimum a panel must grow two members at a time, to five or to seven, so that its number stays odd

No — but a panel of four may sit only where one of its members holds a casting vote to settle an equal division

Most members of the UPC Committee as a whole are directly engaged in market making. The Committee wants to convene a panel whose membership mirrors that balance, with market makers in the majority. Does FINRA Rule 11112 permit such a panel?

Yes — a panel may reflect the balance of the Committee it is drawn from, the ceiling applying only where the Committee itself is balanced

No — the ceiling is measured on each panel's own members, whatever the makeup of the Committee as a whole

Yes, where too few members without a market making connection are free to sit, the ceiling giving way to the need for a prompt decision

No — a Committee with such a majority may not act through panels at all until its own membership has first been rebalanced

A member's clearly erroneous appeal is decided against it by a properly constituted three-member panel of the UPC Committee. The member then asks for the full Committee to decide the appeal afresh. What is the position?

The full Committee must decide the appeal afresh on request, a panel's ruling standing only until the whole body has considered it

The full Committee may decide it afresh, but only where the member shows evidence that was not before the panel when it ruled

The panel's decision was the Committee's decision on the appeal, final and binding, so nothing is left for the full Committee to decide

The member may ask a FINRA officer to review the panel's ruling, and the officer then decides whether the full Committee should sit

A three-member panel of the UPC Committee decides a member's clearly erroneous appeal against it. The member now wants to take its dispute with the counterparty to arbitration, and the counterparty says the panel's decision has closed that route. Is the counterparty right?

Yes — by appealing to the UPC Committee the member chose that forum, and in doing so it gave up any arbitration of the dispute

Yes — arbitration stays open after a panel's decision only where the panel has expressly reserved the point, and this one did not

No — arbitration does stay open, but the arbitrators may rule only on whether the panel decided the appeal correctly, not on the dispute between the parties

No — the Committee's decision on the appeal is rendered without prejudice to the parties' right to submit their dispute to arbitration

FINRA Rule 11112 requires a panel of the UPC Committee to consist of three or more members of the Committee. What does that minimum ensure about the decisions panels render?

They are reached unanimously, a panel's decision binding members only where all of its members agree on the outcome

They are made by members drawn from at least three different member firms, so that no single firm decides a matter

They reflect the collective judgment of at least three Committee members, never that of a single individual or a pair

They come with written reasons signed by each member, so that a party can see how every member of the panel voted

FINRA Rule 11112 | Financial Regulation Courses

Review by Panels of the UPC Committee

SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES

FINRA Rule 11112 establishes the panel mechanism through which the UPC Committee exercises its decision-making authority in practice — a newly adopted rule, distinct from FINRA Rules 11110 and 11111's older provisions, that addresses the operational reality that a body as large as the full UPC Committee cannot practically convene in its entirety for every interpretive ruling or review decision the Committee is called upon to make. The rule consists of two sentences.

The first establishes that for purposes of the UPC Code and other FINRA rules permitting UPC Committee review of FINRA decisions, a decision of the UPC Committee may be rendered by a panel of that Committee — establishing panel decisions as having the same authoritative status as decisions of the full Committee.

The second establishes the panel's minimum size and composition safeguard: the panel shall consist of three or more members of the UPC Committee, provided that no more than 50 percent of the members of any panel are directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues.

FINRA Rule 11112 was adopted by SR-FINRA-2010-030 effective December 15, 2010, as part of the Uniform Practice Code's transfer into the Consolidated FINRA Rulebook — and unlike FINRA Rules 11110 and 11111, which carry amendment histories tracing back to 1968 and earlier NASD-era provisions respectively, FINRA Rule 11112 is identified as Adopted rather than Amended, indicating that FINRA Rule 11112 entered the Consolidated FINRA Rulebook's Uniform Practice Code framework as a new rule rather than as an amended predecessor. One selected notice is associated — Regulatory Notice 10-49.

FINRA Rule 11112 sits within the 11000 Uniform Practice Code as the third and final rule of the governance cluster, immediately following FINRA Rule 11111's refusal-to-abide provision and immediately preceding FINRA Rule 11120's definitions framework.

Panel Decisions as Committee Decisions: The Operational Necessity

FINRA Rule 11112's first sentence establishes the foundational principle that a decision of the UPC Committee may be rendered by a panel of that Committee — meaning a properly constituted panel's decision is, for all purposes under the UPC Code and other FINRA rules permitting UPC Committee review, treated as a decision of the Committee itself.

This is not a delegation of lesser authority to a subordinate body; it is an operational mechanism for the Committee to exercise its full authority through smaller constituent groups.

The operational necessity underlying this mechanism is straightforward. The UPC Committee, as a body designated by the Board of Governors under FINRA Rule 11110, may have a membership too large to convene in its entirety for every interpretive question, good delivery dispute, or clearly erroneous transaction review that arises across the entire securities industry.

Operational questions under the Uniform Practice Code — whether a specific delivery satisfies good delivery standards, whether a specific transaction price should be treated as clearly erroneous under FINRA Rule 11894 — often require prompt resolution, since the underlying transactions and settlement obligations cannot remain in limbo indefinitely while a full Committee convenes. A panel mechanism allows the Committee's authority to be exercised by smaller groups operating in parallel, dramatically increasing the Committee's effective capacity to resolve the volume of operational questions the Uniform Practice Code framework generates.

The for purposes of the UPC Code and other FINRA rules that permit review of FINRA decisions by the UPC Committee framing confirms that this panel mechanism applies across the entire scope of UPC Committee authority — both the interpretive and ruling authority FINRA Rule 11110 establishes directly under the UPC Code itself, and the review authority that FINRA rules confer on the UPC Committee over FINRA decisions — such as FINRA Rule 11894's clearly erroneous transactions review framework, which sits within the Uniform Practice Code's own numbering — together with any such authority that other FINRA rules outside that numbering may confer.

The Minimum Size Requirement: Three or More Members

FINRA Rule 11112's second sentence establishes that the panel shall consist of three or more members of the UPC Committee. This minimum size requirement ensures that panel decisions are not rendered by a single individual or even a pair of individuals, but reflect the collective judgment of at least three Committee members.

The three-or-more formulation establishes a floor, not a ceiling — a panel could in principle consist of more than three members, and the rule's text does not specify any maximum panel size. This flexibility allows the Committee's governing processes to scale panel size according to the significance or complexity of the specific matter at hand — routine operational questions might be addressed by panels at or near the three-member minimum, while more significant or precedent-setting questions might be addressed by larger panels drawing on broader Committee expertise.

The odd-numbered minimum of three is also notable from a decision-making perspective — a three-member panel cannot deadlock on a binary question in the way a two-member panel could, ensuring that a panel at the three-member minimum can always reach a majority on such a question — although, because the rule sets no maximum, a panel with an even number of members, such as four, could still divide equally.

The Market Making Composition Safeguard: No More Than 50 Percent

FINRA Rule 11112's second sentence also establishes a critical composition safeguard — no more than 50 percent of the members of any panel are directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues.

This safeguard addresses a specific conflict-of-interest concern inherent in the kinds of questions the UPC Committee resolves. Many Uniform Practice Code questions — particularly clearly erroneous transactions determinations under FINRA Rules 11890 through 11894 — directly implicate the interests of market makers. A clearly erroneous transaction determination, for example, addresses whether a trade executed at a specific price should be adjusted or busted — a determination with direct financial consequences for the market makers whose quotes and executions are at issue. If panels deciding such questions could be composed predominantly or entirely of individuals who are themselves directly engaged in market making activity, or who are employed by firms with substantial market making revenue, there would be a legitimate concern that panel decisions could be systematically influenced by the panelists' own institutional perspectives and interests as market participants on one side of the very transactions being reviewed.

FINRA Rule 11112's 50 percent ceiling addresses this concern by ensuring that market-making-affiliated individuals can never constitute a majority of any panel. Even if a panel's composition includes individuals directly engaged in market making activity or employed by firms with substantial market making revenue — bringing valuable operational expertise to the panel's deliberations — those individuals can never outnumber panel members without that affiliation, ensuring that panelists whose perspective is not shaped by direct market making interests in the specific questions the panel addresses always make up at least half of the panel, and a majority of any panel with an odd number of members.

The two prongs of this safeguard — directly engaged in market making activity, addressing individuals personally, and employed by a member whose revenues from market making activity exceed ten percent of its total revenues, addressing individuals through their employer's institutional profile — together capture both direct personal involvement in market making and institutional affiliation with firms for which market making represents a significant business line. The ten percent of total revenues threshold for the institutional prong establishes a quantifiable standard for when an employer's market making activity becomes significant enough to trigger the safeguard — a firm whose market making revenue is a negligible fraction of its total revenue would not trigger this prong, while a firm for which market making represents more than ten percent of total revenue would.

FINRA Rule 11112 in the Context of Clearly Erroneous Transactions

While FINRA Rule 11112's panel mechanism applies generally across the UPC Committee's authority, its practical significance is most apparent in the clearly erroneous transactions context governed by FINRA Rules 11890 through 11894. Clearly erroneous transaction determinations frequently arise during periods of extreme market volatility — flash crashes, technological malfunctions, or other disruptive events that can generate large numbers of potentially erroneous transactions across many securities within a very short time window. The volume and time-sensitivity of clearly erroneous transaction reviews during such events make the panel mechanism particularly valuable — multiple panels, each satisfying FINRA Rule 11112's three-member minimum and market-making composition safeguard, can operate in parallel to address the volume of review requests that a major market disruption event might generate, while FINRA Rule 11111 ensures that whatever determination each panel reaches carries the same binding force as a decision of the full UPC Committee.

The 2010 Adoption in Context

FINRA Rule 11112's identification as Adopted by SR-FINRA-2010-030 — rather than Amended, as FINRA Rules 11110 and 11111 are described — is itself a meaningful data point about the Uniform Practice Code's evolution through the Consolidated FINRA Rulebook transfer. FINRA Rules 11110 and 11111 carry forward governance concepts that existed in the predecessor NASD framework — the Committee concept dating to 1968 for FINRA Rule 11110, and the just-and-equitable-principles enforcement mechanism for FINRA Rule 11111. FINRA Rule 11112's panel mechanism, by contrast, was adopted as a new rule in the Consolidated FINRA Rulebook in December 2010, but a panel process was not new to the framework: Regulatory Notice 10-49 records that the predecessor NASD rules included IM-11890-2 (Review by Panels of the UPC Committee), and it describes FINRA Rules 11111 and 11112 as consolidating and clarifying the scope of reviews by the UPC Committee.

This 2010 timing is notable in the broader regulatory context — 2010 was a period of heightened regulatory attention to market structure issues following the May 2010 Flash Crash, an event that brought clearly erroneous transactions and market maker conduct during periods of extreme volatility into sharp regulatory focus. While FINRA Rule 11112's adoption cannot be definitively attributed to Flash Crash-related rulemaking without more specific confirmation, the timing and the rule's direct relevance to clearly erroneous transactions review during volatile market conditions situate it within the broader 2010-era regulatory environment focused on market structure resilience and the integrity of trade execution during disruptive events.

Connection to FINRA Rules 11110, 11111, and 11890 Through 11894

FINRA Rule 11112 connects directly to FINRA Rule 11110 as the source of the UPC Committee's underlying authority that panels exercise on the Committee's behalf. It connects to FINRA Rule 11111 as the enforcement mechanism that gives panel decisions — as decisions of the UPC Committee — the same binding force as decisions of the full Committee, making a member's refusal to effectuate a panel decision an independent FINRA Rule 2010 violation. And it connects most significantly to FINRA Rules 11890 through 11894 — the clearly erroneous transactions framework that represents the most frequent and operationally significant context in which UPC Committee panels, constituted under FINRA Rule 11112's requirements, render the reviewable decisions that FINRA Rule 11894 specifically contemplates.

Counting Members Against the 50 Percent Ceiling

FINRA Rule 11112's composition safeguard counts people, not categories. It asks how many of the members of a panel are directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues. The two descriptions are joined by "or" into one count against one ceiling. A panel member who fits either description is counted, and the total may not be more than 50 percent of the panel.

Consider a seven-member panel. Ms. Reyes and Mr. Chen each make markets personally as part of their jobs. Mr. Adler and Ms. Brandt do no market making themselves, but each is employed by a member whose market making revenues are more than ten percent of its total revenues. The other three members have neither connection. Four of the seven members are counted, and four of seven is more than 50 percent. The panel is not constituted as FINRA Rule 11112 requires, even though neither group taken alone makes up more than half of the panel.

Because the rule counts members, a panel member who fits both descriptions is still one member. Suppose a three-member panel includes Mr. Okafor, who makes markets personally and is employed by a member whose market making revenues are thirty percent of its total revenues. The other two members have no market making connection of either kind. One of the three members is counted, which is within the ceiling. Counting Mr. Okafor once for each description would give two of three and the wrong result.

Applying the Ten Percent Revenue Test

The second description in the safeguard reaches a panel member through his or her employer. The test compares the employing member's revenues from market making activity with that member's total revenues, and it is met only where the first exceeds ten percent of the second.

The word "exceed" settles the boundary. Suppose a panel member does no market making personally and works for a member whose market making revenues are exactly ten percent of its total revenues. Ten percent does not exceed ten percent. That panel member is not counted through the employer, and does not count toward the ceiling at all.

The first description is written in the present tense: members who "are directly engaged in market making activity". Consider a Committee member who ran a market making desk until last year and now works in operations at a member whose market making revenues are five percent of its total revenues. On the rule's wording, that person is not now directly engaged in market making, and the employer does not pass the revenue test. So the person is not counted.

The Limits a Panel Carries With It

A panel renders a decision of the UPC Committee, so it can decide only what the Committee itself could decide. Under FINRA Rule 11110, the Committee's power is to issue interpretations or rulings on how the Code applies to situations in which there is no substantial disagreement as to the facts involved. A panel is bound by the same condition. Suppose one member says it sent a notice to its counterparty on a Tuesday, and the counterparty says no notice ever arrived. The members disagree about what happened. A panel can no more resolve that disagreement by an interpretation or ruling than the full Committee could.

FINRA Rule 11112 decides who may render the Committee's decision. It does not give the Committee anything new to decide. Its first sentence operates "for purposes of" the UPC Code and "other FINRA rules that permit review of FINRA decisions by the UPC Committee". Take a FINRA decision made under a rule that provides for no review by the UPC Committee. FINRA Rule 11112 does not open that decision to review by a panel, because the Committee has no decision to make on it.

The composition safeguard applies to "any panel". It is not confined to panels reviewing clearly erroneous determinations. A panel convened to rule on whether a security tendered is a good delivery must meet the same ceiling as a panel deciding a clearly erroneous appeal. The ceiling is also measured on each panel's own members. How many market-making-affiliated members the Committee as a whole contains does not change the limit for a particular panel.

Panel Size Above the Three-Member Minimum

Every seat on a panel must be filled by a member of the UPC Committee. Suppose two Committee members sit with a FINRA staff attorney who has long experience of clearly erroneous reviews. That group is not a panel of three members of the UPC Committee, however expert the staff attorney is. So it cannot render the Committee's decision under FINRA Rule 11112.

Three is the minimum, not a fixed size, and the rule sets no maximum. A panel at the minimum has an odd number of members. A larger panel need not: a four-member panel is permitted. Such a panel could divide two to two on a yes-or-no question, so the odd minimum avoids an even split only for a panel at the minimum size.

Panel Decisions on Clearly Erroneous Appeals

FINRA Rule 11894, the review rule for clearly erroneous determinations, is part of the FINRA Rule 11000 Series, so it is within the UPC Code as FINRA Rule 11112 defines it. FINRA Rule 11894(e) also carries its own panel provision in the same terms: a decision of the UPC Committee may be rendered by a panel of three or more members of the Committee, with no more than 50 percent of the panel's members directly engaged in market making activity or employed by a member whose market making revenues exceed ten percent of its total revenues. A panel deciding a clearly erroneous appeal therefore meets one set of size and composition requirements.

Under FINRA Rule 11894(c), the decision of the UPC Committee on an appeal is final and binding upon all parties and constitutes final action on the matter in issue. A panel's decision on the appeal is that decision. Suppose a member's appeal is decided against it by a three-member panel, and the member then asks for the full Committee to decide the appeal again. The panel's decision was the Committee's decision on the appeal. It is final and binding and is the final action on the matter. The member's right to take the underlying dispute to arbitration is unaffected, since FINRA Rule 11894(c) makes the Committee's decision without prejudice to that right.

Which Revenues the Ten Percent Test Measures

The employer description in FINRA Rule 11112's safeguard compares two figures, and both belong to the member that employs the panel member: that member's revenues from market making activity, and that member's total revenues. The panel member is counted through the employer only where the first figure exceeds ten percent of the second.

The test is written in revenues, not profits. Suppose Ms. Lindqvist does no market making herself. Her employer, a member, earns eight percent of its total revenues from market making activity, but market making is one of its more profitable lines and produces thirty percent of its profits. Eight percent does not exceed ten percent, so Ms. Lindqvist is not counted. The employer's profits play no part in the test.

The comparison is also with the member's total revenues, not with the revenues of one part of its business. Suppose a member earns forty percent of its trading revenues from market making, but trading is a small part of its business, and its market making revenues are six percent of its total revenues. A panel member employed by that member, who does no market making personally, is not counted. Six percent of total revenues does not exceed ten percent.

The revenues counted are those of the member that employs the panel member. Suppose Mr. Haddad does no market making personally and is employed by a member that earns no revenues from market making. Another member, owned by the same parent company, earns thirty-five percent of its total revenues from market making, but Mr. Haddad is not employed by it. His employer's market making revenues do not exceed ten percent of its total revenues, so he is not counted through the employer description.

If Mr. Haddad were employed by both members, the outcome would change. He would then be employed by a member whose revenues from market making activity exceed ten percent of its total revenues, and he would be counted.

The employer must also be a member. FINRA Rule 0160 defines "member", when used in the FINRA rules and unless the context otherwise requires, as an individual, partnership, corporation or other legal entity admitted to membership in FINRA. Suppose a panel member does no market making personally and is employed by a firm that has not been admitted to FINRA membership, and that firm's revenues from market making activity exceed ten percent of its total revenues. The employer description reaches a person "employed by a member". Because that firm is not a member, the employer description, on its wording, does not count the panel member.

A Panel Need Not Include a Market Maker

FINRA Rule 11112's safeguard is a ceiling. It provides that no more than 50 percent of the members of any panel are directly engaged in market making activity or employed by a member whose revenues from market making activity exceed ten percent of its total revenues. It sets no minimum. Suppose a three-member panel is convened to rule on a question about a "when, as and if issued" contract, and none of its three members fits either description. None of three is within "no more than 50 percent", so the panel meets the composition requirement. A member that disagrees with the ruling cannot object under FINRA Rule 11112 that the panel included no one with a market making connection, because the rule asks for no such member.

The FINRA Officer's Determination and the Panel's Review

Under FINRA Rules 11892 and 11893, the determination to declare a transaction null and void is made by a FINRA officer. FINRA Rules 11892(a)(1) and 11893(a) give the power to declare a transaction null and void to an Executive Vice President of FINRA's Market Regulation Department or Transparency Services Department, or an officer designated by that Executive Vice President. That determination is not a decision of the UPC Committee. FINRA Rule 11112's requirements of three or more Committee members and of the composition ceiling govern a panel rendering a decision of the UPC Committee. Suppose a member's trade is declared null and void by a single FINRA officer, and the member argues that the determination is invalid because no panel of three Committee members made it. The argument fails: FINRA Rule 11112 does not govern who makes the officer's determination. Where FINRA Rule 11894 allows an appeal, the member's course is to appeal the determination to the UPC Committee, and if a panel decides the appeal, that panel must meet both requirements.

A panel can decide an appeal only where an appeal lies. Under FINRA Rule 11893, an officer who declares a transaction in an OTC Equity Security null and void may also determine that the number of the affected transactions is such that immediate finality is necessary to maintain a fair and orderly market and to protect investors and the public interest. The determination then cannot be appealed to the UPC Committee. Suppose a systems malfunction produces several hundred erroneous trades in one OTC Equity Security, and the officer voids them all and makes that further determination. There is then no appeal for the Committee to decide, so there is no appeal decision for a panel to render.

Arbitration and a Panel's Final Decision

FINRA Rule 11894(c) makes the decision of the UPC Committee on an appeal final and binding upon all parties and the final action on the matter in issue. It also provides that the decision is rendered without prejudice as to the rights of the parties to the transaction to submit their dispute to arbitration. A panel's decision on the appeal is the Committee's decision. Suppose a panel affirms the nullification of a member's trade, and the member then submits its dispute with the counterparty to arbitration. The member keeps its right to arbitrate, and the panel's decision remains final and binding upon all parties. Submitting the dispute to arbitration does not turn the decision into one the member may decline to carry out, and FINRA Rule 11111 reaches a member's refusal to take any action that is necessary to effectuate a final decision of the UPC Committee.

A Panel and the Committee's Powers Under Other Code Rules

Several rules of the Uniform Practice Code give a power to "the Committee" in their own terms. FINRA Rule 11120(b) defines "Committee", as used in the Code and unless the context otherwise requires, as the Uniform Practice Code (UPC) Committee delegated the authority to administer the Code by the Board of Governors. FINRA Rule 11112's first sentence applies for purposes of the UPC Code, which it identifies as the FINRA Rule 11000 Series. So, unless the context otherwise requires, a decision that one of those rules gives to the Committee is a decision of the UPC Committee, and FINRA Rule 11112 allows it to be rendered by a panel of that Committee.

FINRA Rule 11810(g) is an example. Where, before the closing of a contract on which a buy-in notice has been given, the buyer receives written or comparable electronic notice from the seller that the securities are in transit, or in one of the other conditions the rule lists, the buyer must extend the execution date of the buy-in for seven calendar days from the date delivery was due under the buy-in. Upon request of the seller, an additional extension of seven calendar days may be granted by the Committee due to the circumstances involved.

Suppose a buyer, after the seller's notice that the securities are in transit, has extended the execution date of a buy-in for seven calendar days from the date delivery was due under the buy-in, and the securities have still not arrived. The seller asks for an additional extension. A properly constituted panel of three members of the UPC Committee grants an additional extension of seven calendar days. The buyer argues that FINRA Rule 11810(g) gives that power to "the Committee", so that only the full Committee could grant it. The argument fails. The extension is a decision of the UPC Committee under the Code, and under FINRA Rule 11112 a panel of that Committee may render it.

Examination Relevance and Key Takeaways

FINRA Rule 11112 is tested on the Series 7 and Series 24 examinations as the panel mechanism rule for the UPC Committee — establishing both the operational vehicle through which the Committee renders decisions and the market-making composition safeguard that protects against conflicts of interest in panel decisions.

The key points to retain are these: FINRA Rule 11112 establishes that a decision of the UPC Committee may be rendered by a panel of that Committee, for purposes of both the UPC Code itself — including the UPC Committee's review of FINRA decisions under FINRA Rule 11894 — and other FINRA rules that permit UPC Committee review of FINRA decisions; a panel decision carries the same authoritative and binding force as a decision of the full Committee, including FINRA Rule 11111's enforcement consequences for non-compliance; each panel must consist of three or more members of the UPC Committee — a floor with no specified maximum; no more than 50 percent of any panel's members may be directly engaged in market making activity or employed by a member whose market making revenue exceeds ten percent of its total revenues — a composition safeguard preventing market-making-affiliated individuals from constituting a panel majority; this safeguard is particularly significant in the clearly erroneous transactions context under FINRA Rules 11890 through 11894, where panel determinations directly affect market makers' executed trades; FINRA Rule 11112 was adopted — not merely amended — by SR-FINRA-2010-030 effective December 15, 2010, indicating that FINRA Rule 11112 entered the Consolidated FINRA Rulebook's Uniform Practice Code framework as a new rule rather than as an amended predecessor; and one selected notice is associated — Regulatory Notice 10-49.