Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 11130 is the comprehensive operational framework governing one of the Uniform Practice Code's most distinctive transaction types — contracts for securities that do not yet exist in issued or distributed form at the time the contract is made, with settlement contingent on the future issuance or distribution actually occurring as contemplated.
The rule operates through eight lettered paragraphs, each addressing a distinct dimension of how these contingent contracts must be documented, priced, margined, secured, segregated, settled, and potentially canceled.
Paragraph (a) establishes confirmation and comparison requirements, including the mandatory use of the Standard Form contracts set forth in Supplementary Material .01. Paragraph (b) establishes the accrued interest treatment for when, as and if issued or distributed transactions in securities of new or reorganized companies. Paragraph (c) establishes the mark-to-market requirement under FINRA Rule 11730 given the indefinite and potentially long-delayed timing of issuance or distribution. Paragraph (d) requires compliance with Regulation T Sections 220.4 and 220.5.
Paragraph (e) permits members to require customer deposits even where Regulation T Section 220.8(b)(1) would not otherwise require one. Paragraph (f) establishes segregation requirements for deposits held against these contracts. Paragraph (g) establishes the settlement framework, including the UPC Committee's authority to declare settlement and delivery dates and the default delivery mechanisms when the Committee declares none. Paragraph (h) establishes the cancellation framework, distinguishing material changes that generally result in cancellation from non-material changes that generally do not.
FINRA Rule 11130 was last amended by SR-FINRA-2010-030 effective December 15, 2010, with prior amendments effective February 9, 1968, March 1, 1970, and SR-NASD-91-66 effective November 2, 1992. Two selected notices are associated — 92-51 and 10-49.
FINRA Rule 11130 sits within the 11100 Scope of Uniform Practice Code subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11121's trade date framework and immediately preceding FINRA Rule 11140's ex-dividend, ex-rights, and ex-warrants framework.
A when, as and if issued or when, as and if distributed contract is a contract for the purchase or sale of a security that does not yet exist in its contemplated form at the time the contract is made — the security will come into existence, if at all, only upon the occurrence of some future corporate or governmental action: the issuance of new securities pursuant to a plan of reorganization, recapitalization, merger, or similar corporate action, or the distribution of securities pursuant to such a plan to existing security holders.
The contract's very name signals its contingent character — the parties are contracting for a security when it is issued, as it is issued (meaning on the terms as actually issued), and if it is issued at all.
This contingent character distinguishes when, as and if issued/distributed contracts from every other transaction type the Uniform Practice Code addresses. An ordinary securities transaction involves a security that already exists, with a known CUSIP number, known terms, and an established trading market — the only open questions are price, quantity, and settlement logistics.
A when, as and if issued/distributed contract involves a security whose existence, precise terms, and timing of availability are all still subject to the successful completion of whatever corporate action is contemplated — the plan of reorganization may be modified before completion, may be delayed indefinitely, or may fail entirely. FINRA Rule 11130's eight paragraphs collectively address how the Uniform Practice Code framework accommodates trading in securities under these conditions of fundamental uncertainty.
FINRA Rule 11130(a) establishes the documentary foundation for when, as and if issued/distributed transactions. Paragraph (a)(1) requires each party to send a written confirmation or comparison in the same form as the Sample Form appearing in Supplementary Material .01, pursuant to the requirements of FINRA Rules 11210(a), 11220, and 11860.
This mandatory standard-form requirement is distinctive — for most transaction types under the Uniform Practice Code, FINRA Rules 11210 and 11220 establish general confirmation content requirements without mandating a specific standardized form; for when, as and if issued/distributed transactions, by contrast, FINRA Rule 11130(a)(1) requires the use of the specific Standard Form set forth in Supplementary Material .01 — reflecting the heightened need for uniformity given the contingent and potentially disputed nature of these contracts.
Paragraph (a)(2) establishes three minimum content requirements for every confirmation or comparison covering a when, as and if issued/distributed security. The first — an adequate description of the security and the plan, if any, under which the security is proposed to be issued or distributed — ensures that both parties to the contract have a documented understanding of precisely what security and what underlying corporate plan the contract contemplates, which becomes critical if the actually-issued security differs from what was originally contemplated, triggering the FINRA Rule 11130(h) cancellation analysis.
The second — designation of FINRA as the authority which shall rule upon the performance of the contract — establishes FINRA's interpretive jurisdiction over disputes regarding the contract's performance, consistent with the UPC Committee's general interpretive authority under FINRA Rule 11110. The third — provision for marking the contract to the market — incorporates the FINRA Rule 11130(c) mark-to-market requirement directly into the confirmation's terms, ensuring both parties have contractually agreed to this mechanism from the outset.
Paragraph (a)(3) establishes a Committee information service — the Committee will furnish, upon written request, an adequate description of any particular issue of securities and of the plan under which the securities are proposed to be issued, for inclusion in all contracts or confirmations covering transactions in the particular securities.
This provision gives market participants a centralized, authoritative source for the FINRA Rule 11130(a)(2)(A) description requirement — rather than each member independently formulating its own description of a complex reorganization plan and risking inconsistent descriptions across different contracts for the same underlying securities, members can request the Committee's standardized description and incorporate it uniformly.
FINRA Rule 11130(b) addresses the accrued interest treatment for when, as and if issued/distributed transactions in fixed-income and related securities of new or reorganized companies — a category of security particularly likely to arise from the bankruptcy reorganizations and recapitalizations that commonly underlie when, as and if issued/distributed contracts.
Paragraph (b)(1) establishes the default rule for fixed obligations — unless the parties agree otherwise, such transactions shall be and accrued interest to date of settlement, with interest computed on the basis of the expired portion of the coupon current at the time of settlement, and all due and past due coupons detached. This and accrued interest treatment mirrors the standard treatment for ordinary bond transactions — the buyer compensates the seller for interest that has accrued but not yet been paid as of the trade, with that accrued interest computed based on the coupon rate in effect at settlement and with any coupons that have already matured (due and past due coupons) detached from the security before delivery, since those coupons represent payments the seller — not the buyer — is entitled to collect.
Paragraph (b)(2) addresses a more specialized category — income or contingent interest securities, whose interest or distribution payments depend on the issuer's earnings or other contingencies rather than being fixed obligations. For these securities, transactions shall be traded flat — meaning without separately accounting for accrued interest — and shall carry all payments made or declared from the effective date of the plan, subject to an ex-date exception: if a payment is made or declared before settlement date, transactions made on and after the ex-date for that payment carry only payments from that ex-date forward. This framework applies the FINRA Rule 11120(d) ex-date concept and FINRA Rule 11160's ex liquidating payments framework to the specific context of income and contingent interest securities arising from reorganizations.
Paragraph (b)(3) addresses a hybrid category — securities bearing a fixed rate of interest plus contingent additional payment — establishing that these securities are traded and accrued interest at the rate of the fixed interest, consistent with paragraph (b)(1)'s treatment of fixed obligations, while being traded flat with respect to the contingent payments, consistent with paragraph (b)(2)'s treatment of contingent interest securities. This hybrid treatment ensures that each component of a security's return — the fixed portion and the contingent portion — receives the accrued-interest treatment appropriate to its own character, rather than forcing the entire security into either the fixed-obligation or contingent-interest framework wholesale.
FINRA Rule 11130(c) establishes the rationale and cross-reference for the mark-to-market requirement that FINRA Rule 11130(a)(2)(C) incorporates into every when, as and if issued/distributed confirmation. The provision states the underlying problem directly — the time of issuance or distribution of the securities is indefinite and may be long delayed — and identifies the solution: such contracts should be marked to the market pursuant to the provisions of FINRA Rule 11730.
The mark-to-market mechanism addresses a fundamental risk inherent in any contract whose performance may be long delayed — the risk that the market value of the underlying security will diverge substantially from the contract price during the period before settlement, creating a growing unrealized gain for one party and a corresponding growing unrealized loss for the other, with the magnitude of that gain or loss representing the counterparty credit risk each party bears with respect to the other's eventual performance. By requiring periodic marks to the market under FINRA Rule 11730 — discussed in that rule's own entry within the FINRA Rule 11700 Reclamations and Rejections subsection — the parties periodically true up the contract's value to reflect current market conditions, limiting the accumulation of unrealized exposure over what may be an extended and uncertain period before the contemplated issuance or distribution actually occurs.
FINRA Rule 11130(d) requires that all when, as and if issued/distributed contracts comply with Sections 220.4 and 220.5 of the Federal Reserve Board's Regulation T — the federal regulation governing credit extended by broker-dealers in connection with securities transactions. This cross-reference ensures that the margin and credit extension rules applicable to ordinary securities transactions under Regulation T apply with equal force to when, as and if issued/distributed contracts, notwithstanding their contingent character.
FINRA Rule 11130(e) addresses a specific interaction with Regulation T Section 220.8(b)(1) — a member may require a customer to deposit cash or collateral to secure a when, as and if issued/distributed contract even though Section 220.8(b)(1) of Regulation T may not require such a deposit. This provision clarifies that Regulation T's deposit requirements establish a floor, not a ceiling — even where the specific Regulation T provision governing cash accounts under Section 220.8(b)(1) might not itself mandate a deposit for a given when, as and if issued/distributed contract, FINRA Rule 11130(e) confirms that the member retains independent authority to require one as a matter of its own risk management, given the extended and uncertain timeline these contracts present.
FINRA Rule 11130(f) establishes a two-part segregation framework for deposits held against when, as and if issued/distributed contracts. Paragraph (f)(1) establishes the principle — such deposits should be segregated on the books of the member to present a true picture of the member's position and commitment in transactions of this kind, with the suggestion that physical segregation in a separate bank from the member's general deposits, loans, or other obligations may be appropriate. The paragraph concludes with an absolute prohibition — whether or not physical segregation is made, no member should permit any part of such deposits to be used for any purpose whatsoever other than to secure such contracts.
Paragraph (f)(2) establishes a minimum quantitative standard — every member doing business in when, as and if issued/distributed securities shall ensure that the sum of cash balances and deposits with banks, clearing houses, or other brokers against such contracts always exceeds the aggregate of all free credits and deposits against such contracts by an amount fully ample to conduct its business without employing any part of such deposits. This requirement establishes a buffer principle — the member's holdings specifically attributable to when, as and if issued/distributed business must exceed its corresponding obligations by a margin sufficient that the member never needs to dip into customer-related deposits to fund its own operations, reinforcing paragraph (f)(1)'s absolute prohibition on using such deposits for any purpose other than securing the contracts themselves.
FINRA Rule 11130(g) establishes the settlement date and delivery mechanics for when, as and if issued/distributed contracts — mechanics that must accommodate the fundamental uncertainty about when, or whether, the underlying issuance or distribution will actually occur.
Paragraph (g)(1) vests the UPC Committee with authority to determine the settlement date — a date for settlement shall be determined by the Committee when a sufficient percentage of the issue is outstanding. This Committee-determination approach reflects the practical reality that settlement cannot sensibly occur until the contemplated securities actually exist in sufficient quantity to be delivered — the Committee monitors the issuance or distribution process and declares a settlement date once a sufficient percentage of the issue is outstanding, providing a centralized, uniform settlement date for all outstanding contracts in the particular security rather than leaving each bilateral pair of counterparties to negotiate settlement timing independently.
Paragraphs (g)(2) and (g)(3) establish default delivery mechanisms for the scenario where the Committee has not declared a delivery date. For when, as and if issued securities under paragraph (g)(2), if no delivery date is declared, the seller may deliver on the business day following delivery of written notice of intention to deliver at the purchaser's office — and a special rule applies to open market when, as and if issued contracts in securities currently being publicly offered through a syndicate or selling group, which shall be settled on the date such syndicate or selling group contracts are settled, with delivery during normal delivery hours in the buyer's community. For when, as and if distributed securities under paragraph (g)(3), the same notice-and-following-business-day mechanism applies without the syndicate-specific provision, reflecting that distributed securities — typically distributed to existing holders pursuant to a reorganization plan rather than offered through a new underwriting syndicate — do not present the same syndicate settlement timing consideration.
FINRA Rule 11130(h) establishes the framework governing when a when, as and if issued/distributed contract is canceled — addressing the contract's if contingency directly. Paragraph (h)(1) confirms the UPC Committee's cancellation authority under FINRA Rule 11110 — the Committee may cancel or terminate such contracts as necessary to resolve conflicts over their settlement.
Paragraph (h)(2) establishes the most fundamental cancellation trigger — contracts will be canceled if the securities are not to be issued or distributed at all. If the underlying plan of reorganization, recapitalization, or distribution fails entirely — the if in when, as and if issued/distributed never occurs — every outstanding contract for the contemplated securities is canceled, since there is nothing left for the contract to settle into.
Paragraph (h)(3) addresses the more nuanced scenario where issuance or distribution does occur, but on different terms than originally contemplated — contracts will generally be canceled if the securities which are to be issued or distributed are not substantially the same as those contemplated in the contract, with material changes generally resulting in cancellation including, but not limited to, changes to the redemption schedule, dividend payments, interest rates, maturity, yield, and exercise price. This enumerated list identifies the categories of terms whose alteration strikes at the economic substance of the security itself — a bond contracted for at one interest rate and maturity is, economically, a substantially different instrument if issued with a different interest rate and maturity, regardless of how similar the two instruments might appear in other respects.
Paragraph (h)(4) provides the converse — notwithstanding paragraph (h)(3), contracts will not generally be canceled as a result of changes that do not constitute material changes, with the enumerated examples of non-material changes including changes in the dollar value of securities to be issued or distributed, restructuring of financing arrangements previously announced by the issuer, or the settlement of any legal action or occurrence of any other event having a material effect on the issuer's financial condition. This paragraph's examples are notable for what they reveal about the boundary between material and non-material change for purposes of FINRA Rule 11130(h) — changes to the issuer's overall financial condition, even material changes to that financial condition, do not themselves constitute the kind of change to the terms of the security called for under the contract that triggers cancellation under paragraph (h)(3). The cancellation analysis under FINRA Rule 11130(h) focuses specifically on whether the security itself — its redemption schedule, dividend payments, interest rate, maturity, yield, and exercise price — remains substantially the same as contemplated, not on whether the issuing company's broader financial circumstances have changed.
Supplementary Material .01 sets forth the two Standard Forms of when, as and if issued/distributed contract that FINRA Rule 11130(a)(1) requires members to use.
The first form — for use by dealers and brokers in confirming transactions with other dealers and brokers — is structured as an inter-dealer confirmation identifying the firm, the counterparty, the date, quantity, description of security, and price. Its operative text establishes that the contract is governed either by the requirements of the national securities exchange on which it was made, or — if made elsewhere than on a national securities exchange — by the requirements of FINRA, its By-Laws, Rules, Uniform Practice Code, and interpretations thereof as amended from time to time. The form further provides that the contract shall be settled and paid for at such time, place, and manner, and by delivery of such securities or other property, as the exchange or association in its sole discretion may determine — or shall be canceled and become null and void if that exchange or association determines in its sole discretion that the securities to be issued or distributed are not substantially the same as those contemplated — directly tracking FINRA Rule 11130(h)(3)'s cancellation standard. The form also confirms each party's right to call for a mark to the market during the contract's pendency, with the non-defaulting party entitled to close the contract upon the other party's failure to comply — directly tracking FINRA Rule 11130(c)'s mark-to-market requirement.
The second form — for use by a dealer acting as principal and its customer, covering transactions on a principal basis — is structured as a direct agreement in which the dealer states it has sold to or purchased from the customer a specified quantity at a specified price, with the securities payable and deliverable when, as and if issued or distributed, or the contract cancelable, in accordance with FINRA's By-Laws, Rules, Uniform Practice Code, and interpretations and amendments thereof. This form includes the dealer's right to demand deposits according to such requirements, with the right to close the contract upon the customer's failure to comply — directly implementing FINRA Rule 11130(e)'s deposit authority — and includes signature lines for the firm and for the customer's acceptance.
FINRA Rule 11130 connects to FINRA Rule 11110 as the source of the UPC Committee's cancellation authority invoked in FINRA Rule 11130(h)(1) and its general interpretive authority underlying the Committee's settlement date determinations under FINRA Rule 11130(g)(1). It connects to FINRA Rule 11120 — whose ex-date definition under paragraph (d) underlies the ex-date exception in FINRA Rule 11130(b)(2). It connects to FINRA Rule 11160's ex liquidating payments framework as the broader context for FINRA Rule 11130(b)(2)'s treatment of income and contingent interest securities. It connects to FINRA Rules 11210 and 11220 — whose general confirmation requirements FINRA Rule 11130(a)(1) incorporates alongside the mandatory Standard Form requirement. It connects to FINRA Rule 11730 — the mark-to-market provision that FINRA Rule 11130(c) specifically invokes for these contracts' indefinite-timing risk. And it connects to FINRA Rule 11860 — whose requirements FINRA Rule 11130(a)(1) also incorporates into the confirmation and comparison framework for these contracts.
FINRA Rule 11130 is tested on the Series 7 and Series 24 examinations as the comprehensive framework for when, as and if issued and when, as and if distributed contracts — securities contracts contingent on a future issuance or distribution that may be delayed, modified, or never occur.
The key points to retain are these: FINRA Rule 11130(a) requires confirmations and comparisons in the Standard Form set forth in Supplementary Material .01, containing at minimum an adequate description of the security and underlying plan, designation of FINRA as the ruling authority, and provision for marking to the market, with the Committee available to furnish standardized security descriptions on written request; FINRA Rule 11130(b) establishes accrued interest treatment — fixed obligations trade and accrued interest to settlement date with due and past due coupons detached unless parties agree otherwise, income or contingent interest securities trade flat carrying payments from the plan's effective date subject to an ex-date exception, and hybrid fixed-plus-contingent securities are split between the two treatments; FINRA Rule 11130(c) requires marks to the market under FINRA Rule 11730 given the indefinite and potentially long-delayed timing of issuance or distribution; FINRA Rule 11130(d) requires Regulation T Sections 220.4 and 220.5 compliance; FINRA Rule 11130(e) permits members to require deposits even where Regulation T Section 220.8(b)(1) would not otherwise require one; FINRA Rule 11130(f) requires segregation of deposits against these contracts with an absolute prohibition on using such deposits for any other purpose, and a minimum buffer ensuring member holdings always exceed corresponding free credits and deposits; FINRA Rule 11130(g) vests the UPC Committee with authority to determine settlement dates once a sufficient percentage of the issue is outstanding, with default notice-based delivery mechanisms — including a syndicate-settlement-date rule for open market when, as and if issued contracts — where the Committee declares no date; FINRA Rule 11130(h) provides for cancellation where the securities are not to be issued or distributed at all, or where issued or distributed securities are not substantially the same as contemplated due to material changes such as redemption schedule, dividend payments, interest rates, maturity, yield, or exercise price changes — while changes in dollar value, financing restructuring, or legal action settlements affecting the issuer's financial condition generally do not trigger cancellation; Supplementary Material .01 provides the two Standard Forms — inter-dealer and dealer-customer — incorporating these substantive requirements directly into their text; and the rule was last amended December 15, 2010 through SR-FINRA-2010-030, with prior amendments effective 1968, 1970, and November 2, 1992 through SR-NASD-91-66, and two selected notices — 92-51 and 10-49.
