FINRA Rule 11363

FINRA Rule 11363 was added effective March 18, 1983 and amended by SR-FINRA-2010-030 effective December 15, 2010 — no amendments have occurred since 2010. Two selected notices are associated — 83-69 and 10-49.

FINRA Rule 11363 sits within the 11300 Delivery of Securities subsection of the 11000 Uniform Practice Code as the third of the five security-type-specific units of delivery rules, immediately following FINRA Rule 11362's units of delivery framework for bonds and immediately preceding FINRA Rule 11364's units of delivery framework for certificates of deposit for bonds.

Why Unit Investment Trust Securities Require Only a Single-Sentence Rule

FINRA Rule 11363's brevity — a single sentence, in stark contrast to FINRA Rule 11361's four numbered subparagraphs for stocks or FINRA Rule 11362's four lettered paragraphs for bonds — reflects a fundamental structural difference between unit investment trust securities and the stock and bond instruments those preceding rules address.

As this dictionary's earlier entries on FINRA Rule 11100(a)(4) and FINRA Rule 11220 discussed, a unit investment trust is a registered investment company whose interests are denominated in units — the very name unit investment trust reflects that the trust's interests are structured from the outset as discrete units, each representing an undivided fractional interest in the trust's underlying portfolio. 

This is fundamentally different from stocks, where the 100-share round lot is a market convention layered on top of shares that are themselves freely divisible and aggregable in any quantity, or from bonds, where the $1,000/$100 denomination framework reflects historical certificate-printing conventions for instruments whose underlying principal amounts could in principle be any figure.

For unit investment trust securities, the unit itself is the security's native, indivisible building block — there is no analogous question of how to subdivide or aggregate units into different certificate denominations, because the unit is not a denomination convention imposed on top of some other underlying measure; it is the fundamental measure of the security itself. FINRA Rule 11363 therefore needs only to establish the floor — the minimum unit of delivery — and that floor is simply a single unit of the trust, the smallest indivisible piece of the security that can exist.

The Minimum Unit Formulation and Its Implications

FINRA Rule 11363's minimum unit of delivery formulation establishes a floor without establishing a ceiling or any intermediate framework — the rule does not address what happens for deliveries of multiple units (presumably any whole number of units may be delivered, since the rule imposes no upper constraint), nor does it address fractional units (the minimum unit formulation, by establishing a single unit as the minimum, implicitly forecloses delivery of any quantity smaller than a single whole unit).

This implicit foreclosure of fractional-unit delivery is significant. While a unit investment trust security might, in certain contexts — such as within a customer's account records, or in connection with the payment options that FINRA Rule 11220 specifically requires comparisons and confirmations to address for unit investment trust series — be tracked or held in fractional-unit amounts, FINRA Rule 11363 establishes that delivery between members, for purposes of the Uniform Practice Code's delivery framework, cannot occur in amounts smaller than a single whole unit. A contract for a fractional-unit amount of a unit investment trust security would, by virtue of FINRA Rule 11363's minimum unit standard, present a units-of-delivery question that the rule's single sentence does not directly resolve — though the broader Uniform Practice Code framework, including FINRA Rule 11100(b)'s layered scope architecture and the general interpretive authority of the UPC Committee under FINRA Rule 11110, would presumably provide the mechanism for addressing any such edge case.

The 1983 Addition in Context

FINRA Rule 11363's amendment history — added effective March 18, 1983, with no prior amendment dates listed, followed by the December 15, 2010 Consolidated Rulebook transfer through SR-FINRA-2010-030 — places this rule's origin notably later than FINRA Rules 11361 and 11362, both of which trace their core frameworks to 1968. The added formulation — as distinguished from amended, the formulation used for FINRA Rules 11361 and 11362's 1968-era provisions — confirms that FINRA Rule 11363 represents a genuinely new addition to the Uniform Practice Code's units of delivery framework in 1983, rather than a 1968-era provision that was subsequently amended.

This 1983 timing aligns with this dictionary's broader observations regarding the regulatory attention given to unit investment trust securities during the early 1980s — Notice to Members 83-69, one of FINRA Rule 11363's two selected notices, is the same notice this dictionary has encountered in connection with FINRA Rule 11100's and FINRA Rule 11140's amendment histories, both also amended effective March 18, 1983. This shared 1983 amendment wave, reflected across multiple Uniform Practice Code provisions including FINRA Rule 11363's addition, suggests a coordinated 1983 rulemaking initiative that addressed multiple aspects of the Uniform Practice Code's treatment of unit investment trust securities and related matters simultaneously — consistent with FINRA Rule 11100(a)(4)'s carve-back of unit investment trust secondary market transactions into Uniform Practice Code coverage, which this dictionary's earlier entry on FINRA Rule 11100 did not specifically date but which may well trace to this same 1983 regulatory initiative given the shared Notice to Members 83-69 reference.

FINRA Rule 11363 in the Context of the Broader Units of Delivery Cluster

FINRA Rule 11363's position within the units of delivery cluster — third of five, following the stock and bond frameworks of FINRA Rules 11361 and 11362 and preceding the certificates of deposit for bonds and units-or-bonds-with-stock frameworks of FINRA Rules 11364 and 11365 — places it as something of a structural outlier within the cluster, precisely because of the brevity this entry has discussed. Where FINRA Rules 11361 and 11362 each had to construct denomination conventions from underlying instruments (shares, bond principal amounts) that do not inherently come pre-divided into standard units, FINRA Rule 11363 addresses a security type that arrives, by its very design, already divided into the units the rule's title references.

This structural difference does not diminish FINRA Rule 11363's regulatory significance — the rule still performs the same fundamental function within the units of delivery cluster as its neighbors, establishing the standardized quantity framework that determines what constitutes a valid delivery for the security type it addresses, and that FINRA Rule 11350's part-delivery framework would draw upon if a part-delivery question arose specifically in the context of unit investment trust securities. It simply performs this function with maximal economy, because the security type's own inherent structure does most of the work that FINRA Rules 11361 and 11362 had to accomplish through more elaborate denomination conventions.

Connection to FINRA Rules 11100, 11110, 11140, 11220, 11350, 11361, 11362, 11364, and 11365

FINRA Rule 11363 connects to FINRA Rule 11100(a)(4) — whose carve-back of unit investment trust secondary market transactions between members into Uniform Practice Code coverage is the foundational scope provision that makes FINRA Rule 11363's units of delivery framework for such securities relevant in the first place. It connects to FINRA Rule 11110's general UPC Committee interpretive authority, which would be available to address any edge cases — such as fractional-unit questions — that FINRA Rule 11363's single-sentence minimum unit standard does not directly resolve. It connects to FINRA Rule 11140 and the shared March 18, 1983 effective date and Notice to Members 83-69 reference, suggesting a coordinated 1983 regulatory initiative addressing unit investment trust securities across multiple Uniform Practice Code provisions. It connects to FINRA Rule 11220's specific requirement that comparisons and confirmations for unit investment trust securities include payment options — a requirement that operates alongside, but addresses a different dimension than, FINRA Rule 11363's units of delivery standard. It connects to FINRA Rule 11350's part-delivery framework, which would draw upon FINRA Rule 11363's minimum unit of delivery standard if a part-delivery question arose for unit investment trust securities specifically. And it connects to FINRA Rules 11361, 11362, 11364, and 11365 as fellow members of the units of delivery cluster, sharing the cluster's common function of establishing standardized delivery quantities while differing substantially in the structural complexity each security type's framework requires.

Applying the Single-Unit Minimum

FINRA Rule 11363 states one requirement: the minimum unit of delivery for Unit Investment Trust Securities shall be a single unit of the trust. Suppose two members trade a single unit of a trust. The contract calls for exactly the minimum, and a delivery of that one whole unit meets the rule.

The rule's single sentence fixes that floor and nothing more. Other rules of the Uniform Practice Code decide which trades in trust units the floor governs, how those trades are confirmed and settled, and what follows when units are not delivered. The sections below apply those rules to trades in unit investment trust securities.

Which Trades in Trust Units the Unit Standard Reaches

FINRA Rule 11100(a)(4) excludes from the Uniform Practice Code transactions in redeemable securities issued by companies registered under the Investment Company Act. It then provides that the Code shall apply to secondary market transactions between members in any security issued by a registered investment company classified as a unit investment trust under Section 4 of the Investment Company Act. The same paragraph adds that redemption of securities directly by the trustee of the unit investment trust is not a transaction between members for its purposes.

Suppose a member holds 500 units of a trust. It sells 200 of them to another member in the secondary market and tenders the other 300 to the trust's trustee for redemption. The sale to the other member is a secondary market transaction between members, so the Code, including FINRA Rule 11363's minimum unit of delivery, applies to it. The redemption directly by the trustee is, in the paragraph's words, not a transaction between members, so the carve-back does not bring it into the Code.

A second exclusion also matters. FINRA Rule 11100(a)(1) excludes transactions in securities between members which are compared, cleared or settled through the facilities of a registered clearing agency, except to the extent that the rules of the clearing agency provide that rules of other organizations shall apply. So where two members' trade in trust units is compared, cleared and settled through a registered clearing agency, the Code, and FINRA Rule 11363 with it, reaches the trade only to the extent the clearing agency's rules provide that other organizations' rules apply. Where the two members compare and settle the trade directly between themselves, that exclusion does not arise. The scenarios in the sections below assume a trade compared and settled directly between two members.

Confirming a Trade in Trust Units

FINRA Rule 11210(a)(1) requires each party to a transaction to send a Uniform Comparison or Confirmation of the transaction by the end of the day on the trade date. Suppose Member A sells 150 units of a trust to Member B on a Tuesday. Each of them must send its comparison or confirmation by the end of that Tuesday. A member that plans to send its confirmation the next morning is late.

Under FINRA Rule 11210(a)(2), comparisons or confirmations are compared upon receipt to find out whether any discrepancies exist. If they do, the party in error sends a corrected Uniform Comparison or Confirmation. Suppose A's confirmation shows 150 units and B's shows 1,500 because B's trader keyed the quantity wrongly. B is the party in error, so B sends the corrected confirmation, even if A was the one that noticed the mismatch.

FINRA Rule 11100(d) requires the CUSIP number to be used on the Uniform Transfer Instruction Form, the Uniform Delivery Ticket and the Uniform Comparison or Confirmation. FINRA Rule 11220 separately requires a confirmation to carry an adequate description of the security, which for a unit investment trust series includes its payment options. A confirmation for a trade in trust units therefore carries the CUSIP number, and describing the series and its payment options in full does not remove the need for the number.

When Trust Units Fall Due for Delivery

FINRA Rule 11320(b) provides that on a transaction made regular way, delivery shall be made at the office of the purchaser on, but not before, the first business day following the date of the transaction. Suppose two members trade 300 units regular way on a Tuesday in a week with no holidays. Delivery of the units is due on the Wednesday.

FINRA Rule 11320(g) deals with a tender made too early. In contracts executed under paragraphs (b), (d) and (h) of the rule, which include regular way and buyer's option contracts, if the seller tenders delivery before the stated time, acceptance is at the election of the purchaser, and rejection of the delivery by the purchaser is without prejudice to its rights. Suppose a buyer's option contract for 80 units expires on the 20th of the month and the seller tenders the units on the 14th. The purchaser may take them or turn them away. If it turns them away, it loses none of its rights under the contract.

On a delayed-delivery transaction, FINRA Rule 11320(f) makes delivery due on the date agreed upon at the time of the transaction. FINRA Rule 11320(e) adds that contracts due on a day other than a business day mature on the next business day. Suppose two members make a delayed-delivery contract for 1,000 units and agree on a delivery date that turns out not to be a business day. The contract matures on the next business day after the agreed date.

Where Trust Units Are Delivered and How They Are Paid For

Under FINRA Rule 11320(h), delivery is made at the office of the purchaser, between the hours established by rule or practice in the community where that office is located. If the purchaser maintains more than one office, delivery is made at the office with which the transaction was effected, unless delivery instructions are provided at the time of the transaction. Suppose a purchasing member bought 400 units through its Denver office and gave no delivery instructions when it traded. The next day it asks the seller to deliver to its New York office instead. The rule still places delivery at the Denver office, because instructions given after the trade are not instructions provided at the time of the transaction.

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 the purchaser of the 400 units proposes to pay by wire transfer later in the day. The seller making delivery may instead require payment upon delivery in one of the four forms the rule names.

Trust Units Traded Alongside Other Securities

FINRA Rule 11365 is a Ruling of the Committee. Where securities are physically separate instruments, transferable independently of one another, and not subject to any legal or technical condition which requires that they be kept together, good practice requires that they be quoted and dealt in separately and not as units. Suppose a member proposes to offer another member 100 units of a trust together with 500 shares of a common stock, as one package at one combined price. The trust units and the shares are separate instruments, each transferable on its own, and nothing requires them to be kept together. Good practice under FINRA Rule 11365 is to quote and deal in them separately.

Where, for some special reason, members do enter into a contract calling for a group of securities, FINRA Rule 11365 cautions them to make adequate specification both at the time of trade and in their confirmation or comparison, so that uncertainty or misunderstanding in the settlement of the contract may be eliminated. If the two members have a special reason to contract for the trust units and the shares as a group, they should specify what the group contains when they trade, and again in their confirmations.

The word "units" in FINRA Rule 11365 refers to a package of separate securities traded together. A unit of a unit investment trust is something different: it is the security itself, and a single unit is the minimum unit of delivery under FINRA Rule 11363. Where the trust units and the shares are dealt in separately, each is delivered under the units of delivery rule for its own type, the trust units under FINRA Rule 11363 and the shares under FINRA Rule 11361.

A Failed Delivery of Trust Units

FINRA Rule 11100(c) provides that in trades between members, failure to deliver the securities sold on or after the settlement date does not effect a cancellation of the contract. The buyer's remedy is provided for by FINRA Rule 11810 unless the parties mutually consent to cancel the trade. Suppose a seller fails to deliver 250 units due on a Wednesday, and both members would rather unwind the trade than pursue a buy-in. They may cancel it by their mutual consent. Without that consent the contract stays in force.

The same paragraph provides that in every such case of nondelivery the party in default is liable for any damages which may accrue as a result, and that all claims for such damages shall be made promptly. If the buyer of the 250 units suffers a loss because they were not delivered, the defaulting seller is liable for it, and the buyer must make its claim promptly.

FINRA Rule 11810 applies to secondary market transactions between members in unit investment trust securities, although it excludes the redeemable securities of registered investment companies generally. It does not apply where the contract is subject to the buy-in requirements of a national securities exchange or a registered clearing agency; those requirements apply instead. Under FINRA Rule 11810(a), a 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. If the 250 units were due on a Monday in a week with no holidays, the earliest day on which the buyer may close the contract by buy-in is the Thursday.

Giving Notice of a Buy-In of Trust Units

FINRA Rule 11810(b)(1) requires written notice of a buy-in to be delivered to the seller at its office not later than 12:00 noon, Eastern Time, two business days preceding the execution of the proposed buy-in. Suppose a buyer of trust units plans to execute a buy-in on a Friday in a week with no holidays. Its written notice must reach the seller's office by noon Eastern Time on the Wednesday.

For this purpose written notice includes an electronic notice through a medium that provides for an immediate return receipt capability. The rule names facsimile transmission, a computerized network facility and the electronic functionality of a registered clearing agency, and the list is not limited to those. A buy-in notice sent by facsimile transmission is therefore written notice under the rule.

FINRA Rule 11810(c) sets out what every buy-in notice states: the date that the contract will be closed out, the quantity and contract value of the securities covered by the contract, the settlement date of the contract, and any other information deemed necessary to properly identify the contract to be closed out. The notice also states that unless delivery is effected at or before 3:00 p.m. Eastern Time on the effective date, the security may be bought in on the date specified for the account of the seller, and it gives the name and telephone number of the individual authorized to pursue further discussions concerning the buy-in. A notice that gives the number of units and the close-out date but leaves out the contract's settlement date does not state everything the rule requires.

Before a Buy-In of Trust Units Is Executed

FINRA Rule 11810(b)(4) gives the seller, before the proposed effective date of the buy-in, a right to request proof of fail obligation from the buyer, and requires the buyer to deliver that proof to the seller before that date. A buyer may not execute a buy-in notice to the extent it fails to deliver the proof of fail obligation as the paragraph requires. Suppose the seller of 250 units asks for proof of fail obligation and the buyer does not supply it before the effective date. The buyer may not execute the buy-in to that extent.

Under FINRA Rule 11810(d)(1)(A), if the buyer, before executing the buy-in, is notified by the seller 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, the buy-in is not executed with respect to those securities. The buyer must accept and pay for them if they are delivered promptly. If they are not promptly delivered, the seller that said they would be is liable for any resulting damages. Suppose the seller of the 250 units tells the buyer, before the buy-in is executed, that it has all 250 in its physical possession and will deliver them promptly. The buyer does not execute the buy-in for those units, and it must accept and pay for them if they arrive promptly.

FINRA Rule 11810(g) deals with securities in transit. If, before the closing of a contract on which a buy-in notice has been given, the buyer receives from the seller written or comparable electronic notice stating that the securities are in transfer, in transit, being shipped that day or due from a depository, and giving the certificate numbers of the securities, 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, the Committee may grant an additional extension of seven calendar days. Suppose the seller sends the buyer written notice, giving the certificate numbers, that the 250 units are in transfer. The buyer must extend the execution date rather than execute the buy-in on the original date.

When a Buy-In Is Not Completed

Under FINRA Rule 11810(e)(1), if a buy-in is not completed on the day specified in the notice of buy-in, or on that date as extended under the rule, the notice expires at the close of business on the day specified. Suppose a buyer's notice specified a Thursday for the buy-in of 250 units, no extension applied, and the buyer did not complete the buy-in that day. The notice expired at the close of business on the Thursday, and the buyer cannot execute under it on the Friday.

Substituting Comparable Trust Units

FINRA Rule 11810(d)(2) is headed "Buy-in for unit investment trust securities". It provides that buy-in execution options, in addition to those contained in paragraph (d)(1), may be available when the buyer wishes to buy-in contracts made for unit investment trust securities. The first option is substitution. Under paragraph (d)(2)(A), the buyer may, by mutual agreement, accept from the seller, in place of the seller's obligation under the original contract, the delivery of unit investment trust securities which are comparable to those originally bought in quantity, quality, yield or price and maturity. Suppose a seller that cannot deliver 250 units of one trust offers 125 units of another trust of similar quality, yield and maturity. Those units are not comparable in quantity to the 250 originally bought, so they are not the substitute the paragraph describes.

Any additional expenses, and any additional cost of acquiring the substituted securities, are borne by the seller. If the comparable units cost more to acquire than the price of the original contract, the seller bears the extra cost.

When the buyer accepts the comparable units, the original contract is concurrently canceled. The substitute delivery takes the place of the seller's obligation under the original contract, so once the buyer has accepted it, the buyer cannot also demand delivery of the units first bought.

Requiring the Seller to Repurchase Trust Units

Substitution depends on agreement. Paragraph (d)(2)(A) is available "by mutual agreement", and paragraph (d)(2)(B) deals with the case where the buyer and seller cannot agree upon it. Suppose a seller tenders comparable units of another trust and insists that the buyer take them in settlement. The buyer is not obliged to agree, and without its agreement no substitution takes place.

The second option is repurchase. Under FINRA Rule 11810(d)(2)(B), the buyer may require the seller to repurchase the unit investment trust securities if the buyer's options in paragraph (d)(1) are not available and the buyer and seller cannot agree upon the substitution in paragraph (d)(2)(A). So repurchase is not a first resort. Where the ordinary buy-in under paragraph (d)(1) is available to the buyer, the condition for requiring repurchase is not met.

The repurchase is for the account and liability of the seller, on terms which require the seller to bear the burden of any change in the market price from the original contract price, with accrued interest. If the current market price is higher than the original contract price, the buyer may require the seller to repurchase at the current market price. If the current market price is lower, the buyer may require the seller to repurchase at the original contract price, with accrued interest. Suppose 250 units were bought at $1,020 a unit and the market price has since fallen to $990. The buyer may require the seller to repurchase at the original $1,020 a unit, with accrued interest.

Record Dates and Distributions on Trust Units

FINRA Rule 11120(f) defines the record date as the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of equity securities, bonds, similar evidences of indebtedness or unit investment trust securities entitled to receive dividends, interest or principal payments or any other distributions. Suppose the trustee of a unit investment trust fixes a date to determine which unitholders will receive the trust's next distribution. That date is the record date for the distribution in the Code's sense.

FINRA Rule 11140(a) is written in terms of all transactions in securities, except cash transactions. Under FINRA Rule 11140(b)(1), for cash dividends or distributions which are less than 25 percent of the value of the subject security, if the definitive information is received sufficiently in advance of the record date, the date designated as the ex-dividend date is the record date if the record date falls on a business day. Suppose a trust will make a cash distribution worth well under 25 percent of a unit's value, the Committee received definitive information well before the record date, and the record date falls on a business day. The date designated as the ex-dividend date for the units is then the record date itself.

Disputed Facts and the Committee

FINRA Rule 11110 gives the Uniform Practice Code Committee power to issue interpretations or rulings with respect to the applicability of the Code to situations in which there is no substantial disagreement as to the facts involved. Suppose two members disagree about what quantity of trust units they contracted for, one saying 75 units and the other 75.5. That is a disagreement about the facts, so it is not a situation of the kind on which FINRA Rule 11110 empowers the Committee to rule.

Examination Relevance and Key Takeaways

FINRA Rule 11363 is tested on the Series 7 and Series 24 examinations as the units of delivery framework for unit investment trust securities — the most concise of the five security-type-specific units of delivery rules, reflecting that the unit concept is inherent to the security type's own structure rather than a denomination convention layered on top of it.

The key points to retain are these: FINRA Rule 11363 establishes that the minimum unit of delivery for unit investment trust securities is a single unit of the trust; this single-sentence formulation reflects that, unlike stocks and bonds, unit investment trust securities are inherently structured from discrete units as their fundamental measure, requiring only a minimum-unit floor rather than the more elaborate denomination and aggregation frameworks FINRA Rules 11361 and 11362 establish for stocks and bonds; the minimum unit standard implicitly forecloses delivery of fractional-unit amounts between members for purposes of the Uniform Practice Code's delivery framework, though it does not impose any upper limit on the number of whole units that may be delivered; FINRA Rule 11363 was added effective March 18, 1983 — notably later than FINRA Rule 11361 and 11362's 1968-era origins — sharing Notice to Members 83-69 with FINRA Rule 11100's and FINRA Rule 11140's 1983 amendments, suggesting a coordinated regulatory initiative addressing unit investment trust securities across the Uniform Practice Code; and the rule was amended December 15, 2010 through SR-FINRA-2010-030 — no amendments since — with two selected notices, 83-69 and 10-49.