Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 11365 is the final rule of the FINRA Rule 11300 Delivery of Securities subsection — and, like FINRA Rule 11121 examined earlier in this dictionary's coverage of the 11100 subsection, takes the form of a Ruling of the Committee rather than declarative rule text, addressing the practice of trading multiple physically separate instruments together as a single unit.
The rule consists of two sentences.
The first establishes a good practice presumption against unit trading: 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.
The second addresses the exceptional case where members nonetheless do trade a group of securities together: where, for some special reason, members enter into a contract calling for a group of securities, they are cautioned 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.
FINRA Rule 11365 was amended by SR-FINRA-2010-030 effective December 15, 2010, as part of the Uniform Practice Code's transfer into the Consolidated FINRA Rulebook. One selected notice is associated — Regulatory Notice 10-49.
FINRA Rule 11365 sits within the 11300 Delivery of Securities subsection of the 11000 Uniform Practice Code as the fifth and final rule of the units of delivery cluster and the final rule of the entire FINRA Rule 11300 subsection, immediately following FINRA Rule 11364's units of delivery framework for certificates of deposit for bonds and immediately preceding FINRA Rule 11400's series marker for the Delivery of Securities with Draft Attached subsection.
FINRA Rule 11365's title identifies two related but distinct phenomena that the rule's single Committee ruling addresses together. Trading securities as units refers to a market practice in which two or more separate securities — for example, a share of common stock and a warrant, or a bond and a share of stock — are quoted, traded, and delivered together as a single combined package, often arising from how a security was originally issued in a combination offering, where investors received a bundle of different instruments as part of a single subscription.
Bonds with stock refers more specifically to bonds that were originally issued with stock attached — a historical financing structure in which a bond was issued together with shares of common stock (or warrants to purchase common stock) as a unit, giving the original purchaser both the debt instrument and an equity component as part of a single investment.
Over time, the bond component and the stock component of such an originally-combined issuance might become separable — the bond and the stock could each become independently transferable instruments — even though market participants might, by habit or convenience, continue referring to and potentially trading them together as bonds with stock.
FINRA Rule 11365's Committee ruling addresses the question of whether, and under what circumstances, this kind of combined trading — as units, or as bonds with stock — represents good practice for members operating under the Uniform Practice Code.
FINRA Rule 11365's first sentence establishes a clear presumption — 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.
This sentence identifies three conditions, all of which must be satisfied for the presumption to apply: the securities must be physically separate instruments — distinct certificates or other distinct physical or book-entry representations, not a single combined instrument; the securities must be transferable independently of one another — each instrument can be transferred on its own, without needing to transfer the other instrument(s) simultaneously; and the securities must not be subject to any legal or technical condition which requires that they be kept together — there is no legal restriction, contractual term, or technical feature of the instruments that mandates they remain bundled.
Where all three conditions are satisfied — the securities are physically separate, independently transferable, and not subject to any keep-together requirement — FINRA Rule 11365's first sentence establishes that good practice requires separate quoting and dealing, not unit trading.
This is a meaningful normative statement: even if a particular bond and stock were originally issued together as a unit, once the two components have become physically separate, independently transferable instruments with no legal or technical bar to their separate treatment, the Committee's view is that the market should treat them separately — quoting and trading the bond on its own terms and the stock on its own terms, rather than continuing to quote and trade them as a combined unit merely because of their shared origin.
The rationale underlying this presumption connects directly to the broader purposes FINRA Rule 11110 articulates for the UPC Committee's interpretive authority — making custom, practice, usage, and trading technique uniform, simplifying members' day-to-day business, and removing causes for business disputes and misunderstandings arising from uncertainty and lack of uniformity.
Unit trading of instruments that have become independently separable and transferable introduces exactly this kind of uncertainty — a quoted price for the combined unit does not transparently convey the value of each component separately, and a contract calling for delivery of the combined unit raises questions about how that delivery is to be effected when the components are, in fact, physically separate instruments that could each be delivered on their own.
By establishing separate quoting and dealing as the good practice default for instruments that have become genuinely separable, FINRA Rule 11365's first sentence promotes the transparency and uniformity that the broader Uniform Practice Code framework is designed to achieve.
FINRA Rule 11365's second sentence addresses the exceptional case that the first sentence's good practice default does not categorically prohibit — where, for some special reason, members enter into a contract calling for a group of securities.
The for some special reason formulation acknowledges that, notwithstanding the general good practice presumption favoring separate dealing, circumstances may arise where members have a legitimate reason to enter into a contract for a group of securities together — perhaps reflecting a customer's specific investment objective, a particular trading strategy, or some other circumstance not further specified by the rule.
For such special-reason group contracts, the second sentence does not prohibit the practice but instead cautions members 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.
This caution directly connects to FINRA Rule 11220's description of securities requirements, examined earlier in this dictionary's coverage of the FINRA Rule 11200 subsection. Recall that FINRA Rule 11220 requires comparisons and confirmations to include an adequate description of the security, the price, and any other information deemed necessary to ensure that the buyer and seller agree as to details of the transaction.
FINRA Rule 11365's second sentence applies this same adequate description and necessary-information framework specifically to the special-reason group contract scenario — when members do enter into a contract for a group of securities, the FINRA Rule 11220 description requirements take on heightened importance, since the contract's settlement will require both parties to have a shared, unambiguous understanding of precisely which securities, in what quantities, comprise the group — an understanding that, absent adequate specification at the time of trade and in the confirmation or comparison, could give rise to exactly the uncertainty or misunderstanding the second sentence warns against.
FINRA Rule 11365's presentation as a Ruling of the Committee — rather than declarative rule text in the style of FINRA Rules 11361 through 11364 — marks the second instance this dictionary has encountered of this distinctive format within the Uniform Practice Code, the first being FINRA Rule 11121's Eastern-city/Western-city trade date ruling examined earlier in this dictionary's coverage of the 11100 subsection.
As this dictionary's FINRA Rule 11121 entry discussed, this format directly traces to FINRA Rule 11110's grant of authority to the UPC Committee to issue interpretations or rulings with respect to the applicability of this Code to situations in which there is no substantial disagreement as to the facts involved.
FINRA Rule 11365, like FINRA Rule 11121, appears to be a codification of a Committee ruling — originally issued to address a specific question that arose in practice (here, the question of whether and when securities should be quoted and dealt in as units versus separately), and subsequently incorporated directly into the Code's text as FINRA Rule 11365 itself.
Unlike FINRA Rule 11121, however, which presented its ruling through a concrete worked example — the Eastern dealer and Western dealer scenario — FINRA Rule 11365's ruling is framed in more general, principle-based terms throughout both of its sentences, without a specific illustrative fact pattern. This difference in presentation style between the two Committee rulings this dictionary has encountered may simply reflect the different nature of the questions each ruling addresses — FINRA Rule 11121's cross-time-zone trade date question lent itself naturally to a concrete worked example involving specific dealers in specific localities, while FINRA Rule 11365's question of when unit trading versus separate trading represents good practice may have been more naturally expressed through general principles applicable across the wide range of specific instrument combinations the question could potentially arise for.
FINRA Rule 11365's position as both the final rule of the units of delivery cluster (FINRA Rules 11360 through 11365) and the final rule of the entire FINRA Rule 11300 Delivery of Securities subsection carries a certain structural significance for this dictionary's coverage.
The units of delivery cluster, beginning with FINRA Rule 11360's series marker and Uniform Delivery Ticket Form, proceeded through FINRA Rule 11361's stock framework, FINRA Rule 11362's bond framework, FINRA Rule 11363's unit investment trust securities framework, and FINRA Rule 11364's certificates-of-deposit-for-bonds cross-reference to FINRA Rule 11362 — each addressing the standardized delivery quantities for a specific, identifiable category of security.
FINRA Rule 11365 closes this cluster by addressing the case that does not fit neatly into any single security-type category at all — securities that combine characteristics of multiple types, or that were originally issued together as units or as bonds with stock. Rather than attempting to establish yet another security-type-specific denomination framework for this combined category — which, given the potentially unlimited variety of specific combinations that bonds with stock or other unit structures could take, might prove impractical to standardize in the manner of FINRA Rules 11361 through 11364 — FINRA Rule 11365 instead establishes a principle-based approach: where the components have become genuinely separable, treat them separately under whichever of FINRA Rules 11361 through 11364 applies to each component individually; where members nonetheless transact in a group for some special reason, ensure adequate specification under FINRA Rule 11220's framework to eliminate settlement uncertainty.
This principle-based closing approach is consistent with the broader character of FINRA Rule 11365 as a Ruling of the Committee rather than a denomination-table-style rule — where FINRA Rules 11361 through 11364 each provide specific numerical or unit-based standards (100 shares, $1,000/$100 denominations, a single trust unit, the same as bonds), FINRA Rule 11365 provides interpretive guidance for the residual category that those specific standards do not directly address, fittingly invoking the UPC Committee's general interpretive authority under FINRA Rule 11110 for precisely this kind of residual, principle-based determination.
FINRA Rule 11365 connects to FINRA Rule 11110 as the source of the UPC Committee's authority to issue the kind of interpretive ruling FINRA Rule 11365 itself embodies. It connects to FINRA Rule 11121 as a structural parallel — the second Ruling of the Committee this dictionary has encountered within the Uniform Practice Code, both representing codified Committee interpretations addressing situations without substantial factual disagreement. It connects directly and substantively to FINRA Rule 11220 — whose adequate description, price, and necessary-information requirements for comparisons and confirmations are the specific mechanism FINRA Rule 11365's second sentence invokes for special-reason group contracts. It connects to FINRA Rules 11360 through 11364 as the cluster's capstone — addressing the residual combined-instrument category that the preceding security-type-specific denomination frameworks for stocks, bonds, unit investment trust securities, and certificates of deposit for bonds do not themselves directly resolve. And it connects to FINRA Rule 11400 — the next subsection in the Uniform Practice Code, addressing delivery of securities with draft attached, which this dictionary will examine as the next stage in its coverage of the Code's delivery-related provisions following the completion of the FINRA Rule 11300 subsection.
FINRA Rule 11365 is tested on the Series 7 and Series 24 examinations as the Committee ruling governing unit trading and bonds with stock attached — the final rule of the FINRA Rule 11300 subsection, addressing the residual category of combined-instrument trading that the security-type-specific units of delivery rules do not directly resolve.
The key points to retain are these: FINRA Rule 11365 is framed as a Ruling of the Committee, the second such ruling encountered in this dictionary's coverage of the Uniform Practice Code alongside FINRA Rule 11121; the first sentence establishes that where securities are physically separate instruments, transferable independently of one another, and not subject to any legal or technical condition requiring they be kept together, good practice requires they be quoted and dealt in separately and not as units; the second sentence addresses the exceptional case where members enter into a contract calling for a group of securities for some special reason — in such cases, members are cautioned to make adequate specification both at the time of trade and in their confirmation or comparison, invoking FINRA Rule 11220's description-of-securities framework, so that uncertainty or misunderstanding in the settlement of the contract may be eliminated; FINRA Rule 11365 closes the units of delivery cluster (FINRA Rules 11360 through 11365) by providing a principle-based approach for combined-instrument categories that do not fit the security-type-specific denomination frameworks of FINRA Rules 11361 through 11364; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, with one selected notice — 10-49.
