FINRA Rule 11640

Paragraph (a), Dividends or Rights, establishes that a buyer who had the certificate in time to effect transfer before the books closed or the record date has no claim on the seller (unless the seller is the registered holder) for the dividend or rights, but the seller, upon the buyer's request, shall use best efforts to collect the distribution for the buyer. 

Paragraph (b), Substantiating Claims, establishes that where the buyer requests the seller to collect on its behalf, the seller may require the buyer to present the certificate or a transfer agent letter substantiating the claim, or the buyer's written statement that it or its customer was the holder on the record date, together with a guarantee of indemnity for liability from any further demand. 

Paragraph (c), Interest or Rights, extends paragraphs (a) and (b) equally to interest or rights pertaining to registered bonds and unit investment trust securities. FINRA Rule 11640 was amended by SR-FINRA-2010-030 effective December 15, 2010, with a prior amendment effective March 18, 1983 — no amendments have occurred since 2010. Two selected notices are associated — Regulatory Notice 83-69 and Regulatory Notice 10-49.

FINRA Rule 11640 sits within the 11600 Delivery of Bonds and Other Evidences of Indebtedness subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11630's due-bills and due-bill checks framework and immediately preceding FINRA Rule 11650's transfer fees framework, the final rule of the FINRA Rule 11600 subsection.

The Scenario FINRA Rule 11640 Addresses: The Buyer's Own Delay

FINRA Rule 11640 addresses a scenario that is, in an important sense, the mirror image of the scenario FINRA Rule 11630's due-bill framework addresses. FINRA Rule 11630 addressed the case where a security was sold before its ex-dividend or ex-rights date — meaning the buyer was economically entitled to the upcoming distribution — but delivery occurred too late for the buyer to be transferred onto the issuer's books by the record date, through no necessary fault of the buyer; the due-bill and due-bill check mechanism FINRA Rule 11630 established ensures the buyer nonetheless receives the economic benefit of the distribution despite this timing gap.

FINRA Rule 11640(a) addresses a different scenario — a buyer of stock who has the certificate in its possession in time to enable it to effect transfer prior to the closing of the books or to the record date. Here, the timing problem is not attributable to a late delivery — the buyer had the certificate in hand with sufficient time to effect the transfer before the relevant cutoff. If a claim arises under FINRA Rule 11640, it is because the buyer, despite having the opportunity to effect transfer in time, did not do so — the certificate therefore remains registered in another's name as of the record date, whether the seller's or that of someone else, and the registered holder receives the dividend or rights directly from the issuer, even though the buyer (having held the certificate in time to transfer) was the party who, economically, should have received that distribution.

FINRA Rule 11640(a): No Claim Against the Seller, But Best Efforts to Collect

FINRA Rule 11640(a) establishes two complementary principles for this scenario. The first principle is a non-claim rule — a buyer of stock who has the certificate in its possession in time to enable it to effect transfer prior to the closing of the books or to the record date shall have no claim upon the seller (unless the seller is the registered holder) for the dividend or rights pertaining to such certificate.

This non-claim rule establishes that the buyer's own failure to effect a timely transfer — when the buyer had the opportunity to do so — does not give the buyer a claim against the seller for the resulting distribution. The unless the seller is the registered holder parenthetical is the critical qualifier — the non-claim rule applies unless the seller happens to be the registered holder; where the certificate the buyer holds is registered in the seller's own name, the bar on a claim against the seller does not apply.

This parenthetical's phrasing matters because the certificate a buyer receives may be registered in the seller's name or in someone else's. Where it is registered in someone else's name, the first clause leaves the buyer with no claim against the seller for the dividend or rights itself; paragraph (a)'s second clause, which is not confined to either case, gives the buyer instead a request-based entitlement to the seller's assistance: but the seller, upon request of the buyer, shall use its best efforts to collect the same for the buyer.

This best efforts to collect obligation establishes a cooperative, rather than adversarial, framework for resolving the situation. Rather than the buyer having a direct claim against the seller for the value of the dividend or rights (which paragraph (a)'s first clause forecloses, since the buyer's own failure to transfer in time is what created the situation), the seller — whether or not it is itself the registered holder that receives the dividend or rights from the issuer — is obligated, upon the buyer's request, to use best efforts to collect that distribution and presumably pass it along to the buyer, who remains the party economically entitled to it under the original transaction's terms.

FINRA Rule 11640(b): Substantiating Claims — The Seller's Documentation Requirements

FINRA Rule 11640(b) establishes what the seller may require of the buyer before undertaking the best efforts to collect obligation paragraph (a) establishes — when a buyer of stock who has failed to have said stock transferred in time requests the seller to collect the dividends or rights pertaining thereto, the seller may require from the buyer the presentation of the certificate or a letter from the transfer agent substantiating the claim, or the buyer's written statement that it or its customer was the holder on the record date, and a guarantee of indemnity for liability arising out of any further demand for said dividend or rights.

This provision establishes two categories of documentation the seller may require, connected by or, plus an additional guarantee requirement connected by and.

The first category — the presentation of the certificate or a letter from the transfer agent substantiating the claim — addresses verification of the buyer's underlying claim to the certificate itself. Either the buyer presents the certificate (the same certificate referenced in paragraph (a), which the buyer had in its possession in time to transfer but did not transfer) or a letter from the transfer agent substantiating the claim — some form of documentary confirmation from the transfer agent itself confirming the relevant facts.

The second category — or the buyer's written statement that it or its customer was the holder on the record date — provides an alternative to the first category's certificate-or-transfer-agent-letter approach: a written statement from the buyer itself, attesting that the buyer (or the buyer's customer, reflecting that the buyer here may itself be a broker-dealer acting for an underlying customer) was the holder on the record date. This written-statement alternative provides a less document-intensive pathway than obtaining the certificate or a transfer agent letter, relying instead on the buyer's own attestation.

The guarantee of indemnity for liability arising out of any further demand for said dividend or rights — connected to the preceding alternatives by and, making it a requirement in addition to whichever of the first two categories applies — addresses a distinct risk: the possibility that some other party might subsequently make a further demand for the same dividend or rights, and the seller (having used best efforts to collect and presumably passed the distribution along to the buyer based on the buyer's claim) might face liability arising from that further demand. The guarantee of indemnity protects the seller against this risk — the buyer, in exchange for the seller's best-efforts collection and pass-along, indemnifies the seller against liability from any subsequent further demand for the same distribution.

This documentation framework parallels the signature guarantee and certification frameworks this dictionary has examined throughout its coverage of FINRA Rules 11550, 11571, 11573, and 11574 — in each case, a party providing some accommodation (here, the seller's best-efforts collection on the buyer's behalf; there, a transfer agent processing an assignment, or a successor firm guaranteeing an execution) is entitled to require documentation substantiating the underlying claim or authority, protecting the accommodating party against the risk that the accommodation is provided to a party not actually entitled to it.

FINRA Rule 11640(c): Extension to Interest and Rights on Registered Bonds and UIT Securities

FINRA Rule 11640(c) extends paragraphs (a) and (b)'s framework beyond the stock-dividend-and-rights context those paragraphs' text most directly addresses — the provisions of paragraphs (a) and (b) of this Rule shall be equally applicable to interest or rights pertaining to registered bonds and unit investment trust securities.

This extension confirms that the same non-claim-but-best-efforts framework, and the same substantiation-and-indemnity documentation requirements, apply equally where the distribution at issue is interest on a registered bond or interest or rights pertaining to a unit investment trust security — categories this dictionary has encountered repeatedly throughout its coverage, including FINRA Rule 11630(b)'s due-bill check definition (which specifically enumerates interest on registered bonds and interest on unit investment trust securities among the cash-denominated distributions due-bill checks address) and FINRA Rule 11363's units of delivery framework for unit investment trust securities.

The equally applicable formulation confirms that FINRA Rule 11640(c) is not merely a cross-reference incorporating some modified or partial version of paragraphs (a) and (b) for these additional categories — the full framework, including the registered-holder qualifier, the best-efforts-to-collect obligation, and the substantiation-and-indemnity documentation requirements, applies in identical terms whether the underlying distribution is a stock dividend or rights (the paragraphs' most direct textual focus) or interest or rights on registered bonds or unit investment trust securities (the categories paragraph (c) brings within the same framework).

FINRA Rule 11640's Place at the Close of the FINRA Rule 11600 Subsection's Substantive Distribution Framework

FINRA Rule 11640's position — following FINRA Rule 11630's due-bills and due-bill checks framework, and immediately preceding FINRA Rule 11650's transfer fees framework as the final rule of the FINRA Rule 11600 subsection — situates it as completing a coherent progression this dictionary has now traced across FINRA Rules 11620, 11630, and 11640 together.

FINRA Rule 11620 established the computational mechanics for accrued interest, including the record-date-related deduction (paragraph (c)) and due-bill-check (paragraph (d)) mechanisms for resolving timing mismatches between economic entitlement and record-holder status — mismatches arising from delivery timing relative to the record date, through no fault attributable to either party in particular. FINRA Rule 11630 then elaborated the due-bill and due-bill-check mechanism FINRA Rule 11620(d) introduced, addressing the scenario where delivery occurs too late for the buyer to be transferred by the record date. FINRA Rule 11640 now addresses the converse scenario — where the buyer had the opportunity to effect a timely transfer (the certificate was in the buyer's possession in time) but did not do so, placing the responsibility for the resulting situation differently (on the buyer's own inaction, rather than on a delivery-timing gap) and correspondingly establishing a different remedial framework (best efforts to collect upon request, with substantiation and indemnity requirements, rather than FINRA Rule 11630(f)'s buy-in remedy for a dishonored due-bill).

Together, FINRA Rules 11620 through 11640 provide a comprehensive treatment of how record-date-related distribution entitlements are resolved across the range of scenarios that can arise — computational mechanics for and-interest and flat securities (FINRA Rule 11620), due-bills and due-bill checks for late-delivery scenarios not attributable to the buyer (FINRA Rule 11630), and claims procedures for the buyer's-own-delay scenario (FINRA Rule 11640) — before the FINRA Rule 11600 subsection concludes with FINRA Rule 11650's transfer fees framework, addressing a related but distinct cost-allocation question this dictionary anticipates examining next.

Connection to FINRA Rules 11140, 11363, 11550, 11571, 11573, 11574, 11620, 11630, and 11650

FINRA Rule 11640 connects to FINRA Rule 11140 — whose record date concept, underlying the closing of the books or to the record date language in paragraph (a), is the same record date this dictionary has traced throughout the ex-date framework's settlement-cycle-dependent provisions. It connects to FINRA Rule 11363 — whose unit investment trust securities units of delivery framework is one of the security types FINRA Rule 11640(c) extends paragraphs (a) and (b) to cover. It connects to FINRA Rule 11550, FINRA Rule 11571, FINRA Rule 11573, and FINRA Rule 11574 — whose various guarantee, certification, and substantiation documentation frameworks parallel FINRA Rule 11640(b)'s substantiating-claims documentation requirements, each addressing the risk that an accommodation (transfer processing, execution guarantee, best-efforts collection) is provided to a party not actually entitled to it. It connects directly to FINRA Rule 11620 and FINRA Rule 11630 — together forming the three-rule progression this dictionary has identified addressing record-date-related distribution entitlements across computational mechanics, late-delivery due-bills, and buyer's-own-delay claims respectively. And it connects to FINRA Rule 11650 — the final rule of the FINRA Rule 11600 subsection, addressing transfer fees, which this dictionary anticipates examining next to complete this subsection's coverage.

When the Seller Is, or Is Not, the Registered Holder

FINRA Rule 11640(a) turns on a fact that can be read from the certificate itself: the name in which it is registered. The paragraph gives the buyer no claim upon the seller for the dividend or rights "unless the seller is the registered holder". The no-claim rule therefore applies where the certificate stands in the name of someone other than the seller. The parenthetical takes the case where the seller is itself the registered holder out of that rule.

Consider a buyer, Alder Securities, that bought stock from Birch Capital. Well before the record date, Alder received a certificate registered in the name of Birch Capital, and Alder did not have it transferred in time. Because the seller, Birch, is the registered holder, the bar in paragraph (a) on a claim against the seller does not apply to Alder's position against Birch. The paragraph says only that the bar does not reach this case. It does not itself describe the claim.

Now suppose the certificate Alder received was registered in the name of an earlier owner, Cedar Trust Company, and not in Birch's name. Cedar remains the registered holder on the record date, which is the date fixed for determining the holders entitled to receive the dividend. Alder has no claim upon Birch for the dividend. Birch still has a duty, because the second clause of paragraph (a) is not limited to the case where the seller is the registered holder. Upon Alder's request, Birch must use its best efforts to collect the dividend for Alder, even though the dividend was not paid to Birch.

Worked Scenario: A Buyer's Own Processing Delay

The condition in FINRA Rule 11640(a) is possession of the certificate "in time to enable it to effect transfer" before the closing of the books or the record date. The text asks whether the buyer had the certificate in time. It does not ask why the transfer failed to happen. Suppose Dunmore Brokerage receives a certificate in ample time to have it transferred before the record date. Its transfer department, working through a backlog, does not send the certificate to the transfer agent until after the record date. Dunmore had the certificate in time to enable transfer, so it is a buyer within paragraph (a). It has no claim upon a seller that is not the registered holder, and it may ask the seller to use best efforts to collect the dividend for it.

The position is different where the certificate itself arrived too late. A buyer whose delivery came after the point at which transfer could be effected never had the certificate in time. As the existing section on the scenario this rule addresses explains, that case belongs to the due-bill framework of FINRA Rule 11630. What decides the matter is when the buyer had the certificate, not the buyer's reasons.

Substantiation and Indemnity Worked Through

Suppose Alder asks the seller to collect the dividend and offers to present the certificate. Under FINRA Rule 11640(b) the seller may require three things. The first is presentation of the certificate "or" a letter from the transfer agent substantiating the claim. The second, as an alternative to the first, is the buyer's written statement. The third, joined by "and", is "a guarantee of indemnity". Presenting the certificate meets the first alternative. Because the indemnity is joined by "and", the seller may still require Alder's guarantee of indemnity before collecting.

Suppose instead that Alder can no longer present the certificate, for example because it has since sent the certificate to the transfer agent for transfer. Paragraph (b) does not make the certificate indispensable. Alder can meet the seller's requirement in either of two other ways. One is a letter from the transfer agent substantiating the claim. The other is Alder's own written statement that it or its customer was the holder on the record date. Either way, Alder gives the guarantee of indemnity as well if the seller requires it.

The indemnity protects the seller after it has collected. Suppose the seller collects the dividend for Alder and passes it on. Some months later another party demands the same dividend from the seller. The guarantee covers exactly that further demand, being a guarantee against "liability arising out of any further demand for said dividend or rights". For the liability that demand creates, the seller looks to Alder's guarantee of indemnity.

Registered Bonds Under FINRA Rule 11640(c)

FINRA Rule 11640(c) makes paragraphs (a) and (b) "equally applicable to interest or rights pertaining to registered bonds". Suppose Elm Advisors buys a registered bond and holds the bond certificate in time to effect transfer before the record date for the next interest payment, but does not transfer it. Elm is in the same position as a stock buyer that missed a dividend. Unless the seller is the registered holder, Elm has no claim upon the seller for the interest. Upon Elm's request, the seller must use its best efforts to collect the interest for Elm.

The record date that measures Elm's time is the record date as the Code defines it. That is the date fixed by the trustee, registrar, paying agent or issuer for the purpose of determining the holders of bonds entitled to receive interest. Where a bond's paying agent fixes that date, Elm's possession of the certificate is measured against the date the paying agent fixed.

Unit Investment Trust Securities Under FINRA Rule 11640(c)

The same extension reaches "interest or rights pertaining to ... unit investment trust securities", and it carries paragraph (b) with it as well as paragraph (a). Suppose a buyer of units in a unit investment trust held the certificate in time and did not transfer it. It then asks the seller to collect a distribution of interest. The seller may require the substantiation a stock buyer would give, and the same guarantee of indemnity against any further demand.

The rule applies only to transactions within the Code's scope. FINRA Rule 11100(a)(4) excludes transactions in redeemable securities issued by registered investment companies. It then applies the Code to secondary market transactions between members in securities issued by a unit investment trust. It also provides that redemptions of securities directly by the trustee of the unit investment trust are not transactions between members for purposes of that subparagraph. So a member that redeems units directly with the trustee has not entered a transaction between members to which FINRA Rule 11640 applies.

Late Delivery Instead: The Due-Bill Route Under FINRA Rule 11630

FINRA Rule 11640 governs a buyer that had the certificate in time. A different rule applies when a security is sold before it trades ex-dividend or ex-rights and is delivered too late for transfer on or before the record date. That rule is FINRA Rule 11630, and the instrument the seller must supply depends on the distribution. For a stock dividend or rights, the delivery must be accompanied by a due-bill for the distribution under FINRA Rule 11630(c). For a cash dividend, the delivery must be accompanied by a due-bill check under FINRA Rule 11630(d).

Suppose Fenwick Securities bought shares before they traded ex-dividend for a cash dividend, and the certificate reached Fenwick after the record date. Fenwick never had the certificate in time, so paragraph (a) of FINRA Rule 11640 does not describe its position. The seller's delivery should have come with a due-bill check for the dividend.

Remedies Compared: A Dishonoured Due-Bill and a Missed Transfer

The two routes give the buyer different things. A due-bill is an instrument "evidencing the obligation of a seller to deliver" the security or rights to a subsequent purchaser. A buyer under FINRA Rule 11640 holds no such instrument. What it has is the seller's obligation, on request, to use best efforts to collect the distribution for it.

The difference shows when the seller does not perform. A due-bill issued under FINRA Rule 11630(c) may be presented for redemption and then not honoured by the seller. At the buyer's option, the unhonoured due-bill may be treated as a "fail to receive" from the seller. The distribution it evidences may then be bought in for the account and risk of the seller under FINRA Rule 11810, and the buy-in must be executed after the payable date the issuing corporation has set. Suppose a buyer's due-bill for a stock dividend is presented and not honoured. After the payable date, that buyer may buy in the dividend shares for the seller's account and at the seller's risk.

Bonds Delivered Between the Record Date and the Payment Date: FINRA Rule 11620

A bond delivered after the record date was not in the buyer's possession in time to effect transfer before that date, so FINRA Rule 11640(a) does not describe the buyer's position. For a bond traded "and interest", FINRA Rule 11620(c) deals with the interest at settlement instead. When delivery is made between the record date fixed for determining the holder entitled to receive interest and the interest payment date, a deduction equivalent to the full amount of the interest to be paid is made on settlement. Suppose Garnet Bank buys a registered bond traded "and interest" and receives it after the record date but before the interest payment date. The settlement carries a deduction of the full interest payment.

Who Pays for the Transfer: FINRA Rule 11650

FINRA Rule 11650 allocates the cost of a transfer: "The party at whose instance a transfer of securities is made shall pay all service charges of the transfer agent." Suppose Alder finally sends its certificate to the transfer agent to be registered in its own name. The transfer is made at Alder's instance, so Alder pays the transfer agent's service charges.

Two Indemnities Compared: FINRA Rule 11640(b) and FINRA Rule 11560

FINRA Rule 11560 also uses an indemnity, for a different purpose. A certificate of a company whose transfer books are closed indefinitely is good delivery only if the required ownership transfer indemnification is affixed to or recorded upon it. That indemnification "acknowledges the assignor(s)' ultimate responsibility for the ownership of the certificate". The guarantee of indemnity in FINRA Rule 11640(b) is required from the buyer that asks the seller to collect. It covers liability arising out of any further demand for the dividend or rights. One indemnity comes from the assignor of a certificate and concerns the certificate's ownership. The other comes from a buyer and concerns a distribution the seller collects for it.

Trades Between Members: The Scope FINRA Rule 11640 Operates In

FINRA Rule 11640 is part of the Uniform Practice Code. FINRA Rule 11100(a) makes the Code apply to over-the-counter secondary market transactions in securities between members, "including the rights and liabilities of the members participating in the transaction". Suppose a member sells stock to its own retail customer, who is not a member, and the customer fails to have the stock transferred before the record date. That sale is not a transaction between members, so it falls outside the Code's scope.

The scope expressly includes restricted securities, as defined in Rule 144(a)(3) under the Securities Act. Suppose two members trade restricted stock over the counter and settle the trade directly between themselves. The buying member has the certificate in time but fails to transfer it before the record date. The trade is within the Code's scope, and FINRA Rule 11640(a) governs the buying member's position against the seller.

Trades the Code Excludes

Some transactions between members are excluded from the Code. Transactions compared, cleared or settled through the facilities of a registered clearing agency are outside it, except to the extent that the rules of the clearing agency provide that rules of other organizations shall apply. Suppose two members settle a stock trade through a registered clearing agency whose rules make no such provision. A dispute over a dividend the buyer missed on that trade is not governed by FINRA Rule 11640.

Transactions in municipal securities, as defined in Section 3(a)(29) of the Exchange Act, are also excluded. The extension in FINRA Rule 11640(c) to interest on registered bonds therefore does not reach a trade between members in a registered municipal bond.

Examination Relevance and Key Takeaways

FINRA Rule 11640 is tested on the Series 7 and Series 24 examinations as the claims framework for dividends, rights, and interest where a buyer who had the opportunity to effect a timely transfer did not do so — the converse scenario to FINRA Rule 11630's due-bill framework for late-delivery situations.

The key points to retain are these: FINRA Rule 11640(a) provides that a buyer who had the certificate in time to effect transfer before the books closed or the record date has no claim on the seller for the resulting dividend or rights unless the seller is the registered holder, but the seller — upon the buyer's request — must use best efforts to collect the distribution for the buyer; FINRA Rule 11640(b) permits the seller, when asked to collect on the buyer's behalf, to require either presentation of the certificate or a transfer agent letter substantiating the claim, or the buyer's written statement that it or its customer was the holder on the record date, plus in either case a guarantee of indemnity for liability from any further demand for the same dividend or rights; FINRA Rule 11640(c) extends paragraphs (a) and (b) equally to interest or rights pertaining to registered bonds and unit investment trust securities; FINRA Rule 11640 completes a three-rule progression with FINRA Rules 11620 and 11630 addressing record-date-related distribution entitlements across computational mechanics, late-delivery due-bills, and buyer's-own-delay claims respectively; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, with a prior amendment effective March 18, 1983 — no amendments since — and two selected notices, 83-69 and 10-49.