Several rules spread across the Uniform Practice Code direct a wronged party to a buy-in or sell-out without setting out how that remedy works. Which provision lays the foundation for those directions?

The Committee's interpretive authority, under which it settles the remedy for each failed contract case by case

The scope rule's principle that a failed delivery or payment does not cancel the contract

The reclamations subsection, whose forms and timetables govern every claim arising from a failed contract

The buy-in rule's notice provision, which fixes when a close-out may first be executed after a failure

Most remedial provisions of the Uniform Practice Code cross-refer to the buy-in or sell-out frameworks. The mark-to-market provision does something different. What?

It establishes its own close-out mechanism, parallel to those frameworks rather than invoking them

It suspends the contract until compliance is restored, so no close-out arises

It refers the matter to arbitration rather than providing any close-out remedy at all

It applies the buy-in framework to both parties regardless of which one failed to comply

The Close-Out Procedures subsection's rules run in sequence from the buy-in framework through to the clearly erroneous cluster. What does the subsection show at the position between the selling-out framework and the rights and warrants provision?

No entry at all, the numbering running straight from the one provision to the other

A Reserved designation, carrying no operative rule text

A rule governing the return of securities that are delivered after a close-out has been executed

A cross-reference directing the reader to the reclamations subsection's own close-out provisions

Two remedial provisions of the Uniform Practice Code send a party to the close-out frameworks: one for due-bills not honored upon redemption, the other for reclaimed securities that arrive without a Uniform Reclamation Form. Which framework does each invoke?

The sell-out for the unhonored due-bills, and the buy-in for the reclaimed securities lacking the form

The buy-in for both, since in each case a party is left without the securities it is owed

The buy-in for the unhonored due-bills, and the sell-out for the reclaimed securities lacking the form

The sell-out for both, since in each case a party is left holding securities it cannot use

Some Uniform Practice Code rules that name whose 'account and risk' a close-out is for also direct that it be carried out under the buy-in rule. What does the buy-in rule supply that this account-and-risk wording does not?

A penalty payable to FINRA on top of the price difference that the failing party has already borne

The cancellation of the underlying contract once the close-out has been executed and the difference paid

The identity of the party who bears any loss, which the phrase itself leaves for the procedures to settle

The notice requirements, timing windows and execution mechanics by which the close-out is carried out

Two members want to depart from the trading basis FINRA Rule 11840 fixes — in one transaction for rights to subscribe, in another for stock purchase warrants — and in each case they simply agree to do so between themselves. What is the effect of those agreements?

The warrants agreement is effective; the rights basis yields only to a Committee designation

Both are effective, each basis applying only where the members have not agreed otherwise between themselves

Neither is effective, each basis yielding only to a designation the Committee makes for that security

The rights agreement is effective, the warrants basis being the one the rule reserves to the Committee alone

A rule number within one of the Uniform Practice Code's subsections carries a Reserved designation. What does such a designation typically indicate?

That the rule's content is taken over from an exchange's rule on the same subject and applied to members by reference, without restating its text

That a provision once held the number and was deleted or moved, or that the number is set aside for future use

That the rule is suspended while the SEC considers a proposed replacement, its earlier text remaining binding on members until the Commission decides

That the rule's text is withheld from the public and circulated privately to member firms, each of which must keep it under a confidentiality undertaking

The Close-Out Procedures subsection includes a provision on COD orders. What is a COD order?

A contract between two dealers in which the securities are released only after payment has been received and cleared

A customer order in which payment is made in advance, the securities following once it has cleared

A customer order in which payment is made at the time the securities are delivered

A contract between two dealers in which the buyer pays later on credit extended by the selling dealer

A customer decides to move an entire brokerage account, with every position in it, from one member firm to another. Between whom does the resulting customer account transfer contract run?

Between the customer and the firm receiving the account, which takes on its positions

Between the customer and the firm the account is leaving, which must release it

Between each of the two firms and the clearing agency whose service moves the account

Between the firm the account is leaving and the firm that is receiving it

The clearly erroneous transactions framework is linked conceptually to the settlement formula for part-redeemed bonds and to the marking-to-the-market mechanism. What concern do the three share?

How a contract's price is determined and whether that price can stand

How accrued interest on a security is divided between the buyer and the seller at settlement

Whether a failed delivery has been completed within the period the Code allows

How exposure on an open contract is secured by deposits as the market value of the securities moves

A company offers its shareholders of record the privilege to subscribe, pro rata, for shares of another company. Is that privilege a right in FINRA Rule 11840's sense?

No, since a right is a privilege to subscribe for additional securities of the issuer whose holders receive it

Yes, since a right may be for securities of the same class, of a different class, or of a different issuer

Yes, but only where the other company's shares are of the same class as the shares the holders already own

No, since a privilege to take another company's shares is a tender offer by the holders rather than a subscription right

A company issues new bonds to investors who owned none of its securities, attaching to each bond a detachable instrument that lets the holder buy common stock at $25 a share for five years. How does FINRA Rule 11840 classify the instrument?

As a right: it is a privilege to subscribe for additional securities of the issuer at a stipulated price for a period

As a warrant, but only because it was offered pro rata to the holders of record of the issuer's bonds as of a date

As a warrant: it accompanies another security, was not offered to holders of record, and gives a stipulated price for years

As a right: it was issued together with another security and it remains valid for several years after its issue

A shareholder holds 750 shares of issued stock. The subscription terms require five rights for each new share. Absent any Committee designation, how many rights does the shareholder hold for trading purposes?

3,750 rights, the subscription ratio of five being applied to each of the shares held

150 rights, one for each new share the holding entitles the shareholder to subscribe for

7 rights, one being counted for each full block of 100 shares of issued stock held

750 rights, one right accruing to each share of the issued stock held

A buyer purchases 400 stock purchase warrants, each of which entitles its holder to buy half a share. Nothing else has been agreed or designated. What does the buyer receive in settlement?

400 warrants, each warrant bought representing one warrant to be received

200 shares of the underlying stock, being the quantity the 400 warrants entitle the buyer to purchase

200 warrants, each one adjusted on settlement so that it represents the right to one full share

400 warrants together with a cash payment for the half share that each warrant cannot deliver

A member is preparing to sell a customer's stock purchase warrants. Which of the following is among the facts it must first ascertain?

The price at which the warrants were first issued, so that the customer's gain or loss on the sale can be shown

The identity of the holder of record to whom the warrants were first issued, as evidence of their good title

The issuer's record of dividends on the underlying security over the period since the warrants were issued

A seller owes a buyer 2,000 warrants that expired by their terms 45 days ago, and it no longer has the expired warrants to hand over. What may its delivery consist of?

Unexpired warrants of a later series of the same issuer, bought in the market to stand in for the expired ones

A cash payment equal to the market value the warrants last carried before they expired by their own terms

A Letter of Indemnity in lieu of the expired warrants, as the alternative to delivering the warrants themselves

Nothing further, since the buyer's sole course on expired warrants is to buy them in for the seller's account

A buyer contracted for units, each made up of one share and one warrant. The warrant expires by its terms before the seller delivers. What becomes of the unit and the seller's delivery?

The buyer may reject any delivery, since what the seller can now tender is no longer the unit it bought

The contract for the units is cancelled, each party being released now that the unit cannot be delivered whole

It remains a unit as originally contracted, the warrant's expiry having no effect on the instrument at all

It ceases to be a unit as the contract contemplated, but the seller still delivers the unexpired share

A buyer contracted for warrants at $1.20 each. The warrants expired by their terms before the seller delivered, and delivery is later made under the Code's provision for expired securities. At what price does the delivery settle?

At the existing contract price of $1.20 a warrant, expiration not repricing the contract

At the price the warrants last traded before expiry, the contract being repriced on the expiration date

At nothing, the expired warrants being worthless, so the buyer owes the seller no payment for them

At $1.20 less the value the warrants' exercise privilege still held on the date they expired

A receiving member has delivered a Liability Notice on a contract for warrants that can be exercised on a daily basis. At expiration the contract remains undelivered, and it has not been cancelled by mutual consent. What does the receiving member then do?

It refers its claim to the Committee, which fixes the amount of the liability after hearing both members

On the following business day, it tells the defaulting member the exact amount of that member's liability

It issues a fresh notice of intent to buy in, giving the defaulting member two business days to deliver

It waits for the defaulting member to state what liability it accepts, and the claim is settled at the amount it names

A receiving member is owed warrants that are due to expire, the expiration date falling on or after the contract's settlement date. It chooses not to use the Liability Notice procedure. When may it buy the contract in?

Without prior notice, during trading hours on the business day after the expiration date

Without prior notice, at the opening of trading on the business day before the expiration date

Without prior notice, once any protect period attached to the expiring event has fully run

A buyer is still owed 250 shares of a stock that trades in units of 100 shares. It wants to issue a buy-in notice for 40 of those shares. May it?

No, since a buy-in notice must always cover the full quantity that is still due under the uncompleted contract, never a part

Yes, since a buyer may issue a buy-in notice for any part, however small, of the quantity that remains undelivered to it

Yes, provided the seller agrees in writing that the notice may cover the reduced quantity of shares instead of the full amount

No, since a notice for less than the full amount due may not be for less than one trading unit

A buyer proceeds to a buy-in after its seller failed to deliver. Besides a purchase in the market, from where may the buyer obtain the securities?

From nowhere else: a buy-in is a purchase in the open market through an executing broker

From securities of the failing seller that the buyer holds in custody or as collateral for it

From the registered clearing agency, which allocates the shortfall among its participating members

A buyer executes a buy-in at a price well above where the stock was trading at that moment. What does FINRA Rule 11810 require of it regarding that price?

That it first obtain the seller's written consent to any buy-in price above the stock's most recent reported sale

That it be prepared to defend the price against the current market at the time of the buy-in

Nothing, since the failing seller bears the full cost of the buy-in whatever price the buyer chooses to pay

That it re-execute the buy-in at the prevailing market price and absorb any difference in price itself

A transfer instruction asks to move an account titled in one spouse's name alone. The carrying member's records show the account as a joint account. May the carrying member take exception to the instruction?

No, since the customer's own signed authorization of the transfer instruction settles whose name the account is held in

No, since the receiving member corrects any discrepancy in the account's title on its own books once the transfer has been completed

Yes, since a title on the instruction that does not match its records is a listed ground for exception

Yes, but only where the customer's most recent account statement has not been attached to the transfer instruction it received

A carrying member renumbered a customer's account when it reassigned the account internally to a new representative. A transfer instruction then arrives bearing the old number. May the carrying member take exception on the ground of an invalid account number?

No, but it may delay validating the instruction until the customer has confirmed the new account number in writing

Yes, since any account number that does not appear on the carrying member's current records is by definition an invalid number

Yes, but it must first invite the receiving member to re-submit the instruction under the account's new internal number

No, since tracking the changed number is its own job, so the reassigned number is not treated as invalid

A carrying member validating a transfer instruction must list each asset with a then-current market value. The account holds a limited partnership interest whose current market value cannot be determined. At what value is it listed?

At original cost, a then-current market value not being determinable for it

At zero, until a market value for the interest can be established by the receiving member

At the value the customer states for the interest on the transfer instruction it authorized

At the value shown on the partnership's most recent annual report to its limited partners

A customer authorizes an instruction to transfer a whole brokerage account from one member firm to another. What must the customer affirm as part of that instruction?

That every open order on the account has been cancelled, so that no order can execute during the move

That any credit or debit cards and unused checks issued for the account were destroyed or returned

That no margin debit is outstanding with the carrying member, any balance having been paid beforehand

That the positions listed on the instruction match those shown on the customer's latest account statement

Some assets in an account being transferred cannot be transferred, and the customer has authorized their liquidation. By when must the carrying member distribute the resulting money balance to the customer?

At the next monthly statement date following the sale of the assets concerned

Within one business day after the transfer instruction has been validated by it

Within five business days after it receives the customer's disposition instructions

Only once every fail contract established on the transfer has been closed out

Fail contracts established under the customer account transfer rule against positions not delivered can stay open for some time. How must they be carried while they remain open?

They are referred each month to the Committee, which fixes their value

They stay at the value fixed when established, revalued only on close-out

They are revalued only if a member asks in writing for a revaluation

They must be marked to the market regularly while they remain open

FINRA Rule 11840(d) lists facts a member must ascertain before it sells warrants. What does the same paragraph add about the trades in warrants themselves?

That they should be reported to the Committee on the day each one is executed

That they should settle through the facilities of a registered clearing agency

That they should be priced at no more than the warrant's exercise value on the day

FINRA Rule 11800 | Financial Regulation Courses

Close-Out Procedures

SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES

FINRA Rule 11800 is the series-level marker for the eighth and largest remaining major subsection of the Uniform Practice Code — the organizational designation grouping the buy-in and sell-out frameworks this dictionary has anticipated since FINRA Rule 11100(c), alongside a substantial collection of additional close-out-adjacent provisions addressing rights and warrants, COD orders, customer account transfer contracts, syndicate account settlement, and the Clearly Erroneous Transactions cluster.

FINRA Rule 11800 has no operative text. Its FINRA.org page returns no rule text under The Rule tab, shows no amendment history, and lists no selected notices — only its organized entries: FINRA Rule 11810, Buy-In Procedures and Requirements; FINRA Rule 11820, Selling-Out; FINRA Rule 11830, Reserved; FINRA Rule 11840, Rights and Warrants; FINRA Rule 11860, COD Orders; FINRA Rule 11870, Customer Account Transfer Contracts; FINRA Rule 11880, Settlement of Syndicate Accounts; and FINRA Rule 11890, the series sub-marker for Clearly Erroneous Transactions, itself organizing FINRA Rule 11891 (General), FINRA Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities), FINRA Rule 11893 (Clearly Erroneous Transactions in OTC Equity Securities), and FINRA Rule 11894 (Review by the Uniform Practice Code ("UPC") Committee).

FINRA Rule 11800 sits within the 11000 Uniform Practice Code as the eighth major subsection, positioned between FINRA Rule 11740 — the final rule of the FINRA Rule 11700 Reclamations and Rejections subsection — and FINRA Rule 11810, the first substantive rule of the FINRA Rule 11800 subsection itself.

The Capstone Function: Where the Uniform Practice Code's Remedial Threads Converge

FINRA Rule 11800's position as the final major substantive subsection before FINRA Rule 11900 concludes the entire 11000 series reflects its function as the convergence point for remedial threads this dictionary has traced throughout its coverage. FINRA Rule 11100(c) established the foundational non-cancellation principle — failures of delivery or payment do not cancel the contract, but direct the parties to buy-in and sell-out remedies.

FINRA Rule 11190(b)(1) invoked a close-out, by the party who submitted the contract, for DK'd reconfirmation-and-pricing-service contracts. FINRA Rule 11630(f) invoked FINRA Rule 11810's buy-in framework specifically for due-bills not honored upon redemption.

FINRA Rule 11710(b)(2) invoked FINRA Rule 11820's sell-out framework for reclaimed securities lacking a Uniform Reclamation Form. FINRA Rule 11740(e) established its own without-notice close-out mechanism for mark-to-market non-compliance, structurally parallel to but distinct from FINRA Rules 11810 and 11820.

FINRA Rule 11800 now gathers the detailed buy-in (FINRA Rule 11810) and sell-out (FINRA Rule 11820) frameworks that all of these cross-references have pointed toward, while also housing several additional close-out-adjacent topics whose connection to the broader Uniform Practice Code framework this dictionary's examination of each individual rule will establish.

FINRA Rule 11810's Buy-In Procedures and FINRA Rule 11820's Selling-Out: The Anticipated Core

FINRA Rule 11810 and FINRA Rule 11820 represent the core this dictionary has anticipated most directly. A buy-in, in the context this dictionary has developed, is the remedy available to a buyer whose seller has failed to deliver — the buyer purchases the security elsewhere (in the market, or from its own long position or customers' accounts) and holds the failing seller liable for any cost difference. A sell-out is the converse — the remedy available to a seller whose buyer has failed to pay or take delivery, where the seller sells the security elsewhere and holds the failing buyer liable for any difference.

These two frameworks represent the operative mechanisms underlying some of the for the account and liability of formulations this dictionary has encountered repeatedly — FINRA Rule 11190(b)(1)'s account and liability of the non-confirming member, FINRA Rule 11630(f)'s account and risk of the seller, and FINRA Rule 11740(e)'s account and liability of the party failing to comply all describe who bears a close-out, but only FINRA Rule 11630(f) sends its buy-in to one of FINRA Rules 11810 and 11820's detailed procedural frameworks — establishing the specific notice requirements, timing windows, and execution mechanics for buy-ins and sell-outs — while FINRA Rule 11190(b)(1) and FINRA Rule 11740(e) each permit a close-out without notice on their own terms.

FINRA Rule 11830's Reserved Status

FINRA Rule 11830's Reserved designation — a placeholder with no current content — represents a numbering gap within the subsection's sequence, positioned between FINRA Rule 11820's Selling-Out framework and FINRA Rule 11840's Rights and Warrants framework. A Reserved rule number typically indicates that a provision previously occupied this position (and was subsequently deleted or relocated) or that FINRA has set aside this number for potential future use without current substantive content — this dictionary will confirm which characterization applies, if either, when it examines FINRA Rule 11830 directly, though given the Reserved designation itself, this dictionary anticipates that entry will be necessarily brief, simply confirming the reserved status and noting any available context regarding its history.

FINRA Rule 11840's Rights and Warrants

FINRA Rule 11840's title — Rights and Warrants — connects directly to several threads this dictionary has traced throughout its coverage.

FINRA Rule 11140(d) and (e) established the ex-rights date framework for transferable rights subscription offerings.

FINRA Rule 11220's illustrative phrases included ex-warrants. FINRA Rule 11630(c) established the due-bill framework for rights specifically (among the categories excepted from pro-ration). FINRA Rule 11140(b)(2) addressed warrant distributions of 25% or greater of a security's value within the ex-dividend/ex-warrants framework.

FINRA Rule 11840's text, within the FINRA Rule 11800 Close-Out Procedures subsection, defines rights and warrants, sets the basis and unit of trading for each, and governs deliveries on contracts for rights, warrants and other securities that have expired by their terms, its sample Letter of Indemnity stating that acceptance of such a delivery operates to close out the contract; the notice procedure for a failure to deliver rights or warrants that are due to expire sits in FINRA Rule 11810, which connects the rights-and-warrants threads this dictionary has traced through FINRA Rules 11140, 11220, and 11630 to the buy-in and sell-out mechanics FINRA Rules 11810 and 11820 establish.

FINRA Rule 11860's COD Orders

FINRA Rule 11860's title — COD Orders — connects directly to FINRA Rule 11130(a)(1), which this dictionary examined as requiring confirmations or comparisons for when, as and if issued/distributed transactions pursuant to the requirements of FINRA Rules 11210(a), 11220, and 11860. COD — collect on delivery — orders represent a category of customer order in which payment for securities purchased or delivery of securities sold is made to or by an agent of the customer, likely connected to the delivery-versus-payment and receipt-versus-payment transactions FINRA Rule 11310(b) addressed in connection with book-entry settlement for customer transactions.

FINRA Rule 11860's position within the FINRA Rule 11800 subsection, combined with its FINRA Rule 11130(a)(1) cross-reference, suggests this rule establishes the specific confirmation, documentation, or close-out-related requirements for COD orders — a category this dictionary anticipates examining in detail to resolve precisely how COD orders interact with the broader confirmation framework FINRA Rule 11130(a)(1) invokes them within.

FINRA Rule 11870's Customer Account Transfer Contracts

FINRA Rule 11870's title — Customer Account Transfer Contracts — addresses a category distinct from the inter-dealer and dealer-customer transaction contracts this dictionary's coverage has primarily addressed. A customer account transfer occurs when a customer moves securities account assets — the whole account or specifically designated parts of it — from one member firm to another, a process that FINRA Rule 11870 routes through the Automated Customer Account Transfer Service (ACATS), although a customer may send alternate instructions to transfer part of an account outside it.

FINRA Rule 11870's text, within the FINRA Rule 11800 Close-Out Procedures subsection, addresses what happens when a transfer is not completed by delivery: the carrying member and the receiving member must establish fail-to-receive and fail-to-deliver contracts against positions not delivered, and the rule sets its own close-out and sell-out procedures for those contracts, following the pattern of the close-out mechanics FINRA Rules 11810 and 11820 establish for ordinary inter-dealer transactions, but applied to the customer-account-transfer context specifically.

FINRA Rule 11880's Settlement of Syndicate Accounts

FINRA Rule 11880's title — Settlement of Syndicate Accounts — connects directly to FINRA Rule 11310(d)(2)'s new-issue underwriting syndicate timing provisions examined earlier in this dictionary's coverage, which addressed depository eligibility timing for new issues distributed by underwriting syndicates and referenced the syndicate's ability to track and manage repurchases of distributed shares during the post-distribution period.

FINRA Rule 11880's text, within the FINRA Rule 11800 subsection, establishes the framework for how a syndicate account itself — an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering — is finally settled: the syndicate manager must effect final settlement within 90 days following the syndicate settlement date, the date on which the issuer delivers the securities to or for the account of the syndicate members (for a public offering of a corporate debt security, by remitting to each syndicate member at least 70 percent of the gross amount due within 30 days and any final balance within 90 days), and must provide each member an itemized statement of syndicate expenses no later than the date of final settlement.

FINRA Rule 11890's Clearly Erroneous Transactions Cluster

FINRA Rule 11890's role as a series sub-marker — organizing FINRA Rule 11891 (General), FINRA Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities), FINRA Rule 11893 (Clearly Erroneous Transactions in OTC Equity Securities), and FINRA Rule 11894 (Review by the Uniform Practice Code ("UPC") Committee) — represents the third instance this dictionary has encountered of the series-marker-within-a-series-marker pattern, following FINRA Rule 11360 (units of delivery) and FINRA Rule 11570 (certificates in various names).

A clearly erroneous transaction is one with an obvious error in any of its terms, such as price, number of shares or other unit of trading, or identification of the security, and a FINRA officer may declare such a transaction null and void — a framework with obvious connections to the price-determination concerns this dictionary has traced throughout its coverage, from FINRA Rule 11170's part-redeemed bond pricing formula to FINRA Rule 11740's mark-to-market mechanism. The four-rule structure — general provisions (FINRA Rule 11891), then separate treatment for exchange-listed securities (FINRA Rule 11892) versus OTC equity securities (FINRA Rule 11893), followed by UPC Committee review (FINRA Rule 11894) — mirrors the kind of general-then-category-specific-then-review structure this dictionary has observed elsewhere, while the explicit naming of the UPC Committee in FINRA Rule 11894's title connects directly to FINRA Rule 11110's establishment of that Committee's interpretive and oversight authority throughout the Uniform Practice Code.

The Scale of FINRA Rule 11800: Comparable to FINRA Rule 11500

With thirteen total entries (including the FINRA Rule 11800 header itself, the FINRA Rule 11830 Reserved placeholder, and the four-rule FINRA Rule 11890 Clearly Erroneous Transactions cluster), FINRA Rule 11800 approaches the scale of FINRA Rule 11500 — the largest subsection this dictionary has examined, with fourteen entries of its own counted the same way. This scale is consistent with FINRA Rule 11800's capstone function — just as FINRA Rule 11500 needed to address the wide variety of special circumstances affecting delivery (temporary certificates, mutilation, called/worthless securities, governmental restrictions, registration-name categories, and limited partnerships), FINRA Rule 11800 needs to address the wide variety of circumstances under which a transaction's close-out becomes necessary — ordinary buy-ins and sell-outs, rights and warrants, COD orders, customer account transfers, syndicate account settlement, and clearly erroneous transactions across both exchange-listed and OTC contexts.

Connection to FINRA Rules 11100, 11110, 11130, 11140, 11170, 11190, 11220, 11310, 11360, 11570, 11630, 11710, 11740, and 11900

FINRA Rule 11800 connects to FINRA Rule 11100(c) — whose non-cancellation principle and direction to buy-in and sell-out remedies establishes the foundational framework that FINRA Rule 11810 and FINRA Rule 11820 will provide the detailed mechanics for.

It connects to FINRA Rule 11110 — whose UPC Committee FINRA Rule 11894's title explicitly names. It connects to FINRA Rule 11130(a)(1) — whose explicit cross-reference to FINRA Rule 11860 this dictionary will resolve when examining that rule directly.

It connects to FINRA Rule 11140, FINRA Rule 11220, and FINRA Rule 11630(c) — whose rights-and-warrants threads FINRA Rule 11840 likely brings into the close-out context. It connects to FINRA Rule 11170 and FINRA Rule 11740 — whose pricing-determination concerns (part-redeemed bond settlement price; mark-to-market) connect conceptually to the Clearly Erroneous Transactions cluster's pricing-validity focus. It connects to FINRA Rule 11190(b)(1), FINRA Rule 11630(f), and FINRA Rule 11710(b)(2) — each having cross-referenced the FINRA Rule 11810 buy-in or FINRA Rule 11820 sell-out frameworks this subsection now houses. It connects to FINRA Rule 11310(d)(2) — whose underwriting syndicate provisions connect to FINRA Rule 11880's syndicate account settlement framework. It connects to FINRA Rule 11360 and FINRA Rule 11570 — as structural parallels for the series-marker-within-a-series-marker pattern FINRA Rule 11890 replicates. And it connects to FINRA Rule 11900 — the final rule of the entire 11000 series, which this dictionary anticipates examining after completing FINRA Rule 11800's thirteen entries.

What FINRA Rule 11840 Means by Rights and by Warrants

FINRA Rule 11840 opens by defining its two subjects. A right, or right to subscribe, is the privilege offered to holders of record of issued securities to subscribe, usually on a pro rata basis, for additional securities. Those securities may be of the same class, of a different class, or of a different issuer. So a privilege offered to a company's shareholders of record to subscribe for shares of another company is still a right in the rule's sense. What makes it a right is that it is offered to holders of record of issued securities. The securities subscribed for need not be the issuer's own.

A warrant, or stock purchase warrant, is an instrument issued separately or together with other securities. It is not necessarily issued to stockholders of record as of a specific date. Warrants issued with or attached to bonds, common stock or preferred stock are the rule's examples. The instrument represents the privilege to purchase securities at a stipulated price or prices, and it is usually valid for several years. Suppose a company sells a new bond issue to investors who held none of its securities before, and attaches to each bond a detachable instrument allowing the holder to buy common stock at $25 a share for five years. That instrument is a warrant. It accompanies another security, it was not offered to holders of record as of a date, and it carries a privilege to buy at a stipulated price for several years.

Trading Rights and Warrants: The Basis and the Unit

FINRA Rule 11840 fixes the basis on which each instrument trades. Transactions in rights to subscribe are on the basis of one right accruing to each share of issued stock, except as otherwise designated by the Committee. A shareholder holding 750 shares of issued stock therefore holds 750 rights for trading purposes, whatever number of rights the subscription terms require for each new share. The unit of trading in rights is 100 rights, unless otherwise specified.

Warrants trade on a basis of their own. Except as otherwise agreed or designated by the Committee, a transaction in stock purchase warrants is on the basis of one warrant representing the right of the purchaser to receive one warrant in settlement. The unit of trading is 100 warrants. So the quantity is counted in warrants, not in the securities the warrants can buy. Take a buyer of 400 warrants, each of which entitles its holder to buy half a share. That buyer receives 400 warrants in settlement, not 200 of anything. The wording of the two paragraphs also differs. The basis for rights gives way only where the Committee designates otherwise. The basis for warrants gives way where the parties agree otherwise or the Committee designates otherwise.

What a Member Must Know Before Selling Warrants

Before selling warrants, a member has to establish the facts that decide what is being sold. FINRA Rule 11840(d) lists four. The member must ascertain how many warrants it has to sell, what each warrant entitles the holder to purchase, the purchase price, and the current price of the warrant relative to the price of the underlying security that may be purchased. A member preparing to sell a customer's warrants therefore checks the quantity held, the entitlement per warrant, the purchase price, and where the warrant is priced against the underlying stock. The rule adds that trades in warrants should be properly described on comparisons and confirmations.

Delivering Rights and Warrants That Have Expired

Rights and warrants run out. FINRA Rule 11840(e) governs contracts for warrants, rights or other securities that have expired by their terms. Where delivery on such a contract is effected more than 30 days after expiration, the delivery consists of either the expired securities or a Letter of Indemnity in lieu of the expired instrument. Consider a seller that owes a buyer 2,000 warrants which expired by their terms 45 days ago, and that no longer has the expired warrants to hand over. It may deliver a Letter of Indemnity in lieu of them.

Units get their own treatment. Where one or more integral parts of a unit, or of another security, has expired by its terms, the instrument ceases after expiration to be a unit as originally contemplated in the contract. Deliveries effected after expiration consist of the unexpired security together with either the expired instrument or a Letter of Indemnity in lieu of it. This paragraph speaks of deliveries "after expiration" and sets no 30-day condition. Suppose a buyer contracted for units, each made up of one share and one warrant, and the warrant expires before delivery. The seller then delivers the share, together with the expired warrant or a Letter of Indemnity in lieu of it.

Expiration does not reprice the contract. Deliveries under either paragraph are settled at the existing contract price. A buyer that contracted for warrants at $1.20 each pays $1.20 each on such a delivery, even though the warrants expired before it was made.

The rule's sample Letter of Indemnity shows what the instrument does. The member delivering it assigns to the buyer all rights and privileges that may accrue on the contract. It agrees to indemnify and hold the buyer harmless against claims, liabilities, damages, taxes, charges and expense incurred by reason of the delivery. The form closes by stating that acceptance of the delivery shall operate to close out the contract in accordance with the provisions of the Uniform Practice Code. This is the point at which FINRA Rule 11840 meets the close-out theme of its subsection.

Rights and Warrants Due to Expire: The Liability Notice in FINRA Rule 11810

A failure to deliver rights or warrants before they expire is handled in FINRA Rule 11810, not in FINRA Rule 11840. Where a contract is for warrants, rights, convertible securities or other securities due to expire by their terms, and the expiration date is the settlement date of the contract or later, the receiving member may deliver a Liability Notice to the delivering member. This is an alternative to the ordinary close-out procedures. The channel for the notice is prescribed:

Where both parties participate in a registered clearing agency that has an automated service for notifying a failing party of its liability, the notice must be sent through that service.

Where they do not both participate, the notice must be issued in written or comparable electronic form with immediate receipt capabilities. It must be sent as soon as practicable, and no later than two hours before the cutoff time for the offer or other event.

So two members that both participate in a clearing agency offering such a service cannot give the notice by fax.

Some instruments can be exercised on any day. For a deliverable instrument with an exercise provision that can be used on a daily basis, the receiving member may deliver a Liability Notice no later than 11:00 a.m. ET on the day the exercise is to be effected, where the settlement date of its purchase is on or before the requested exercise date. If the contract remains undelivered at expiration and has not been cancelled by mutual consent, the receiving member notifies the defaulting member of the exact amount of the liability on the next business day.

A receiving member does not have to use the Liability Notice. If the procedures are not used, the contract may be bought in without prior notice, after normal delivery hours, on the expiration date, for the account and risk of the defaulting member.

A Buy-In Timeline, Worked Through

FINRA Rule 11810 builds its timetable from the date delivery was due. A buyer may close an uncompleted contract not sooner than the third business day following that date. Written notice of the buy-in must be delivered to the seller at its office no later than 12:00 noon ET, two business days before the proposed execution. Take a contract on which delivery was due on a Monday, in a week with no holiday. The third business day following the Monday is the Thursday, so Thursday is the earliest day the buy-in can be executed. For a Thursday execution, the notice must be at the seller's office by noon on the Tuesday.

A member that receives a buy-in notice may itself be waiting for the same securities from another party. It passes the notice on as a re-transmitted notice, and that runs to a shorter clock. The re-transmitted notice must reach the subsequent party no later than 12 noon ET on the business day before the time and date of the proposed execution. The delivery time it specifies may not be earlier than the time in the original notice. If the original notice names a Friday execution, the re-transmitted notice must reach the next party by noon on the Thursday.

Buy-In Notices: Receipt, Proof and Size

Three smaller requirements govern the notice itself:

The seller's confirmation that it received the buy-in notice is kept with the notice, as part of the buyer's books and records.

Before the proposed effective date, the seller has a right to ask the buyer for proof of the fail obligation, and the buyer must deliver that proof before that date. A buyer that fails to deliver the proof may not execute the buy-in to that extent.

When a notice is given for less than the full amount of securities due, it may not be for less than one trading unit. Take a buyer still owed part of a delivery in a stock that trades in units of 100 shares. It cannot issue a buy-in notice for 40 shares.

Executing and Reporting the Buy-In

A buy-in need not be a fresh purchase in the market. FINRA Rule 11810 allows a member to execute a buy-in from its own long position, from customers' accounts maintained with it, or both. Wherever the securities come from, members must be prepared to defend the price at which the buy-in is executed relative to the current market at the time of the buy-in. A buyer that fills its buy-in at a price well above where the stock was trading at that moment must be ready to justify that price.

After execution, the party for whose account the securities were bought must be told the quantity purchased and the price paid, in written or electronic form with immediate receipt capabilities. If that kind of written media is not available, the telephone is used for same-day notification. Written or similar electronic notification with next-day receipt capabilities must be sent out at the same time. A telephone call alone does not complete the notification.

Reporting a Sell-Out on the Day

The seller's side has a same-day reporting duty too. A party executing a sell-out under FINRA Rule 11820 must notify the broker-dealer for whose account and risk the securities were sold of the quantity sold and the price received. It must do so as promptly as possible on the day of execution, and no later than 6 p.m. ET. A sell-out executed at 11:00 a.m. on a Tuesday must therefore be reported by 6 p.m. that Tuesday. Notification the next morning is late.

Buying In Unit Investment Trust Securities by Substitution

FINRA Rule 11810 gives a buyer of unit investment trust securities execution options beyond the ordinary buy-in. One of them rests on agreement. By mutual agreement, the buyer may accept from the seller, in place of the seller's obligation under the original contract, delivery of unit investment trust securities comparable to those bought in quantity, quality, yield or price, and maturity. The original contract is cancelled at the same time. Any additional expenses, or any additional cost of acquiring the substituted securities, are borne by the seller.

Customer Account Transfers: When a Carrying Member May Take Exception

Under FINRA Rule 11870, a carrying member may take exception to a transfer instruction only on the grounds the rule lists. One listed ground is that the account title on the transfer instruction does not match the title on the carrying member's records. Take an instruction to transfer an account titled in one spouse's name alone, where the carrying member's records show a joint account. That is a ground on which the carrying member may take exception.

An invalid account number is another listed ground. The rule narrows it. If the carrying member changed the account number to reassign the account internally to another broker or account executive, it is the carrying firm's job to track the changed number. The reassigned number is not treated as invalid. A carrying member that renumbered an account when the customer's representative left cannot reject a transfer instruction because it carries the old number.

If the carrying member takes exception because the account is "flat", meaning it reflects no transferable assets, the receiving member may re-submit the transfer instruction only with the customer's most recent statement attached.

Customer Account Transfers: Valuation, Cards and Checks, and Disposition Proceeds

When the carrying member validates a transfer instruction, it attaches a list of the positions and money balances to be transferred. That list must include a then-current market value for each asset. Where a then-current market value cannot be determined, as with a limited partnership interest, the asset must be valued at original cost.

A transfer of a whole account carries a condition for the customer. Where securities account assets are being transferred in whole, other than retirement plan account assets, the customer must affirm that he or she has destroyed or returned to the carrying member any credit or debit cards and any unused checks issued in connection with the account. The affirmation is part of the transfer instruction that the customer authorizes.

Some assets cannot be transferred. Once the customer has authorized the liquidation or transfer of such assets, the carrying member must distribute the resulting money balance to the customer, or initiate the transfer, within five business days after receiving the customer's disposition instructions.

Customer Account Transfers: Living With Fail Contracts

Within three business days after validation, the carrying member must complete the transfer, and the two members immediately establish fail-to-receive and fail-to-deliver contracts at then-current market values against positions not delivered. From that point FINRA Rule 11870 governs those fail contracts as open obligations:

Open fail contracts established under the rule must be marked to the market regularly.

A carrying member may not reject ("DK") a fail contract, including a Receive/Deliver Instruction generated by an automated customer account transfer system, for assets in an account that has been transferred but whose assets have not been delivered to the receiving member.

With the customer's prior consent, members may agree to close out such fail contracts by delivering securities substantially comparable to those owed.

If one or both members is not a member of a registered clearing agency, the fail contracts are established outside a clearing corporation on an "ex-clearing house" basis. Their settlement, and any close-out executions, are made ex-clearing house too.

Where a valued fail contract in a security has no established close-out procedure and the carrying member has not completed it, the receiving member follows the close-out procedure in FINRA Rule 11870 itself. Every close-out notice must state a time for delivery, and that time may not be earlier than 3:00 p.m. ET.

Clearly Erroneous Review in Numbers

The clearly erroneous rules turn on numbers. For an OTC equity security, a transaction may be found clearly erroneous only if its execution price is away from the Reference Price by an amount that equals or exceeds the Numerical Guideline for that price tier. The Reference Price is generally the prevailing market price just before the trade. For Reference Prices from $5.0000 up to and including $74.9999, the guideline is 10%. Take an OTC equity security whose Reference Price is $20.00 and which trades at $22.50. The trade is 12.5% away, which is at least the 10% guideline, so it may be found clearly erroneous. Meeting the guideline is the condition for such a finding; the rule does not say a finding must follow. Had the trade printed at $21.50, 7.5% away, it could not be.

For an exchange-listed security traded over the counter outside Normal Market Hours, the figures in FINRA Rule 11892 apply. For a Reference Price greater than $25.00 up to and including $50.00, the outside-hours guideline is 10%. Subject to the additional factors the rule lists, a transaction that equals or exceeds it shall be found clearly erroneous. A trade at $33.30 against a Reference Price of $30.00, 11% away, reaches that guideline. The in-hours figure for the same tier is 5%.

A determination by a FINRA officer, or a decision of the UPC Committee on appeal, is rendered without prejudice to the parties' right to submit their dispute to arbitration.

Examination Relevance and Key Takeaways

FINRA Rule 11800 is tested on the Series 7 and Series 24 examinations as the series-level marker for the Close-Out Procedures framework — the capstone subsection housing the buy-in and sell-out mechanics this dictionary has anticipated since FINRA Rule 11100(c), alongside rights and warrants, COD orders, customer account transfers, syndicate settlement, and clearly erroneous transactions.

The key points to retain are these: FINRA Rule 11800 has no operative text, no amendment history, and no selected notices of its own — it organizes thirteen entries: FINRA Rule 11810 (Buy-In Procedures and Requirements), FINRA Rule 11820 (Selling-Out), FINRA Rule 11830 (Reserved), FINRA Rule 11840 (Rights and Warrants), FINRA Rule 11860 (COD Orders — note the gap, as FINRA Rule 11850 does not exist), FINRA Rule 11870 (Customer Account Transfer Contracts), FINRA Rule 11880 (Settlement of Syndicate Accounts), and FINRA Rule 11890 (series sub-marker for Clearly Erroneous Transactions, organizing FINRA Rules 11891 through 11894); FINRA Rules 11810 and 11820 represent the buy-in and sell-out frameworks repeatedly cross-referenced throughout this dictionary's coverage — by FINRA Rule 11190(b)(1), FINRA Rule 11630(f), and FINRA Rule 11710(b)(2); FINRA Rule 11890's four-rule cluster represents the third series-marker-within-a-series-marker pattern this dictionary has encountered, following FINRA Rule 11360 (units of delivery) and FINRA Rule 11570 (certificates in various names); and with thirteen total entries, FINRA Rule 11800 approaches the scale of FINRA Rule 11500, the largest subsection previously examined, consistent with FINRA Rule 11800's function as the convergence point for the Uniform Practice Code's remedial frameworks.