Table of Contents
SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 11820 establishes the seller's converse remedy to FINRA Rule 11810's buy-in — the sell-out mechanism this dictionary has anticipated since FINRA Rule 11100(c), and the specific remedy FINRA Rule 11710(b)(2) invoked for reclaimed or returned securities lacking a properly executed Uniform Reclamation Form. The rule operates through two lettered paragraphs.
Paragraph (a), Conditions Permitting "Sell-Out," establishes that upon a buyer's failure to accept delivery in accordance with the contract's terms, and lacking a properly executed Uniform Reclamation Form (or equivalent depository-generated advice for depository eligible securities) meeting FINRA Rule 11710(b)'s requirements, the seller may, without notice, sell-out in the best available market and for the account and liability of the defaulting party all or any part of the securities due or deliverable under the contract.
Paragraph (b), Notice of "Sell-Out," establishes the post-execution notification framework — as promptly as possible on the day of execution, but no later than 6 p.m. ET, notify the defaulting broker-dealer of the quantity sold and price received, in written or electronic form with immediate receipt capabilities, with formal confirmation forwarded as promptly as possible thereafter. FINRA Rule 11820 was amended by SR-FINRA-2010-030 effective December 15, 2010, by SR-NASD-91-13 effective November 1, 1991, and effective February 21, 1969 and September 1, 1969. One selected notice is associated — Regulatory Notice 10-49.
FINRA Rule 11820 sits within the 11800 Close-Out Procedures subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11810's buy-in procedures and immediately preceding FINRA Rule 11830, the Reserved placeholder.
FINRA Rule 11820(a)'s core triggering event — upon failure of the buyer to accept delivery in accordance with the terms of the contract — establishes the sell-out's mirror-image relationship to FINRA Rule 11810's buy-in. Where FINRA Rule 11810 addresses the seller's failure to deliver, FINRA Rule 11820 addresses the buyer's failure to accept delivery — the same fundamental dichotomy this dictionary identified at the outset of its coverage in connection with FINRA Rule 11100(c)'s non-cancellation principle, which directed the seller to FINRA Rule 11820's sell-out remedy specifically for the scenario where a buyer fails to pay for securities as delivered.
This failure to accept delivery formulation connects directly to FINRA Rule 11350's part delivery framework and FINRA Rule 11810(f)'s incorporation of that framework — recall that FINRA Rule 11350 establishes the buyer's mandatory acceptance obligation (subject to the odd-lot exception), and FINRA Rule 11810(f) incorporates this same obligation into the buy-in context. FINRA Rule 11820(a)'s failure to accept delivery represents a breach of that same FINRA Rule 11350 mandatory acceptance obligation — the buyer who fails to accept a delivery it was obligated under FINRA Rule 11350 to accept is the buyer whose failure FINRA Rule 11820(a) addresses.
FINRA Rule 11820(a)'s second condition — and lacking a properly executed Uniform Reclamation Form or the equivalent depository generated advice for depository eligible securities meeting the requirements prescribed in Rule 11710(b) — directly confirms and resolves the cross-reference this dictionary's FINRA Rule 11710 entry identified. Recall that FINRA Rule 11710(b)(2) provided that any security reclaimed or returned on a transaction without a properly executed Uniform Reclamation Form may, at the option of the receiving broker, be "sold-out" pursuant to Rule 11820, however, in no event later than three business days after receipt.
FINRA Rule 11820(a) now confirms the reciprocal side of this relationship — the sell-out remedy under FINRA Rule 11820 is available precisely where the buyer (the party that received and is now returning or reclaiming a security, per FINRA Rule 11710(a)'s definitions) has failed to accept delivery and is lacking a properly executed Uniform Reclamation Form (or its depository-generated equivalent for depository eligible securities). This confirms that FINRA Rule 11820's sell-out remedy operates in (at least) two related scenarios this dictionary's coverage has now traced from both directions — the original failure-to-accept-delivery scenario FINRA Rule 11100(c) anticipated, and the FINRA Rule 11710(b)(2) reclaimed-or-returned-without-proper-documentation scenario, both unified under FINRA Rule 11820(a)'s lacking a properly executed Uniform Reclamation Form... meeting the requirements prescribed in Rule 11710(b) condition.
The or the equivalent depository generated advice for depository eligible securities addition reflects the depository-eligible-securities context this dictionary examined in connection with FINRA Rule 11310's book-entry settlement mandate — for securities settled through book-entry at a registered securities depository under FINRA Rule 11310, the Uniform Reclamation Form's physical-paper-based mechanism (FINRA Rule 11710(b)'s form, accompanying physically reclaimed or returned securities) has a depository-system equivalent — an equivalent depository generated advice — serving the same documentary function within the electronic, book-entry environment.
FINRA Rule 11820(a)'s authorization for the seller to, without notice, sell-out presents a notable structural asymmetry relative to FINRA Rule 11810's buy-in framework. FINRA Rule 11810(b) establishes an elaborate notice-and-confirmation framework — written notice delivered two business days in advance, a deemed-acceptance default with a same-day rejection deadline, a re-transmission chain, and so forth — before a buy-in may be executed. FINRA Rule 11820(a), by contrast, authorizes the seller to sell-out without notice — no advance notice to the defaulting buyer is required before the sell-out itself occurs.
This asymmetry parallels the without notice authorizations this dictionary has encountered in more limited contexts elsewhere — FINRA Rule 11190(b)(1)'s without notice close-out for DK'd reconfirmation-and-pricing-service contracts, FINRA Rule 11740(e)'s without notice close-out for mark-to-market non-compliance, and FINRA Rule 11810(i)(3)'s without notice buy-ins and sell-outs under UPC Committee close-out rulings. FINRA Rule 11820(a) establishes this without notice characteristic as the general rule for sell-outs — not merely an exception applicable in specific circumstances (DK'd contracts, mark-to-market non-compliance, insolvency-related Committee rulings) as in those other provisions, but the baseline standard for sell-outs generally.
This asymmetry may reflect a practical reality regarding the two remedies' different postures. A buy-in requires the buyer (the non-defaulting party) to go into the market and purchase securities the seller failed to deliver — an affirmative action requiring the buyer to commit capital to a purchase, for which the elaborate notice framework provides the defaulting seller an opportunity to cure (deliver) before that purchase becomes necessary. A sell-out, by contrast, involves the seller (the non-defaulting party) selling securities it already possesses (since the seller, as the delivering party, presumably retains possession of securities the buyer failed to accept) — an action that may be considered less burdensome to reverse or adjust than a buy-in's affirmative purchase, and that addresses a scenario (a buyer's refusal or failure to accept delivery) where the buyer's own inaction has already signaled its position, potentially reducing the practical value of an advance-notice-and-cure-opportunity framework analogous to FINRA Rule 11810(b)'s.
FINRA Rule 11820(a)'s remaining elements — sell-out in the best available market and for the account and liability of the party in default all or any part of the securities due or deliverable under the contract — employ formulations this dictionary has now encountered as a consistent thread throughout the Uniform Practice Code's close-out provisions. The best available market standard parallels FINRA Rule 11810(d)(1)(C)'s identical phrase for clearing-corporation-failure buy-ins. The for the account and liability of the party in default formulation directly parallels FINRA Rule 11810(d)(1)(C) and FINRA Rule 11810(i)(4)'s account and liability allocations, FINRA Rule 11630(f)'s account and risk allocation, and FINRA Rule 11740(e)'s account and liability allocation — confirming that whatever financial consequences flow from the sell-out (most directly, any shortfall between the contract price and the price actually realized in the sell-out) fall on the defaulting buyer.
The all or any part of the securities due or deliverable under the contract formulation establishes that the sell-out, like the buy-in under FINRA Rule 11810(d)(1)(B), need not address the entire contracted quantity at once — a partial sell-out, addressing only part of the securities due or deliverable, is permitted.
FINRA Rule 11820(b) establishes the post-execution notification requirements — the party executing a "sell-out" shall, as promptly as possible on the day of execution, but no later than 6 p.m. ET, notify the broker-dealer for whose account and risk such securities were sold of the quantity sold and the price received, in written or electronic form having immediate receipt capabilities, with a formal confirmation of such sale... forwarded as promptly as possible after the execution.
This framework directly parallels FINRA Rule 11810(h)'s notice-of-executed-buy-in framework — the same as promptly as possible standard, the same 6 p.m. ET same-day deadline (matching FINRA Rule 11810(b)(4)'s 6:00 p.m. ET rejection deadline and FINRA Rule 11810(h)'s own 6:00 p.m. ET execution-notice deadline), and the same written or electronic form having immediate receipt capabilities standard this dictionary has now encountered repeatedly. The for whose account and risk such securities were sold language — notably using account and risk rather than paragraph (a)'s account and liability — may simply reflect stylistic variation rather than substantive distinction, both formulations appearing throughout the Uniform Practice Code's close-out provisions (FINRA Rule 11630(f)'s account and risk versus FINRA Rule 11740(e)'s account and liability) without apparent functional difference.
FINRA Rule 11820(b)'s formal confirmation of such sale shall be forwarded as promptly as possible after the execution — without FINRA Rule 11810(h)'s more specific 9:30 a.m. ET next-business-day deadline for formal confirmation — represents a notably less granular timing standard than its FINRA Rule 11810(h) counterpart, though the as promptly as possible standard for both the initial notification and the formal confirmation suggests the same underlying urgency this dictionary has observed throughout the close-out framework's notice provisions.
FINRA Rule 11820's amendment history — effective February 21, 1969 and September 1, 1969, followed by SR-NASD-91-13 effective November 1, 1991, and SR-FINRA-2010-030 effective December 15, 2010 — places its origins close in time to FINRA Rule 11740's February 21, 1969 and March 1, 1970 amendments examined in this dictionary's immediately preceding subsection, and situates its 1991 refinement within the same broader early-1990s modernization wave this dictionary has traced through FINRA Rules 11120, 11320, 11530, 11560, 11571, and 11720.
Notably, FINRA Rule 11820's amendment history is considerably shorter than FINRA Rule 11810's fourteen-effective-date history — FINRA Rule 11820 shows only four effective dates total. This relative brevity may reflect that the sell-out mechanism, addressing the buyer's-failure scenario, has presented fewer occasions requiring refinement than the buy-in mechanism's seller's-failure scenario — possibly because buyer defaults (failures to accept delivery or pay) may be operationally less complex to address than the wide variety of seller-default scenarios (cash contracts, UIT securities, securities in transit, expiring instruments, RECAPS interactions, and so forth) that have driven FINRA Rule 11810's extensive amendment history.
FINRA Rule 11820 connects to FINRA Rule 11100(c) — the foundational non-cancellation principle that directs a seller, upon a buyer's failure to pay for securities as delivered, to FINRA Rule 11820's sell-out remedy, which this rule now provides the detailed mechanics for. It connects to FINRA Rule 11190(b)(1) and FINRA Rule 11740(e) — both without notice close-out authorizations that FINRA Rule 11820(a)'s general without notice sell-out standard parallels, though as a baseline rule rather than a context-specific exception. It connects to FINRA Rule 11310 — whose depository eligible securities and registered securities depository concepts underlie FINRA Rule 11820(a)'s equivalent depository generated advice alternative to the physical Uniform Reclamation Form. It connects directly and substantively to FINRA Rule 11350 — whose mandatory delivery-acceptance obligation (subject to the odd-lot exception) the buyer's failure to accept delivery under FINRA Rule 11820(a) represents a breach of. It connects to FINRA Rule 11630(f) — a structural parallel for account-and-risk allocation language. It connects directly and by explicit, now-fully-confirmed cross-reference to FINRA Rule 11710(b) — whose Uniform Reclamation Form requirement and three-business-day sell-out option this rule's lacking a properly executed Uniform Reclamation Form... meeting the requirements prescribed in Rule 11710(b) condition directly incorporates, completing the bidirectional cross-reference this dictionary traced from FINRA Rule 11710(b)(2) to FINRA Rule 11820 and now confirmed from FINRA Rule 11820(a) back to FINRA Rule 11710(b). And it connects to FINRA Rule 11810 — its buyer's-remedy counterpart, sharing the best available market and for the account and liability of the party in default formulations, and the same promptly-on-the-day-of-execution-but-no-later-than-6-p.m.-ET notification structure.
FINRA Rule 11820 is tested on the Series 7 and Series 24 examinations as the sell-out framework — the seller's converse remedy to FINRA Rule 11810's buy-in, available without notice upon a buyer's failure to accept delivery where a properly executed Uniform Reclamation Form (or its depository-generated equivalent) under FINRA Rule 11710(b) is lacking.
The key points to retain are these: FINRA Rule 11820(a) permits a seller, upon a buyer's failure to accept delivery in accordance with the contract's terms, and lacking a properly executed Uniform Reclamation Form or equivalent depository-generated advice meeting FINRA Rule 11710(b)'s requirements, to sell-out without notice in the best available market, for the account and liability of the defaulting buyer, all or any part of the securities due or deliverable; this without notice standard represents the general baseline for sell-outs, in contrast to FINRA Rule 11810's elaborate advance-notice-and-rejection framework for buy-ins; the FINRA Rule 11710(b) cross-reference confirms the bidirectional relationship this dictionary traced from FINRA Rule 11710(b)(2)'s three-business-day sell-out option for reclaimed or returned securities lacking the Uniform Reclamation Form; FINRA Rule 11820(b) requires same-day notification (no later than 6 p.m. ET) of the quantity sold and price received, in written or electronic form with immediate receipt capabilities, with formal confirmation forwarded as promptly as possible thereafter — paralleling but somewhat less granular than FINRA Rule 11810(h)'s buy-in notification framework; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, by SR-NASD-91-13 effective November 1, 1991, and effective February 21, 1969 and September 1, 1969, with one selected notice, 10-49.
