FINRA Rule 11890

FINRA Rule 11890 sits within the 11800 Close-Out Procedures subsection of the 11000 Uniform Practice Code as the series-level marker for its final cluster, immediately following FINRA Rule 11880’s settlement of syndicate accounts framework and immediately preceding FINRA Rule 11891, the first rule of the cluster it organizes.

What “Clearly Erroneous Transactions” Means and Why It Concludes the FINRA Rule 11800 Subsection

A clearly erroneous transaction is a trade 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 for price the procedural rules measure the error by how far the execution price is from a Reference Price; under those rules a FINRA officer may declare the transaction null and void, and on appeal the UPC Committee may affirm, modify, reverse, or remand that determination. 

This concept addresses a problem categorically different from the delivery-and-payment failures this dictionary has traced throughout FINRA Rules 11810 through 11880 — those rules address what happens when a validly-priced transaction fails to settle as agreed; the Clearly Erroneous Transactions cluster instead addresses what happens when the transaction’s own terms (most centrally, its price) are themselves so anomalous that the transaction’s validity is called into question from the outset.

FINRA Rule 11890’s position as the final cluster within the FINRA Rule 11800 Close-Out Procedures subsection nonetheless makes structural sense. This dictionary has traced pricing-validity concerns at several points throughout its coverage — FINRA Rule 11170’s settlement price formula for part-redeemed bonds, FINRA Rule 11740’s marking-to-market mechanism for when, as and if issued/distributed contracts, and FINRA Rule 11810(d)(1)(D)’s requirement that members be prepared to defend the price at which a buy-in is executed relative to the current market. 

The Clearly Erroneous Transactions cluster represents the most direct and comprehensive treatment of price-validity questions this dictionary has encountered — addressing not merely how a price is calculated or defended in a specific remedial context, but whether a transaction’s price is so anomalous that the transaction itself should be unwound.

Regulatory Notice 10-04 and the 2010 Consolidation of Clearly Erroneous Transaction Rules

Regulatory Notice 10-04’s title — “SEC Approves Consolidated FINRA Rules Governing Clearly Erroneous Transactions” — and its January 15, 2010 date situate this cluster’s origin within the broader Consolidated FINRA Rulebook project this dictionary has traced throughout its coverage, but as a notably earlier and more specifically-targeted approval than the December 15, 2010 SR-FINRA-2010-030/SR-FINRA-2010-060 amendments this dictionary has encountered repeatedly for individual rule transfers.

The consolidated framing suggests that, prior to this 2010 consolidation, clearly erroneous transaction rules may have existed in some more fragmented form — potentially with different standards applicable across different markets or contexts (consistent with FINRA Rule 11892’s separate treatment of exchange-listed securities and FINRA Rule 11893’s separate treatment of OTC equity securities) — with the 2010 consolidation bringing these various standards together into the unified FINRA Rule 11890 cluster this dictionary now examines. This dictionary cannot confirm the specific pre-consolidation history without examining FINRA Rules 11891 through 11894 directly, but notes Regulatory Notice 10-04’s title and date as the relevant starting point for this cluster’s modern framework.

The Four-Rule Structure: General, Exchange-Listed, OTC Equity, and UPC Committee Review

FINRA Rule 11891’s title — General — suggests this rule establishes foundational definitions and principles applicable across the cluster, paralleling the role this dictionary has observed for other “General Provisions”-titled rules, most directly FINRA Rule 11710 within the FINRA Rule 11700 subsection.

FINRA Rule 11892 and FINRA Rule 11893’s parallel titles — Clearly Erroneous Transactions in Exchange-Listed Securities and Clearly Erroneous Transactions in OTC Equity Securities respectively — establish a market-structure-based bifurcation. 

This bifurcation directly parallels the kind of category-specific treatment this dictionary has observed throughout its coverage — FINRA Rule 11140(b)(3)’s separate ADR-and-foreign-securities treatment, FINRA Rule 11550(i)’s foreign-internal-securities carve-out, and most directly, FINRA Rule 11860(a)’s Clearing Agency framework, which itself addresses both exchange-cleared and OTC-context transactions. Exchange-listed securities trade on national securities exchanges with their own market-structure characteristics (specialists or designated market makers, exchange-specific trading rules, and so on), while OTC equity securities trade in the over-the-counter market without a single primary exchange — these structural differences plausibly warrant the separate treatment FINRA Rule 11892 and FINRA Rule 11893’s titles suggest, with FINRA Rule 11891’s General provisions presumably establishing whatever common framework applies across both contexts before each rule’s category-specific provisions diverge.

FINRA Rule 11894’s title — Review by the Uniform Practice Code (“UPC”) Committee — directly invokes the UPC Committee this dictionary has traced throughout its coverage since FINRA Rule 11110, here in a review capacity specifically for clearly erroneous transaction determinations. 

This review function connects to the broader interpretive and dispute-resolution role this dictionary has observed the Committee perform — FINRA Rule 11110’s general interpretations and rulings authority, FINRA Rule 11140(b)(3) and (c)’s ex-date designation authority, FINRA Rule 11810(g) and (i)’s extension and close-out-ruling authority, and now FINRA Rule 11894’s review authority specifically for clearly erroneous transaction determinations made in the first instance under FINRA Rule 11892 or FINRA Rule 11893.

The Shared T+2 Connection: Regulatory Notice 17-19

FINRA Rule 11890’s page displays Regulatory Notice 17-19 alongside Regulatory Notice 10-04, but that display does not show that the Clearly Erroneous Transactions cluster — unlike FINRA Rules 11140, 11150, 11210, 11320, and 11620 — was amended as part of the 2017 T+2 settlement cycle conformity initiative. The amendment histories of FINRA Rules 11891 through 11894 record no amendment in 2017, and none of them lists Regulatory Notice 17-19; the settlement cycle does bear on the cluster in one place, because under FINRA Rule 11892(d) no action can be taken on transactions in a multi-day event that have reached settlement date.

Notably, Regulatory Notice 17-19 appears on FINRA Rule 11890’s page without the corresponding Regulatory Notice 24-04 (the T+1 conformity notice) that this dictionary has seen accompany Regulatory Notice 17-19 for FINRA Rules 11140, 11150, 11210, 11320, and 11620. The individual child rules’ own amendment histories show that this absence does not mean the cluster was left out of the 2024 T+1 conformity wave: FINRA Rule 11893 and FINRA Rule 11894 were each amended by SR-FINRA-2023-017 effective May 28, 2024, and each lists Regulatory Notice 24-04 among its selected notices.

Connection to FINRA Rules 11110, 11140, 11150, 11170, 11210, 11320, 11360, 11570, 11620, 11710, 11800, 11810, and 11860

FINRA Rule 11890 connects to FINRA Rule 11110 — whose UPC Committee FINRA Rule 11894’s title explicitly names in a review capacity. It connects to FINRA Rule 11140, FINRA Rule 11150, FINRA Rule 11210, FINRA Rule 11320, and FINRA Rule 11620 — whose Regulatory Notice 17-19 its own page also displays, although its own page does not display the corresponding T+1 Notice 24-04, which appears instead among the selected notices of FINRA Rules 11893 and 11894. 

It connects to FINRA Rule 11170 and FINRA Rule 11740 — whose pricing-determination frameworks (part-redeemed bond settlement price; mark-to-market) represent earlier instances of the pricing-validity concerns this cluster addresses comprehensively. It connects to FINRA Rule 11360 and FINRA Rule 11570 — as the third instance of the series-marker-within-a-series-marker pattern this dictionary has now traced across its coverage. 

It connects to FINRA Rule 11710 — as a structural parallel for FINRA Rule 11891’s anticipated General-provisions role. It connects to FINRA Rule 11800 as its parent series marker, the final cluster within that subsection. It connects to FINRA Rule 11810(d)(1)(D) — whose price-defense documentation requirement for buy-ins represents an earlier, narrower instance of the price-validity concern this cluster addresses generally. And it connects to FINRA Rule 11860(a)(5) — whose Clearing Agency-based bifurcation of book-entry settlement responsibilities provides a structural parallel for the exchange-listed-versus-OTC bifurcation FINRA Rule 11892 and FINRA Rule 11893’s titles establish.

Which Errors the Series Reaches

FINRA Rule 11891 supplies the definition used across the whole series. The terms of a transaction are clearly erroneous “when there is an obvious error in any term, such as price, number of shares, or other unit of trading, or identification of the security”. Price is one of several terms. A trade can therefore be clearly erroneous because of its size or because it was in the wrong security, not only because of its price.

The definition concerns a transaction’s own terms. Consider a trade executed at a fair price, where the seller then fails to deliver the securities. None of its terms is in error, so it is not a clearly erroneous transaction. The seller’s failure to deliver is a settlement problem, and it is handled by the close-out procedures of FINRA Rules 11810 through 11880.

The procedural rule can set a narrower gate than the definition. FINRA Rule 11893 allows a transaction in an OTC Equity Security to be found clearly erroneous under that rule “only if the execution price of the transaction is away from the Reference Price by an amount that equals or exceeds the Numerical Guidelines”. Suppose an OTC equity trade is executed for a hundred times the intended number of shares, at a price equal to the prevailing market price just before the trade. 

The error in the number of shares is an obvious error in a term under FINRA Rule 11891. Because the price is not away from the Reference Price, however, the trade cannot be found clearly erroneous under FINRA Rule 11893. FINRA Rule 11893(a) separately allows a FINRA officer to declare a transaction null and void where that is necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest.

Which Transactions Each Rule Reaches

Each of the two procedural rules has its own reach. FINRA Rule 11892 lets a FINRA officer review “any over-the-counter transaction involving an exchange-listed security” that arises out of or is reported through a trade reporting system owned or operated by FINRA and authorized by the Commission. An execution on a national securities exchange is not an over-the-counter transaction. A trade printed on the exchange itself is therefore outside the officer’s review under FINRA Rule 11892, even though an over-the-counter trade in the same security, reported to a FINRA facility, would be within it.

FINRA Rule 11893 reaches transactions involving an “OTC Equity Security”. FINRA Rule 11893(c) gives that term the meaning in FINRA Rule 6420, which defines it as any equity security that is not an NMS stock and excludes any Restricted Equity Security. FINRA Rule 11893(c) further excludes any equity security traded on a national securities exchange. Two consequences follow:

A corporate bond that is not listed on any exchange is neither an exchange-listed security nor an equity security. Neither FINRA Rule 11892 nor FINRA Rule 11893 gives a FINRA officer a procedure for reviewing a trade in it.

A Restricted Equity Security, meaning an equity security that is a “restricted security” under Securities Act Rule 144(a)(3), is excluded from the term “OTC Equity Security”. A trade in such a security that is not traded on any exchange is therefore outside FINRA Rule 11893’s review.

The two rules also differ on time of day. FINRA Rule 11893(a) lets the officer review “any transaction involving an OTC Equity Security” reported through a FINRA system, and says nothing about Normal Market Hours. An OTC equity trade executed at 11:00 a.m. Eastern Time is as open to review as one executed at 7:00 p.m.

Exchange-Listed Trades: When Review Is Available

For an over-the-counter trade in an exchange-listed security, FINRA Rule 11892 treats Normal Market Hours (9:30 a.m. to 4:00 p.m. Eastern Time) differently from other times. During those hours a transaction “will not be reviewable as clearly erroneous unless” it falls within one of three categories: the security is an NMS Stock not subject to the Limit Up-Limit Down (LULD) Plan;

Price Bands were unavailable, a member’s technology or systems issue put the trade outside the Price Bands, or the trade came after a regulatory trading halt, suspension or pause; the Reference Price was erroneous in the case of a corporate action, a new issue, or a resumption after a Trading Pause without an auction.

Suppose that at 11:00 a.m. a member mixes up two similar ticker symbols and buys the wrong issuer’s shares over the counter. The security is an NMS Stock subject to the LULD Plan, Price Bands were being disseminated, no systems issue was involved, and no halt had been declared. The error in the identification of the security is obvious. However, none of the three categories applies, so the trade is not reviewable as clearly erroneous under FINRA Rule 11892. Had the same error occurred at 8:30 a.m., before Normal Market Hours, the trade would have been open to review.

The same limit applies to the extra tools. Under FINRA Rule 11892(b)(2)(C), a FINRA officer may consider additional factors such as news, volume and volatility, or a recent halt, “provided the execution occurred outside of Normal Market Hours or is eligible for review pursuant to paragraph (b)(1)(A)”. Suppose an in-hours trade is under review only because Price Bands were unavailable, a (b)(1)(B) case. It is measured against the Percentage Parameters, and the additional factors are not available to the officer. Likewise, the alternative Reference Price for news, extreme volatility, sustained illiquidity or widespread system issues under FINRA Rule 11892(c)(3) is available only where those circumstances occurred outside Normal Market Hours or the trade is eligible under paragraph (b)(1)(A).

Where a single plan processor has a technology or systems issue that prevents the dissemination of Price Bands, there are no bands to test the trade against. FINRA then decides under FINRA Rule 11892(b)(1)(B). A trade to buy is clearly erroneous if its price is greater than the Reference Price by at least the applicable Percentage Parameter in Appendix A to the LULD Plan, and a trade to sell if its price is less than the Reference Price by that amount.

A member’s own systems failure is handled differently. If a member’s technology or systems issue causes a trade reported to a FINRA system to occur outside the Price Bands, a FINRA officer “shall review and deem such transaction clearly erroneous”, subject to the member’s certification that the cause was a bona fide technological or systems issue.

Exchange determinations also matter. FINRA generally follows a national securities exchange that has broken related trades at or near the price and time in question. Where several exchanges have related trades and any one of them left its trade unbroken, FINRA will leave the over-the-counter trade unbroken.

Exchange-Listed Trades: Applying the Thresholds

The Numerical Guidelines in FINRA Rule 11892(b)(2) are set by Reference Price tier. The first tier runs from “Greater than $0.00 up to and including $25.00”. It carries 10% for eligible trades during Normal Market Hours and 20% outside them. The next tier, above $25.00 up to and including $50.00, carries 5% and 10%. Suppose a trade at 9:15 a.m. is 15% away from a Reference Price of exactly $25.00. The trade is outside Normal Market Hours and the price falls in the first tier, so the applicable guideline is 20%, which the trade does not reach. Had the Reference Price been $25.01, the guideline would have been 10%, and the same 15% deviation would have met it.

Leveraged products use the in-hours figures. For “Leveraged ETF/ETN securities” the table gives “N/A” in the in-hours column. In the outside-hours column it gives “Normal Market Hours Numerical Guidelines multiplied by the leverage multiplier”. Consider a three-times leveraged ETF with a Reference Price of $60 that trades at 7:00 p.m. The in-hours guideline for a price above $50 is 3%, so the applicable figure is 9%. The ordinary outside-hours figure of 6% does not apply, and neither does 6% multiplied by three.

Multi-Stock Events displace the price tiers. An event involving five or more, but fewer than twenty, securities “whose executions occurred within a period of five minutes or less” carries a flat 10%, in or out of hours. Suppose eight securities print aberrant trades within three minutes after the close, one of them a stock with a $100 Reference Price whose trade is 8% away. On its own that trade would face the outside-hours figure of 6%. As part of the event it faces 10%, which it does not reach. The additional factors cannot be used either, because FINRA Rule 11892(b)(2)(C) excludes Multi-Stock Events involving five or more securities.

The five-minute window is part of the definition. If six securities print aberrant trades spread over twelve minutes, the executions did not occur within five minutes or less. The trades are not a Multi-Stock Event, and each is measured against the ordinary guideline for its own price tier.

In an event involving twenty or more securities, the Reference Price itself may change. FINRA coordinates with other self-regulatory organizations to set the review period and to select one or more points in time before the transactions in question. It uses prices at or immediately before those points as the Reference Price. It then nullifies all transactions in the review period that are 30% or more away from that Reference Price. Suppose a trade within the review period is 35% below the price at the selected point in time but only 5% below the consolidated last sale just before it. The trade is nullified, because the measure is the selected Reference Price, not the last sale.

Reference Prices in Unusual Cases

FINRA Rule 11892(b)(1)(C)(i) deals with a corporate action or new issue whose Reference Price is erroneous because it “clearly deviated from the theoretical value of the security”. In that case FINRA may use a new Reference Price based on theoretical value. Suppose a stock closed at $80 and opens the next day after a two-for-one split, and the unadjusted $80 is being used as the Reference Price. Among the factors FINRA would consider is “the ratio of the stock split applied to the prior day’s closing price”, which gives $40. For a new issue, the factors include the offering price.

Once the new Reference Price is set, the threshold depends on the security. A trade is measured against it by the Numerical Guidelines or the Percentage Parameters, “as applicable depending on whether the security is subject to the LULD Plan”. If the split stock is subject to the LULD Plan, the Percentage Parameters apply.

Actions Taken Without the Numerical Thresholds

Two exchange-listed powers apply regardless of how far a trade is from its Reference Price. The first is the multi-day Event. A series of transactions in a security, on one or more trading days, may be treated as one Event “if all such transactions were effected based on the same fundamentally incorrect or grossly misinterpreted issuance information resulting in a severe valuation error”. Any action “will be taken without regard to the Percentage Parameters or Numerical Guidelines”. Suppose the market misreads a split ratio and trades a stock for two days at prices that are all badly wrong, each close to the one before it. Every trade may be only 2% from its Reference Price, because the Reference Price is itself wrong. The trades can still be declared null and void as one Event.

The Event power has a limit tied to settlement. No action can be taken on transactions “that have reached settlement date”. Suppose an Event runs from Monday to Wednesday and the FINRA officer acts on Wednesday evening, by which time Monday’s trades have reached their settlement date. Monday’s trades cannot be declared null and void, and Tuesday’s and Wednesday’s can. The officer must act no later than the start of trading on the day after the Event’s last transaction. If trading is halted before the valuation error is corrected, the officer must act before trading resumes.

The second power covers trading halts. Where a disruption or malfunction in the transmittal or receipt of a regulatory trading halt lets trades print after the primary listing market declared the halt, a FINRA officer “shall declare as null and void” those trades, again without regard to the Percentage Parameters or Numerical Guidelines. Suppose FINRA, acting alone, voids such trades. The aggrieved party may appeal under FINRA Rule 11894. The appeal bars in that rule cover Price Band decisions under Supplementary Material .02 and rulings made in conjunction with other self-regulatory organizations, and neither applies here.

OTC Equity Trades in Practice

FINRA Rule 11893 uses a single table that does not change with the time of day. For a Reference Price from $5.0000 up to and including $74.9999 the figure is 10%. Suppose an OTC equity security with a $10.00 Reference Price trades 15% away at 7:00 p.m. The guideline is 10%, which the trade meets, whatever the hour.

Where a tier is a range, the percentage slides across it: “the maximum percentage difference applies to the lower execution price in the range and the minimum percentage difference applies to the higher execution price in the range”. For $1.0000 up to $4.9999, the range runs from 20% down to 10%.

The officer’s time limit is firm. The officer “shall take action ... as soon as possible after becoming aware of the transaction, but in all cases no later than the start of trading on the day following the date of the transaction(s) at issue”. Suppose an OTC equity trade executes on Monday afternoon and the officer first learns of it on Tuesday afternoon. The start of trading on Tuesday has passed, so the trade can no longer be declared null and void under FINRA Rule 11893(a).

The OTC rule also sets expectations. Supplementary Material .01 says that in the vast majority of situations involving OTC Equity Securities FINRA does not expect to use its clearly erroneous authority, and it expects the parties to settle any dispute privately.

A security’s category can change. FINRA Rule 11893(c) excludes from “OTC Equity Security” any equity security traded on a national securities exchange. A security that has up-listed to an exchange is therefore no longer within FINRA Rule 11893, and an over-the-counter trade in it reported to a FINRA facility is reviewed under FINRA Rule 11892. For such an up-listing, a factor FINRA would consider in setting a substitute Reference Price is the prior day’s FINRA Trade Dissemination Service final closing report.

From Determination to Appeal

A member or person associated with a member may appeal a FINRA officer’s “determination to declare a transaction null and void” to the UPC Committee. The appeal right is framed around nullification. Suppose an officer reviews a trade and decides to let it stand. FINRA Rule 11894(a) provides no appeal from that decision, because its appeal right runs from determinations declaring a transaction null and void.

An appeal “must be received by FINRA within thirty (30) minutes after the person making the appeal is given the notification of the determination being appealed”. The period runs separately for each person. Suppose FINRA reaches one party by electronic mail at 2:00 p.m. and the other by voicemail at 2:20 p.m. An appeal from the second party received at 2:45 p.m. is within its thirty minutes, although it comes forty-five minutes after the first party was notified.

Receipt is measured at FINRA’s end. Materials “shall be deemed received at the time indicated by the equipment (i.e., facsimile or computer) receiving the materials”. Suppose a member notified at 10:00 a.m. sends its appeal at 10:29 by its own system’s log, and FINRA’s computer records it arriving at 10:31. The appeal was received after the thirty minutes. FINRA reserves the right to reject or accept material not received within the time parameters.

The Committee’s deadline counts from the trade, not from the appeal. For OTC Equity Securities, determinations are rendered “as soon as practicable, but in no case later than the trading day following the date of the execution(s) under review”. Suppose an OTC equity trade executes on Monday. The officer declares it null and void at 8:45 a.m. on Tuesday, before trading opens, and an appeal arrives at 9:10 a.m. The Committee must decide no later than Tuesday. For exchange-listed securities, determinations are generally made on the same trading day as the execution, but an appeal received after 3:00 p.m. Eastern Time is decided no later than the next trading day.

The appeal reaches only the appellant’s own trades: “the scope of the appeal shall be limited to trades which the person making the appeal is a party”. The Committee may sit as a panel of three or more of its members, of whom no more than 50 percent may be directly engaged in market making activity or employed by a member whose market-making revenues exceed ten percent of its total revenues. A panel of five may therefore include at most two such members. A decision of the Committee on appeal, or an officer’s determination that is not appealed, is final and binding on all parties. Either kind of determination is rendered without prejudice to the parties’ right to submit their dispute to arbitration.

Examination Relevance and Key Takeaways

FINRA Rule 11890 is tested on the Series 7 and Series 24 examinations as the series-level marker for the Clearly Erroneous Transactions cluster — the framework addressing transactions with an obvious error in a term such as price, number of shares, or identification of the security, so that the transaction’s validity is called into question, concluding the FINRA Rule 11800 Close-Out Procedures subsection.

The key points to retain are these: FINRA Rule 11890 has no operative text of its own, but its page displays two notices — Regulatory Notice 10-04 (“SEC Approves Consolidated FINRA Rules Governing Clearly Erroneous Transactions,” January 15, 2010), marking this cluster’s 2010 consolidation as a dedicated rule filing distinct from the broader SR-FINRA-2010-030/060 transfers this dictionary has traced elsewhere, and Regulatory Notice 17-19, the T+2 settlement cycle conformity notice; FINRA Rule 11890 organizes four child rules — 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); a clearly erroneous transaction is one with an obvious error in any term, such as price, number of shares or other unit of trading, or identification of the security, and it may be declared null and void under specific procedural rules — categorically distinct from the delivery/payment-failure remedies (buy-in, sell-out) this dictionary examined in FINRA Rules 11810 through 11880; the four-rule structure bifurcates by market structure (exchange-listed versus OTC equity securities) with general provisions and UPC Committee review as bookending elements; and this represents the third instance of the series-marker-within-a-series-marker pattern this dictionary has encountered, following FINRA Rule 11360 and FINRA Rule 11570.