FINRA Rule 2370

Origins in the Commodity Futures Modernization Act of 2000

For nearly two decades before the Commodity Futures Modernization Act of 2000 took effect, single-stock futures were effectively prohibited in the United States. The prohibition traced to the Shad-Johnson Accord of 1982, a jurisdictional compromise between SEC Chairman John Shad and CFTC Chairman Phil Johnson that drew a line between equity options, which fell under SEC jurisdiction, and commodity futures, which fell under CFTC jurisdiction. Single-stock futures sat uncomfortably across that line, and rather than resolve the jurisdictional ambiguity, the two agencies agreed to a ban. While single-stock futures traded actively in London, Sydney, Johannesburg, and other financial centers, the product was entirely unavailable to U.S. investors.

The Commodity Futures Modernization Act of 2000 resolved the impasse by defining security futures as both securities and futures contracts simultaneously, giving each agency full jurisdiction and requiring them to harmonize their regulatory frameworks. The CFMA established the foundational rule: futures on single securities and on narrow-based security indexes — those that concentrate exposure in a small number of component securities rather than tracking a broad market — would be regulated jointly by the SEC and CFTC. Futures on broad-based indexes such as the S&P 500 remain exclusively under CFTC jurisdiction and are not covered by Rule 2370. The SEC and CFTC adopted joint rules in August 2001 specifying the methodology for determining whether an index qualifies as narrow-based or broad-based, and in March 2004 the two agencies formalized their coordination through a Memorandum of Understanding governing joint oversight and information sharing for security futures product markets.

FINRA, then operating as NASD, adopted Rule 2865 — the precursor to Rule 2370 — effective October 15, 2002, coinciding precisely with the launch of security futures trading on U.S. exchanges, principally on OneChicago. The rule was redesignated as Rule 2370 when it was consolidated into the current FINRA rulebook through SR-FINRA-2008-032 and SR-FINRA-2009-005, effective February 17, 2009. Subsequent amendments in 2010 and 2011 refined the rule's provisions, with the most recent amendment — SR-FINRA-2011-065 — taking effect December 5, 2011. The rule has not been formally amended since that date.

The Narrow-Based Distinction and the Scope of Rule 2370

The definition of security future incorporated by Rule 2370(a) — drawn from Section 3(a)(55) of the Exchange Act — hinges on the concept of a narrow-based security index. Understanding this distinction is essential to understanding the rule's scope. A narrow-based security index is one that fails the broad-based tests established in the CFMA and the joint SEC/CFTC rules implementing it. The statutory criteria for narrow-basedness consider factors including the number of component securities in the index, the weight assigned to any single component, the market capitalization of each component, and whether the index's composition appears designed to circumvent the regulatory framework applicable to security futures.

The practical consequence of this distinction is that the most familiar equity index futures — contracts on the S&P 500, the Nasdaq-100, the Russell 2000 — fall outside Rule 2370 entirely and are regulated exclusively by the CFTC under the Commodity Exchange Act. Rule 2370 applies to contracts on individual stocks and to contracts on indexes that concentrate exposure in a small number of underlying securities, where the futures contract is more analogous to a leveraged position in a specific company or small basket of companies than to a diversified market exposure. This concentration is precisely what makes security futures a higher-risk product than broad-based index futures and explains the protective framework that Rule 2370 imposes.

General Framework and FINRA's Emergency Authority

Rule 2370(b)(1) establishes the rule's general applicability and its relationship to the rest of the FINRA rulebook. The rule applies to all security futures trading by FINRA members and their associated persons. Where Rule 2370 does not specifically address a matter, all other FINRA rules, the FINRA By-Laws, and all Board of Governors interpretations apply — meaning that the general standards of commercial honor under FINRA Rule 2010, the anti-fraud provisions under FINRA Rule 2020, and the trading-ahead prohibitions of FINRA Rule 5270 all remain fully operative in the security futures context.

Rule 2370(b)(8) grants FINRA independent authority to impose restrictions on security futures transactions whenever it determines such restrictions are necessary to maintain a fair and orderly market in security futures or in the underlying securities, or otherwise to serve the public interest or protect investors. During any period of restriction imposed under this provision, no member may effect any security futures transaction in contravention of that restriction. This emergency restriction authority reflects a specific concern that concentrated security futures positions could create or amplify manipulative pressure on underlying equity markets — a risk that regulators identified when designing the initial security futures regulatory framework and that FINRA retains independent authority to address.

Risk Disclosure Requirements

One of the most operationally critical requirements in Rule 2370 is the mandatory delivery of the security futures risk disclosure statement. Rule 2370(b)(11)(A) requires every member to deliver the current risk disclosure statement to each customer at or prior to the time that customer's account is approved for security futures trading. The disclosure document is not a proprietary firm document — FINRA and the NFA jointly developed a standardized disclosure statement when the product launched in 2002, reflecting the product's dual-jurisdiction nature. The statement has been revised and updated periodically, with major iterations distributed under Regulatory Notice 14-24 (April 2014 Supplement), Regulatory Notice 18-24 (2018 update), and Regulatory Notice 20-28 (2020 revision), which produced the version currently in effect.

After the initial delivery, each new or revised risk disclosure statement must be distributed to every customer whose account is approved for security futures trading, or in the alternative delivered no later than the time a transaction confirmation is sent to any customer who enters into a security futures transaction after the revision becomes available. FINRA notifies members when a new or revised statement is available. The rule also addresses the omnibus account context — where a broker-dealer routes orders through another member in an omnibus account, the carrying member must take reasonable steps to ensure the introducing broker-dealer can furnish adequate quantities of the disclosure statement to its customers. In a fully disclosed introducing and clearing arrangement, the responsibility for disclosure delivery rests with the clearing member who carries the individual customer accounts, though the clearing member may rely on a good-faith representation from the introducing firm that delivery has been completed.

The risk disclosure requirement exists because security futures carry a risk profile that differs materially from holding the underlying equity. Positions are leveraged — customers can lose substantially more than their initial margin deposit, and losses on short positions are theoretically unlimited. The disclosure statement communicates these risks, explains mark-to-market margining mechanics, describes applicable position limits, and identifies the ways in which security futures differ from options on the same underlying security. Failure to deliver the current statement before account approval constitutes a direct violation of Rule 2370 and will typically also constitute a supervisory failure under FINRA Rule 3110.

Account Opening, Due Diligence, and the Written Agreement

Rule 2370(b)(16) establishes a multi-layered account approval process for security futures trading that mirrors the architecture of FINRA Rule 2360's options account approval framework while adding provisions specific to the security futures product. No member or associated person may accept an order to purchase or sell a security future until three conditions are satisfied: the risk disclosure statement has been delivered, a principal qualified to supervise security futures activities has specifically approved the account in writing with documented reasons for approval, and the firm has exercised due diligence to ascertain the essential facts about the customer's financial situation and investment objectives.

For natural persons, Rule 2370(b)(16)(B)(i) specifies a minimum information set that members must seek to obtain: investment objectives, employment status, estimated annual income from all sources, estimated net worth excluding the primary residence, estimated liquid net worth, marital status and number of dependents, age, and investment experience across futures, commodities, options, stocks, bonds, and other financial instruments. The enumeration of experience across multiple product categories reflects the security futures product's hybrid nature — a customer experienced in equity trading alone may not appreciate the margining mechanics and daily settlement requirements that come from the instrument's futures-market characteristics. Members must also establish specific minimum net equity requirements for initial approval and ongoing maintenance of customers' security futures accounts, and should note any refusal by a customer to provide required information at the time the account is opened.

Rule 2370(b)(16)(C) requires that within fifteen days of account approval, the background and financial information on file must be sent to the customer for verification. This requirement does not apply if the same information was included in the account agreement or was previously verified in connection with an options account approval — a practical accommodation for the substantial overlap between the options and security futures customer populations. A copy of the background and financial information must also be sent for verification within fifteen days after the member becomes aware of any material change in the customer's financial situation.

Rule 2370(b)(16)(D) requires, also within fifteen days of account approval, that the member obtain a written agreement from the customer acknowledging awareness of and agreement to be bound by applicable FINRA rules governing security futures, confirming receipt of the current risk disclosure statement, and expressly agreeing not to violate applicable security futures position limits. This three-part written acknowledgment — rules awareness, disclosure receipt, and position limit commitment — is the formal documentary record that closes the account opening process.

Principal Qualification Requirements

Rule 2370(b)(2)(B) defines the term "principal qualified to supervise security futures activities" by reference to the legacy NASD Rule 1022 qualification standards. Two pathways exist to satisfy this qualification. A Registered Options Principal who has either completed a firm-element continuing education requirement addressing security futures and a principal's responsibilities for security futures, or has passed a revised qualification examination for Registered Options Principals covering security futures, qualifies under the first pathway. A Limited Principal-General Securities Sales Supervisor who has satisfied the equivalent firm-element continuing education or examination requirement qualifies under the second. The firm-element continuing education pathway reflects the practical reality that when security futures launched in 2002, FINRA and the NFA jointly developed internet-based training programs that allowed existing principals to add security futures competency without sitting an entirely new licensing examination. Firms engaged in security futures business must ensure that at least one qualified principal is designated to review and approve all security futures account approvals, discretionary account authorizations, and unusual activity in security futures accounts.

Statements of Account

The account statement requirements for security futures customers in Rule 2370(b)(15) are more frequent than the general quarterly standard that applies to most securities accounts. Statements must be sent at least monthly to any customer whose account had an entry related to a security futures contract during the preceding month, and at least quarterly to all customers maintaining an open security futures position or a money balance in a security futures account. For customers with general margin accounts, statements must include the market price, market-to-market value, and nominal value of each security futures position; the total value of all positions; the outstanding debit or credit balance; and the account equity. Two mandatory legend requirements apply to all security futures account statements: one directing customers to prior transaction confirmations for commission and fee detail, and one requesting that customers advise the member of any material change in their investment objectives or financial situation. The latter legend functions as a supervisory trigger — a customer who responds by reporting a material change should prompt the member to reassess that customer's account approval status under the standards of Rule 3110.

Discretionary Account Controls

Rule 2370(b)(18) imposes layered controls on discretionary security futures trading that go beyond the general discretionary account requirements. The written authorization of a customer required for any discretionary account must specifically authorize security futures trading — a generic discretionary authority covering equities or other securities is insufficient. The account must be accepted in writing by a principal qualified to supervise security futures activities, and a separate principal who did not accept the account must independently determine and document that the customer could reasonably understand and bear the risk of the proposed strategies.

Every discretionary security futures order must be identified as discretionary on the order ticket at the time of entry. Discretionary accounts must receive frequent supervisory review by a qualified principal who is not the person exercising the discretion — a structural separation designed to prevent unsupervised trading or unsuitable strategy execution in accounts where the firm's associated person is making unilateral trading decisions. Members that lack computerized surveillance tools for discretionary activity must establish procedures requiring designated reviewing principals to approve and initial each discretionary order on the day it is entered.

Time-and-price discretion — authority only as to execution timing and pricing for a customer-specified number of contracts in a specified security — is presumed to expire at end of business day unless a specific written contrary instruction is signed and dated by the customer. An exception exists for institutional accounts as defined in FINRA Rule 4512(c) acting pursuant to valid Good-Till-Cancelled instructions issued on a not-held basis. Where a discretionary account employs systematic security futures programs — recurring strategies deployed as a package — customers must receive a written explanation of the nature and risks of those programs before they commence.

Suitability and Regulation Best Interest

Rule 2370(b)(19) contains the suitability framework that governs recommendations of security futures to customers. Section (b)(19)(A) prohibits recommending any security futures transaction or trading strategy unless the member or associated person has a reasonable basis, based on information furnished by the customer after reasonable inquiry concerning investment objectives, financial situation, and needs, to believe that the recommendation is not unsuitable for that customer. Section (b)(19)(B) imposes an additional requirement: the person making the recommendation must have a reasonable basis to believe that the customer has sufficient knowledge and experience in financial matters to evaluate the risks of the recommended transaction and is financially able to bear those risks.

The suitability framework of Rule 2370(b)(19) predates but operates alongside the Regulation Best Interest framework established by SEC Rule 15l-1, which took effect June 30, 2020. As FINRA clarified in Regulatory Notice 22-08, Regulation Best Interest applies where a broker-dealer or associated person recommends a security future — or a trading strategy involving a security future — to a retail customer. For retail customers, the higher Regulation Best Interest standard applies, requiring not merely that the recommendation be not unsuitable but that it reflect the exercise of reasonable diligence, care, and skill in the customer's best interest. For non-retail customers and institutional contexts, Rule 2370's suitability provisions remain independently operative and must be satisfied.

Recordkeeping, Complaint Logs, and Market Maker Reporting

Rule 2370(b)(17) layers security-futures-specific recordkeeping requirements on top of the general books-and-records obligations of FINRA Rule 4511 and FINRA Rule 4513. Every member engaged in security futures business must maintain a separate central complaint log for all security futures-related complaints — defined as any written statement by a customer or person acting on behalf of a customer alleging a grievance arising out of or in connection with security futures. The central log must include the complainant's identity, the date received, the registered representative involved, a description of the matter, and a record of what action the member took. Branch office complaints must be forwarded to the central file location within thirty days of receipt, and a copy must remain at the originating branch. Background and financial information for approved security futures customers must be maintained at both the branch office servicing the account and the principal supervisory office, and account statements must be maintained at both locations for the most recent six-month period.

Rule 2370(b)(24) addresses a distinct conflict-of-interest risk specific to firms that are off-board market makers in exchange-listed securities. Every such member must report to FINRA, under procedures established by the Board of Governors, any transaction involving fifty or more security futures contracts on that listed security that is directly for the benefit of the member itself or any employee, partner, officer, or director who is directly involved in proprietary trading of the underlying security, responsible for supervising such persons, or otherwise authorized to obtain information about the firm's proprietary account in the underlying security. This reporting requirement enables FINRA to monitor for the risk that a firm with privileged access to order flow information in an underlying stock might exploit that knowledge through strategic security futures positions.

Rule 2370(b)(25) independently requires every member to exercise due care to avoid trading ahead of a customer's security futures order — a requirement triggered when the member has gained or reasonably should have gained knowledge of a customer's order before transmitting the firm's own order for a proprietary or affiliated account to a securities exchange. This provision operates alongside the general trading-ahead prohibition of FINRA Rule 5270 and the anti-manipulation provisions of FINRA Rule 2020.

The Rule 2010 Enforcement Bridge

Rule 2370(b)(21) creates an important and broadly worded enforcement mechanism. A finding in FINRA disciplinary proceedings that a member or associated person engaged in security futures transactions has violated any provision of the rules, regulations, or by-laws of a registered clearing agency under Section 17A(b)(8) of the Exchange Act may be deemed conduct inconsistent with just and equitable principles of trade and therefore a violation of FINRA Rule 2010. The same bridge applies to violations of FINRA's own rules by members engaged in security futures transactions. This double incorporation — sweeping in both clearing agency violations and FINRA rule violations — ensures that FINRA's disciplinary jurisdiction reaches the full scope of conduct that could harm market integrity in the security futures context, including violations of clearing agency rules that might not independently trigger FINRA authority.

The Current State of the U.S. Security Futures Market

Rule 2370 was designed for a product that regulators expected to grow into a major segment of U.S. equity markets. That expectation was not fulfilled. OneChicago — the primary U.S. exchange for security futures, jointly established by the Chicago Board Options Exchange, Chicago Mercantile Exchange, and Chicago Board of Trade — ceased operations in September 2020, leaving no domestic exchange currently listing single-stock security futures. The U.S. market never achieved the liquidity depth of the London International Financial Futures Exchange or the South African Futures Exchange, where security futures have traded in substantial volume for decades.

The rule nonetheless remains fully operative. FINRA members may facilitate security futures transactions for customers on foreign exchanges where the product is actively listed, and FINRA retains authority to revive domestic market participation. Any broker-dealer maintaining a current security futures business, contemplating one, or facilitating customer transactions on foreign exchanges must maintain functional written supervisory procedures under FINRA Rule 3110 specifically addressing security futures, designate at least one qualified principal, and maintain all account-level compliance obligations imposed by Rule 2370. The regulatory infrastructure built in 2002 does not lapse simply because the domestic trading venue closed.

Relationship to Rule 2360 and the Special Products Framework

Rule 2370 is best understood as a security-futures-specific application of the protective principles developed more fully in FINRA Rule 2360 for exchange-listed options. Both rules require risk disclosure documents delivered before account approval. Both require written account agreements. Both require suitability analysis calibrated to the specific product's risk. Both require qualified principal oversight of account approvals and discretionary trading. Both impose enhanced account statement requirements beyond the general FINRA standard. And both connect communications obligations to product-specific communications rules — Rule 2360 to FINRA Rule 2220, and Rule 2370 to FINRA Rule 2215.

The key structural difference between the two rules lies in margining. Options margin under Rule 4210 follows the securities-market convention of calculating required deposits based on the risk of specific positions. Security futures margin, by contrast, follows futures-market conventions — daily mark-to-market settlement under joint SEC/CFTC margin rules means that a customer's account is credited or debited each trading day for the gain or loss on the security futures position, regardless of whether the position has been closed. This feature, familiar to futures market participants, is foreign to customers who know only equity and options trading, and it is one of the primary disclosures in the mandatory risk disclosure statement.

Rule 2370 also connects to FINRA Rule 2215, which governs communications with the public regarding security futures, paralleling the role that Rule 2220 plays for options communications. Together, FINRA Rules 2215, 2370, and the applicable provisions of Rule 4210 form the complete regulatory framework within which a FINRA member firm must operate when it engages in security futures business. Rule 2350 — governing trading in index warrants, currency index warrants, and currency warrants — completes the 2300 Special Products series, reflecting the common regulatory philosophy that derivative instruments with concentrated or leveraged risk profiles require enhanced disclosure, heightened account approval diligence, and qualified supervisory oversight as the foundational investor protections.

Examination Relevance and Key Takeaways

FINRA Rule 2370 is tested on the Series 7 General Securities Representative examination and the Series 4 Registered Options Principal examination, primarily in the context of derivative products, account approval procedures, risk disclosure obligations, and the regulatory framework governing complex investment products. Series 24 General Securities Principal candidates are additionally tested on the supervisory and principal qualification aspects of Rule 2370. The rule appears in examination materials in connection with the dual-jurisdiction structure established by the Commodity Futures Modernization Act of 2000, the distinction between security futures and broad-based index futures, the account opening and written agreement requirements, the suitability framework and its relationship to Regulation Best Interest, and the mandatory risk disclosure delivery obligations.

The key points to retain are these: FINRA Rule 2370 governs security futures — contracts on single securities or narrow-based security indexes — which are classified simultaneously as securities and as futures contracts under the Commodity Futures Modernization Act of 2000, subjecting them to concurrent SEC and CFTC jurisdiction and requiring registration with both agencies; the rule requires delivery of the current FINRA/NFA joint risk disclosure statement before or at the time of account approval, with follow-up delivery of each new or revised version to existing approved customers; account approval requires due diligence on customer financial information, written approval by a principal qualified to supervise security futures activities with documented reasons, verification of background information sent to the customer within fifteen days, and a written account agreement signed within fifteen days confirming awareness of FINRA rules, receipt of the disclosure statement, and agreement not to violate position limits; the suitability standard of Rule 2370(b)(19) prohibits recommending any security futures transaction or trading strategy unless the member has a reasonable basis to believe it is not unsuitable for the customer and that the customer has the knowledge and financial capacity to bear the risks, with Regulation Best Interest additionally applying to retail customer recommendations; discretionary security futures accounts require a specific written authorization for security futures trading, acceptance by a qualified principal, independent verification of the customer's capacity to bear risk by a second non-accepting principal, order-by-order identification as discretionary, and frequent supervisory review by a qualified principal not exercising the discretion; account statements must be issued monthly for active accounts and quarterly for accounts with open positions or money balances, with enhanced content requirements for margin accounts; the enforcement bridge in Rule 2370(b)(21) means that clearing agency violations and general FINRA rule violations by members engaged in security futures transactions may be deemed Rule 2010 violations; and while no U.S. exchange currently lists domestic single-stock security futures following OneChicago's closure in September 2020, Rule 2370 remains fully operative for transactions on foreign exchanges.