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FINRA Rule 11000 Series: Uniform Practice Code

Instructor: James Blackburn

James has over 25 years of experience in higher education. He has an MBA from Auburn University and MA in Humanities from Cal State Dominguez Hills. He is currently a Doctoral candidate at the University of North Georgia. James's research focus is on how storytelling can modify beliefs and behaviors.

FINRA rule series 11000 addresses the Uniform Practice Code. This rule provides basic guidelines governing securities transactions. This lesson will provide a comprehensive overview of the rule. It will also highlight specific guidance within the rule.

Traffic Lights

Imagine driving in a major metropolitan city during rush hour. All of a sudden, the lights begin to flash red. Traffic jams pop up all over the city. The flow of cars crawls to a stop. Next, the lights stop working altogether. Drivers don't know what to do. Some drivers make up their own rules, leaving a path of crumpled metal behind them.

Now, imagine navigating the transactional highways of the financial markets. Similar to drivers navigating city streets, securities brokers and dealers buy and sell stocks, bonds and other financial instruments on the streets of the financial markets. If brokers didn't have rules guiding their transactions, the financial markets could slow to a halt, perhaps even collapsing under chaos and confusion. Rules help keep order and make investing safe.

FINRA Establishes Rules

In the interest of public safety, the Financial Industry Regulator Authority (FINRA) was created. The mission of FINRA is to protect investors. By providing guidance for brokers and securities dealers, FINRA helps establish order through guidance. The FINRA Manual codifies this guidance and establishes the rules of the game.

Within this guidance, FINRA Rule 11000 establishes the Uniform Practice Code. This code provides definitions, structure and guidance that govern transactions of financial instruments. Rule 11000 covers all over-the-counter transactions and provides operational guidance for processing the sale from buyer to seller.

FINRA Rule 11000 is divided into nine sections. A summary of these sections is provided below.

Rule # Title Summary
11100 Scope of Uniform Practice Covers all over-the-counter secondary market transactions
11200 Comparisons, Confirmations, Don't Know Notices Provides guidance on immediate post-trade communications
11300 Delivery of Securities Establishes transaction level details for the trade
11400 Delivery of Securities with Draft Attached Governs the timing and acceptance of draft for the trade
11500 Delivery of Securities with Restrictions Provides guidance on damaged certificates or worthless securities
11600 Delivery of Bonds and Other Evidences of Indebtedness Establishes the methods of delivery of bonds including interest calculations
11700 Reclamations and Rejections Describes requirements for the return or rejection of securities
11800 Close-out Procedures Provides guidance on the completion of the sales transaction including account settlement
11900 Clearance of Corporate Debt Securities Establishes a requirement for agents to participate in a registered clearing agency

Rule 11100

The guidance provided in Rule 11100 establishes the scope of the rule. In other words, it describes the type of transactions covered by the rule. In addition to all of the over-the-counter transactions, it also provides guidance on when a seller fails to deliver the security sold and when a buyer fails to pay for a security sold. The scope of this rule is primarily focused on the transactional details of the exchange. It establishes the ''rules of the road'' that allows for the smooth transfer of securities from the seller to the buyer.

Rule 11200

Rule 11200 requires each party to send a Uniform Comparison or Confirmation on the first day following the transaction. The purpose of this correspondence is to identify and correct discrepancies in the transfer. When one party does not receive a comparison or confirmation, they are required to send a ''Don't Know Notice'' to the other party involved in the trade. Rule 11200 describes in detail the timing of notices sent and the information that must be included on the notices.

Rule 11300

Rule 11300 establishes the requirements for the actual delivery of securities. It describes the use of a clearinghouse for the transfer of the security. The rule also discusses delivery dates, payments, and taxes. Rules 11361 and 11362 establish the units of delivery for stocks and bonds, respectively. These rules establish the method and quantities for delivering stocks and bonds.

Rule 11400

Rule 11400 focuses on the process for accepting drafts submitted with securities. This rule includes guidance on the acceptance date and time of the draft, the responsibility for the costs of shipment and timing associated with irregularities. If the draft is not accepted on the next business day, the drawee of the draft is responsible for interest and other fees associated with the delayed acceptance.

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