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Rule 401T Business Conduct

/01 Trading Against Firm Recommendations


/02 Private Sales


/03 Conversions, Acquisitions and Changes in Business Activities

Member organizations are expected to notify the Exchange when planning important organizational or operational changes, such as mergers with or acquisitions of other broker/dealers or the acquisition of a significant electronic data processing system conversion or a change in business activity involving the addition of new product lines such as municipal bonds, government securities, options or commodities, etc. By discussing these proposals with the Exchange well in advance of implementation, member organizations will have the benefit of the Exchange's insight and experience which may serve to aid in avoiding financial and operational problems.

/04 Early Reporting of Developing Problems

Exchange and SEC regulations presently require member organizations to give certain "early warning" notices when conditions fall outside of specified parameters. However, it has been our experience that in many cases an earlier informal notice can help resolve the difficulty before any formal notification would be required. The Exchange, therefore, expects notification from a member organization immediately upon discovery of any existing or impending condition(s) which it reasonably believes could lead to capital, liquidity or operational problems or impairment of record-keeping, clearance or control functions.
A list of the kind of potential problems on which early notification is expected follows. It should be realized that this list is not intended to be all inclusive and that your coordinator may be of further assistance with regard to situations not specifically covered.

Capital Problems

Concentrations in securities or commodities positions, commitments or other contingencies wherein adverse results could reasonably be expected to create a loss or net capital deduction that would result in a violation of the net capital requirements.
Accruals of expenses, deficits in customers' or brokers' accounts, liabilities, "Don't Know" trades, short security positions and similar items for which adequate reserves have not been provided and which, individually or in the aggregate, could have a material adverse effect on net capital.
An acceleration clause or other default provision in a loan or subordinated loan agreement is expected to or has become operative.

Reserve Requirements Problems

Any condition that could result in a material failure to make a required deposit or cause a deficiency in the balance on deposit in the Special Reserve Bank Account for the Exclusive Benefit of Customers as required under SEA Rule 15c3-3.

Liquidity Problems

Any problem with liquidity, profitability or a cash or other asset shortage which could materially inhibit a broker or dealer from promptly meeting its obligations to customers, other broker/dealers or creditors.
Impending circumstances which cause or might cause a bank to call its loans or to refuse to carry the firm's accounts in a normal fashion.
Developing situations which cause or might cause a clearing corporation to limit the firm to cash settlements.
Impending or actual inability to complete daily deliveries without the creation of deficit conditions pursuant to possession and control requirements under SEA Rule 15c3-3 for customers' securities.

Recordkeeping Problems

Any situation which may materially impair accurate maintenance of the member organization's Books and Records or the ability to account for possession or control of securities or commodities. This could be a computer breakdown, service agency problems, loss of key personnel, systems conversions, continuous inability to complete daily activities because of volume or personnel difficulties or similar reasons.

Reputation Problems

Loss of confidence in a broker-dealer may cause immediate returns of stock loans, refusals to trade or buy- ins by other broker-dealers, calling of bank loans or tightening of collateral requirements, customer account delivery requests and eventual profit deterioration.
Reputation may be impaired either by direct events such as announcements of disciplinary actions or litigation against a member organization, or by indirect unfavorable developments such as personal bankruptcies or criminal prosecution of key personnel, or financial problems of other associated organizations for whom the member organization has no legal responsibility.
Amended by SR-FINRA-2008-028 eff. Dec. 15, 2008.
Amended by SR-FINRA-2019-009 eff. May 8, 2019.

Selected Notice: 08-57.

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