Transactions rules

Transactions for or by Associated Persons
On the new account form, we ask if the customer is associated with a member firm. If your broker-dealer knows that the customer is associated with a member firm, or if an associate of a member firm has discretion over the account, your firm must:

•    notify the employer member in writing, prior to the execution of a transaction for such account, of the executing member's intention to open or maintain such an account;
•    upon written request by the employer member, transmit duplicate copies of confirmations, statements, or other information with respect to such account; and
•    notify the person associated with the employer member of the executing member's intention to provide the notice and information required

If you want to open an investment account with another firm, remember that FINRA rules state:
A person associated with a member; prior to opening an account or placing an initial order for the purchase or sale of securities with another member; shall notify both the employer member and the executing member; in writing, of his or her association with the other member; provided, however; that if the account was established prior to the association of the person with the employer member, the associated person shall notify both members in writing promptly after becoming so associated. 

Transactions Involving FINRA Employees
FINRA has approximately 3,400 employees, and surely some of them have investment accounts. Because FINRA is the regulator of the broker-dealer and agent dealing with such an employee's account, there are rules designed to prevent members from trying to buy favor with their regulator. When the member has actual knowledge that the account is partly or wholly owned by an employee of FINRA, they must promptly provide duplicate account statements to FINRA. Also, other than normal margin loans or loans between family members, no member can make any loans to an employee of FINRA. And, if an employee of FINRA has responsibility for any regulatory matter concerning the member, the firm would be in serious trouble if they tried to start providing expensive gifts to that employee. Anything more than, say, a key chain or pen would probably raise red flags for FINRA.
As in Major League Baseball, disputes in this industry are settled through arbitration. In other words, member firms can't sue each other in civil court if an underwriting turns sour and one member of the syndicate is convinced they are owed an additional $1 million from another member, who acted as syndicate manager in the IPO. That sort of dispute must be submitted to arbitration. That means you get one shot, no appeals. As we saw earlier, firms get their customers to sign pre-dispute arbitration agreements, but they must be very upfront about what that means in the document they're getting the customer to sign. The rule stipulates that the warning must look like this:

 This agreement contains a pre-dispute arbitration clause. By signing an arbitration agreement, the parties agree as follows:
 (A) All parties to this agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed. (B) Arbitration awards are generally final and binding a party's ability to have a court reverse or modify an arbitration award is very limited.
(C) The ability of the parties to obtain documents, witness statements and other discovery is generally more limited in arbitration than in court proceedings.
(D) The arbitrators do not must explain the reason(s) for their award. 
(E) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry
(F) The rules of some arbitration forums may impose time limits for bringing a claim in arbitration. In some cases, a claim that is  ineligible for arbitration may be brought in court.
(G) The rules of the arbitration forum in which the claim is filed, and any amendments thereto, shall be incorporated into this agreement.

Only by getting the customer to sign this agreement would your firm know that when somebody loses money, that somebody will not be able to drag them through civil court, with appeal after appeal. Arbitration is faster and cheaper for all involved.

FINRA rules make sure that your firm provides the registered representative with the same written disclosure that he is bound by FINRA Arbitration when asked to sign a U4 or U5 form.


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