Payments for Market Making

A quotation is supposed to tell the market what a dealer will actually pay or accept. It stops doing that the moment the issuer is paying for the quote to exist, which is what this prohibition removes.

What Payment Is Prohibited?

Under the payments for market making prohibition, no member or person associated with a member may accept any payment or other consideration, directly or indirectly, from an issuer of a security, or any affiliate or promoter of that issuer, for any of three things:

• Publishing a quotation.
• Acting as market maker in a security.
• Submitting an application in connection with either of those.

Every element of that sentence does work. The prohibition binds the associated person as well as the firm, it reaches consideration other than money, and it reaches payments made indirectly.

Exam Tip: Gotchas

• Indirect consideration is inside the prohibition. A payment routed through a third party, or given in a form other than cash, is still payment or other consideration accepted from the issuer.
• The associated person is bound personally. The rule names the member and the person associated with a member, so a payment to an individual trader is not a way around it.
• Submitting the application is itself a covered act. Payment for submitting an application in connection with publishing a quotation or making a market is prohibited even if the firm never quotes.

What May a Member Still Accept?

The prohibition does not preclude a member from accepting three categories of payment:

Exam Tip: Gotchas

• The bona fide services list is open. It reads including, but not limited to, investment banking services, so investment banking is an example rather than the boundary.
• The reimbursement carve-out names its imposers. Registration payments must be imposed by the SEC or state regulatory authorities, and listing payments by a self-regulatory organization.
• Labelling a quote payment as a service fee does not save it. What the payment buys decides it, so a fee whose only object is publishing a quotation stays prohibited whatever it is called.
• The exchange carve-out has a filing condition. The exchange rules must be effective after being filed with, or filed with and approved by, the SEC under the requirements of the Securities Exchange Act.

Who Counts as an Affiliate or a Promoter?

The rule defines both terms for its own purposes.

Affiliate takes the same definition used in the conflicts of interest offering rule, where the term means an entity that controls, is controlled by or is under common control with a member. The prohibition itself reaches an affiliate or promoter of the issuer, so read the control test against the parties the scenario actually names.

Promoter is a six-limb list, and the last limb keeps it open. A promoter is any person who:

• Founded or organized the business or enterprise of an issuer.
• Is a director or employee of an issuer.
• Acts or has acted as a consultant, advisor, accountant or attorney to an issuer.
• Is the beneficial owner of any of an issuer's securities that are considered restricted securities under the restricted securities resale safe harbor.
• Is the beneficial owner of five percent or more of the public float of any class of an issuer's securities.
• Has a similar interest in promoting the entry of quotations or market making in an issuer's securities.

Exam Tip: Gotchas

• The promoter list closes with a catch-all. Any other person with a similar interest in promoting the entry of quotations or market making is a promoter, so an option calling the list exhaustive misreads it.
• A former adviser is still a promoter. The consultant limb reads acts or has acted, which reaches a relationship that has already ended.
• Two different ownership tests appear in the same list. Holding any restricted securities of the issuer is one, and holding five percent or more of the public float of any class is the other.

What Counts as a Quotation for This Prohibition?

The rule's definition of quotation is broader than a two-sided market. It reaches:

• Any bid or offer at a specified price with respect to a security.
• Any indication of interest by a member in receiving bids or offers from others for a security.
• An indication by a member that it wishes to advertise its general interest in buying or selling a particular security.

Exam Tip: Gotchas

• An unpriced expression of interest is a quotation here. Both an indication of interest in receiving bids or offers and an advertisement of general interest fall inside the definition.
• The three limbs are alternatives. A member paid for any one of them has accepted payment for publishing a quotation.

What Should You Check on Exam Day?

• Trace the money to its source. The prohibition reaches payment from the issuer, or from any affiliate or promoter of the issuer, directly or indirectly.
• Ask what was bought. Publishing a quotation, acting as market maker, and submitting an application in connection with either are the three covered acts.
• Test a carve-out against its own wording, including the imposer of a reimbursed registration or listing payment.
• Run the promoter list to its last limb, and remember a former consultant, advisor, accountant or attorney still counts.
• Read quotation broadly. An indication of interest, or an advertisement of general buying or selling interest, is enough.