Responsibilities of a Qualified Block Positioner

Three defined terms sit in one short SEC rule: qualified OTC market maker, qualified third market maker, and qualified block positioner. They share a structure, and the exam tests the differences between them, so read the shared part first.

What Do the Three Qualified Categories Have in Common?

The rule opens with a scope clause that governs every definition under it. The three terms are defined for the purposes of Regulation U, the Federal Reserve's credit regulation covering banks and persons other than brokers or dealers. None of them is the statutory definition of a market maker.

Each category then names its own subject matter:

• Qualified OTC market maker: a dealer in any OTC margin security, a term the rule takes from that Federal Reserve credit regulation.
• Qualified third market maker: a dealer in any stock registered on a national securities exchange.
• Qualified block positioner: a dealer, with no security-type limit in its opening clause, though the block it positions must be a block of stock.

All three then require the same two things. The dealer must be a broker or dealer registered with the SEC, and it must be subject to and in compliance with the net capital rule.

Each category also carries its own minimum net capital figure and its own conduct conditions. The conduct conditions in every category open with the same qualifier: except when such activity is unlawful, the dealer must meet all of the conditions listed for that category.

Exam Tip: Gotchas

• These definitions are written for a credit regulation. The rule states that it defines the three terms for the purposes of Regulation U, so a scenario that treats a qualified OTC market maker as the statutory market maker definition has the wrong rule.
• The security type differs by category. The OTC category reaches a dealer in an OTC margin security, the third market category reaches a dealer in a stock registered on a national securities exchange, and the block positioner category names no security type in its opening clause, though the block it positions must be a block of stock.
• The conduct conditions are conjunctive under an unlawfulness qualifier. The dealer must meet all of the conditions for its category, except when the activity in question is unlawful.

How Much Net Capital Does Each Category Require?

Every figure below is minimum net capital as the net capital rule defines it.

A worked case makes the arithmetic concrete. A dealer that is or seeks to be a qualified OTC market maker in six securities computes $25,000 plus $5,000 for the one security in excess of five, or $30,000. Because the test takes the lesser of the two amounts, $30,000 is the figure.

Exam Tip: Gotchas

• Both per-security tests take the lesser amount, not the greater. The $250,000 and $500,000 figures are ceilings on the computation, so a small market maker lands well below them.
• The per-security add-on starts after five securities. It applies to each security in excess of five, so a dealer in five or fewer adds nothing to the base amount.
• The block positioner figure is flat. It is $1,000,000 regardless of how many blocks the dealer positions, which is the only one of the three with no per-security element.

What Must a Qualified Block Positioner Actually Do?

Beyond registration, net capital rule compliance and the $1,000,000 minimum, the block positioner must meet three conditions, except when the activity is unlawful.

Condition one is the positioning activity itself. The dealer engages in the activity of purchasing long or selling short, from time to time, from or to a customer, a block of stock with a current market value of $200,000 or more.

That block must be bought long or sold short in a single transaction, or in several transactions at approximately the same time, from a single source, to facilitate a sale or purchase by that customer.

The rule then narrows who the customer can be. It excludes a partner, and a joint venture or other entity in which a partner, the dealer, or a person associated with the dealer participates.

Condition two is diligence. The dealer has determined, in the exercise of reasonable diligence, that the block could not be sold to or purchased from others on equivalent or better terms.

Condition three is disposal. The dealer sells the shares comprising the block as rapidly as possible commensurate with the circumstances. The rule states no day count.

Exam Tip: Gotchas

• The block test is a market value test, not a share count. A block qualifies at a current market value of $200,000 or more, whatever the number of shares.
• Several transactions can build one block. The rule allows a single transaction or several transactions at approximately the same time, provided they come from a single source.
• A trade opposite a partner or a connected entity does not qualify. The customer excludes a partner, and a joint venture or other entity in which a partner, the dealer, or a person associated with the dealer participates.
• The disposal standard has no deadline attached. The dealer sells as rapidly as possible commensurate with the circumstances, so an option supplying a fixed number of days is inventing one.

How Do the Two Qualified Market Maker Categories Differ?

Both quote, and both must be ready to trade, but the conditions are not the same list.

That gives the OTC category four conditions and the third market category three.

Exam Tip: Gotchas

• Only the OTC category has a publication condition. The third market category's list contains no requirement to publish quotations in a recognized inter-dealer quotation system.
• The third market category adds two words the other lacks. Its furnishing condition runs at all times, and its readiness condition names transactions for its own account.
• Every condition in both lists attaches to the particular security. Both categories require the dealer to meet all of the conditions with respect to such security, so status is held security by security.

What Should You Check on Exam Day?

• Confirm the question is about the credit-regulation definitions. All three qualified categories are defined for the purposes of Regulation U, not for the statutory market maker definition.
• Take the lesser amount on both per-security tests, and count securities in excess of five before adding $5,000 or $20,000 apiece.
• Confirm the block positioner's minimum is a flat $1,000,000 with no per-security add-on.
• Test a block on current market value of $200,000 or more, from a single source, and check the customer is not a partner or a connected entity.
• Check the disposal condition for an invented deadline. The rule says as rapidly as possible commensurate with the circumstances and gives no day count.