Minimum Criteria Necessary for a Transaction to Qualify as Clearly Erroneous

The clearly erroneous transaction rules are a narrow safety valve, not a general do-over. The definition sets the entry test, and the guidance printed under it says what FINRA weighs and what it says may not be sufficient on its own.

What Does "Clearly Erroneous" Mean?

For purposes of the clearly erroneous transaction rules, the terms of a transaction are "clearly erroneous" when there is an obvious error in any term, such as price, number of shares, or other unit of trading, or identification of the security.

The phrase "such as" opens that list. Price, share count and security identification are examples of a term that can carry an obvious error, not the only terms that can.

Exam Tip: Gotchas

• The definition names an obvious error in any term, not only in price. A wrong share count, a wrong unit of trading and a wrong security identification each fit the definition on the rule's own wording.
• The list is illustrative rather than closed. An answer choice presenting price, quantity and security identification as the complete set of erroneous terms reads more narrowly than the rule does.

What Kinds of Situations Do These Rules Target?

The clearly erroneous transaction rules are generally focused on systemic problems that involve large numbers of parties or trades, or market conditions where it would not be in the best interests of the market for one or more transactions to stand.

They would also include situations where an extraordinary event has occurred or is ongoing that has had a material effect on the market for a security traded over the counter, or has caused major disruption to the marketplace.

Exam Tip: Gotchas

• The guidance says "generally focused," not "limited to." Systemic scale is the typical case rather than a threshold the rule imposes, so an option that turns it into a requirement overstates the text.
• The extraordinary-event branch is written in two tenses and two effects. An event that has occurred and one that is ongoing both qualify, and the effect can be a material effect on the market for a security traded over the counter or a major disruption to the marketplace.

What Does FINRA Weigh, and What May Not Be Enough on Its Own?

In making a determination regarding whether a transaction is clearly erroneous, FINRA takes into account three things:

• The circumstances at the time of the transaction
• The maintenance of a fair and orderly market
• The protection of investors and the public interest

Participants in FINRA systems are responsible for ensuring that the appropriate price and type of order are entered into FINRA's systems.

A simple assertion by a member that it made a mistake in entering an order or a quote, or that it failed to pay attention or to update a quote, may not be sufficient to establish that a transaction was clearly erroneous.

Exam Tip: Gotchas

• The mistake guidance says "may not be sufficient," not "is never sufficient." An admitted entry error is evidence the officer weighs alongside everything else, rather than an automatic disqualifier or an automatic win.
• The sentence names what the assertion fails to establish. It says such an assertion may not be sufficient to establish that the transaction was clearly erroneous, which is the specific finding at stake.
• The member's own responsibility covers the order type as well as the price. Sending a market order where a limit order was intended sits inside the same sentence as entering the wrong price.

Does the Authority Reach Account Intrusion?

No. FINRA's clearly erroneous authority does not extend to unauthorized trading activity or attempts to manipulate stock prices by illegally gaining access to legitimate accounts or opening new accounts using false information, often referred to as account intrusion.

Such suspicious trading activities relate to allegations of fraud and are therefore not within the scope of these rules.

Exam Tip: Gotchas

• Account intrusion is routed to fraud, not to a trade break. A hijacked account that prints a wild trade sits outside these rules even though the price looks exactly like an obvious error.

What Happens If a Member Refuses to Honor a Ruling?

It is considered conduct inconsistent with just and equitable principles of trade for any member to refuse to take any action that is necessary to effectuate a final decision of a FINRA officer or the Uniform Practice Code (UPC) Committee under the clearly erroneous transaction rules.

Exam Tip: Gotchas

• The refusal provision reaches a final decision only. An unappealed determination is itself final, an appeal does not stay the determination it challenges, and the just-and-equitable characterization attaches to refusing to effectuate a final decision.
• Both decision-makers are named, and so is the audience. The provision covers a final decision of a FINRA officer and a final decision of the UPC Committee, and it applies to any member.

What Should You Check on Exam Day?

• Confirm which term carries the error. Price, share count, unit of trading and security identification are examples of an obvious error, and the list is open.
• Read an admitted entry mistake as evidence, not proof. The guidance says a simple assertion of a mistake may not be sufficient.
• Route an account-intrusion fact pattern to fraud. These rules do not reach illegal account access or accounts opened with false information.
• Confirm the decision being ignored is final. The just-and-equitable violation attaches to refusing to effectuate a final decision.
• Check the order type as well as the price. The member is responsible for entering both correctly into FINRA's systems.