Nullifying an Exchange-Listed Transaction

This review reaches an over-the-counter trade in an exchange-listed security that arose out of, or was reported through, a trade reporting system owned or operated by FINRA or FINRA Regulation and authorized by the SEC, and that occurred outside Normal Market Hours or is eligible for review inside them, provided it meets the rule's guidelines.

The rule fixes who acts, on what grounds, how fast, and what the officer may actually do about it.

Who Reviews an Exchange-Listed Transaction, and on Whose Motion?

The reviewer is a FINRA officer, defined as an Executive Vice President of FINRA's Market Regulation Department or Transparency Services Department, or any officer designated by such Executive Vice President.

That officer may review a transaction on his or her own motion. This paragraph gives a member no route to request a review; the single place in the exchange-listed clearly erroneous rule where a member may ask is the technology-issue provision covered in this unit's lesson on multi-day events, trading halts and exchange coordination.

Exam Tip: Gotchas

• The officer definition names two departments and a delegate. An Executive Vice President of Market Regulation, an Executive Vice President of Transparency Services, and any officer either one designates all qualify.
• The review runs on the officer's own motion. A member that spots a bad print of its own has no request right under this paragraph, however obvious the error looks.

Which Transactions Fall Inside the Review?

The officer may review an over-the-counter transaction involving an exchange-listed security where all of the following hold:

• It occurred outside Normal Market Hours, which the rule states as 9:30 a.m. Eastern Time to 4:00 p.m. Eastern Time, or it is eligible for review under one of the during-hours gateways covered in this unit's lesson on reviewability and the two price yardsticks
• It arose out of, or was reported through, a trade reporting system owned or operated by FINRA or FINRA Regulation and authorized by the SEC
• It meets the guidelines set forth in the rule

Exam Tip: Gotchas

• Normal Market Hours is a defined window, and this review starts outside it. A trade executed between 9:30 a.m. and 4:00 p.m. Eastern reaches review only through one of the three during-hours gateways.
• The venue clause is part of the scope, not background. The transaction must arise out of or be reported through a trade reporting system that FINRA or FINRA Regulation owns or operates and that the SEC authorized.
• The guidelines proviso is a third condition. The rule reaches the transaction provided that it meets the guidelines the rule itself sets out.

On What Grounds Can an Officer Void a Trade?

A FINRA officer acting under this paragraph may declare any such transaction null and void if the officer determines either of two things:

• The transaction is clearly erroneous
• Such actions are necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, consistent with the guidelines set forth in the rule

Exam Tip: Gotchas

• The two grounds are alternatives. A transaction can be voided on the fair-and-orderly-market and investor-protection ground without any separate finding that its terms were clearly erroneous.
• The second ground carries its own "or" inside it. The action must be necessary for the maintenance of a fair and orderly market or the protection of investors and the public interest, so either half of that phrase supports it.
• The second ground is still tied to the guidelines. The rule requires the action to be consistent with the guidelines it sets out, so this is not a free-floating public interest power.

How Fast Must the Officer Act?

Absent extraordinary circumstances, the officer shall take action generally within 30 minutes after becoming aware of the transaction.

When extraordinary circumstances exist, any such action must be taken no later than the start of trading on the day following the date of the execution or executions under review.

Exam Tip: Gotchas

• The thirty-minute clock starts at awareness, not at execution. It runs from the point the officer becomes aware of the transaction, and the rule frames it as "generally within" that window.
• Extraordinary circumstances replace the clock rather than stretch it a little. The outer limit becomes the start of trading on the day following the execution date under review.

Who Gets Notice, and Who Can Appeal?

If a FINRA officer acting under this rule declares any transaction null and void, each party involved in the transaction shall be notified as soon as practicable by FINRA, and the party aggrieved by the action may appeal.

Two carve-outs sit in that same sentence:

• No appeal where the decision is made by a FINRA officer under the member technology-issue provision regarding transactions that occurred outside the applicable Price Bands disseminated pursuant to the Limit Up-Limit Down (LULD) Plan
• No appeal of rulings made by FINRA in conjunction with one or more other self-regulatory organizations (SROs)

Read that first carve-out beside the provision it points at. The member technology-issue provision itself says each member involved in the transaction shall be notified as soon as practicable and a member aggrieved by the action may appeal, so the rulebook prints both a bar and a grant on the same decision. This course teaches both as printed.

The appeal itself, and the one further bar the clearly erroneous appeal rule adds for an OTC equity determination, are covered in this unit's lesson on appealing a nullification.

Exam Tip: Gotchas

• Notice goes to each party involved, not only to the party that gets hurt. The appeal right is narrower than the notice duty: it belongs to the party aggrieved by the action.
• A multi-regulator ruling is unappealable no matter who made it worse. Rulings FINRA makes in conjunction with one or more other SROs are outside the appeal right entirely.
• The rulebook prints both a bar and a grant on the technology-issue decision. This paragraph and the clearly erroneous appeal rule withhold the appeal, while the technology-issue provision itself says a member aggrieved by the action may appeal.

What Remedy Does the Officer Actually Have?

The remedy this rule states is nullification. The officer may declare the transaction null and void, and the rule states no power for the officer to adjust a trade's price and leave it standing.

The rulebook is not perfectly consistent on that point, so read each provision for what it prints. On appeal, the Uniform Practice Code (UPC) Committee shall affirm, modify, reverse, or remand the determination. The clearly erroneous appeal rule's notice provision separately refers to an officer who nullifies or modifies a large number of transactions.

Exam Tip: Gotchas

• The officer's stated remedy is a break, not a price adjustment. The exchange-listed clearly erroneous rule and the OTC equity clearly erroneous rule both say "declare null and void," and neither gives the officer a stated re-pricing power.
• The appeal body's list of dispositions is wider than the officer's remedy. The Committee shall affirm, modify, reverse, or remand, so "modify" appears on the appeal side of these rules.

What Should You Check on Exam Day?

• Confirm the trade is over-the-counter in an exchange-listed security and arose out of or was reported through a trade reporting system owned or operated by FINRA or FINRA Regulation and authorized by the SEC.
• Place the execution against Normal Market Hours, 9:30 a.m. to 4:00 p.m. Eastern. Inside that window the trade needs a during-hours gateway.
• Check the officer acted generally within 30 minutes of becoming aware or, in extraordinary circumstances, no later than the start of trading on the day following the execution date under review.
• Confirm the officer acted on his or her own motion. This paragraph gives a member no right to request a review.
• Check the two appeal bars: a member technology-issue decision outside the Price Bands, and a ruling made with one or more other SROs. The technology-issue provision itself grants an appeal, so read both.