The Financial Industry Regulatory Authority (FINRA) has proposed broadening its Front Running Policy by adopting NASD Rule IM-2110-3 as FINRA Rule 5270. First, FINRA proposes to expand the scope of the Front Running Policy to cover trading in an option, derivative or other financial instrument overlying a security that is the subject of an imminent block transaction. The proposed expansion is intended to capture those financial instruments that could be used to take advantage of knowledge of an imminent block transaction in an underlying security (or vice versa), including, for example, equity swaps, convertible debt, and any other type of financial instrument the value of which is materially related to, or otherwise acts as a substitute for, an underlying security.
Second, FINRA proposes replacing existing exceptions in the Front Running Policy for certain transactions in automatic execution systems and for positioning the other side of certain orders. New supplementary material will codify FINRA’s position that member firms are permitted to trade ahead of a customer’s block order when the purpose of such trading is to fulfill the customer order and when the customer has authorized such trading. A member firm also may engage in hedging and other positioning activity that could affect the market for a security that is the subject of the customer’s block order provided that the firm has received the customer’s affirmative written consent prior to receipt and/or execution of the order.
Comments are due by February 6.