NYSE Rule 5320: A Harmonized Approach to Customer Order Protection

The SEC recently approved replacing NYSE Rule 92 with the new NYSE Rule 5320, which is substantially the same as FINRA’s 5320. This action followed months of thorough, public review and will result in a harmonized approach to customer order protection as well as reduced regulatory duplication. NYSE Rule 5320 is well designed to achieve its objectives as it was the result of extensive solicitation of comment over a period extending 2 ½ years, and provides regulatory benefits for customers as well as the industry.

The NYSE initiated the harmonization because NYSE Rule 92 and FINRA’s “Manning Rule”, while similar in purpose, imposed different customer order-protection standards for the same security. Rule 92 applied to trading in NYSE- and NYSE Amex-listed securities only on those markets, and did not apply to trading in those securities in other markets. By contrast, the Manning Rule applied to all trading by FINRA members in all exchange-listed securities, regardless of the venue.  NYSE Rule 5320 addresses this and other differences between the rules.

Comments were solicited from NYSE and NYSE Amex member firms when we first proposed Rule 5320 in March 2009 and also posted the proposal on our web site. In addition, we specifically sought comment on the type of disclosures that should be provided to customers to advise them of the terms and conditions of the orders, i.e., how the member organization may trade along with customer orders. Rule 92 required either affirmative blanket written consent or order-by-order consent. The NYSE noted that it was proposing to replace that requirement with a negative consent standard that was already part of the Manning Rule, and we specifically requested comment on that issue. Only two letters were received – from SIFMA and FIF – and both supported this change.

As the NYSE was developing this new rule, on a parallel track FINRA was working to replace the Manning Rule with its own new Rule 5320. In numerous rule filings to the SEC, we stated that we were working diligently with FINRA on harmonizing our respective customer order-protection rules, and intended file a rule substantially identical to FINRA’s and implement it on the same date. FINRA’s 5320 underwent its own extensive comment period, during which no one suggested that the NYSE retain Rule 92. FINRA’s 5320 was approved by the SEC in August 2011, 15 months after it was filed. At that point, the NYSE filed for immediate effectiveness of our own 5320, with a delayed operative date of September 12, 2011 so that it would be operative on the same date as FINRA’s rule.

Today, there is a single, consistent approach to customer order protection, across markets and securities. This also serves to further reduce regulatory duplication, which is a critical issue for the securities industry. In addition, we have advanced the goal of establishing FINRA as the primary member-firm regulator. FINRA is the appropriate regulatory body for setting such policies and monitoring customer order protection.

Our Relationship Management team is always available if you would like to discuss this further.

SEC Release No.34-65164;  File No. SR-NYSE-2011-43 can be viewed at the following link.

The FINRA Regulatory Notice on SEC Approval of Consolidated FINRA Customer Order Protection Rule can be viewed at the following link.