Those of us in the financial industry have over the years seen many new rules and regulations introduced by the U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA) or even the various stock exchanges. With the exception of the SEC and CFTC, which are agencies under the U.S. federal government, all of these organizations are classified as Self-Regulatory Organizations (SROs). Their actions to create new regulations or change existing ones can trigger chain reactions across the entire financial industry.

What happens when new rules and regulations are introduced?

Broker-dealers, trading firms and third-party software providers all must make quick assessments to determine the impact on their business lines, order management software and/or personnel if applicable. From there, they can determine what will be needed with regard to software coding, resources and costs necessary to achieve compliance with new regulatory requirements. A large portion of this effort takes place within financial industry forums, which are working groups that discuss, debate and share difficulties presented by new rules and endeavor to identify paths to compliance that may not be as difficult or costly.


Where do these rules and regulations come from?

SROs such as FINRA and the various stock exchanges, put forth their own rules that apply to their members. Some of these rules mirror regulations put forth by the government agencies. The SROs do this mainly so they can enforce government regulations according to their own requirements. Some of these rules originate directly from the SROs, but most of them derive from federal regulation.

Let's take a look at a few examples:

Reg NMS Order Protection Rule – SEC Rule 242.611

Rule 611 was adopted on April 6, 2005 and requires that trading centers establish, maintain and enforce policies and procedures designed to prevent “trade throughs” of protected quotations.

In general, firms that engage in effecting trades in NMS securities are prohibited from executing at prices that fall outside of the National Best Bid and Offer (NBBO) of a protected quotation. However, the rule does provide a list of exemptions to this prohibition. Key terms used in the rule, such as “trading center” and “NMS security,” are defined in SEC Rule 242.600 (NMS Security Designation and Definitions).


Reg SHO Circuit Breaker – SEC Rule 242.201

Rule 201 was adopted on February 26, 2010 and requires that when a stock price falls 10% or more from the previous day’s close on the primary listing market, a “price test” goes into effect. This is published by the exchanges via the Securities Information Processor (SIP). From that point forward, for the balance of the current trading day and the entire following, no short sales are permitted to be executed at a price equal to or lower than the inside NBBO in an NMS Security.

Both of these rules serve as only one part of their respective regulations.
For example, Rule 611 is part of a series of rules that are numbered in the 600s, and Rule 201 is part of a series of rules numbered in the 200s.

Here are other rules that fall under each of these regulations:

Rule 611

  • § 242.600: NMS security designation and definitions;
  • § 242.601: Dissemination of transaction reports and last sale data with respect to transactions in NMS stocks;
  • § 242.602: Dissemination of quotations in NMS securities;
  • § 242.603: Distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks;
  • § 242.604: Display of customer limit orders;
  • § 242.605: Disclosure of order execution information;
  • § 242.606: Disclosure of order routing information;
  • § 242.607: Customer account statements;
  • § 242.608: Filing and amendment of national market system plans;
  • § 242.609: Registration of securities information processors: form of application and amendments;
  • § 242.610: Access to quotations;
  • § 242.610T: Equity transaction fee pilot;
  • § 242.611: Order protection rule;
  • § 242.612: Minimum pricing increment;
  • § 242.613: Consolidated audit trail;
  • § 242.614: Registration and responsibilities of competing consolidators.

Rule 201

  • § 242.200: Definition of “short sale” and marking requirements;
  • § 242.201: Circuit breaker;
  • § 242.203: Borrowing and delivery requirements;
  • § 242.204: Close-out requirement.

These rules are all derived from The Securities Acts Amendments of 1975. This was an Act of Congress that passed as a United States Public Law (Pub.L. 94-29) on June 4, 1975. This act ultimately amended the Securities Act of 1933, as well as the Securities Exchange Act of 1934.

Let’s take a look at another example:

Anti Money Laundering (AML)

Where did AML come from? Money laundering is covered under U.S. Statutes – more specifically, under Title 18 U.S. Code Part1, Chapter 95 §1956 and §1957. This falls under the jurisdiction of The Financial Crimes Enforcement Network (FinCEN). After the terrorist attacks on September 11, 2001, new requirements were put into place to prevent the funding of terrorist organizations and prevent or detect money laundering. These included rules requiring securities firms to Know Your Customer (KYC).

Once again, the question arises: where did these requirements come from? After the September 11 attacks, Congress passed another piece of legislation called the U.S. Patriot Act – Public Law 107-56 – on October 26, 2001.

These modern AML requirements may have come from the U.S. Patriot Act of 2001, but what is the origin of legislation in his area? Once again, we point to an Act of Congress: The Bank Secrecy Act of 1970.





These rules and regulations might seem like new concepts as regulators put them in place, but as you can see, they have actually been around for quite some time. Over time and as major events impact the financial industry – stock market crashes, financial crimes and the like – the various regulating entities find themselves adding new requirements and regulations in order to protect investors and the markets, and prevent or detect crime as much as possible.

In the financial industry, much of the focus is on how new rules and regulations might impact company business lines and software and necessitate work to remain compliant. Most professionals look only at the new regulation itself and don’t really take an interest in where it originated. Those that do look deeper, however, will often uncover a long and sometimes fascinating story of origin, impacted by all kinds of significant historical events.

This process plays out on an ongoing basis: the SROs and government regulators are constantly implementing new regulations and requirements. Sometimes there are quiet periods when there isn’t much regulatory activity, and sometimes there are periods when the introduction of new rules is quite robust. For the most part, if you look, you’ll find that there is a history behind most newly proposed rules and regulations that dates back quite a long time – a family tree, so to speak. All in all, the industry always manages to work through the complications, headaches and costs of implementing new rules and regulations, and ultimately, it is the investing public that benefits from it.


Sources: U.S. Securities and Exchange Commission (SEC), Financial Crimes Enforcement Network (FinCen), Financial Industry Regulatory Authority (FINRA),

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Written by

Carmen Lelli

Regulatory Business Analyst, Itiviti

Carmen has over 34 years of experience in the Financial Industry, the past 17 of which have been devoted to the Laws and Regulations of the Financial Industry. He is specialized in SEC, FINRA and CAT (Consolidated Audit Trail).

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