FINRA Front-Running Policy: FINRA Proposes to Codify NASD Front-Running Policy as FINRA Rule 5270, with Expanded Scope

Sullivan & Cromwell LLP - Revised June 18, 2012

FINRA has proposed to codify its front-running policy, originally adopted by the NASD in 1987, as new FINRA Rule 5270. The new rule would expand the policy to prohibit member firms and their associated persons from engaging in a broader range of front-running transactions ahead of a customer block order in securities. The rule would apply to most derivative transactions, not just those in futures and options, when the block involves the underlying security, as well as to transactions in the block security itself. In addition, block orders subject to the rule would include those in most derivatives, not only futures and options. FINRA believes that the additional trading activity that would now be covered by the broader prohibition would already violate other FINRA rules. The new provisions would also state that front-running activity ahead of non-block orders may violate other FINRA rules or the federal securities laws. FINRA originally proposed these changes in 2008 and expects to announce an implementation date within 90 days after SEC approval.