Rule 407 Letter: What It Is, Sample, Example

Every firm that is a FINRA member must provide its executives, employees, and other associated persons with a notice about their obligation to adhere to Rule 407 of the FINRA.

This rule restricts how and when these individuals are allowed to buy or sell securities in their personal accounts.

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According to the letter, these individuals must obtain permission from their firm before they make any transactions in a personal account.

This permission should be written, and the individual must provide information about the proposed transaction, such as what kind of security will be bought or sold, at what price it will be traded, and when it is expected to take place.

What is a Rule 407 Letter?

Rule 407 is a law that requires employees of the Financial Industry Regulatory Authority (FINRA) to hold investments in equities or bonds in personal accounts.

By law, employees must divulge info on personal bank accounts where they deposit securities. This rule was established to prevent any potential conflict of interest and safeguard retail investors.

In simple terms, a Rule 407 letter is a written document that outlines the restrictions and requirements for FINRA members when it comes to investing in their personal accounts.

The goal of this letter is to ensure that the employee’s interests are aligned with those of their clients and that there is no opportunity for self-dealing or speculation.

To this end, employees must obtain permission from their firm before making any transactions in a personal account.

This permission should be written, and the individual must provide details about the proposed transaction, such as what type of security will be bought or sold, at what price it will be traded, and when it is expected to take place.

How the Rule 407 Letter Works

Members of FINRA have to tell the NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotations) about their investment holdings.

This rule is designed to stop people who work in the financial industry from using information that they know but other people don’t make money for themselves at the expense of other investors.

Rule 407 of the FINRA defines the circumstances in which its members are allowed to possess personal investments.

The Rule-407 letter is necessary for members of the FINRA who have opened accounts, as well as their family members so that they are allowed to receive duplicate statements.

The Rule works to prevent fraud that would be considered insider trading.

Example of a Rule 407 Letter

For example, let’s say, Alex is an employee of a brokerage firm that is a FINRA member.

Alex wishes to purchase stocks in his personal account and must therefore provide the firm with the details of the proposed transaction, such as what type of security will be bought or sold, at what price it will be traded, and when it is expected to take place.

In this case, Alex would need to obtain permission from his firm in writing and provide them with the details of the proposed transaction. Once this is done, Alex would be allowed to purchase stocks in his personal account according to Rule 407.

The goal of this letter is to ensure that the employee’s interests are aligned with those of their clients and that there is no opportunity for self-dealing or speculation.

By following Rule 407, Alex can be assured he is abiding by all regulations and that his personal investments will be handled appropriately.

Conclusion

The Rule 407 letter is an important conduct regulation for members of FINRA. It ensures that employees of the Financial Industry Regulatory Authority do not use their knowledge of the industry to gain an advantage when it comes to investing in personal accounts. By requiring written consent from employees before they can make any transactions on their own behalf, this rule prevents conflicts of interest, as well as any potential insider trading.

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