What is the Rule 407 Letter?

//What is the Rule 407 Letter?
What is the Rule 407 Letter? 2017-10-10T05:00:10+00:00

Definition: The Rule 407 letter is a conduct regulation pertaining to how and when a member of the Financial Industry Regulatory Authority (FINRA) is allowed to hold investments in a personal account.

What Does Rule 407 Letter Mean?

What is the definition of rule 407 letter? Members of the FINRA are required to report their investment holdings to the NYSE or the NASDAQ. The idea behind this obligation is that a trader, a broker or any other member of the FINRA may use inside information seeking to satisfy personal interest at the expense of other investors.

Rule-407 indicates the conditions under which a member of the FINRA may hold personal investments. In fact, the Rule-407 letter involves the accounts opened by members of the FINRA or by members of their families so that these people are allowed to receive duplicate statements by the FINRA. The Rule seeks to eliminate cases of fraud that could otherwise be covered by insider trading.

Let’s look at an example.

Example

Bethany is employed by a brokerage firm, and she works on the trading floor. As a member of the FINRA, she is required to report her investment holding to the NYSE. However, Bethany wants to inform the NYSE that she has also opened an account under the name of her husband with another brokerage firm. Hence, she should submit a Rule-407 letter to NYSE.

The “Letter of Approval for Accounts of Affiliated Persons” requires her to fill in her husband’s name and social security. The next field is the request to the NYSE to accept the Rule-407 letter as approval for opening a brokerage account for her husband, i.e. “a member of the immediate household.”

With her signature, Bethany agrees that her employer will be notified of her intention to open a brokerage account for her husband.

Summary Definition

Define Rule 407 Letter: Rule-407 means a guideline pertaining to when an FIRA member can invest personally.