FINRA Rule 11860

FINRA Rule 11860 sits within the 11800 Close-Out Procedures subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11840's rights and warrants framework and immediately preceding FINRA Rule 11870's customer account transfer contracts framework.

What COD and POD Orders Are

A COD (collect on delivery) or POD (payment on delivery) order is a customer order arrangement under which payment for securities purchased, or delivery of securities sold, is made to or by an agent of the customer — typically a custodian bank, trust company, or similar institution holding the customer's assets — rather than directly between the customer and the executing member firm. 

This arrangement is common where a customer's assets are held in custody by an institution separate from the broker-dealer executing the customer's trades — the broker-dealer executes the trade, but settlement (payment and delivery) flows through the customer's custodial agent rather than through an account the customer maintains directly with the executing broker-dealer.

FINRA Rule 11860(a)'s opening sentence establishes the broad scope of this framework — no member shall accept an order from a customer, including foreign customers and/or broker-dealers trading with or through the member, for eligible transactions of such customers that settle in the United States, pursuant to such an arrangement unless all of the enumerated procedures are followed. The including foreign customers and/or broker-dealers trading with or through the member language confirms this framework applies broadly across the customer relationships this dictionary has encountered throughout its coverage — not merely domestic retail customers, but foreign customers and broker-dealers trading with or through the member as well, provided the resulting transactions settle in the United States.

FINRA Rule 11860(a)(1) Through (3): Agent Identification, Order Marking, and Same-Day Confirmation

FINRA Rule 11860(a)(1) requires that the member shall have received from the customer prior to or at the time of accepting the order, the name and address of the agent and the time and account number of the customer on file with the agent and institution number, where appropriate. This establishes the foundational identifying information requirement — before or at the moment of order acceptance, the member must know who the customer's settlement agent is and how the customer is identified on that agent's books, ensuring the member can properly direct settlement instructions to the correct agent and account.

FINRA Rule 11860(a)(2) requires that each order accepted pursuant to such an arrangement has noted thereon the fact that it is a payment on delivery (POD) or collect on delivery (COD) transaction. This marking requirement ensures the order's COD/POD character is documented at the point of order entry — connecting to the broader documentary-trail emphasis this dictionary has observed throughout the Uniform Practice Code, from FINRA Rule 11210's comparison and confirmation framework to FINRA Rule 11710's Uniform Reclamation Form.

FINRA Rule 11860(a)(3) requires the member to deliver to the customer a confirmation, or all relevant data customarily contained in a confirmation with respect to the execution of the order, in whole or in part, no later than the end of the day on the trade date. This same-trade-day confirmation requirement directly parallels — and in fact predates by decades — the kind of prompt-confirmation emphasis this dictionary has traced throughout FINRA Rule 11210's comparison and confirmation framework, ensuring the customer receives execution details promptly even though settlement itself will flow through the customer's separate agent.

FINRA Rule 11860(a)(4): The SEA Rule 15c6-2 Connection

FINRA Rule 11860(a)(4) introduces a cross-reference this dictionary has not previously encountered directly — prior to accepting any such order, the member shall have entered into the written agreement, or established the written policies and procedures, required by SEA Rule 15c6-2 with respect to any resulting transaction.

SEA Rule 15c6-2 is a Securities Exchange Act rule addressing the settlement-cycle obligations of broker-dealers specifically in connection with transactions that will settle through a custodian or similar arrangement — precisely the COD/POD scenario FINRA Rule 11860 addresses. This dictionary has encountered SEA Rules 15c6-1 (the general standard settlement cycle rule) repeatedly throughout its coverage of the T+2-to-T+1 transition reflected in FINRA Rules 11140, 11150, 11210, 11320, and 11620's amendment histories — SEA Rule 15c6-2 represents the companion provision specifically addressing the COD/POD context, where the broker-dealer executing the trade is not the party that will directly effect settlement, creating a distinct compliance challenge for ensuring the overall transaction nonetheless settles within the standard cycle.

FINRA Rule 11860(a)(4)'s requirement — a written agreement, or written policies and procedures — establishes that the member must have, before accepting any COD/POD order, either a direct written agreement addressing SEA Rule 15c6-2 compliance, or its own written policies and procedures addressing that compliance, with respect to any resulting transaction. This requirement's presence within FINRA Rule 11860(a) — alongside the May 28, 2024 T+1 amendment date this rule shares with FINRA Rules 11140, 11150, 11210, 11320, and 11620 — confirms that the COD/POD framework's settlement-cycle compliance obligations have been kept in step with the broader settlement-cycle-shortening initiatives this dictionary has traced throughout its coverage.

FINRA Rule 11860(a)(5): Clearing Agency and Qualified Vendor Facilities for Depository Eligible Transactions

FINRA Rule 11860(a)(5) establishes the book-entry-settlement and electronic-confirmation requirements for depository eligible transactions — the facilities of a Clearing Agency shall be utilized for the book-entry settlement of all depository eligible transactions except transactions that are to be settled outside the United States. The facilities of either a Clearing Agency or a Qualified Vendor shall be utilized for the electronic confirmation and affirmation of all depository eligible transactions.

This provision directly parallels FINRA Rule 11310's book-entry settlement mandate for depository eligible securities examined extensively in this dictionary's earlier coverage — the same except transactions that are to be settled outside the United States exclusion this dictionary encountered in connection with FINRA Rule 11310(e) appears here as well, confirming the consistency of this cross-border accommodation across both the general book-entry settlement framework and the COD/POD-specific framework FINRA Rule 11860 establishes.

The bifurcated structure — Clearing Agency facilities mandatory for book-entry settlement itself, but either a Clearing Agency or a Qualified Vendor for electronic confirmation and affirmation — introduces the Qualified Vendor concept that paragraph (b)(3)'s extensive definition addresses. This bifurcation reflects that confirmation and affirmation — the process by which the parties to a transaction agree on its terms before settlement, connecting to the comparison and confirmation framework this dictionary examined in FINRA Rule 11210 — represents a function that, unlike book-entry settlement itself (which requires the depository infrastructure a Clearing Agency provides), can be performed by either the Clearing Agency directly or by a separate, independently-qualified vendor meeting the standards paragraph (b)(3) establishes.

FINRA Rule 11860(b)(1) and (2): "Clearing Agency" and "Depository Eligible Transactions"

FINRA Rule 11860(b)(1) defines Clearing Agency by reference to the Exchange Act — a clearing agency as defined in Section 3(a)(23) of the Exchange Act that is registered with the SEC pursuant to Section 17A(b)(2) of the Exchange Act or has obtained from the SEC an exemption from registration granted specifically to allow the clearing agency to provide confirmation and affirmation services. This definition directly parallels FINRA Rule 11310(c)'s registered securities depository definition examined in this dictionary's earlier coverage — both definitions anchor to the same Exchange Act Section 17A registration framework, with FINRA Rule 11860(b)(1) additionally accommodating clearing agencies operating under an SEC exemption specifically for confirmation and affirmation services — a category this dictionary has not previously encountered, reflecting FINRA Rule 11860's specific focus on the confirmation-and-affirmation function alongside book-entry settlement.

FINRA Rule 11860(b)(2) defines depository eligible transactions as transactions in those securities for which confirmation, affirmation or book entry settlement can be performed through the facilities of a Clearing Agency, with a second sentence addressing a specific sub-category — eligible sinking funds and/or dividends reinvestment transactions must be confirmed, acknowledged and book entry settled through the facilities of a registered securities depository. This sinking fund and dividend reinvestment sub-category connects to several threads this dictionary has traced — sinking funds relate to the bond redemption concepts underlying FINRA Rules 11170 and 11530(a), while dividend reinvestment connects to the broader corporate-action and distribution framework of FINRA Rules 11140 and 11630.

FINRA Rule 11860(b)(3): "Qualified Vendor" — A Seven-Part Operational Standard

FINRA Rule 11860(b)(3) establishes the most elaborate definition this dictionary has encountered within the 11000 series — a Qualified Vendor is a vendor or electronic confirmation and affirmation service meeting seven sets of requirements, lettered (A) through (G).

Subparagraph (A) establishes operational requirements for each transaction subject to the rule — the vendor must deliver a trade record to a Clearing Agency in the Clearing Agency's format, obtain a control number for the trade record from the Clearing Agency, cross-reference that control number to the confirmation and subsequent affirmation of the trade, and include the control number when delivering the affirmation to the Clearing Agency. This control-number cross-referencing mechanism ensures that even though a Qualified Vendor (rather than the Clearing Agency itself) handles confirmation and affirmation, the resulting records remain traceable within the Clearing Agency's own systems — connecting to the documentary-traceability emphasis this dictionary has observed throughout the Uniform Practice Code, from CUSIP numbers under FINRA Rule 11100(d) to the various standardized forms this dictionary examined in FINRA Rules 11130, 11210, 11360, 11550, and 11710.

Subparagraph (B) establishes five operational certifications a Qualified Vendor must make to its customers — a capacity requirements evaluation and monitoring process; sufficient system capacity for anticipated volume; formal, regularly-reviewed-and-tested contingency procedures; processes for preventing, detecting, and controlling systems integrity failures and security breaches; and a minimum financial standard — current assets exceeding current liabilities by at least $500,000. This $500,000 net-current-asset minimum represents the first specific dollar-denominated financial threshold this dictionary has encountered within its coverage of the Uniform Practice Code's 11000 series — a baseline financial-soundness standard for entities performing the confirmation-and-affirmation function this rule permits Qualified Vendors to perform.

Subparagraphs (C) through (F) establish ongoing SEC and FINRA oversight obligations — annual Auditor's Report submission to SEC staff (not deemed unacceptable); immediate written notification to SEC staff of significant changes affecting (or potentially affecting) the confirmation/affirmation system's capacity, security, technology, or services; immediate written notification if the vendor intends to cease providing services, plus supplemental information as requested by FINRA or SEC staff; and provision to FINRA of copies of any SEC submissions under (C), (D), and (E) within ten business days.

Subparagraph (G) establishes the disqualification mechanism — a vendor may cease to be qualified if SEC staff deems its Auditor's Report unacceptable (due to material weaknesses or other identified reasons) or notifies the vendor in writing that it is no longer qualified — with a member-protection provision: if the vendor ceases to be qualified, the member using that vendor shall not be deemed in violation of this Rule if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified. This member-protection provision ensures that a member's compliance with FINRA Rule 11860 does not become retroactively jeopardized by a vendor's subsequent disqualification, provided the member acts promptly once notified.

FINRA Rule 11860(b)(4): "Auditor's Report"

FINRA Rule 11860(b)(4) defines the Auditor's Report referenced throughout paragraph (b)(3) — a written report prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association, which (i) verifies the paragraph (b)(3)(B) certifications, (ii) contains a risk analysis of all aspects of the entity's information technology systems — including computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing — and (iii) contains the entity's management's written response to that information.

This definition's reference to two specific professional standards bodies — the American Institute of Certified Public Accountants (AICPA) and the Information Systems Audit and Control Association (ISACA) — reflects the dual financial-audit and information-technology-audit character of the Qualified Vendor certification process, with the AICPA representing the traditional financial-audit profession and ISACA representing the specialized information-systems-audit discipline appropriate to verifying paragraph (b)(3)(B)'s technology-capacity, contingency, and security certifications.

The Amendment History: From 1982 Adoption Through the 2024 T+1 Conformity Amendment

FINRA Rule 11860's amendment history — Adopted effective November 19, 1982, amended effective February 11, 1988, SR-NASD-94-56 effective June 7, 1995, SR-NASD-98-20 effective June 28, 1999, SR-FINRA-2010-030 effective December 15, 2010, SR-FINRA-2016-047 effective September 5, 2017, and SR-FINRA-2023-017 effective May 28, 2024 — reveals a rule whose 1982 origin predates most of the early-1990s modernization wave this dictionary has traced through FINRA Rules 11120, 11320, 11530, 11560, 11571, 11720, and 11820, while its most recent amendment places it squarely within the current T+1 settlement cycle framework alongside FINRA Rules 11140, 11150, 11210, 11320, and 11620.

The SR-NASD-94-56 effective June 7, 1995 amendment — sharing both this effective date and Notice 95-36 with FINRA Rule 11150 and FINRA Rule 11620's amendment histories examined earlier in this dictionary's coverage — confirms that this 1995 amendment represented a coordinated package addressing multiple Uniform Practice Code provisions together, now including FINRA Rule 11860 as a third member of this coordinated 1995 amendment group.

The selected notices 86-60 and 88-3 — corresponding to the rule's pre-1990s amendment history (the February 11, 1988 amendment) — represent notices this dictionary has not previously encountered, situating FINRA Rule 11860's early refinement within a distinct mid-1980s regulatory period from the 1983-era Notice 83-69 amendments this dictionary has traced through numerous other 11000-series provisions.

Connection to FINRA Rules 11100, 11130, 11140, 11150, 11170, 11210, 11220, 11310, 11320, 11530, 11571, 11630, and 11800

FINRA Rule 11860 connects directly and by explicit cross-reference to FINRA Rule 11130(a)(1) — this dictionary's long-anticipated resolution, confirming FINRA Rule 11860 as the rule that FINRA Rule 11130(a)(1) invokes alongside FINRA Rules 11210(a) and 11220 for when, as and if issued/distributed transaction confirmations and comparisons. It connects to FINRA Rule 11100(d) — whose CUSIP traceability principle FINRA Rule 11860(b)(3)(A)'s control-number cross-referencing mechanism extends into the electronic confirmation/affirmation context. It connects to FINRA Rules 11140, 11150, 11210, 11320, and 11620 — sharing the May 28, 2024 SR-FINRA-2023-017 T+1 conformity amendment, with FINRA Rule 11860(a)(4)'s SEA Rule 15c6-2 cross-reference introducing the COD/POD-specific companion to the SEA Rule 15c6-1 settlement-cycle framework this dictionary has traced throughout those provisions. It connects to FINRA Rule 11170 and FINRA Rule 11530(a) — whose bond redemption and sinking fund concepts underlie FINRA Rule 11860(b)(2)'s eligible sinking funds sub-category. It connects directly and substantively to FINRA Rule 11310 — whose registered securities depository definition under paragraph (c) and book-entry settlement mandate (including its except transactions settled outside the United States exclusion under paragraph (e)) FINRA Rule 11860(a)(5) and (b)(1) directly parallel. It connects to FINRA Rule 11220 — whose description-of-securities and confirmation framework underlies FINRA Rule 11860(a)(3)'s same-trade-day confirmation requirement. It connects to FINRA Rule 11571 — sharing the broader pattern of institutional-authority and certification documentation this dictionary has traced, here in the form of paragraph (b)(3)(B)'s Qualified Vendor certifications. It connects to FINRA Rule 11630 — whose dividend-related due-bill framework connects to FINRA Rule 11860(b)(2)'s dividends reinvestment transactions sub-category. And it connects to FINRA Rule 11800 as its parent series marker.

Examination Relevance and Key Takeaways

FINRA Rule 11860 is tested on the Series 7 and Series 24 examinations as the COD/POD orders framework — establishing the procedures a member must follow before accepting customer orders settled through a third-party agent, and defining the Clearing Agency, depository eligible transaction, Qualified Vendor, and Auditor's Report concepts underlying those procedures.

The key points to retain are these: FINRA Rule 11860(a) requires, before accepting a COD/POD order (including from foreign customers or broker-dealers, for transactions settling in the United States), that the member obtain the customer's agent identifying information and account details, mark the order as POD or COD, deliver a same-trade-day confirmation (or its substantive equivalent), comply with SEA Rule 15c6-2's written agreement or policies-and-procedures requirements, and utilize Clearing Agency facilities for book-entry settlement of depository eligible transactions (except those settling outside the United States) and either Clearing Agency or Qualified Vendor facilities for electronic confirmation and affirmation of such transactions; FINRA Rule 11860(b) defines Clearing Agency by reference to Exchange Act Section 3(a)(23)/17A(b)(2) registration or a confirmation-and-affirmation-specific exemption, defines depository eligible transactions (with a special sinking-fund and dividend-reinvestment sub-category requiring registered-depository confirmation, acknowledgment, and book-entry settlement), defines Qualified Vendor through a seven-part standard (A)-(G) covering control-number cross-referencing, capacity/security/contingency certifications including a $500,000 net-current-asset minimum, annual Auditor's Report submission, SEC/FINRA notification obligations, and a member-protective disqualification mechanism, and defines Auditor's Report by reference to AICPA and ISACA standards; and the rule was most recently amended May 28, 2024 through SR-FINRA-2023-017 (T+1 conformity), with prior amendments through SR-FINRA-2016-047 effective September 5, 2017, SR-FINRA-2010-030 effective December 15, 2010, SR-NASD-98-20 effective June 28, 1999, SR-NASD-94-56 effective June 7, 1995, effective February 11, 1988, and Adopted effective November 19, 1982, with six selected notices — 86-60, 88-3, 95-36, 10-49, 17-19, and 24-04.