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Rule 401 Business Conduct

This rule interpretation is no longer applicable effective December 15, 2008.

/01 Trading Against Firm Recommendations

Transactions in a security by a member organization or its personnel shortly before or after the firm issues a purchase or sale recommendation raise questions of motive. Firm personnel who participate in making the recommendation or have any pre-publication knowledge of it should refrain from any action in contemplation of the report, such as making a transaction for their own account or accounts in which they have an interest or discretion or passing on advance information concerning the report to persons outside the firm.

At the time that customers generally learn of the recommendation, firm personnel (except "research analysts" as defined in Rule 472.40) should be free to act for unaffiliated discretionary accounts but should refrain from acting for accounts in which they have an interest, either in accordance with or in a manner inconsistent to the recommendation, until the market has absorbed the effect of the recommendation.

The time duration of the market effect is very difficult to determine and varies greatly with circumstances. Some firms have lessened the difficulty of individual decisions by selecting a minimum period following a recommendation during which firm personnel are restricted from acting for accounts in which they have an interest.

The period of time which elapses before customers generally learn of the recommendation is also difficult to determine and, therefore, it is advisable that a similar policy be adopted with respect to the accounts over which personnel have discretion but in which they have no interest.

"Research analysts" as defined in Rule 472.40 are also subject to personal trading restrictions specified in Rule 472(e).
/02 Private Sales

Member organizatio ns must monitor the activities of their associated personnel in regard to their marketing of securities through private sales. The SEC has stated that:

"(W)here employees effect transactions for customers outside of the normal channels and without disclosure to the employer, the public is deprived of protection which it is entitled to expect. Moreover the employer may also thus be exposed to risks to which it should not be exposed. Thus, such conduct is not only potentially harmful to public investors, but inconsistent with the obligation of an employee to serve his employer faithfully."

(Securities Exchange Act Release No. 10265 June 29, 1973)

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