New FINRA Fidelity Bond Requirements

& CLIENT UPDATE: SPRING 2012

Effective January 1, 2012 the SEC approved FINRA’s proposal to adopt a revised FINANCIAL rule governing fidelity bonds for the FINRA rulebook. The new rule, Rule 4360, enforces each firm that is required to join the Securities Investor Protection INDUSTRY Corporation (SIPC) to maintain blanket fidelity coverage, with specified amounts of REGULATORY coverage based on the firm’s net capital requirement with certain exceptions. Those firms that act solely as a designated market maker, floor broker or AUTHORITY registered floor trader that does not conduct business with the public are exempt from the fidelity bond requirement. One person firms no longer maintain the RULE 4360: exemption in NASD Rule 3020(e) as FINRA is requiring all SIPC member firms New FINRA regardless of size or structure to maintain fidelity bond coverage. Fidelity Bond Rule 4360 updates the fidelity bond requirements and NYSE Rule 319 including Requirements its interpretation. Minimum Net Capital Requirement • Firms with less than $250,000 must maintain minimum coverage of the The new rule, Rule 4360, greater of 120% of its required minimum net capital or $100,000. enforces each firm that is • Firms with a minimum net capital requirement between $250,000 and required to join the SIPC $1 million must use a table, which is part of Rule 4360, to determine their to maintain blanket fidelity minimum fidelity bond coverage requirement. bond coverage. • Firms with a minimum net capital requirement that exceeding $1 million will use the same FINRA/NYSE guidelines as before.

Financial Institution Bond Form No. 14 • Standard fidelity bond with an aggregate limit of liability which caps a firm’s coverage during the bond period. • A per loss limit without an aggregate limit for the period of coverage provides the most beneficial coverage as the bond limit cannot be exhausted by one or more covered losses.

Securities Dealer Bond efforts to promptly notify FINRA in the event the bond is cancelled, terminated or substantially modified. • Provides coverage on a per loss basis without capping a firm’s coverage during the bond period. • Provides court costs and attorney’s fees in addition to Court Costs & Attorneys’ Fees the limit of liability. • Must be available for covered losses and may not be • A firm that had a loss within a particular period of time eroded by the costs an insurer may incur if it chooses (generally three years), does not qualify. to defend a claim. • Firms that do not qualify must: • Defense costs for covered losses must be in addition to a firm’s minimum coverage requirements. − Use Financial Institution Bond Form No. 14. − Maintain substantially similar fidelity bond coverage Provide a Deductible of up to 25% of Bond Limit in compliance with all other provisions of the rule. • Any deductible amount elected by the firm that is − Maintain written correspondence from two insurance greater than 10% of the coverage limit must be providers stating that it does not qualify for such deducted from its net worth in the calculation of its coverage and this correspondence must be retained net capital for purchase of Rule 15c3-1. for the period specified by Exchange Act Rule 17a- • If a firm is a subsidiary of another FINRA member firm, 4(b)(4). this amount may be deducted from the parent’s net

NYSE Rule 319 • The firm’s fidelity bond must include a cancellation rider providing that the insurer will use its best

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