FINRA Manual: Contents
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11-06 SEC Approves Consolidated FINRA Rule Governing Reporting Requirements; Effective Date: July 1, 2011
Consolidated FINRA Rulebook
Referenced Rules & Notice
FINRA Rule 4530
Information Notice 3/12/08
NASD Rule 3070
NYSE Rule 351
The SEC approved FINRA's proposal to adopt a rule governing reporting requirements1 for the consolidated FINRA rulebook.2 The new rule, FINRA Rule 4530, is based in large part on NASD Rule 3070, taking into account certain requirements under NYSE Rule 351.3
The text of the new rule is set forth in Attachment A. The new event codes for batch reporting specified events via the Rule 4530 Application are set forth in Attachment B. The rule takes effect on July 1, 2011.
Questions regarding this Notice should be directed to Afshin Atabaki, Assistant General Counsel, Office of General Counsel, at (202) 728-8902.
Technical questions regarding the Rule 4530 Application, including testing, should be directed to the FINRA Help Desk, at (800) 321-6273 (if your question relates to testing, please indicate that your question is about a test system issue, and not an actual submission).
Background & Discussion
FINRA uses the information for regulatory purposes to identify and initiate investigations of firms, offices and associated persons that may pose a risk. The new rule applies to all FINRA member firms. In most cases, the requirements of FINRA Rule 4530 are based on similar requirements in the NASD and NYSE rules. FINRA Rule 4530 strengthens and clarifies these requirements, as explained below.
FINRA Rule 4530(b) requires a member firm to report to FINRA within 30 calendar days after the firm has concluded, or reasonably should have concluded, on its own that the firm or an associated person of the firm has violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body or self-regulatory organization (SRO). This requirement is generally modeled after a requirement in the NYSE rule.
The new rule does not require firms to report every instance of noncompliant conduct. With respect to violative conduct by a firm, this provision requires the firm to report only conduct that has widespread or potential widespread impact to the firm, its customers or the markets, or conduct that arises from a material failure of the firm's systems, policies or practices involving numerous customers, multiple errors or significant dollar amounts.4 Regarding violative conduct by an associated person, the provision requires a firm to report only conduct that has widespread or potential widespread impact to the firm, its customers or the markets; conduct that has a significant monetary result on a member firm(s), customer(s) or market(s); or multiple instances of any violative conduct.5
For purposes of compliance with the "reasonably should have concluded" standard, FINRA will rely on a firm's good faith reasonable determination. If a reasonable person would have concluded that a violation occurred, then the matter is reportable; if a reasonable person would not have concluded that a violation occurred, then the matter is not reportable.
Additionally, a firm determines the person(s) within the firm responsible for reaching such conclusions, including the person's required level of seniority. However, stating that a violation was of a nature that did not merit consideration by a person of such seniority is not a defense to a failure to report such conduct. Further, it may be possible that a department within a firm reaches a conclusion of violation, but on review senior management reaches a different conclusion. Nothing in the rule prohibits a firm from relying on senior management's determination, provided such determination is reasonable as described above.
Moreover, the reporting obligation under FINRA Rule 4530 and the internal review processes set forth under other rules (e.g., FINRA Rule 3130) are mutually exclusive. While internal review processes may inform a firm's determination that a specific violation occurred, they do not by themselves lead to the conclusion that the matter is reportable.6 For example, FINRA would not view a discussion in an internal audit report regarding the need for enhanced controls in a particular area, standing alone, as determinative of a reportable violation. It should also be noted that an internal audit finding would serve only as one factor, among others, that a firm should consider in determining whether a reportable violation occurred.
Lastly, the new rule provides that certain disciplinary actions taken by a firm against an associated person must be reported under a separate provision (discussed below),7 rather than under the internal conclusion provision.8
Other Reportable Events
In addition to internal conclusions, FINRA Rule 4530 requires a member firm to report to FINRA within 30 calendar days9 after the firm knows or should have known10 of the existence of certain other events relating to the firm or an associated person of the firm. These events are based on existing requirements in NASD Rule 3070 or NYSE Rule 351, with a few modifications as described below.
FINRA Rule 4530(a)(1)(A) requires the reporting of certain external findings similar to the NASD rule,11 but limits the scope of the requirement to where the firm or an associated person has been found12 by an external body13 to have violated any securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any domestic or foreign regulatory body, SRO or business or professional organization.14
Complaints Involving Certain Allegations
FINRA Rule 4530(a)(1)(B) requires that a firm report any written customer complaint against the firm or an associated person alleging theft or misappropriation of funds or securities or forgery. The new rule clarifies that, for purposes of this requirement, a "customer" includes any person (other than a broker or dealer) with whom the firm has engaged, or has sought to engage, in securities activities.15 Further, it codifies existing staff guidance reminding firms to report quarterly statistical and summary information regarding such complaints.16
Named in a Regulatory Proceeding; Subject to Other Regulatory Actions; or Associated with a Financial Entity Subject to Certain Actions
FINRA Rules 4530(a)(1)(C), (D) and (F) generally require firms to report whenever they or their associated persons are:
These provisions apply to domestic and foreign matters,17 including actions by a foreign regulatory body or, in the case of criminal actions, actions brought in a foreign court. The term "regulatory body," which is used in these provisions and the provisions relating to internal conclusions and external findings,18 is defined as a governmental regulatory body or an authorized non-governmental regulatory body, such as the Financial Services Authority.19
Criminal Actions Involving Felonies and Certain Misdemeanors
FINRA Rule 4530(a)(1)(E) generally requires that a firm report any indictment, conviction, or guilty or no contest plea of the firm or an associated person involving:
Civil Litigation; Arbitration Matters; or Certain Claims for Damages
FINRA Rule 4530(a)(1)(G) generally requires that a firm submit a report if it or an associated person is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, or is subject to a claim for damages by a customer, broker or dealer, that is disposed of for certain dollar thresholds (above $15,000 for associated persons; above $25,000 for firms).
The new rule extends this requirement to any financial-related insurance civil litigation or arbitration. "Financial-related" means related to the provision of financial services.20 By its terms, the rule excludes certain insurance products, such as traditional auto and health insurance. However, the scope of the rule is not limited to insurance products that are securities. Civil litigation or arbitration involving a non-securities insurance product that is related to the provision of financial services is subject to the rule.
Additionally, the new rule limits the scope of the requirement to report certain claims for damages by requiring the reporting of claims that relate to the provision of financial services or relate to a financial transaction, such as a loan by a customer to an associated person.
When calculating the dollar thresholds for reporting civil litigations, arbitrations or claims for damages subject to reporting, the new rule requires firms to include attorney's fees and interest.21 Further, it codifies existing staff guidance regarding "joint and several" liability.22 If parties are subject to "joint and several" liability, firms must use the aggregate dollar amount for reporting purposes since each party is separately liable for the aggregate amount. For instance, if two parties have "joint and several" liability for $40,000, the amount reported would be $40,000 for each party.
FINRA Rule 4530(a)(1)(H) requires that firms report certain "statutory disqualification" matters. The rule provides that a firm is required to report whenever the firm or an associated person is subject to a "statutory disqualification." In addition, it provides that firms are required to report whenever they or their associated persons are "involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities" with any person who is subject to a "statutory disqualification."23
Disciplinary Actions Taken by a Firm Against an Associated Person
FINRA Rule 4530(a)(2) requires that a firm report any disciplinary action taken by the firm against an associated person involving a suspension or termination, the imposition of fines above $2,500, or any other disciplinary action that would have a significant limitation on the associated person's activities. The rule clarifies that any disciplinary action involving the withholding of compensation or of any other remuneration above $2,500 is also reportable.24
Obligation of Associated Persons
Under FINRA Rule 4530(c), associated persons continue to have an obligation to promptly report to their member firms the existence of the events described above. The new rule clarifies that this obligation does not extend to internal conclusions and disciplinary actions taken by a firm against an associated person.
Exception for Information Disclosed on the Form U5
FINRA Rule 4530(e) provides, similar to the NASD rule, that firms and associated persons have a separate obligation to disclose required information on the Uniform Forms, as applicable, to make any other required filings and to respond to FINRA with respect to any customer complaint, examination or inquiry. Further, the new rule clarifies that the reporting obligations under the rule apply regardless of whether the information is reported or disclosed pursuant to any other rule or requirement.
However, the rule creates an exception for information disclosed on the Form U5. More specifically, a firm is not required to report an event otherwise required to be reported under the provisions discussed above if the firm discloses the event on the Form U5, consistent with the requirements of that form.25 This exception does not extend to the reporting of quarterly statistical and summary complaint information, which is addressed below.
Reporting an Event Under the Most Appropriate Provision
Member firms have an obligation to report an event under the most appropriate provision of FINRA Rule 4530 and not to report the same event under more than one provision.26 The rule recognizes that related events may have to be reported under more than one provision, such as being named as a respondent in an SRO proceeding alleging violation of the SRO's rules and subsequently found to have violated those rules.
Quarterly Statistical and Summary Complaint Information
FINRA Rule 4530(d) retains the requirement of the NASD and NYSE rules that firms report quarterly statistical and summary written customer complaint information, with the following modification. If a firm has engaged in securities activities with a person (other than a broker or dealer), the firm is required to report any written grievance by such person involving the firm or an associated person.27 If a firm has sought to engage in securities activities with a person (other than a broker or dealer), the firm is only required to report any securities-related written grievance by such prospective customer involving the firm or an associated person or any written complaints alleging theft or misappropriation of funds or securities or forgery.28
Obligation to Report Matters Relating to Former Associated Persons
Under the new rule, a firm is required to report a matter relating to a former associated person if it occurred while the person was associated with the firm.29 If a firm, however, becomes aware of a matter, but based on its records or information available through Web CRD® the firm cannot determine that the person was an associated person of the firm, the firm is not obligated to report it.30
FINRA Rule 4530(f) keeps the requirement of the NASD rule that firms promptly file with FINRA copies of certain: (1) criminal complaints and plea agreements; (2) civil complaints; and (3) arbitration claims. FINRA Rule 4530 extends this filing requirement to any financial-related insurance civil complaint filed against the firm or any financial-related insurance arbitration claim against the firm. FINRA Rule 4530(g) retains the exception for any arbitration claim that is originally filed in the FINRA Dispute Resolution forum and for those documents that have already been requested by FINRA's Registration and Disclosure (RAD) staff, provided that the firm produces those requested documents to RAD staff within 30 days after receipt of such request.
Technical Changes to Reporting Application
Member firms should continue to report specified events and quarterly statistical and summary information on written customer complaints via the Regulatory Filings Application on the FINRA Firm Gateway.31 Beginning July 1, 2011, the application will be renamed the Rule 4530 Application.
Firms must use new event codes for batch reporting specified events on or after July 1, 2011. The new codes are 11 through 20, and are described in detail in Attachment B. The old event codes, 01 through 10, will continue to be available for amending batch events that were reported prior to July 1, 2011, pursuant to NASD Rule 3070 or NYSE Rule 351. There are no changes to the codes for reporting quarterly statistical and summary information regarding written customer complaints.
Beginning June 6, 2011, firms will have an opportunity to test the new event codes for batch reporting through FINRA's test site at: https://regfilingtest.finra.org.
Any matter that becomes subject to reporting32 or filing prior to July 1, 2011, must be reported or filed in accordance with the requirements of NASD Rule 3070 and NYSE Rule 351, as applicable, including the reporting and filing deadlines of those rules. Any matter that becomes subject to reporting or filing on or after July 1, 2011, must be reported or filed in accordance with the requirements of FINRA Rule 4530.
For purposes of compliance with FINRA Rule 4530(d) (quarterly statistical and summary complaint information), starting on July 1, 2011, the beginning of the third calendar quarter, firms must report such information in accordance with the requirements of the new rule. The first report based on the requirements of FINRA Rule 4530(d) is due by October 15, 2011, which is the reporting deadline for customer complaints received during the third calendar quarter.
1 See Securities Exchange Act (SEA) Release No. 63260 (November 5, 2010), 75 FR 69508 (November 12, 2010) (Notice of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated Approval to Proposed Rule Change; File No. SR-FINRA-2010-034).
2 The current FINRA rulebook consists of: (1) FINRA Rules; (2) NASD Rules; and (3) rules incorporated from NYSE (Incorporated NYSE Rules) (together, the NASD Rules and Incorporated NYSE Rules are referred to as the Transitional Rulebook). While the NASD Rules generally apply to all FINRA member firms, the Incorporated NYSE Rules apply only to those members of FINRA that are also members of the NYSE (Dual Members). The FINRA Rules apply to all FINRA member firms, unless such rules have a more limited application by their terms. For more information about the rulebook consolidation process, see Information Notice 03/12/08 (Rulebook Consolidation Process). For convenience, the Incorporated NYSE Rules are referred to as the NYSE Rules.
3 FINRA Rule 4530 replaces NASD Rule 3070 and the corresponding provisions in NYSE Rule 351. Accordingly, effective July 1, 2011, NASD Rule 3070, paragraphs (a) through (d) of NYSE Rule 351, and NYSE Rules 351.10 and 351.13 will be deleted from the Transitional Rulebook.
4 See FINRA Rule 4530.01.
6 During the rulemaking process, some commenters asked whether a settlement with a customer creates the presumption that a reportable violation has occurred. FINRA reiterates that it is not the fact that a firm has settled a matter that makes it a reportable event under the rule; rather, it is whether the firm has reached an internal conclusion or reasonably should have reached an internal conclusion that the firm or an associated person has engaged in the enumerated violative conduct. Firms should note that certain settlements will have to be reported based on other reporting requirements [e.g., securities-related civil litigation settled for certain dollar thresholds set forth in the rule).
7 See FINRA Rule 4530(a)(2).
8 See FINRA Rule 4530.01.
9 The reporting deadline under NASD Rule 3070 is 10 business days. The reporting deadline under NYSE Rule 351 is 30 calendar days, which is also consistent with the reporting deadline for disclosing information on the Forms BD (Uniform Application for Broker-Dealer Registration), U4 (Uniform Application for Securities Industry Registration or Transfer) and U5 (Uniform Termination Notice for Securities Industry Registration) (collectively referred to as the Uniform Forms).
10 The purpose of the "should have known" standard is to ensure that member firms do not intentionally avoid becoming aware of a reportable event.
11 NASD Rule 3070 extends to a finding of violation of "any" rule or standard of conduct of "any" governmental agency, SRO, or financial business or professional organization.
12 FINRA Rule 4530.03 defines the term "found" generally consistent with the definition of the term in the Uniform Forms. In addition, the term includes any formal finding (regardless of whether the finding will be appealed), but it does not include a minor rule violation involving a fine of $2,500 or less.
13 An external body includes, but is not limited to, a court, domestic or foreign regulatory body, 5RO or business or professional organization. See FINRA Rule 4530.02.
14 During the rulemaking process, FINRA provided the following examples of the types of reportable external findings: (1) court finding relating to the violation of insurance laws; (2) finding of violation of an SRO's just and equitable principles of trade rule, such as FINRA Rule 2010; or (3) finding of violation of the Code of Professional Conduct of the American Institute of Certified Public Accountants. These examples are provided for illustrative purposes and are not exhaustive.
15 See FINRA Rule 4530.08.
17 Other provisions of FINRA Rule 4530 also apply to domestic and foreign matters, including the provisions relating to internal conclusions, external findings and criminal actions involving felonies and certain misdemeanors. See FINRA Rules 4530(a)(1)(A), (a)(1)(E) and (b).
18 See FINRA Rules 4530(a)(1)(A) and (b).
19 See FINRA Rule 4530.04.
20 See FINRA Rule 4530.09. The term "financial-related" is also used in other provisions, including the provisions regarding internal conclusions, external findings and filing requirements. See FINRA Rules 4530(a)(1)(A), (b) and (f).
21 See FINRA Rule 4530.06. Based on FINRA's experience, some firms have considered structuring settlements using attorney's fees to avoid the dollar thresholds for reporting. The inclusion of attorney's fees and interest is intended to address this concern.
22 See id.
23 The requirement in the NASD and NYSE rules is based on whether the firm or associated person is "associated in any business or financial activity" with a person who is subject to a "statutory disqualification."
24 The requirement in the NASD and NYSE rules is limited to the withholding of commissions above $2,500.
25 While this exception only applies to information that is disclosed on the Form U5, FINRA will work toward the goal of extending this exception to information that is disclosed on the Forms BD and U4.
26 See FINRA Rule 4530.05.
27 See FINRA Rule 4530.08.
28 See id.
29 See FINRA Rule 4530.07.
30 Firms are reminded that records relating to associated persons must be preserved consistent with the requirements of SEA Rule 17a-4(e)(1).
31 In general, firms should report the information in their custody, possession or control or to which they have knowledge and provide an explanation in the appropriate Rule 4530 Application fields of the information that they were unable to obtain due to circumstances beyond their control, with the understanding that firms cannot intentionally avoid becoming aware of a reportable event.
32 Firms should continue to use the Regulatory Filings Application on the FINRA Firm Gateway for purposes of reporting such matters.
Below is the text of the new FINRA rule.
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4530. Reporting Requirements
• • • Supplementary Material:------------
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New Event Codes for Batch Reporting Pursuant to FINRA Rule 4530
|12||(a)(1)(B)||Customer Complaint Involving Certain Allegations|
|13||(a)(1)(C)||Named in a Regulatory Proceeding|
|14||(a)(1)(D)||Subject to Other Regulatory Actions|
|15||(a)(1)(E)||Criminal Actions Involving Felonies and Certain Misdemeanors|
|16||(a)(1)(F)||Associated with a Financial Entity Subject to Certain Actions|
|17||(a)(1)(G)||Civil Litigation; Arbitration Matters; or Certain Claims for Damages|
|19||(a)(2)||Disciplinary Action Taken by a Firm Against an Associated Person|