Fidelity Bonds – Regulatory Notice 11-21

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FINRA Rule 4360 requires each member firm that is required to join the Securities Investor Protection Corporation (SIPC) to maintain blanket fidelity bond coverage with specified amounts of coverage based on the firm’s net capital requirement, with certain exceptions. Such firms must maintain fidelity bond coverage that provides for per loss coverage without an aggregate limit of liability. The new rule is based on NASD Rule 3020, taking into account certain requirements under NYSE Rule 319 and its Interpretation.

A firm not qualifying for a fidelity bond with per loss coverage and no aggregate limit of liability must maintain substantially similar cover with compliance with all other provisions of the rule, providing that the firm is able to show through correspondence from two insurance carriers that the firm does qualify for such coverage.

A firm’s fidelity bond must provide against loss and have Insuring Agreements covering at least the following: fidelity, on premises, in transit, forgery and alteration, securities and counterfeit currency. Also, the rule replaces the specific coverage provisions in the NASD and NYSE rules that permit less than 100 percent of coverage for certain agreements, thus coverage for all Insuring Agreements must be equal to 100 percent of the firm’s minimum required bond coverage. A firm’s fidelity bond must include a cancellation rider providing that the insurer will use its best efforts to promptly notify FINRA in the event the bond is cancelled, terminated or substantially modified.

The minimum required coverage increased under the new rule for firm’s with minimum net capital requirements that are less than $250,000 to the greater of 120% of its required minimum net capital or $100,000 (presently $25,000).

Deductibles are allowed up to 25% of the fidelity bond coverage purchased by a firm, but any deductible amount greater than 10% of the coverage purchased must be deducted from its net worth in the net capital calculation for purposes of Exchange Act Rule 15c3-1.

A member firm (even for a multi-year insurance policy) must review annually the adequacy of its fidelity bond and make required adjustments to its coverage, based on its highest net capital requirement for the preceding 12-month period.

Further, Rule 4360 removes the historical exemption of NASD Rule 3020(e) for a one-person firm.

FINRA Rule 4360 takes effect on January 1, 2012.

Contact Evans & Kob PC for experienced legal representation regarding securities, broker-dealer and investment advisers, arbitration or litigation or any other regulatory related matter at info@eklawpc.com.

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