FINRA Rule 4530 – Self-Reporting Misconduct

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New FINRA Rule 4530, representing a consolidation of NASD Rule 3070 and NYSE Rule 351, takes effect on July 1, 2011. The rule increases the level of self-reporting by firms by requiring firms to not only report when a court or self-regulatory body determines a securities violation, but also when the firm concludes or “reasonably should have concluded” that the firm or an associated person violated securities laws.

In particular, FINRA Rule 4530(b) requires the firm to report to FINRA within 30 calendar days after the firm has concluded, “or reasonably should have concluded” that the firm or an associated person of the firm 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. As Regulatory Notice 11-06 spells out, the reporting is limited to 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.” The standard of “reasonably should have concluded” is defined as “[i]f a reasonable person would have concluded that a violation occurred, then the matter is reportable[.]” The determination is to be made by the person designated as such in the firm’s written supervisory or operating procedures.

Obviously, a reasonable conclusion as to a potential violation may differ among firms as well as with FINRA due to its subjective interpretation leaving the door open for confusion and potential liability by member firms. Further, 4530(b) is only one parameter of the new rule with Regulatory Notice 11-06 discussing several other amendments to the self-reporting framework for member firms.

One thing is certain; firms will need to update their written supervisory procedures to account for additional self-reporting. Please contact our firm if you need experienced legal representation and advice if you need assistance updating your written supervisory procedures as a result of FINRA Rule 4530(b) or any other regulatory or arbitration related legal assistance at info@eklawpc.com.

Link: Broker-Dealer Advisory Services

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