FINRA Rule 4530

On November 5, 2010, the United States Securities and Exchange Commission issued an Order Granting Accelerated Approval of Proposed Rule Change, as Amended, To Adopt FINRA Rule 4530 (Reporting Requirements) in the Consolidated FINRA rule book. See Federal Register Vol. 75, No. 218 (Friday, November 12, 2010). FINRA has now announced that FINRA Rule 4530 will become effective on July 1, 2011. See Regulatory Notice 11-06 (February 2011).

FINRA Rule 4530 consolidates and replaces existing NASD Rule 3070 and Incorporated NYSE Rule 351 requiring members to report to FINRA certain specified events‚ to file with FINRA documents related to such events, and to report to FINRA statistical and summary information regarding written customer complaints. This alert sets forth a summary of the ways in which proposed FINRA Rule 4530 differs from NASD Rule 3070 and Incorporated NYSE Rule 351.

FINRA Rule 4530(a)(1)(A) - (H) — Rule 4530 begins with eight subparagraphs that are similar to, but not identical to, NASD Rule 3070(a)(1) - (9) and Incorporated NYSE Rule 351(a)(2) - (9). Some of the different provisions of FINRA Rule 4530(a)(1) are:

• Rule 4530(a)(1)(A) requires reports of external findings of violations and includes securities-, insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct by any domestic or foreign regulatory body, SRO or business or professional organization. It is limited to findings as defined in FINRA Rule 4530.03 by external regulators of the types of violations listed in the Rule. In addition, Rule 4530(a)(1)(A) expressly includes external findings by foreign regulators.
• Rule 4530(a)(1)(B) requires the firm to 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.
• Rule 4530(a)(1)(C) and (D) requires reports when a member or an associated person is named in a proceeding by a regulator or SRO (C) or is disciplined by a regulator or SRO (D). This provision now includes foreign proceedings and discipline.
• Rule 4530(a)(1)(E) continues to require reporting of felony criminal events and certain misdemeanor criminal events.
• Note that Rule 4530(a)(1)(F) also added foreign regulators, although this remains a very specific reporting requirement, when an entity was expelled for a conviction.
• Rule 4530(a)(1)(G) requires reports of (1) settlements of certain civil litigations or arbitrations in which the firm or an associated person is named a party or (2) claims for damages by a customer, broker or dealer when the firm or an associated person is the “subject of” the claim. These used to be two separate subparagraphs in the old rules. The reporting thresholds remain the same, exceeding $15,000 for individuals and exceeding $25,000 for firms. The new rule adds “financial-related insurance” civil litigations and arbitrations. This is not limited to insurance products that are securities. It also describes the claims for damages as claims that relate to the provision of financial services or to a financial transaction.
• Rule 4530(a)(1)(H) requires reports whenever the firm itself or an associated person of the firm is subject to a “statutory disqualification.” While NASD Rule 3070(a)(9) requires a member to report to FINRA if the member or an associated person of the member “is associated in any business or financial activity” with a person subject to a “statutory disqualification,” proposed FINRA Rule 4530(a)(1)(H) instead requires a member to report to FINRA whenever the member or an associated person of the member “is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities” with a person subject to a “statutory disqualification.”

This paragraph, 4530(a)(1), also establishes that filings must be made not later than 30 calendar days after the firm knows or should have known of the events. A single event should not be reported under more than one subparagraph. See Supplementary Material .05. However, related events may require reporting under different subparagraphs.

FINRA Rule 4530(a)(2) — This provision continues the requirements to report “disciplinary” actions described in the Rule, previously required by NASD Rule 3070(a)(10) and Incorporated NYSE Rule 351(a)(10). The new rule clarifies that the withholding of any compensation or remuneration in excess of $2,500 triggers a filing.

FINRA Rule 4530(b) — This provision requires the reporting of internal conclusions, including when the firm reasonably should have concluded that the firm or an associated person has violated any securities-,
insurance-, commodities-, financial- or investment-related laws, rules, regulations or standards of conduct of any regulatory body or SRO. The Supplementary Material to FINRA Rule 4530, Section .01, and the rule-making guidance provide FINRA’s expectations:

• Firm — report only conduct that has widespread or potential widespread impact or arises from a material failure involving numerous customers, multiple errors or significant dollar amounts.
• Associated Person — report conduct that has widespread or potential widespread impact or has a significant monetary result or if there are multiple instances of any violative conduct. If the firm takes discipline and reports under FINRA Rule 4530(a)(2), it need not report here.
• Audit Findings — These serve only as one factor, among others, that a firm should consider. A discussion in an internal audit report about the need for enhanced controls alone is not determinative.

FINRA noted in the rule-making that its view was that the prior standard from NYSE IM 06-11 (March 2006) was too narrow. Nevertheless, FINRA substantially narrowed the scope of reporting of internal violations from where FINRA started in the rule-making process.

FINRA Rule 4530(c) — This provision establishes that associated persons must inform the firm “promptly” of any reportable event (except the firm’s internal conclusions or firm disciplinary actions).

FINRA Rule 4530(d) — This provision continues the filing requirement for quarterly statistical information about customer complaints. According to the Supplementary Material, paragraph .08, for purposes of paragraph (d) of this Rule, with respect to a person other than a broker or dealer with whom the member has engaged in securities activities, the member must report any written grievance by such person involving the member or a person associated with the member. In addition, with respect to a person other than a broker or dealer with whom the member has sought to engage in securities activities, the member must report any securities-related written grievance by such person involving the member or a person associated with the member and any written complaint reportable under paragraph (a)(1)(B) of this Rule. All written complaints reported under FINRA Rule 4530(a)(1)(B) must be reported with the quarterly report.

FINRA Rule 4530(e) — This provision clarifies that a member need not report under Rule 4530(a) or (b) if it files a U5 to disclose the event. However, if a filing is made on a U4 or BD, it still must be reported under FINRA Rule 4530(a) or (b), if applicable.

FINRA Rule 4530(f) — This provision follows NASD Rule 3070(f) and requires the filing of certain documents with FINRA, including criminal documents, certain civil litigations naming the firm, and arbitrations naming the firm filed in a forum other than FINRA. This provision now adds “financial-related insurance” private civil actions and arbitrations. These filings need not be made under this provision if the documents have been requested by FINRA’s Registration and Disclosure staff and they are produced within 30 days of the request. See FINRA Rule 4530(g).

Supplementary Material. Some of the provisions of the Supplementary Material are discussed above. In addition, attorneys’ fees and interest are included in calculating threshold amounts under FINRA Rule 4530(a)(1)(G). “Joint and several” amounts must be reported as totals by each party under FINRA Rule 4530(a)(1)(G). See Supplementary Material .06.

For former associated persons, members should report an event if it occurred while the individual was associated with the member. The member is not required to report the event if it cannot determine that the individual was an associated person based on its records or Web CRD. See Supplementary Material .07.

Amy Kroll, Partner, Broker-Dealer Group
amy.kroll@bingham.com, 202.373.6118

David Boch, Partner, Broker-Dealer Group
david.boch@bingham.com, 617.951.8485

Roger P. Joseph, Practice Group Leader, Investment Management; Co-chair, Financial Services Area
roger.joseph@bingham.com, 617.951.8247

Edwin E. Smith, Partner, Financial Restructuring; Co-chair, Financial Services Area
edwin.smith@bingham.com, 617.951.8615

Tim Burke, Practice Group Leader, Broker-Dealer Group; Co-chair, Financial Services Area
timothy.burke@bingham.com, 617.951.8620