FINRA Rule 4360 requires each member firm to join the Securities Investor Protection Corporation (SIPC) and to secure fidelity bonding insurance with specified amounts of coverage based on the firm’s net capital requirement. Such firms must maintain fidelity bond coverage that provides for per loss coverage without an aggregate limit of liability. Firms may apply for this level of coverage with any product that meets these requirements, including the Securities Dealer Blanket Bond (SDBB) or a properly endorsed Financial Institution Form 14 Bond (Form 14).
Net Capital Requirements
The rule requires a member with a net capital requirement of less than $250,000 to maintain minimum coverage of 120% of the firm’s net capital requirement or $100,000, whichever is greater. Also, firms with net capital requirements of $250,000 or more must purchase an amount found on a FINRA table found in the rule. The higher the minimum, the more the required bond. Members must review the adequacy of coverage annually, even if the firm buys multi-year policies. Furthermore, firms that act solely as designated market makers or floor brokers are exempt from this entire rule if they do no business with the public.
Determining Fidelity Bonding Requirements
In determining their fidelity bonding requirement, firms must use their highest net capital requirement over the 12 months preceding the computation. The preceding 12-month period includes the 12-month period that ends 60 days before the yearly anniversary date of the bond. This allows sufficient time for a firm to determine its required amount of the fidelity bond by the anniversary date. Member firms must review coverage annually.
A provision may be included in a fidelity bond to provide for a deductible of up to 25% of the coverage purchased by a member. Any deductible amount elected by the member that is greater than 10% of the coverage purchased by the member must be deducted from the member’s net worth in the calculation of its net capital for purposes of SEA Rule 15c3-1. If the member is a subsidiary of another FINRA member, this amount may be deducted from the parent’s rather than the subsidiary’s net worth, but only if the parent guarantees the subsidiary’s net capital in writing. Member firms must immediately advise FINRA in writing if its fidelity bond is terminated, cancelled, or substantially modified.
For more information on fidelity bonds, check out FINRA Rule 4360.
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