Reporting Broker-dealer Misconduct Under FINRA Rule 4530

August 10, 2011Articles Westlaw News & Insight Securities Blog

On July 1, 2011, FINRA Rule 4530 became effective. Under this rule, member firms are required to electronically report to FINRA specified events and quarterly customer complaint information. The scope of Rule 4530 gave rise to a number of questions that FINRA has attempted to address in Notice to Members 11-32. In doing so, FINRA addressed the following categories of information that requires reporting: internal conclusions of violations; customer complaints; financial-related insurance litigation; and former associated persons.

One of the biggest areas of concern arising out of 4530 is the scope of the reporting obligations when a firm internally concludes that there was a rule violation. Notice to Members 11-32 makes clear that not all violations have to be reported, 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." This Notice to Members also addressed those instances where a firm must report because it "reasonably should have concluded" there was a rule violation. FINRA advised that it would apply a "reasonable person" standard to assess whether a violation should have been reported. FINRA further advised that nothing in this rule meant to thwart a member firm from taking remedial action against an associated person even if the member firm should not have reasonably concluded a violation occurred. Conversely, if a member firm does not take remedial action against an associated person, FINRA cautioned that would not necessarily mean that the member firm should not have reasonably concluded that a violation occurred. Notwithstanding this guidance, an interpretative problem remains — a reasonable conclusion by one firm may not be the same as another.

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