FINRA received SEC approval to adopt a new FINRA Rule 4360 for governing fidelity bonds.  The new rule is based on NASD Rule 3020, taking into account certain requirements under NYSE Rule 319 and its Interpretation.  The rule takes effect on 1/1/2012.

        FINRA Staff Contacts.   Questions should be directed to:   Susan DeMando Scott, Financial Operations Policy - (202) 728-8411;  or Erika Lazar, Office of General Counsel - (202) 728-8013.

        FINRA Rule 4360, Fidelity Bonds.    The new rule updates and clarifies existing fidelity bond requirements and better reflects current industry practices.   Each member firm that is required to join the SIPC will be required 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.  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).

Most fidelity bonds contain a definition of the term “loss” (or “single loss”), for purposes of the bond, which generally includes all covered losses resulting from any one act or a series of related acts. A payment by an insurer for covered losses attributed to a single loss does not reduce a firm’s coverage amount for losses attributed to other, separate acts. A fidelity bond with an aggregate limit of liability caps a firm’s coverage during the bond period at a certain amount if a loss (or losses) meets this aggregate threshold. FINRA believes that per loss coverage without an aggregate limit of liability provides firms with the most beneficial coverage since the bond amount cannot be exhausted by one or more covered losses, which means it will be available for future losses during the bond period.

A firm that does not qualify for a fidelity bond with per loss coverage and no aggregate limit of liability must maintain substantially similar fidelity bond coverage in compliance with all other provisions of the rule, provided that the firm maintains written correspondence from two insurance providers stating that the firm does not qualify for such coverage.  The firm must retain such correspondence for the period specified by Exchange Act Rule 17a-4(b)(4).

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.9 These Insuring Agreements are defined in the fidelity bond forms available to firms. FINRA Rule 4360 modifies the descriptive headings for these Insuring Agreements, in part, from NASD Rule 3020(a)(1) and NYSE Rule 319(d) to align them with the headings in the current bond forms.  In addition, FINRA Rule 4360 replaces the specific coverage provisions in the NASD and NYSE rules that permit less than 100% of coverage for certain Insuring Agreements (i.e., fraudulent trading and securities forgery) so that coverage for all Insuring Agreements must be equal to 100% 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. FINRA Rule 4360 adopts the definition of “substantially modified” in NYSE Rule 31913 and incorporates NYSE Rule 319.12’s standard that a firm must immediately advise FINRA in writing if its fidelity bond is cancelled, terminated or substantially modified.

To continue reading provisions of new FINRA Rule 4360 - including:  (i) Minimum Required Coverage;  (ii) Deductible Provision;  (iii) Annual Review of Coverage;  and, (iv) Exemptions, go to:   [FINRA RegNote 11-21, May 2011, "Fidelity Bonds"] .