The SEC approved FINRA’s proposal to adopt new FINRA Rules 4150, 4311, 4522 and 4523 that will govern financial responsibility as well as certain operational and contractual requirements of members.  The rules, which become effective 8/1/11, are based in part on, and replace, provisions in the NYSE and NASD Rules. 

On that date, NYSE Rules 322, 382, 440.10 and 440.20, and NYSE Rule Interpretations 382/01 through 382/05, 409(a)/01 and 440.20/01, along with NASD Rule 3230, will be deleted from the Transitional Rulebook.

Continue reading below for C-I's discussion of the new rules.  For complete details, go to:  FINRA Regulatory Notice 11-26, that includes a questionnaire that FINRA specifies is for use by carrying firms pursuant to new FINRA Rules 4311(b)(3) and 4311.02.  

FINRA Staff Contacts.   Questions should be directed to:   Kris Dailey in Risk Oversight & Operational Regulation (646-315-8434;  Susan DeMando Scott in Financial Operations Dept (202-728-8411); or Adam Arkel in Office of General Counsel (202-728-6961).

Background.   New FINRA Rules 4150, 4311, 4522 and 4523, in combination with the consolidated financial responsibility rules that the SEC approved in November 2009, enhance FINRA’s authority to execute effectively its financial and operational surveillance and exam programs.  Consistent with the approach that FINRA discussed in Rule Filing 08-067 and RegNote 09-71, many of the requirements set forth in the new rules are substantially the same as requirements found in current rules and, where appropriate, are tiered to apply only to carrying or clearing firms, or to firms that engage in certain specified activities.  Certain provisions of the rules are new for FINRA members that are not Dual Members - i.e., non-NYSE members.  Certain other provisions are new for both Dual Members and non-NYSE members alike.

FINRA Rule 4150, Guarantees by, or Flow Through Benefits for, Members. FINRA Rule 4150(a), based in large part on NYSE Rule 322, requires that prior written notice be given to FINRA whenever a member guarantees, endorses or assumes, directly or indirectly, the obligations or liabilities of another person (including an entity). 

• Supplementary Material to the new rule (FINRA Rule 4150.01) includes details of the rule’s notice and prior approval requirements. 
• FINRA Rule 4150.02 provides that a member may, at any time - i.e., not just within the context of the prior written notice that the member provides or the prior written approval that the member seeks to obtain pursuant to the rule - be required to provide FINRA with information with respect to the arrangement, relationship and dealings with a person referred to in the rule.
• FINRA Rule 4150.03 prohibits any member from entering into an arrangement described in the rule unless the member has the authority to make available promptly the books and records of the other person for inspection by FINRA in the U.S.  The rule provides that the books and records of the other person must be kept separately from those of the member.
• FINRA Rule 4150.04 requires that the member furnish to FINRA copies of the person’s FOCUS Reports simultaneous with their being filed with the person’s designated examining authority (DEA).
• FINRA Rule 4150 concludes with subsections .05 and .06.

FINRA Rule 4311, Carrying Agreements.   New FINRA Rule 4311 is based on NASD Rule 3230 and NYSE Rule 382 - including NYSE Rule Interps 382/01 through 382/05 and 409(a)/01).  The new rule governs requirements applicable to members when entering into agreements for the carrying of any customer accounts in which securities transactions can be effected.  Current NASD and NYSE rules serve to ensure that certain functions and responsibilities are clearly allocated to either the introducing or carrying firm, consistent with the requirements of the SRO’s and SEC’s financial responsibility and other rules and regulations, as applicable. The new rule continues to serve that same purpose, and accordingly, contains many requirements that are substantially unchanged from NASD Rule 3230 and NYSE Rule 382. 

• FINRA Rule 4311(a)(1) prohibits a member, unless otherwise permitted by FINRA, from entering into an agreement for the carrying, on an omnibus or fully disclosed basis, of any customer account in which securities transactions can be effected unless the agreement is with a carrying firm that is a FINRA member.  This is a new requirement for all members - however, the vast majority of carrying firms in the U.S. are FINRA members.
• New FINRA Rule 4311(a)(1) also includes a provision requiring that, when an introducing firm acts as an intermediary for another introducing firm or firms - i.e., so-called “piggyback” or “intermediary clearing arrangements” - for purpose of obtaining clearing services from the carrying firm, the introducing firm must notify the carrying firm of the existence of the arrangement(s) with the other introducing firm(s) and disclose the identity of the firm(s). Based in large part on NYSE Rule Interp 382/05, the new rule further requires that each carrying agreement identify and bind every direct and indirect  recipient of clearing services as a party to the agreement.
• FINRA Rule 4311(b)(1), consistent with requirements of NASD Rule 3230(e) and NYSE Rule 382(a), requires that the carrying firm submit to FINRA for prior approval any agreement for the carrying of accounts, whether on an omnibus or fully disclosed basis, before the agreement may become effective.
• FINRA Rule 4311 contains several other subsections, which we have not delineated.

FINRA Rule 4522, Periodic Security Counts, Verifications and Comparisons.   FINRA Rule 4522(a), based in large part on NYSE Rule 440.10, requires each member that is subject to the requirements of SEA Rule 17a-13 to make the counts, examinations, verifications, comparisons and entries set forth in SEA Rule 17a-13.  FINRA Rule 4522(b), again based in large part on NYSE Rule 440.10, requires each carrying or clearing member subject to SEA Rule 17a-13 to make more frequent counts,  examinations, verifications, comparisons and entries where prudent business practice would so require. The requirements of FINRA Rule 4522(b) are new to non-NYSE carrying or clearing members that are subject to the requirements of SEA Rule 17a-13.

FINRA Rule 4523, Assignment of Responsibility for General Ledger Accts and ID of Suspense Accounts.   FINRA Rule 4523, based in large part on NYSE Rule 440.20, is intended to help assure the accuracy of each member’s books and records and includes supervisory measures for their implementation.  Under Paragraph (a), each member must designate
an associated person to be responsible for each general ledger bookkeeping account and account of like function used by the member, and that the associated person must control and oversee entries into each such account and determine that the account is current and accurate as necessary to comply with all applicable FINRA rules and federal securities laws governing books and records and financial responsibility requirements.  A supervisor is required to, as frequently as is necessary considering the function of the account but, in any event, at least monthly, review each account to determine that it is accurate and that any items that are aged or uncertain as to resolution are promptly identified for research and possible transfer to a suspense account(s). 

FINRA Rule 4523 contains subsections (b) and (c), which we have not delineated.

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