Exam Alert: FINRA Updates and Consolidates Rules Regarding Customer Protection, Callable Securities, and Securities Loans

Effective May 1, 2014, FINRA will put into place new consolidated financial and operational rules, based on existing NYSE and NASD rules. The rules cover requirements regarding customer protection, callable securities, and securities loans. Continue reading

Effective May 1, 2014, FINRA will put into place new consolidated financial and operational rules, based on existing NYSE and NASD rules.

The new customer protection rule requires firms to:
-obtain written authorization from a customer before lending out securities in that customer’s margin account
-notify FINRA in writing at least 30 days prior to borrowing fully paid or excess margin securities from a customer account
-make an appropriateness determination prior to first entering into a securities borrowing arrangement with a customer and provide specified written disclosures
-prior to first entering into a securities borrowing arrangement with a customer, provide the customer with a written notice stating that the Securities Investor Protection Act of 1970 may not protect the customer in the securities loan transaction, along with other disclosures (note: this last requirement will go into effect October 28, 2014).

The new callable securities rule requires a firm to:
-identify its held callable securities and establish a lottery allocation system for determining which customers will be impacted in the event of a partial redemption or call
-share the allocation procedures on its website
-provide written notice to new customers when opening an account and to all customers annually of where to access the allocation procedures
-not allocate securities to its accounts and the accounts of associated persons in the event of a redemption that is favorable to the security holders until all other customer positions in the securities have been satisfied
-not exclude its accounts and the accounts of associated persons in the event that the redemption is unfavorable to the security holders.

The securities loans and borrowings rule requires firms to:
-have consistent disclosure and recordkeeping for its securities lending activities
-when lending or borrowing securities from non-FINRA members, have a written agreement that gives the firm the right to liquidate the transaction under specified conditions.

Source: FINRA Regulatory Notice 14-05: SEC Approves Consolidated FINRA Rules 4314 (Securities Loans and Borrowings), 4330 (Customer Protection – Permissible Use of Customers’ Securities) and 4340 (Callable Securities)

This alert applies to the Series 24, Series 62, Series 82, and Series 99.

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