Recent amendments to FINRA’s Rule 4530 that ease up on broker-dealers’ self-reporting requirements provide a convenient occasion for us to remind the industry of the Rule’s already existing requirement to report internal conclusions of violations. This requirement, set forth in Rule 4530(b), should be the focus of broker-dealer compliance efforts. Reportable potential violations targeted by the rule are those with widespread impact on a member firm, its customers or the markets, or those arising from a material failure of a member’s systems, policies and practices involving many customers, multiple errors, or significant dollar amounts. The mention of the need for enhanced controls in internal audit reports will not be determinative, but should be a factor considered by the firm in determining whether a reportable violation occurred.
FINRA’s head of enforcement indicated shortly before the Rule went into effect that Rule 4530(b) could be a “game changer” in terms of requiring more proactive self-reporting by firms, and the first enforcement action would likely be not “a close one” but rather “a situation in which the firm clearly knew of violations and chose not to self-report.”
FINRA likely is still looking for an appropriate set of facts to bring an enforcement action for violation of Rule 4530(b), and member firms should be mindful of this in their compliance with the language and spirit of this carefully worded and interpreted rule. Member firms should have procedures that, among other things, identify who will make the determination of whether a violation is reportable, and require that all such considerations be documented. Procedures and documentation are always good inoculants against actions for failure to act in good faith.