A broker-dealer, especially one that is not a member of the NYSE, may fail to recognize that FINRA Rule 4150(a) requires prior written notice to be given to FINRA whenever it guarantees, endorses, or assumes, directly or indirectly, the obligations or liabilities of another person (for example, an affiliated company). In Regulatory Notice 11-26, FINRA explained that this requirement, which was based on an NYSE Rule, would be new to non-NYSE members because the NASD Rules had no corresponding provision. We encourage broker-dealers to take a closer look at FINRA Rule 4150 and verify that they are fully complying with its provisions, especially the requirement to give prior written notice to FINRA whenever it assumes an obligation of another person.
Requirement to Give Prior Written Notice
FINRA Rule 4150(a) reads, “Prior written notice shall be given to FINRA whenever any member guarantees, endorses or assumes, directly or indirectly, the obligations or liabilities of another person.” For purposes of the rule, “person” includes any individual or entity. According to the Supplementary Material to the rule, a broker-dealer must give written notice to FINRA at least 10 business days prior to entering into such arrangement or relationship with another person.
Definition of “Obligation”
FINRA Rule 4150 does not define “obligation.” When the rule was proposed, some commenters initially assumed that the rule was intended to cover financial obligations, but not contractual obligations that were not financial. FINRA was asked to clarify the meaning of “obligation” for purposes of FINRA Rule 4150(a). To the surprise of many, FINRA clarified that the term “obligation” includes not only financial obligations, but also any other obligation that may have a financial impact on the broker-dealer.
Nature and Content of the Written Notice
The written notice to FINRA must include the following:
- address and general nature of the business conducted by the other person;
- a description of the relationship or arrangement between the parties;
- details regarding the capitalization of such person (including the percentage of ownership or profits by the broker-dealer);
- the actual and potential effect of the arrangement or relationship on the broker-dealer’s capital (including net capital) and operations; and
- such other information as FINRA may require.
It is important to note that, upon assuming another person’s obligations or liabilities, a broker-dealer may at any time be required to provide FINRA with information concerning its arrangement, relationship, and dealings with the person.
Recordkeeping Requirement
The Supplementary Material contains a recordkeeping requirement that prohibits a broker-dealer from assuming the obligations or liabilities of another person unless it has the authority to make available promptly the books and records of such other person for inspection by FINRA in the United States. The books and records of such person must be kept separately from those of the broker-dealer.
Reporting Requirements
The Supplementary Material also contains reporting requirements. When assuming the obligations or liabilities of another person, a broker-dealer must furnish to FINRA copies of financial and operational statements, in such format and at such time periods as may be required by FINRA, sufficient to gauge the capital and operational effects of the arrangement or relationship.
Concluding Thoughts
FINRA’s effort to create a consolidated rulebook has been a long process. Over the years, many non-NYSE members have failed to recognize the need to comply with certain requirements that carried over from NYSE Rules. Consequently, we strongly urge the non-NYSE member to regularly evaluate its compliance with FINRA Rule 4150 and the other FINRA Rules based in whole or part on NYSE Rules.