NASD Regulation staff does not have the authority, under Rule 3020 or otherwise, to exempt members from the fidelity bond requirement in its entirety. Rule 3020(c) authorizes the staff to adjust the required fidelity bond amount under certain circumstances.
May 9, 2001
Mr. John W. Marcus
PIBC Securities LLC
640 Fifth Avenue
New York, NY 10019
Re: Exemption Request from Fidelity Bonding Requirements
Dear Mr. Marcus:
I am responding to your letter of November 21, 2000, in which you request that PIBC Securities LLC ("PIBC") be exempt from the requirement to maintain a fidelity bond under NASD Rule 3020. Specifically, your letter requests an exemption from the requirement to maintain a fidelity bond on the basis that PIBC, among other things, does not engage in any transactions with retail customers, does not carry any customer accounts or securities, and does not hold any customer funds. NASD Regulation, Inc. ("NASD Regulation") staff has concluded that it does not have the authority to entertain your request.
Pursuant to NASD Rule 3020, each member that is required to join the Securities Investor Protection Corporation ("SIPC") and that has employees must maintain a blanket fidelity bond, unless the member is covered by the fidelity bond requirement of a national securities exchange. The Rule applies to all members regardless of the type of business they conduct. The purpose of the fidelity bond is to protect the member against certain types of losses, including losses caused by the malfeasance of its officers and employees, and the effect of such losses on the member's capital. The amount of required fidelity bond coverage is based on the member's net capital requirements under the Securities Exchange Act of 1934.
Paragraph (c) of Rule 3020 provides that a member must review the adequacy of its fidelity bond coverage on an annual basis, as of the anniversary date of the issuance of the original bond, and maintain an amount of fidelity bond coverage for the next 12 months that correlates to its highest net capital requirement for the previous 12 months. Paragraph (c)(4) of Rule 3020 also permits NASD Regulation staff, where good cause is shown, to exempt members from the requirements under paragraph (c) of the Rule. See Notice to Members ("NTM") 98-67 (August 1998). For instance, if a self-clearing member changes its business to become a correspondent firm clearing through another member so that it no longer holds customer funds or securities, absent the granting of an exemption, Rule 3020(c) would still require the member to maintain bond coverage at the level that applied during the preceding year. Paragraph (c)(4) of Rule 3020, however, permits the staff, pursuant to its exemptive authority, to adjust the fidelity bonding requirements to reflect such changes in a member's business and allows the staff to relieve members from maintaining unnecessarily high fidelity bond coverage without compromising investor protection.
In your letter, you request an exemption from the need for a fidelity bond. As stated above, Rule 3020 requires members that are required to join SIPC and that have employees to maintain a fidelity bond, unless the member is covered by the fidelity bond requirement of a national securities exchange. NASD Regulation staff does not have the authority, under Rule 3020 or otherwise, to exempt members from the fidelity bond requirement in its entirety. The relief that you are seeking is not available under the NASD rules. Therefore, PIBC must comply with the requirements set forth in Rule 3020. In the event PIBC wishes to reduce the amount of the bond, it may request an exemption from the annual review and adjustment requirements contained in paragraph (c) of Rule 3020. Any such request should be consistent with the standards for granting exemptions under paragraph (c)(4) of the Rule (see footnote 1).
If you have any questions on this matter, please do not hesitate to contact me at (202) 728-8902.
Very truly yours,
|cc:|| Joseph M. McCarthy, Deputy Director
NASD Regulation, Inc., District 10
Andrew Shubert, Senior Compliance Officer
1 As discussed in NTM 98-67, in considering an application for exemption from paragraph (c) of Rule 3020, NASD Regulation applies a "good cause" standard that requires a member to demonstrate that a modification from the bonding requirement is justified by the level of loss exposure that may be expected from the member. In addition, NASD Regulation will apply this authority only when it is clear that an exemption will not have any unintended impact on the insurance pool, and the modified coverage will adequately protect the member against potential losses. NASD Regulation also will include conditions in any exemption to ensure that any subsequent increase in capital requirements is accompanied by a corresponding increase in coverage.