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FINRA Proposes to Prohibit Non-Regulated Custodians

David P. Meyer, Esq.

In order to more effectively detect investment fraud, FINRA recently proposed a rule to prohibit the use of non-FINRA-regulated institutions as custodians, according to an August 9 Wall Street Journal article.
A custodian is a financial institution that is responsible for safeguarding an individual or institutional investor's financial assets (i.e. stocks, bonds, mutual funds, and currency).

The proposed rule would require brokerage firms to discontinue using non-regulated institutions, who do not comply with staff requests to verify assets, as custodians. Upon receiving a notification from FINRA, brokerage firms would be required to transfer investor assets from any such custodian "within a reasonable period of time," according to the article.

A number of large U.S. financial institutions, including HSBC, Wells Fargo Bank, and Citibank currently provide custodian services.

The SEC is requesting comments on the proposal through August 26.

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