What is the difference between a fidelity bond and a surety bond ?

These types of bonds are not bonds in the traditional sense like the ones investors purchase to earn interest income. Fidelity and surety bonds are more line insurance policies designed to protect against certain events. FINRA member firms are required to obtain a fidelity bond that covers the firm’s officers and employees. The purpose of the fidelity bond is to protect the firm’s customers from:

• Fraudulent acts
• Loss of securities
• Check forgery
• Securities forgery

The fidelity bond does not cover broker dealer bankruptcy or losses incurred as a result of errors or omissions. The required amount of the fidelity bond is based on the firm’s net capital. The minimum required fidelity bond coverage is 120 percent of the firm’s net capital for firms whose required net capital is less than $600,000 with a $25,000 minimum. The minimum fidelity bond requirement is based on 120 percent of the firm’s highest net capital requirement during the preceding 12 months. All firms must review their fidelity bond coverage annually and must make any required changes to the coverage within 60 days of the anniversary date of the bond’s issuance. For firms whose minimum required net capital is greater than $600,000, the minimum required fidelity bond coverage is $750,000. The minimum required coverage increases to a maximum of $5,000,000 for a firm whose minimum required net capital is greater than $12,000,000. If a broker-dealer makes a substantial change to its blanket fidelity bond or if the coverage is terminated, the broker-dealer must immediately notify FINRA in writing. Exchange members such as designated market makers and floor brokers who do not conduct business with the general public are exempt from the fidelity bond requirements.

A surety bond on the other hand primarily ensures a broker dealer’s financial solvency. It is used to guarantee that a broker dealer can meet its financial obligations. Many states require broker dealers to post a surety bond as a condition of state registration. On the series 24 exam you are most likely to encounter questions about fidelity bonds. The key test points are covered above.