Document ID: SEC-2021-1067-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-08-10T04:00Z

[Federal Register Volume 86, Number 151 (Tuesday, August 10, 2021)]
[Notices]
[Pages 43698-43700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-16965]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92561; File No. SR-FINRA-2021-009]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt a 
Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to 
FINRA Rule 4524 (Supplemental FOCUS Information)

August 4, 2021.

I. Introduction

    On April 30, 2021, the Financial industry Regulatory Authority 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt a Supplemental Liquidity Schedule, and 
Instructions thereto, pursuant to FINRA Rule 4524 (Supplemental FOCUS 
Information).
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on May 18, 2021.\3\ The comment period closed on June 8, 2021. 
The Commission received one comment letter in response to the 
Notice.\4\ On June 22, 2021, FINRA extended the time period in which 
the Commission must approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change to August 16, 2021. On July 7, 
2021, FINRA responded to the comment letter received in response to the 
Notice.\5\ For the reasons discussed below, the Commission is approving 
the proposed rule change.
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 91876 (May 12, 2021), 86 FR 
27005 (May 18, 2021) (File No. SR-FINRA-2021-009) (``Notice'').
    \4\ See Letter from Kevin Zambrowicz, Managing Director & 
Associate General Counsel, the Securities Industry and Financial 
Markets Association (``SIFMA''), dated June 8, 2021 (``SIFMA 
Letter'').
    \5\ See Letter from Adam Arkel, Associate General Counsel, 
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary, 
U.S. Securities and Exchange Commission, dated July 7, 2021 (``FINRA 
Letter''). The FINRA Letter is available on FINRA's website at 
https://www.finra.org/sites/default/files/2021-07/sr-finra-2021-009-response-to-comments.pdf, on the Commission's website at https://www.sec.gov/comments/sr-finra-2021-009/srfinra2021009.htm, and at 
the Commission's Public Reference Room.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change 6
---------------------------------------------------------------------------

    \6\ The subsequent description of the proposed rule change is 
substantially excerpted from FINRA's description in the Notice. See 
Notice, 86 FR at 27005-06.
---------------------------------------------------------------------------

    FINRA Rule 4524 provides in part that FINRA may require certain 
members to file supplements to the Financial and Operational Combined 
Uniform Single Report (``FOCUS Report''), which is filed pursuant to 
Rule 17a-5 under the Exchange Act \7\ and FINRA Rule 2010. These 
supplements may include such additional financial or operational 
schedules or reports as FINRA may deem necessary or appropriate for the 
protection of investors or in the public interest. FINRA Rule 4524 
further requires FINRA to file a proposed schedule or report with the 
Commission pursuant to section 19(b) of the Exchange Act. Pursuant to 
FINRA Rule 4524, FINRA proposed to adopt a Supplemental Liquidity 
Schedule (``SLS''), and Instructions thereto.
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17a-5 (``Rule 17a-5''). Paragraph (a) of Rule 
17a-5 requires a broker-dealer to file a version of the FOCUS 
Report.
---------------------------------------------------------------------------

    A FINRA member that would be required to file the Form SLS would 
report detailed information relating to the member's:

[[Page 43699]]

     Reverse repurchase and repurchase agreements;
     securities borrowed and securities loaned;
     non-cash reverse repurchase and securities borrowed 
transactions;
     non-cash repurchase and securities loaned transactions;
     bank loan and other committed and uncommitted credit 
facilities;
     total available collateral in the member's custody;
     margin and non-purpose loans;
     collateral securing margin loans;
     deposits at clearing organizations; and
     cash and securities received and delivered on derivative 
transactions not cleared through a central clearing counterparty 
(``CCP'').
    According to FINRA, the SLS is tailored to apply only to members 
with the largest customer and counterparty exposures. Unless otherwise 
permitted by FINRA in writing, each carrying member with $25 million or 
more in free credit balances, as defined under Exchange Act Rule 15c3-
3(a)(8),\8\ and each member whose aggregate amount outstanding under 
repurchase agreements, securities loan contracts and bank loans is 
equal to or greater than $1 billion, as reported on the member's most 
recently filed FOCUS report, would be required to file the SLS. The SLS 
would be required to be completed as of the last business day of each 
month and filed within 24 business days after the end of the month. A 
member would not need to file the SLS for any period where the member 
does not meet the $25 million or $1 billion thresholds.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.15c3-3 (``Rule 15c3-3'').
---------------------------------------------------------------------------

III. Comment Summary

    As noted above, the Commission received one comment letter in 
response to the Notice.\9\ In its comment letter, SIFMA asked that the 
implementation timing of the SLS be aligned with the implementation of 
the Federal Reserve Board's ``6G'' reporting framework with respect to 
the FR 2052a reports required to be filed by FINRA member firms that 
have bank holding company affiliates,\10\ or that additional time be 
allotted for the implementation of the SLS.\11\
---------------------------------------------------------------------------

    \9\ See supra note 4.
    \10\ According to SIFMA, member firms are expected to be working 
on the implementation of the Federal Reserve 6G reporting through 
the end of 2022.
    \11\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

    Additionally, noting that some of the reporting requirements for 
the SLS may be duplicative of information that must be reported to the 
Federal Reserve Board on FR 2052a reports, SIFMA has asked that the SLS 
contain an ``overlay'' that is mapped to the 5G/6G reporting frameworks 
of the Federal Reserve Board. According to SIFMA, this would have the 
effect of consolidating certain reporting categories where the 
respective categories and definitions align for the FINRA and the 
Federal Reserve Board reports, which would in turn streamline the 
reporting process for firms that are required to file with both FINRA 
and the Federal Reserve Board. Firms that are not required to file with 
both FINRA and the Federal Reserve Board would not be impacted, 
according to SIFMA.\12\
---------------------------------------------------------------------------

    \12\ See SIFMA Letter at 3-4.
---------------------------------------------------------------------------

    In response, FINRA reiterated that the proposed SLS is designed to 
improve FINRA's ability to monitor for events that signal an adverse 
change in the liquidity risk of broker-dealers that that file the 
schedule. FINRA also noted the extensive prior outreach and discussions 
that FINRA conducted regarding the potential burdens on broker-dealers 
that are subsidiaries of bank holding companies. According to FINRA, 
this consultation resulted in the alignment of categories in the 
proposed SLS with reporting required in the Federal Reserve Board's 
Complex Institution Liquidity Monitoring Report (referred to as ``FR 
2052a'').\13\
---------------------------------------------------------------------------

    \13\ See FINRA Letter at 2.
---------------------------------------------------------------------------

    FINRA also stated the SLS serves an important regulatory purpose 
because access to the information that would be reported on the SLS is 
important for FINRA to efficiently monitor on an ongoing basis the 
liquidity profile of its members. FINRA stated that the information 
would facilitate FINRA's efforts to understand and respond to firms 
that may appear similar based on their balance sheets, but in fact have 
different liquidity risk profiles which could negatively the ability to 
fund operations during periods of market stress or other stress events. 
Absent the reporting set forth in the SLS, FINRA noted that it would 
need to request such information on a firm-by-firm basis as the need 
arises, which could, according to FINRA, result in similar or 
potentially larger costs for some firms.\14\
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

    While acknowledging that some members that would be subject to the 
proposed SLS could face potential burdens with respect to reporting 
requirements from other regulators, FINRA stated that it would revisit 
the reporting categories in the proposed SLS as appropriate with 
respect to potential alignments of such categories with other reporting 
requirements, including the FR 2052a, depending on how they evolve in 
the future. Consequently, FINRA stated that it believes it would not be 
appropriate to delay implementation of the proposed SLS.\15\
---------------------------------------------------------------------------

    \15\ Id. at 3.
---------------------------------------------------------------------------

    Finally, FINRA stated that it believes that the proposed timeframe 
for implementation of the proposed SLS set forward in the Notice 
affords members sufficient time to prepare.\16\
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the comment 
letter, and FINRA's response to the comment letter, the Commission 
finds that the proposal is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\17\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Exchange Act,\18\ which requires, among other 
things, that the Commission determine any FINRA rule to be designed to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \17\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that the proposed SLS, which will require 
certain FINRA members, subject to the thresholds described above, to 
provide detailed information regarding various aspects of the member's 
liquidity profile will enable more effective monitoring of the 
liquidity risk of FINRA members by the Commission and FINRA. The 
Commission believes that regular and ongoing access to such information 
is important for the purpose of understanding the liquidity risks that 
member firms face, as well as differences in liquidity risks among 
firms that otherwise may appear to be similar based on similar 
characteristics in the firms' balance sheets. By enabling more 
effective monitoring of liquidity risk, the Commission believes that 
the information obtained through the SLS will protect investors and the 
public interest by providing FINRA and the Commission with information 
needed to better anticipate and respond to the risks that FINRA member 
firms may face during market or other stress events that could 
jeopardize their ability to fund their operations. FINRA estimates that 
between 85 and 100 broker-dealers will be required to file Form SLS, 
the universe of broker-dealers carrying customer accounts with at least 
$25 million in free credit balances or with

[[Page 43700]]

a minimum of $1 billion in repurchase agreements, bank loans or 
securities loans outstanding. Therefore, the Commission believes that 
the proposed Form SLS is reasonably designed to apply only to those 
broker-dealers that have the highest potential to adversely affect 
investors and the public interest in a liquidity stress event.
    Finally, the Commission believes that FINRA has reasonably 
addressed the concerns raised by SIFMA's comment letter. Specifically, 
the Commission agrees that the SLS would serve an important regulatory 
purpose by providing FINRA and the Commission with information useful 
in evaluating a member firm's liquidity risk profile. While the 
Commission recognizes that there is the potential for burdens on 
certain member firms that are subject to the regulatory reporting 
requirements of other regulators, the Commission believes that the 
important regulatory purpose served by the SLS justifies the potential 
burdens. The Commission believes that absent the SLS, FINRA and the 
Commission would be required to request the information supplied in the 
SLS repeatedly and on a firm-by-firm basis in order to obtain the 
information necessary to monitor member firms for potential liquidity 
concerns. Such an approach would not only create regulatory 
inefficiency, but could also result in similar or potentially larger 
costs for firms, as FINRA noted.
    Moreover, in light of the prior outreach that FINRA has conducted 
including publishing an earlier version of SLS in January 2018 and 
revising it in response to feedback from industry participants,\19\ the 
Commission believes that FINRA's proposed approach to revisit the 
reporting categories in the SLS with a view to potential alignments of 
such categories with other reporting requirements depending on how they 
evolve would have the effect of further minimizing the regulatory 
burdens on member firms subject to the SLS. Consequently, the 
Commission believes that FINRA has appropriately addressed concerns 
raised in the comment letter concerning reducing the reporting costs 
imposed by the SLS.
---------------------------------------------------------------------------

    \19\ See Regulatory Notice 18-02 (January 2018) (Liquidity 
Reporting and Notification). See also Notice, 86 FR at 27006.
---------------------------------------------------------------------------

    Finally, the Commission agrees with FINRA that it is not 
appropriate to delay implementation of the SLS beyond the timeframe set 
forth in the Notice. Because FINRA previously published a version of 
the SLS in 2018, and will announce an effective date that will be 180 
days following the publication of a Regulatory Notice published no 
later than 30 days after Commission approval, the Commission believes 
that member firms will have sufficient time to prepare to implement the 
SLS. Furthermore, in light of recent events connected to market 
volatility, which were discussed in the Notice,\20\ the Commission 
believes that further delaying implementation of the SLS will undermine 
the regulatory interest that the Commission and FINRA have in 
monitoring member firms' liquidity risk profiles.
---------------------------------------------------------------------------

    \20\ See Notice, 86 FR at 27005.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-FINRA-2021-009) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16965 Filed 8-9-21; 8:45 am]
BILLING CODE 8011-01-P