Document ID: SEC-2013-0284-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2013-02-11T05:00Z

[Federal Register Volume 78, Number 28 (Monday, February 11, 2013)]
[Notices]
[Pages 9754-9756]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02952]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68832; File No. SR-FINRA-2012-050]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1, and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, to Adopt a Supplementary Schedule for Derivatives and 
Other Off-Balance Sheet Items Pursuant to FINRA Rule 4524 (Supplemental 
FOCUS Information)

February 5, 2013.

I. Introduction

    On November 15, 2012, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a supplementary schedule 
for derivatives and other off-balance sheet items pursuant to FINRA 
Rule 4524 (Supplemental FOCUS Information). The proposed rule change 
was published for comment in the Federal Register on November 27, 
2012.\3\ The Commission received one comment letter on the proposed 
rule change.\4\ On February 1, 2013, FINRA filed Amendment No. 1 with 
the Commission to respond to the comment letter and to propose 
technical changes and the addition of a clarifying instruction.\5\ The 
Commission is publishing this notice and order to solicit comments on 
Amendment No. 1 and to approve the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 68270 (Nov. 20, 2012), 77 FR 70860 
(Nov. 27, 2012).
    \4\ See Email from Suzanne Shatto to Commission, dated Jan. 3, 
2013, available at http://sec.gov/comments/sr-finra-2012-056/finra2012056-1.pdf.
    \5\ See SEC File No. SR-FINRA-2012-050 Amendment No. 1, dated 
Feb. 1, 2013 (``Amendment No. 1''). Amendment No. 1 is described 
below in Section III.B. and the text of Amendment No. 1 is available 
on FINRA's Web site at http://www.finra.org, at the principal office 
of FINRA, and on the Commission's Web site at  http://www.sec.gov/rules/sro.shtml.
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II. Description of Proposal

    FINRA Rule 4524 requires each firm, as FINRA shall designate, to 
file 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 as a supplement to the FOCUS reports. 
Pursuant to FINRA Rule 4524, FINRA proposed the adoption of a 
supplemental schedule to the FOCUS reports to capture important 
information that is not otherwise reported on certain firms' balance 
sheets. To that end, the proposal would require all carrying or 
clearing firms to file with FINRA the Derivatives and Other Off-Balance 
Sheet Items Schedule (``OBS'') within 22 business days of the end of 
each calendar quarter. The proposed OBS is necessary for FINRA to more 
effectively examine for compliance with, and enforce, its rules on 
capital adequacy. The proposed OBS enables FINRA to examine on an 
ongoing basis the potential impact off-balance sheet activities may 
have on carrying and clearing firms' net capital, leverage and

[[Page 9755]]

liquidity, and ability to fulfill their customer protection 
obligations.
    In the aftermath of the financial crisis, FINRA began to closely 
monitor firms' levels of leverage and available liquidity to meet their 
funding needs and began to collect certain additional information from 
certain carrying and clearing firms with regard to their proprietary 
positions, financing transactions and certain off-balance sheet 
transactions. FINRA believes the proposed OBS will allow FINRA to 
obtain more comprehensive and consistent information regarding carrying 
and clearing firms' off-balance sheet assets, liabilities and other 
commitments. The proposed OBS would require firms to report their gross 
exposures in financing transactions (e.g., reverse repos, repos and 
other transactions that are otherwise netted under generally accepted 
accounting principles, reverse repos and repos to maturity and 
collateral swap transactions), interests in and exposure to variable 
interest entities, non-regular way settlement transactions (including 
to be announced or TBA securities and delayed delivery/settlement 
transactions), underwriting and other financing commitments, and gross 
notional amounts in centrally cleared and non-centrally cleared 
derivative contracts involving equities, commodities, interest rates, 
foreign exchange derivatives and credit default swaps. However, the 
proposed OBS contains a de minimis off-balance sheet activity exception 
for each reporting period. If the aggregate of all gross amounts of 
off-balance sheet items is less than 10% of the firm's excess net 
capital on the last day of the reporting period, the firm will not be 
required to file the proposed OBS for the reporting period.\6\
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    \6\ For purposes of the proposed OBS, the term ``excess net 
capital'' means net capital reduced by the greater of the minimum 
dollar net capital requirement or two percent of combined aggregate 
debit items as shown in the Formula for Reserve Requirements 
pursuant to 17 CFR 240.15c3-3.
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    FINRA stated that it would announce the first quarterly reporting 
period (i.e., the implementation date for purposes of the proposed off-
balance sheet schedule) in a regulatory notice to be published no later 
than 60 days following Commission approval of the proposed rule change. 
The due date for the first proposed schedule would be no later than 210 
days following Commission approval of the proposed rule change.

III. Summary of Comment Letter, FINRA's Response, and Amendment No. 1

A. Summary of and FINRA's Response to Comment Letter

    As stated above, the Commission received one comment letter in 
response to the proposed rule change.\7\ The commenter asked if 
reporting will begin for the OBS on January 22, 2013, and if the OBS 
will be public. In addition, the commenter questioned if the 
information in the OBS will be in the December 31, 2012 financials. In 
response, FINRA reiterated the statement in its initial filing: ``FINRA 
will announce the first quarterly reporting period (i.e., the 
implementation date for purposes of the proposed off-balance sheet 
schedule) in a regulatory notice to be published no later than 60 days 
following Commission approval of the proposed rule change.'' Further, 
the proposed OBS will be treated with the same confidentiality as the 
FOCUS report to which it relates.\8\ Finally, firms are required to 
file annually with the SEC audited financial statements that include a 
publicly available Statement of Financial Condition.\9\ The footnotes 
to the Statement of Financial Condition should contain off-balance 
sheet disclosures as required by generally accepted accounting 
principles.
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    \7\ See supra note 4.
    \8\ See 17 CFR 240.17a-5(a)(3).
    \9\ See 17 CFR 240.17a-5(d) and 17 CFR 240.17a-5(e)(3).
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B. Description of Amendment No. 1

    Not in connection with the comment letter, FINRA filed Amendment 
No. 1 with the Commission proposing to amend the OBS and the 
instructions to the OBS. First, FINRA is proposing to clarify that the 
de minimis exception is based on the aggregate of all gross amounts of 
off-balance sheet items. Second, FINRA is making a technical change to 
require a firm that claims the de minimis exception to affirmatively 
indicate through functionality on the eFOCUS system that no filing is 
required for the reporting period. Third, FINRA is proposing to add 
instructions for item 6 (Total gross notional amount) of the OBS. 
Fourth, FINRA is proposing to renumber as line 25 both ``for period 
ending'' lines 24 and 3932 of the OBS.\10\
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    \10\ See Amendment No. 1.
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IV. Commission's Findings

    After careful consideration of the proposed rule change, as 
modified by Amendment No. 1, the comment letter received, and FINRA's 
response to the comment letter, the Commission finds that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder that are applicable to a national securities 
association.\11\ In particular, the Commission finds that the proposal, 
as modified by Amendment No. 1, is consistent with Section 15A(b)(6) of 
the Exchange Act,\12\ which requires, among other things, that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. The 
Commission believes that FINRA adequately addressed the comments raised 
in response to FINRA's notice.
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    \11\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \12\ See 15 U.S.C. 78o-3(b)(6).
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    The proposed OBS will provide FINRA with the ability to obtain more 
specific information about the finances of a member broker-dealer. 
Thus, the Commission believes that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the provisions of the 
Exchange Act noted above in that the proposed OBS will permit FINRA to 
assess more effectively on an ongoing basis the potential impact off-
balance sheet activities may have on carrying and clearing firms' net 
capital, leverage and liquidity, and ability to fulfill their customer 
protection obligations.
    The Commission believes that the proposed rule change, as modified 
by Amendment No. 1, works in conjunction with the existing Commission 
broker-dealer financial responsibility rules and will further FINRA's 
ability to oversee its members by, among other things, increasing the 
transparency of the various revenue streams and sources of income of 
broker-dealers.
    The Commission does not believe that the proposed rule change, as 
modified by Amendment No. 1, will result in any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act. As stated above, the Commission believes the proposed 
OBS will allow FINRA to better understand the potential impact off-
balance sheet activity may have on carrying and clearing firms' net 
capital, leverage and liquidity, and ability to fulfill their customer 
protection

[[Page 9756]]

obligations. Ready access to the information in the proposed OBS is 
important for FINRA to efficiently monitor on an ongoing basis the 
financial condition of firms.
    The Commission also believes FINRA has carefully crafted the 
proposed OBS to achieve its intended and necessary regulatory purpose 
while being cognizant of the burden on firms. The information required 
to complete the proposed OBS should be readily available to firms due 
to firms' obligations to maintain books and records and take applicable 
capital charges in relation to off-balance sheet activity. Further, 
firms that are owned by a publicly held company provide much of the 
information required by the proposed OBS to the SEC on the quarterly 
Form 10-Q or on the annual Form 10-K. Finally, for those firms that 
conduct limited off-balance sheet activity, the proposed OBS contains a 
de minimis exception for each reporting period.

V. Accelerated Approval

    The Commission finds goods cause, pursuant to Section 19(b)(2) of 
the Exchange Act \13\ for approving the proposal, as modified by 
Amendment No. 1, prior to the 30th day after publication of Amendment 
No. 1 in the Federal Register. The changes proposed in Amendment No. 1 
are technical or clarifying changes and do not raise regulatory 
concerns.
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    \13\ 15 U.S.C. 78s(b)(2).
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    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendment No. 1, on an accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Exchange Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-050 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2012-050. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-050 and should be 
submitted on or before March 4, 2013.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\14\ that the proposed rule change (SR-FINRA-2012-050), as 
modified by Amendment No. 1, be and hereby is approved on an 
accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ See 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02952 Filed 2-8-13; 8:45 am]
BILLING CODE 8011-01-P