FINANCIAL RESPONSIBILITY RULES FOR BROKER-DEALERS

General

SEC Adopts Clearing Agency Rule to Limit Potential for Overlapping or Duplicative Regulation

The SEC is adopting a rule pursuant to Section 36 of the Securities Exchange Act of 1934 (“Exchange Act”) to exempt from the definition of “clearing agency” in Section 3(a)(23) of the Exchange Act certain activities of a registered security-based swap dealer, a registered security-based swap execution facility, and a person engaging in dealing activity in security-based swaps that is eligible for an exception from registration as a security-based swap dealer because the quantity of dealing activity is de minimis.

SEC Release No. 34-90667 (December 16, 2020), 86 FR 7637 (February 1, 2021): Exemption from the Definition of “Clearing Agency” for Certain Activities of Security-Based Swap Dealers and Security Based Swap Execution Facilities (Final Rule)

 

Amendments to Financial Disclosures about Acquired and Disposed Businesses

The SEC adopted amendments to its rules and forms to improve their application, assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant, and to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses, including real estate operations and investment companies. The changes are intended to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.The final rules become effective on January 1, 2021

SEC Release No. 33-10786 (May 20, 2020)85 FR 54002 (August 31, 2020): Amendments to Financial Disclosures about Acquired and Disposed Businesses (Final Rule)

 


FINRA Announces Update of the Interpretations of Financial and Operational Rules

FINRA updated the text of the Securities Exchange Act (SEA) financial responsibility rules in the Interpretations of Financial and Operational Rules to reflect the effectiveness of a rule change that the SEC) adopted. The SEC’s rule change, amending paragraph (e)(1)(i)(A) of SEA Rule 17a-5, relates to a specified exemption with regard to the annual reporting requirement for a broker-dealer whose securities business has been limited to acting as broker (agent) for a single issuer in soliciting subscriptions for securities of that issuer.

FINRA Regulatory Notice 20-06 (February 25, 2020): FINRA Announces Update of the Interpretations of Financial and Operational Rules

 

Risk Mitigation Techniques for Uncleared Security-Based Swaps

The SEC adopted final rules requiring the application of specific risk mitigation techniques to portfolios of uncleared security-based swaps. In particular, these final rules establish requirements for each registered security-based swap dealer and each registered major security-based swap participant with respect to, among other things, reconciling outstanding security-based swaps with applicable counterparties on a periodic basis, engaging in certain forms of portfolio compression exercises, as appropriate, and executing written security-based swap trading relationship documentation with each of its counterparties prior to, or contemporaneously with, executing a security-based swap transaction. In addition, the Commission issued an interpretation addressing the application of the portfolio reconciliation, portfolio compression, and trading relationship documentation requirements to cross-border security-based swap activities and amended its regulations to address the potential availability of substituted compliance in connection with those requirements. Lastly, the final rules include corresponding amendments to the recordkeeping, reporting, and notification requirements applicable to SBS Entities.

SEC Release No. 34-87782 (December 18, 2019), 85 FR 6359 (February 4, 2020): Risk Mitigation Techniques for Uncleared Security-Based Swaps (Final Rule) 

 

Cross-Border Application of Certain Security-Based Swap Requirements

The SEC adopted rule amendments and provided guidance to address the cross-border application of certain security-based swap requirements under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) that were added by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ‘‘Dodd-Frank Act’’). The SEC also issued a statement regarding compliance with rules for security-based swap data repositories and Regulation SBSR. The rules became effective on April 6, 2020.

• SEC Release No. 34-87780 (December 18, 2019), 85 FR 6270 (February 4, 2020) : Cross-Border Application of Certain Security-Based Swap Requirements (Final Rules; Guidance)

 

Capital, Margin and Segregation Requirements

In accordance with the Dodd-Frank Act, the SEC, pursuant to the Securities Exchange Act of 1934 (Exchange Act), adopted capital and margin requirements for security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs), segregation requirements for SBSDs, and notification requirements with respect to segregation for SBSDs and MSBSPs. The Commission also increased the minimum net capital requirements for broker-dealers authorized to use internal models to compute net capital (“A NC broker-dealers”), and prescribed certain capital and segregation requirements for broker-dealers that are not SBSDs to the extent they engage in security-based-swap and swap activity. The Commission also made substituted compliance available with respect to capital and margin requirements under Section 15F of the Exchange Act and the rules thereunder and adopted a rule that specifies when a foreign SBSD or foreign MSBSP need not comply with the segregation requirements of Section 3E of the Exchange Act and the rules thereunder. The effective date was October 21, 2019.

SEC Release No. 34-86175 (June 21, 2019), 84 FR 43872 (August 22, 2019): Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers (Final Rule)

 

Guidance on FOCUS Reporting for Operating Leases

In October 2018, the SEC staff issued no-action relief regarding the treatment of operating leases under SEA Rule 15c3-1 in connection with the Financial Accounting Standards Board’s (FASB) Accounting Standards Update for Leases. Based on discussions with the SEC staff, and in response to member inquiries, FINRA is issuing this Notice to provide guidance to members for reporting lease assets and lease liabilities on their FOCUS reports. Members should apply the guidance in this Notice going forward when preparing their FOCUS reports. Members are not required to refile any FOCUS reports that they have already submitted to comply with this guidance.

FINRA Regulatory Notice 19-08 (March, 2019): Guidance on FOCUS Reporting for Operating Leases

 

Liquidity Risk Management Practices

Effective liquidity management is a critical control function at broker-dealers and across firms in the financial sector. Failure to manage liquidity has contributed to both individual firm failures and, when widespread, systemic crises. From an investor protection perspective, sound liquidity risk management practices enhance investor protection because they make it more likely that a firm’s customers continue to have prompt access to their assets, even in times of stress.

FINRA is providing guidance on effective practices that senior management and risk managers at firms should consider and implement. Regulatory Notice 15-33 is directed to firms that hold inventory positions or clear and carry customer transactions. Other types of broker-dealers may also find the Notice is of value to them when assessing their own liquidity risks.

FINRA Regulatory Notice 15-33 (September 2015):  Guidance on Liquidity Risk Management Practices