FINANCIAL AND OPERATIONAL RULES

General

(NEW) Vendor Management and Outsourcing

Member firms are increasingly using third-party vendors to perform a wide range of core business and regulatory oversight functions. FINRA is publishing this Notice to remind member firms of their obligation to establish and maintain a supervisory system, including written supervisory procedures (WSPs), for any activities or functions performed by third-party vendors, including any sub-vendors (collectively, Vendors) that are reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. This Notice reiterates applicable regulatory obligations; summarizes recent trends in examination findings, observations and disciplinary actions; and provides questions member firms may consider when evaluating their systems, procedures and controls relating to Vendor management.

FINRA Regulatory Notice 21-29 (August 13, 2021): FINRA Reminds Firms of their Supervisory Obligations Related to Outsourcing to Third-Party Vendors

(NEW) SEC Financial Responsibility Rules

FINRA is making available updates to interpretations in the Interpretations of Financial and Operational Rules that have been communicated to FINRA by the staff of the SEC’s Division of Trading and Markets. The updated interpretations are with respect to Securities Exchange Act (SEA) Rules 15c3-1 and 15c3-3.

FINRA Regulatory Notice 21-27 (July 22, 2021): FINRA Announces Update of the Interpretations of Financial and Operational Rules

 

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)

 


SEC Financial Responsibility 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)