The SEC has approved the proposed amendment to FINRA Rules1 to adopt a set of financial liability rules and related operational rules for the Consolidated Regulation (FINRA Consolidated Regulation).2 FINRA Rules 4150, 4311, 4522 and 4523 are new consolidated rules on financial accountability as well as certain operational and contractual requirements for members. The new rules are based in part on and replace the NYSE and NASD rules.3 Currently, copies of client complaints received by investment firms are not required to be forwarded to the SEC or a self-regulatory body. To the extent that this requirement is imposed, is it appropriate to distinguish letters concerning importing companies or their related persons addressed to clearing companies from other types of customer complaints? Paragraph (c)(2) requires the clearing company to keep copies of all reports requested or made available to the importing enterprise as part of its books and records. The provision allows a clearing company to comply with the requirement if it retains the data used to prepare the report, but only if, at the request of the DEA, the clearing member can recreate the report or provide the data and formatting of the data used to prepare the report. If the clearing company provides data and data formatting to the importing company, the clearing company could provide the DEA with the same data and data formatting to meet this requirement. These termination penalty clauses have raised questions about the clearing company`s rights to the clearing deposit of an importing company that is subject to an early repayment penalty if the importing company is subject to a protection order under the Securities Investor Protection Act of 1970. The question also arises as to how the importing entity should take these clauses into account in terms of calculating its net capital. Please note that Finra Rule 4311(b)(4) requires each transferring business to exercise appropriate due diligence with respect to each new business relationship in order to assess the financial, operational, credit and reputational risk that such an agreement entails for the limited partner. The following questions are representative of the type of reviews FINRA expects from companies as part of their respective due diligence under this rule. However, the Corporation is expected to assess the scope of the review required for each correspondent and conduct additional reviews if it deems it necessary.
Please note that the due diligence performed for each new importing company must be performed by the transferring company in accordance with the time limits prescribed by Rule 17a-4(b) of the Exchange Act. What are the compliance burdens or costs associated with requiring clearing companies to keep copies of exemption reports or data provided to importing companies? To what extent is this data now stored and for how long? To address this issue, the proposed subparagraph (b) of the new paragraph states that if a clearing company receives a complaint from a customer through an importing company regarding the functions and responsibilities of the importing company, the clearing company must forward the complaint to the importing company and send a copy of the complaint to the designated audit authority (DEA) of the importing company. The requirement can warn the DEA early on of potential problems with listing businesses. The proposed amendment also provides that the clearing agreement must explicitly order and empower the clearing company to forward the complaint to the importing company and send a copy of the complaint to the importing company`s DEA. I think the rules are pretty clear. FINRA Rule 4311(b)(1) requires a clearing company to “submit to FINRA any accounting agreement, whether on an omnibus or fully disclosed basis, for prior approval before such an agreement can come into force. How did we come to fix it? By notifying FINRA. In conversations I wasn`t aware of, the finra – and later the SEC – apparently said something about the clearing company, prompting them to withdraw their position and restore all trading privileges for my client`s clients. I am not sure what was submitted, but I assume that the clearing company was informed that it was not effective without the regulatory approval of the order, so my client remained the importing company under their clearing agreement. I am happy to admit that I meet regularly with FINRA on this blog, and I was quick to point out the circumstances in which their alleged dedication to “investor protection” seems particularly illusory. But here I have nothing but praise for FINRA. When FINRA was informed of the facts, in particular the fact that my client`s clients were denied access to the markets except to carry out liquidation operations, FINRA acted immediately and spectacularly, prompting the clearing company to reconsider its previously stubborn position.
Nothing I said would change the clearing company`s mind about the order. But when I was confronted with FINRA and the SEC, it was a different story. It is investor protection, ladies and gentlemen, and I will be the first to admit that. Exception reports. All NASD member firms are required by the NASD and federal regulations to establish, maintain and enforce oversight systems and procedures that cover all areas of a member`s business. An important aspect of these monitoring procedures are the exemption reports and other compliance reports that a member prepares to fulfill these monitoring obligations. In the case of a fully disclosed netting arrangement, the clearing member generally submits exceptional reports to assist the importing member in fulfilling its supervisory obligations. In addition, the officers and officers of the initiating members should be informed of the reports and information available to them in the exercise of their supervisory and supervisory functions. Item (c) of the proposed amendment addresses these issues. Customer complaints. As a general rule, it is the practice of clearing companies to forward to importing companies complaints they receive concerning matters within the jurisdiction of the importing enterprise. Under NASD Rule 3070, a member is required to report to the NASD any written complaint by a customer against him or her involving allegations of theft, misappropriation of funds or securities, or forgery.
Recently, however, there have been instances where importing entities may not have met the requirements of Rule 3070 on time when their clearing companies forwarded customer complaints to them, which delayed the receipt of these reports by the NASD. Since there is no mechanism other than Rule 3070 that aims to provide this information to the NASD Regulation, such late notification may undermine the objective of Rule 3070, which is to provide early warning indicators to the NASD Regulation in order to generate a regulatory response to problems. . . .