Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to FINRA Rule 4570 (Custodian of Books and Records), 7945-7948 [2019-03879]
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Federal Register / Vol. 84, No. 43 / Tuesday, March 5, 2019 / Notices
You may obtain publicly-available
information related to this document
using any of the following methods:
• Federal Rulemaking website: Go to
https://www.regulations.gov and search
for Docket ID NRC–2016–0126. Address
questions about NRC docket IDs in
Regulations.gov to Krupskaya Castellon;
telephone: 301–287–9221; email:
Krupskaya.Castellon@nrc.gov. For
technical questions, contact the
individual listed in the FOR FURTHER
INFORMATION CONTACT section of this
document.
• NRC’s Agencywide Documents
Access and Management System
(ADAMS): You may obtain publiclyavailable documents online in the
ADAMS Public Document collection at
https://www.nrc.gov/reading-rm/
adams.html. To begin the search, select
‘‘Begin Web-based ADAMS Search.’’ For
problems with ADAMS, contact the
NRC’s Public Document Room (PDR)
reference staff at 1–800–397–4209, 301–
415–4737, or by email to pdr.resource@
nrc.gov.. The final revision to SRP 13.6
is available in ADAMS under Accession
No. ML18344A041.
• NRC’s PDR: You may examine and
purchase copies of public documents at
the NRC’s PDR, Room O1–F21, One
White Flint North, 11555 Rockville
Pike, Rockville, Maryland 20852.
FOR FURTHER INFORMATION CONTACT:
Mark D. Notich, Office of New Reactors,
U. S. Nuclear Regulatory Commission,
Washington, DC 20555–0001; telephone:
301–415–3053, email: Mark.Notich@
nrc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
On September 11, 2018 (83 FR 45992),
the NRC published for public comment
a proposed revision of Section 13.6,
‘‘Physical Security’’ of NUREG–0800,
‘‘Standard Review Plan (SRP) for the
Review of Safety Analysis Reports for
Nuclear Power Plants: LWR Edition.’’
The public comment period closed on
November 13, 2018. No public
comments were received concerning
Revision 4 of SRP 13.6.
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II. Backfitting and Issue Finality
Chapter 13 of the SRP provides
guidance to the staff for conduct of
operations under part 52 of title 10 of
the Code of Federal Regulations (10
CFR). Section 13.6 of the SRP provides
an introduction for the remainder of the
Chapter 13 SRP sections addressing
physical security for the review of
combined license (COL), early site
permit (ESP), standard design
certification, and operating license (OL)
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applications and amendments for
physical security.
Issuance of this SRP section revision
does not constitute backfitting as
defined in 10 CFR 50.109 (the Backfit
Rule) nor is it inconsistent with the
issue finality provisions in 10 CFR part
52. The NRC’s position is based upon
the following considerations:
1. The SRP positions do not constitute
backfitting, inasmuch as the SRP is
guidance direct to the NRC staff with
respect to its regulatory responsibilities.
The SRP provides guidance to the
NRC staff on how to review an
application for NRC regulatory approval
in the form of licensing. Changes in
guidance intended for use by only the
staff are not matters that constitute
backfitting as that term is defined in 10
CFR 50.109(a)(1) or involve the issue
finality provisions of 10 CFR part 52.
2. Backfitting and issue finality—with
certain exceptions discussed belowe—
do not apply to current or future
applicants.
Applicants and potential applicants
are not, with certain exceptions, the
subject of either the Backfit Rule or any
issue finality provisions under 10 CFR
part 52. This is because neither the
Backfit Rule nor the issue finality
provisions under 10 CFR part 52 were
intended to apply to every NRC action
that substantially changes the
expectations of current and future
applicants.
The exceptions to the general
principle are applicable whenever a 10
CFR part 50 operating license applicant
references a construction permit or a 10
CFR part 52 combined license applicant
references a license (e.g., an early site
permit) or an NRC regulatory approval
(e.g., a design certification rule) for
which specified issue finality provisions
apply.
The NRC staff does not currently
intend to impose the positions
represented in this final SRP section in
a manner that constitutes backfitting or
is inconsistent with any issue finality
provision of 10 CFR part 52. If in the
future the NRC staff seeks to impose a
position stated in this SRP section in a
manner that would constitute
backfitting or be inconsistent with these
issue finality provisions, the NRC staff
must make the showing as set forth in
the Backfit Rule or address the
regulatory criteria set forth in the
applicable issue finality provision, as
applicable, that would allow the staff to
impose the position.
3. The NRC staff has no intention to
impose the SRP positions on existing
nuclear power plant licensees either
now or in the future (absent a voluntary
request for a change from the licensee,
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holder of a regulatory approval or a
design certification applicant).
The NRC staff does not intend to
impose or apply the positions described
in this final SRP section to existing
(already issued) licenses (e.g., operating
licenses and combined licenses) and
regulatory approvals. Hence, the
issuance of this SRP guidance—even if
considered guidance subject to the
Backfit Rule or the issue finality
provisions in 10 CFR part 52—would
not need to be evaluated as if it were a
backfit or as being inconsistent with
issue finality provisions. If, in the
future, the NRC staff seeks to impose a
position in the SRP on holders of
already issued licenses in a manner that
would constitute backfitting or does not
provide issue finality as described in the
applicable issue finality provision, then
the staff must make a showing as set
forth in the Backfit Rule or address the
criteria in the applicable issue finality
provision, as applicable, that would
allow the staff to impose the position.
III. Congressional Review Act
The Office of Management and Budget
makes the determination that the United
States Nuclear Regulatory Commission
action titled ‘NUREG–0800, ‘‘Standard
Review Plan for the Review of Safety
Analysis Reports for Nuclear Power
Plants; LWR Edition,’’ Revision 4 of
Standard Review Plan Section 13.6,
‘‘Physical Security’’’ is non-major under
the Congressional Review Act.
Dated at Rockville, Maryland, on February
27, 2019.
For the Nuclear Regulatory Commission.
Jennivine K. Rankin,
Chief (Acting), Division of Licensing, Siting,
and Environmental Analysis, Licensing
Branch 3, Office of New Reactors.
[FR Doc. 2019–03862 Filed 3–4–19; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85209; File No. SR–FINRA–
2018–039]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change Relating to
FINRA Rule 4570 (Custodian of Books
and Records)
February 27, 2019.
I. Introduction
On November 15, 2018, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
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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:
(1) provide a member that is filing a
Form BDW (Uniform Request for
Broker-Dealer Withdrawal) the option of
designating another FINRA member as
the custodian of its books and records
on the form; (2) clarify the obligations
of the designated custodian; and (3)
require the designated custodian to
consent to act in such a capacity. The
proposed rule change was published for
comment in the Federal Register on
November 30, 2018.3 On January 11,
2019, the Commission extended until
February 28, 2019 the time period to
approve the proposed rule change, or
institute proceedings to determine
whether the proposed rule change
should be disapproved.4 The
Commission received one comment
letter on the proposed rule change.5
FINRA submitted a response to the
comment on February 26, 2019.6 This
order approves the proposed rule
change.
II. Description of the Proposal
Pursuant to Rule 17a–4 (Records to be
Preserved by Certain Exchange
Members, Brokers and Dealers) under
the Exchange Act,7 broker-dealers are
required to retain their books and
records for specified retention periods.8
Paragraph (g) of Rule 17a–4 9 provides
that an entity that stops doing business
as a registered broker-dealer has a
continuing obligation to preserve its
required books and records for the
remainder of the specified retention
periods. Form BDW requires that a firm
that is withdrawing its registration
identify and provide the contact
information of the person who will have
custody of the firm’s books and records
after the firm has discontinued its
business operations. Form BDW also
requires that the firm provide the
address where the books and records
will be located, if different than the
custodian’s address. In addition, the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85646
(Nov. 30, 2018), 83 FR 61689 (‘‘Notice’’).
4 See Securities Exchange Act Release No. 84982
(Feb. 4, 2019), 84 FR 1525 (‘‘Extension’’).
5 See letter to Robert W. Errett, Deputy Secretary,
Commission, from Richard J. O’Brien, Senior Vice
President, Compliance, National Financial Services
LLC, dated February 5, 2019 (‘‘NFS Letter’’).
6 See letter to Brent J. Fields, Secretary,
Commission, from Julia Bogolin, FINRA, dated
February 26, 2019 (‘‘FINRA Response’’).
7 17 CFR 240.17a–4.
8 See also FINRA Rule 4511 (General
Requirements).
9 17 CFR 240.17a–4(g).
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Form BDW provides that the firm and
person signing the form on behalf of the
firm must certify that the firm’s books
and records will be preserved and made
available for inspection.
Currently, FINRA Rule 4570 requires
a member firm to designate as the
custodian of its required books and
records on the Form BDW a person who
is associated with the firm at the time
the Form BDW is filed.10 FINRA has
noted that the current rule is intended
to enhance the ability of FINRA to
obtain a firm’s required books and
records upon dissolution of the firm.11
A. Permitting Another Member To Act
as the Designated Custodian
To provide greater flexibility to its
members, FINRA has proposed to
amend Rule 4570 to provide a member
that is filing a Form BDW the option of
designating another FINRA member as
the custodian of its books and records
on the Form BDW. The proposed rule
change would not require members to
designate another FINRA member as the
custodian of their books and records,
but would give them the option to do so,
at their discretion.
B. Clarifying the Obligations of the
Designated Custodian
In addition to permitting another
member to act as the designated
custodian, FINRA has proposed to
amend Rule 4570 to clarify the
obligations of the designated custodian.
Specifically, the proposed rule change
would clarify that the custodian
designated on the Form BDW must
preserve books and records on behalf of
the member that filed the Form BDW for
the remainder of the applicable
retention periods and make them
available for inspection by FINRA upon
request. Further, FINRA’s proposed rule
change would clarify that a custodian is
required to preserve and produce a
former member’s books and records in
the same manner in which they were
received. However, the proposed rule
change would provide that a custodian
would not be precluded from converting
the books and records in its possession
into another format acceptable under
10 For purposes of FINRA’s rule, an associated
person is a natural person. See FINRA By-Laws,
Article I, paragraph (rr).
11 FINRA has jurisdiction over, and has the ability
to obtain information from, a former associated
person of a member for generally two years after:
(1) The effective date of the person’s termination of
registration; (2) the effective date of revocation or
cancellation of the person’s registration; or (3) in
the case of an unregistered person, the date upon
which such person ceased to be associated with the
member. See FINRA By-Laws, Article V, Section 4
(Retention of Jurisdiction) and FINRA Rule 8210
(Provision of Information and Testimony and
Inspection and Copying of Books).
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the Exchange Act (e.g., convert from
paper format to an electronic storage
media), so long as such records are not
altered or deleted during the conversion
process.
In addition, the proposed rule change
would provide that where a member is
acting as custodian, such member
would not be required to verify the
completeness or accuracy of the books
and records that it receives.12
Further, FINRA has proposed to
amend Rule 4570 to require that where
a FINRA member has agreed to act as
custodian of the books and records of
another member that has filed a Form
BDW, the member acting as custodian
must: (1) Treat such books and records
as if they were its own books and
records; and (2) arrange upon its
dissolution for such books and records
to continue to be retained for the
remainder of the applicable retention
periods under FINRA and Exchange Act
rules in the same manner as its own
books and records consistent with Rule
4570.
C. Requiring the Consent of the
Designated Custodian
FINRA’s proposed rule change would
also require a member to obtain the
affirmative, written or verbal, consent of
the custodian of books and records
identified in the firm’s Form BDW. In
addition, the proposed rule change
would require a member that is
withdrawing its registration to inform
its custodian of the obligations under
FINRA and Exchange Act rules,
including FINRA Rule 4570, prior to
obtaining the custodian’s consent. The
proposed rule change would also
require the designated custodian to
represent to FINRA, in a method
prescribed by FINRA, that the
custodian: (1) Has consented to act in
the capacity of a custodian; (2)
understands the responsibilities of a
custodian; and (3) agrees to provide the
books and records of the member for
which it is acting as custodian to FINRA
upon request during the course of the
required retention periods.
FINRA has stated that it will
announce the effective date of the rule
change in a Regulatory Notice to be
published no later than 60 days
following a Commission approval, and
the effective date will be no later than
120 days following publication of that
Regulatory Notice.13
12 However, FINRA believed that an associated
person who is acting as custodian of a member’s
books and records is in a position to verify the
completeness and accuracy of the member’s books
and records based on his or her existing
relationship with the member.
13 See Notice, 83 FR at 61690.
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III. Summary of Comment and FINRA’s
Response
The Commission received one
comment letter regarding the
proposal.14 The commenter generally
believed that the proposed rule would
place undue financial and operational
burdens on clearing firms.15 More
specifically, the commenter warned that
there are far fewer fully disclosed
clearing firms that could act as
custodians for purposes of the rule
change than FINRA indicated, and that
therefore the resulting burden on
competition would not be reasonable
and appropriate.16 Furthermore, the
proposed rule requirement for a
custodian to treat the withdrawing
firm’s books and records as if they were
the custodian’s own ‘‘would add to a
clearing firm’s existing complex and
voluminous record storage practice’’
and would require ‘‘sizable additional
technology and human resources, not to
mention the costs of paying for
additional storage.’’ 17 The commenter
also warned that, as custodian of a BDW
firm’s books and records, it would be
subject to additional regulatory requests
and potentially become the subject of
litigation, if either it must retain books
and records for a longer period of time
due to a litigation hold or if it becomes
the logical defendant for an end
customer with a grievance deciding to
pursue litigation after their introducing
firm has filed a BDW.18 Despite these
‘‘significant regulatory and litigation
burdens,’’ the commenter noted that it
would be unpractical to expect
correspondent clients to pay for the
additional costs, because ‘‘clearing firms
will have little leverage to force such an
additional cost’’ and introducing brokerdealers are ‘‘looking to reduce costs and
increase efficiency and it is unlikely
that they would agree to pay in advance
for a service that would be necessary
only in a worst-case scenario, which
they do not believe will ever occur.’’ 19
Finally, the commenter stated that if the
Commission approves the proposed rule
change, the rule should be modified as
follows: (1) The rule should require
written consent from the person
identified as custodian on the firm’s
BDW; (2) clearing firms must be granted
limitations on liability under the rule
with respect to recordkeeping or related
deficiencies that are attributable to the
withdrawing broker-dealer; and (3) the
Commission should consider enacting a
rule to provide for a comprehensive and
orderly process for unwinding a brokerdealer.20
In its response letter, FINRA clarified
that the proposed rule change ‘‘would
have no impact on clearing firms or any
other firms or individuals that choose
not to consent to becoming a Rule 4570
custodian for another firm.’’ 21 FINRA
also acknowledged that a member that
chooses to assume the role of custodian
would likely incur additional costs, but
noted that FINRA ‘‘expects that a
member would weigh the extent of the
burden and ability to recover costs in
determining whether to consent to
become a custodian of books and
records.’’ 22 In addition, FINRA stated
that it developed the rule change ‘‘in
response to feedback from some
members that expressed difficulty in
identifying and designating an
associated person as the books and
records custodian on their Form BDW’’
and that these members ‘‘indicated that
other members are willing to function as
custodians for purposes of FINRA Rule
4570, but they cannot do so currently
because of the limitations in the rule.’’ 23
Furthermore, FINRA noted that it vetted
the proposed rule change with several of
its advisory committees, including the
Clearing Firm Advisory Committee, and
that ‘‘ultimately each committee
supported the Proposal going forward,
given its optional nature.’’ 24
Furthermore, FINRA stated that the
commenter ‘‘provided no basis for its
contention that it will be ‘pressured’ to
take on the custodian role without
compensation’’ and that FINRA believed
that ‘‘market forces will determine
whether a third party will consent to
acting as custodian.’’ 25 In addition to
clarifying the number of clearing firms
that appear to have fully disclosed
relationships with introducing brokerdealers,26 FINRA also clarified, with
respect to the commenter’s
modifications to the proposal, that: (1)
Oral consent is an option under the
proposed rule because ‘‘sometimes firms
wind down business operations under
expedited circumstances,’’ but there is
nothing in the proposed rule that would
prevent a clearing firm from ‘‘having an
internal policy that would require
written consent be given’’ in order to
establish the required consent; and (2)
the proposed rule did not contemplate
that a member acting as custodian
20 See
id. at 5–6.
FINRA Response at 1.
22 See id. at 1–2.
23 See id. at 2.
24 See id.
25 See id.
26 See id. at 2–3.
14 See
supra note 5.
15 See NFS Letter at 1.
16 See id. at 2.
17 See id. at 3.
18 See id. at 3–4.
19 See id.
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21 See
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‘‘would be liable for deficiencies in the
records that it receives,’’ but ‘‘any
limitations on liability that would affect
the maintenance, preservation or
availability of the records received by
the custodian would be contrary to the
purpose of the rule.’’ 27
IV. Discussion and Commission
Findings
After careful consideration of the
proposal, the comment submitted, and
FINRA’s response to the comment, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
association.28 In particular, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act,29 which
requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
The Commission believes that the
proposal is reasonably designed to
facilitate compliance with
recordkeeping requirements pursuant to
FINRA rules and the Exchange Act.
First, the proposed rule will provide
greater flexibility for members,
particularly introducing-only firms with
established relationships with clearing
firms, as FINRA has stated that some
members have had difficulty in
identifying and designating an
associated person as the books and
records custodian on their Form BDWs
when they are in the process of winding
down. This change will also enhance
FINRA’s ability to obtain the member’s
required books and records upon the
member’s dissolution, as FINRA’s
jurisdiction over former associated
persons is more limited than its
jurisdiction over current members.
Second, the proposed rule change will
clarify the obligations of the designated
custodian to ensure that the custodian is
preserving the former firm’s books and
records for the applicable retention
periods. Such clarification will help
ensure that the former firm’s books and
records are available for FINRA staff to
conduct its work and so that customers
who wish to bring a claim against the
firm are not unnecessarily limited in
their ability to obtain restitution. Third,
the proposed rule change will require
27 See
FINRA Response at 3.
approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
29 15 U.S.C. 78o–3(b)(6).
28 In
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the designated custodian to consent to
act in such a capacity, which will
address the potentially problematic
situation where the person named as the
custodian on the Form BDW was not
aware that the member was designating
the person as a custodian and did not
have access to the former firm’s books
and records. Furthermore, given the
optional nature of the proposed rule
change, the Commission has no reason
to believe that this proposal will impose
undue burdens on FINRA member
firms.
The Commission acknowledges the
concerns of the commenter who argued
that ‘‘a considerable amount of work’’
would be required of a clearing brokerdealer that agrees to be designated as a
custodian under the proposed rule
change and that such firm would bear
additional financial and operational
costs.30 The Commission believes,
nevertheless, that the comment does not
preclude approval of the proposal. The
proposed changes to FINRA Rule 4570
would permit, but not obligate, a
member firm to take on the
responsibilities associated with being
designated as a custodian by another
FINRA member on the Form BDW.31
This change will allow member firms
that have already indicated their
willingness to be named as custodian
for other broker-dealers the ability to be
designated as such. The Commission
also notes that FINRA vetted the
proposal with several advisory
committees, including the Clearing Firm
Advisory Committee. These committees
would be aware of the concerns
expressed by the commenter, but they
supported the proposal given its
optional nature. With respect to the
commenter’s assumption that the costs
for custodial services provided by
clearing firms could not be priced into
contracts with introducing brokerdealers, the commenter did not offer
data or other analysis to support its
position. In the absence of such data or
analysis, and given that the proposal
does not create any mandate for any
member to become a custodian of books
and records of another member, it is
difficult for the Commission to
understand the commenter’s contention
that the proposed rule change would
impose substantial operational and
financial burdens on clearing firms. The
Commission further notes that the
optional nature of the proposed rule
change would permit a clearing firm to
avoid taking on the responsibilities and
burdens associated with becoming a
custodian for an introducing member
30 See
31 See
NFS Letter at 1–2.
Notice, 83 FR at 61690.
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until such time that the market allows
it to price such custodial services into
its contracts with introducing firms.
The Commission also acknowledges
the commenter’s requested clarifications
to the proposed rule change.32 The
Commission notes that while the
proposal requires that the broker-dealer
filing the Form BDW receive written or
oral consent from the custodian, it also
requires that the custodian follow up
with a written confirmation to FINRA
stating that the custodian agrees to this
designation and that it understands its
obligations under the rule.33 This
second step effectively ensures that
there is written confirmation from the
custodian before it can be designated as
such. Furthermore, the Commission
notes that the current proposal makes
clear that any member firm that
undertakes custodial responsibilities for
another member firm would not be
expected to verify the completeness or
accuracy of any books and records it
receives as part of its custodial duties.34
However, the Commission believes that
a limitation on liability with respect to
the custodian’s maintenance or
preservation of records would frustrate
the policy objectives of Rule 17a–4
under the Exchange Act and FINRA
Rule 4570.
As discussed above, the proposed rule
change will facilitate compliance with
recordkeeping requirements for member
firms and preserve FINRA’s ability to
have jurisdiction over, and obtain
information from, the member that has
agreed to act as custodian.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85213; File No. SR–BX–
2018–066]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Withdrawal of a
Proposed Rule Change To Amend the
Exchange’s Port Fee Schedule
February 27, 2019.
On December 20, 2018, Nasdaq BX,
Inc. (‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend its port fee schedule. The
proposed rule change was immediately
effective upon filing with the
Commission pursuant to Section
19(b)(3)(A) of the Act.3 The proposed
rule change was published for comment
in the Federal Register on January 31,
2019.4 On February 15, 2019, pursuant
to Section 19(b)(3)(C) of the Act, the
Commission: (1) Temporarily
suspended the proposed rule change;
and (2) instituted proceedings to
determine whether to approve or
disapprove the proposed rule change.5
The Commission has received no
comment letters on the proposed rule
change. On February 25, 2019, the
Exchange withdrew its proposed rule
change (SR–BX–2018–066).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–03892 Filed 3–4–19; 8:45 am]
V. Conclusion
BILLING CODE 8011–01–P
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,35
that the proposed rule change (SR–
FINRA–2018–039) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–03879 Filed 3–4–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85212; File No. SR–Phlx–
2018–83]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Withdrawal of a
Proposed Rule Change To Amend the
Exchange’s Port Fee Schedule
February 27, 2019.
On December 20, 2018, Nasdaq PHLX
LLC (‘‘Exchange’’) filed with the
Securities and Exchange Commission
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 See Securities Exchange Act Release No. 84965
(December 26, 2018), 84 FR 842.
5 See Securities Exchange Act Release No. 85152,
84 FR 5737 (February 22, 2019).
6 17 CFR 200.30–3(a)(12).
2 17
32 See
NFS Letter at 5–6.
Notice, 83 FR at 61690.
34 See id.
35 15 U.S.C. 78s(b)(2).
36 17 CFR 200.30–3(a)(12).
33 See
PO 00000
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]]>Agencies
[Federal Register Volume 84, Number 43 (Tuesday, March 5, 2019)]
[Notices]
[Pages 7945-7948]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85209; File No. SR-FINRA-2018-039]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change Relating to FINRA
Rule 4570 (Custodian of Books and Records)
February 27, 2019.
I. Introduction
On November 15, 2018, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''),
[[Page 7946]]
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: (1) provide a member that is filing a Form BDW (Uniform
Request for Broker-Dealer Withdrawal) the option of designating another
FINRA member as the custodian of its books and records on the form; (2)
clarify the obligations of the designated custodian; and (3) require
the designated custodian to consent to act in such a capacity. The
proposed rule change was published for comment in the Federal Register
on November 30, 2018.\3\ On January 11, 2019, the Commission extended
until February 28, 2019 the time period to approve the proposed rule
change, or institute proceedings to determine whether the proposed rule
change should be disapproved.\4\ The Commission received one comment
letter on the proposed rule change.\5\ FINRA submitted a response to
the comment on February 26, 2019.\6\ This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85646 (Nov. 30,
2018), 83 FR 61689 (``Notice'').
\4\ See Securities Exchange Act Release No. 84982 (Feb. 4,
2019), 84 FR 1525 (``Extension'').
\5\ See letter to Robert W. Errett, Deputy Secretary,
Commission, from Richard J. O'Brien, Senior Vice President,
Compliance, National Financial Services LLC, dated February 5, 2019
(``NFS Letter'').
\6\ See letter to Brent J. Fields, Secretary, Commission, from
Julia Bogolin, FINRA, dated February 26, 2019 (``FINRA Response'').
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II. Description of the Proposal
Pursuant to Rule 17a-4 (Records to be Preserved by Certain Exchange
Members, Brokers and Dealers) under the Exchange Act,\7\ broker-dealers
are required to retain their books and records for specified retention
periods.\8\ Paragraph (g) of Rule 17a-4 \9\ provides that an entity
that stops doing business as a registered broker-dealer has a
continuing obligation to preserve its required books and records for
the remainder of the specified retention periods. Form BDW requires
that a firm that is withdrawing its registration identify and provide
the contact information of the person who will have custody of the
firm's books and records after the firm has discontinued its business
operations. Form BDW also requires that the firm provide the address
where the books and records will be located, if different than the
custodian's address. In addition, the Form BDW provides that the firm
and person signing the form on behalf of the firm must certify that the
firm's books and records will be preserved and made available for
inspection.
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\7\ 17 CFR 240.17a-4.
\8\ See also FINRA Rule 4511 (General Requirements).
\9\ 17 CFR 240.17a-4(g).
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Currently, FINRA Rule 4570 requires a member firm to designate as
the custodian of its required books and records on the Form BDW a
person who is associated with the firm at the time the Form BDW is
filed.\10\ FINRA has noted that the current rule is intended to enhance
the ability of FINRA to obtain a firm's required books and records upon
dissolution of the firm.\11\
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\10\ For purposes of FINRA's rule, an associated person is a
natural person. See FINRA By-Laws, Article I, paragraph (rr).
\11\ FINRA has jurisdiction over, and has the ability to obtain
information from, a former associated person of a member for
generally two years after: (1) The effective date of the person's
termination of registration; (2) the effective date of revocation or
cancellation of the person's registration; or (3) in the case of an
unregistered person, the date upon which such person ceased to be
associated with the member. See FINRA By-Laws, Article V, Section 4
(Retention of Jurisdiction) and FINRA Rule 8210 (Provision of
Information and Testimony and Inspection and Copying of Books).
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A. Permitting Another Member To Act as the Designated Custodian
To provide greater flexibility to its members, FINRA has proposed
to amend Rule 4570 to provide a member that is filing a Form BDW the
option of designating another FINRA member as the custodian of its
books and records on the Form BDW. The proposed rule change would not
require members to designate another FINRA member as the custodian of
their books and records, but would give them the option to do so, at
their discretion.
B. Clarifying the Obligations of the Designated Custodian
In addition to permitting another member to act as the designated
custodian, FINRA has proposed to amend Rule 4570 to clarify the
obligations of the designated custodian. Specifically, the proposed
rule change would clarify that the custodian designated on the Form BDW
must preserve books and records on behalf of the member that filed the
Form BDW for the remainder of the applicable retention periods and make
them available for inspection by FINRA upon request. Further, FINRA's
proposed rule change would clarify that a custodian is required to
preserve and produce a former member's books and records in the same
manner in which they were received. However, the proposed rule change
would provide that a custodian would not be precluded from converting
the books and records in its possession into another format acceptable
under the Exchange Act (e.g., convert from paper format to an
electronic storage media), so long as such records are not altered or
deleted during the conversion process.
In addition, the proposed rule change would provide that where a
member is acting as custodian, such member would not be required to
verify the completeness or accuracy of the books and records that it
receives.\12\
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\12\ However, FINRA believed that an associated person who is
acting as custodian of a member's books and records is in a position
to verify the completeness and accuracy of the member's books and
records based on his or her existing relationship with the member.
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Further, FINRA has proposed to amend Rule 4570 to require that
where a FINRA member has agreed to act as custodian of the books and
records of another member that has filed a Form BDW, the member acting
as custodian must: (1) Treat such books and records as if they were its
own books and records; and (2) arrange upon its dissolution for such
books and records to continue to be retained for the remainder of the
applicable retention periods under FINRA and Exchange Act rules in the
same manner as its own books and records consistent with Rule 4570.
C. Requiring the Consent of the Designated Custodian
FINRA's proposed rule change would also require a member to obtain
the affirmative, written or verbal, consent of the custodian of books
and records identified in the firm's Form BDW. In addition, the
proposed rule change would require a member that is withdrawing its
registration to inform its custodian of the obligations under FINRA and
Exchange Act rules, including FINRA Rule 4570, prior to obtaining the
custodian's consent. The proposed rule change would also require the
designated custodian to represent to FINRA, in a method prescribed by
FINRA, that the custodian: (1) Has consented to act in the capacity of
a custodian; (2) understands the responsibilities of a custodian; and
(3) agrees to provide the books and records of the member for which it
is acting as custodian to FINRA upon request during the course of the
required retention periods.
FINRA has stated that it will announce the effective date of the
rule change in a Regulatory Notice to be published no later than 60
days following a Commission approval, and the effective date will be no
later than 120 days following publication of that Regulatory
Notice.\13\
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\13\ See Notice, 83 FR at 61690.
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[[Page 7947]]
III. Summary of Comment and FINRA's Response
The Commission received one comment letter regarding the
proposal.\14\ The commenter generally believed that the proposed rule
would place undue financial and operational burdens on clearing
firms.\15\ More specifically, the commenter warned that there are far
fewer fully disclosed clearing firms that could act as custodians for
purposes of the rule change than FINRA indicated, and that therefore
the resulting burden on competition would not be reasonable and
appropriate.\16\ Furthermore, the proposed rule requirement for a
custodian to treat the withdrawing firm's books and records as if they
were the custodian's own ``would add to a clearing firm's existing
complex and voluminous record storage practice'' and would require
``sizable additional technology and human resources, not to mention the
costs of paying for additional storage.'' \17\ The commenter also
warned that, as custodian of a BDW firm's books and records, it would
be subject to additional regulatory requests and potentially become the
subject of litigation, if either it must retain books and records for a
longer period of time due to a litigation hold or if it becomes the
logical defendant for an end customer with a grievance deciding to
pursue litigation after their introducing firm has filed a BDW.\18\
Despite these ``significant regulatory and litigation burdens,'' the
commenter noted that it would be unpractical to expect correspondent
clients to pay for the additional costs, because ``clearing firms will
have little leverage to force such an additional cost'' and introducing
broker-dealers are ``looking to reduce costs and increase efficiency
and it is unlikely that they would agree to pay in advance for a
service that would be necessary only in a worst-case scenario, which
they do not believe will ever occur.'' \19\ Finally, the commenter
stated that if the Commission approves the proposed rule change, the
rule should be modified as follows: (1) The rule should require written
consent from the person identified as custodian on the firm's BDW; (2)
clearing firms must be granted limitations on liability under the rule
with respect to recordkeeping or related deficiencies that are
attributable to the withdrawing broker-dealer; and (3) the Commission
should consider enacting a rule to provide for a comprehensive and
orderly process for unwinding a broker-dealer.\20\
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\14\ See supra note 5.
\15\ See NFS Letter at 1.
\16\ See id. at 2.
\17\ See id. at 3.
\18\ See id. at 3-4.
\19\ See id.
\20\ See id. at 5-6.
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In its response letter, FINRA clarified that the proposed rule
change ``would have no impact on clearing firms or any other firms or
individuals that choose not to consent to becoming a Rule 4570
custodian for another firm.'' \21\ FINRA also acknowledged that a
member that chooses to assume the role of custodian would likely incur
additional costs, but noted that FINRA ``expects that a member would
weigh the extent of the burden and ability to recover costs in
determining whether to consent to become a custodian of books and
records.'' \22\ In addition, FINRA stated that it developed the rule
change ``in response to feedback from some members that expressed
difficulty in identifying and designating an associated person as the
books and records custodian on their Form BDW'' and that these members
``indicated that other members are willing to function as custodians
for purposes of FINRA Rule 4570, but they cannot do so currently
because of the limitations in the rule.'' \23\ Furthermore, FINRA noted
that it vetted the proposed rule change with several of its advisory
committees, including the Clearing Firm Advisory Committee, and that
``ultimately each committee supported the Proposal going forward, given
its optional nature.'' \24\ Furthermore, FINRA stated that the
commenter ``provided no basis for its contention that it will be
`pressured' to take on the custodian role without compensation'' and
that FINRA believed that ``market forces will determine whether a third
party will consent to acting as custodian.'' \25\ In addition to
clarifying the number of clearing firms that appear to have fully
disclosed relationships with introducing broker-dealers,\26\ FINRA also
clarified, with respect to the commenter's modifications to the
proposal, that: (1) Oral consent is an option under the proposed rule
because ``sometimes firms wind down business operations under expedited
circumstances,'' but there is nothing in the proposed rule that would
prevent a clearing firm from ``having an internal policy that would
require written consent be given'' in order to establish the required
consent; and (2) the proposed rule did not contemplate that a member
acting as custodian ``would be liable for deficiencies in the records
that it receives,'' but ``any limitations on liability that would
affect the maintenance, preservation or availability of the records
received by the custodian would be contrary to the purpose of the
rule.'' \27\
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\21\ See FINRA Response at 1.
\22\ See id. at 1-2.
\23\ See id. at 2.
\24\ See id.
\25\ See id.
\26\ See id. at 2-3.
\27\ See FINRA Response at 3.
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IV. Discussion and Commission Findings
After careful consideration of the proposal, the comment submitted,
and FINRA's response to the comment, the Commission finds that the
proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities association.\28\ In particular, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(6) of the Exchange Act,\29\ which requires, among other things,
that FINRA rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
and, in general, to protect investors and the public interest.
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\28\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposal is reasonably designed to
facilitate compliance with recordkeeping requirements pursuant to FINRA
rules and the Exchange Act. First, the proposed rule will provide
greater flexibility for members, particularly introducing-only firms
with established relationships with clearing firms, as FINRA has stated
that some members have had difficulty in identifying and designating an
associated person as the books and records custodian on their Form BDWs
when they are in the process of winding down. This change will also
enhance FINRA's ability to obtain the member's required books and
records upon the member's dissolution, as FINRA's jurisdiction over
former associated persons is more limited than its jurisdiction over
current members. Second, the proposed rule change will clarify the
obligations of the designated custodian to ensure that the custodian is
preserving the former firm's books and records for the applicable
retention periods. Such clarification will help ensure that the former
firm's books and records are available for FINRA staff to conduct its
work and so that customers who wish to bring a claim against the firm
are not unnecessarily limited in their ability to obtain restitution.
Third, the proposed rule change will require
[[Page 7948]]
the designated custodian to consent to act in such a capacity, which
will address the potentially problematic situation where the person
named as the custodian on the Form BDW was not aware that the member
was designating the person as a custodian and did not have access to
the former firm's books and records. Furthermore, given the optional
nature of the proposed rule change, the Commission has no reason to
believe that this proposal will impose undue burdens on FINRA member
firms.
The Commission acknowledges the concerns of the commenter who
argued that ``a considerable amount of work'' would be required of a
clearing broker-dealer that agrees to be designated as a custodian
under the proposed rule change and that such firm would bear additional
financial and operational costs.\30\ The Commission believes,
nevertheless, that the comment does not preclude approval of the
proposal. The proposed changes to FINRA Rule 4570 would permit, but not
obligate, a member firm to take on the responsibilities associated with
being designated as a custodian by another FINRA member on the Form
BDW.\31\ This change will allow member firms that have already
indicated their willingness to be named as custodian for other broker-
dealers the ability to be designated as such. The Commission also notes
that FINRA vetted the proposal with several advisory committees,
including the Clearing Firm Advisory Committee. These committees would
be aware of the concerns expressed by the commenter, but they supported
the proposal given its optional nature. With respect to the commenter's
assumption that the costs for custodial services provided by clearing
firms could not be priced into contracts with introducing broker-
dealers, the commenter did not offer data or other analysis to support
its position. In the absence of such data or analysis, and given that
the proposal does not create any mandate for any member to become a
custodian of books and records of another member, it is difficult for
the Commission to understand the commenter's contention that the
proposed rule change would impose substantial operational and financial
burdens on clearing firms. The Commission further notes that the
optional nature of the proposed rule change would permit a clearing
firm to avoid taking on the responsibilities and burdens associated
with becoming a custodian for an introducing member until such time
that the market allows it to price such custodial services into its
contracts with introducing firms.
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\30\ See NFS Letter at 1-2.
\31\ See Notice, 83 FR at 61690.
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The Commission also acknowledges the commenter's requested
clarifications to the proposed rule change.\32\ The Commission notes
that while the proposal requires that the broker-dealer filing the Form
BDW receive written or oral consent from the custodian, it also
requires that the custodian follow up with a written confirmation to
FINRA stating that the custodian agrees to this designation and that it
understands its obligations under the rule.\33\ This second step
effectively ensures that there is written confirmation from the
custodian before it can be designated as such. Furthermore, the
Commission notes that the current proposal makes clear that any member
firm that undertakes custodial responsibilities for another member firm
would not be expected to verify the completeness or accuracy of any
books and records it receives as part of its custodial duties.\34\
However, the Commission believes that a limitation on liability with
respect to the custodian's maintenance or preservation of records would
frustrate the policy objectives of Rule 17a-4 under the Exchange Act
and FINRA Rule 4570.
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\32\ See NFS Letter at 5-6.
\33\ See Notice, 83 FR at 61690.
\34\ See id.
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As discussed above, the proposed rule change will facilitate
compliance with recordkeeping requirements for member firms and
preserve FINRA's ability to have jurisdiction over, and obtain
information from, the member that has agreed to act as custodian.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\35\ that the proposed rule change (SR-FINRA-2018-039) is
approved.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03879 Filed 3-4-19; 8:45 am]
BILLING CODE 8011-01-P
