Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt a Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information), 27005-27008 [2021-10390]

Download as PDF Federal Register / Vol. 86, No. 94 / Tuesday, May 18, 2021 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–10386 Filed 5–17–21; 8:45 am] BILLING CODE 8011–01–P summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91876; File No. SR–FINRA– 2021–009] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt a Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information) May 12, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on April 30, 2021, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to adopt a Supplemental Liquidity Schedule, and Instructions thereto, pursuant to FINRA Rule 4524 (Supplemental FOCUS Information). The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. jbell on DSKJLSW7X2PROD with NOTICES II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 16:40 May 17, 2021 Jkt 253001 FINRA Rule 4524 provides in part that, as a supplement to filing FOCUS Reports required pursuant to SEA Rule 17a–5 3 and FINRA Rule 2010, each member, as FINRA shall designate, shall 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. Pursuant to FINRA Rule 4524, FINRA is proposing to adopt a Supplemental Liquidity Schedule (‘‘SLS’’), and Instructions thereto (the ‘‘Instructions’’).4 The proposed SLS, which would be filed as a supplement to the FOCUS Report, is tailored to apply only to members with the largest customer and counterparty exposures, as discussed further below. The SLS is designed to improve FINRA’s ability to monitor for events that signal an adverse change in the liquidity risk of the members that would be subject to the requirement. Effective monitoring of liquidity and funding risks is an essential element of members’ financial responsibility and an ongoing focus for FINRA’s financial supervision programs. Liquidity and funding stress was a significant factor in the financial crisis of 2008.5 Since that time, FINRA has looked closely at members’ liquidity and funding risk management practices.6 Regulatory 3 17 CFR 240.17a–5 (hereinafter cited as SEA ‘‘Rule 17a–5’’). SEA Rule 17a–5 governs financial and operational reporting by brokers and dealers. Members are required to file with FINRA, through the eFOCUS System, reports concerning their financial and operational status using SEC Form X– 17A–5 (the ‘‘FOCUS Report’’). See, e.g., Information Notice, November 23, 2020 (2021 and First Quarter of 2022 Report Filing Due Dates); Regulatory Notice 18–38 (November 2018) (Amendments to the SEC’s Financial Reporting Requirements—eFOCUS System Updates and Annual Audit Requirements). ‘‘FOCUS’’ stands for Financial and Operational Combined Uniform Single. 4 The proposed SLS and Instructions are included as Exhibit 3 to this rule filing. 5 See, e.g., Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011), available at: <https://fraser.stlouisfed.org/ title/financial-crisis-inquiry-report-5034>. 6 See Regulatory Notice 10–57 (November 2010) (Risk Management) and Regulatory Notice 15–33 (September 2015) (Liquidity Risk). However, even prior to the financial crisis, FINRA noted the importance of risk management practices. See, e.g., Notice to Members 99–92 (November 1999) (Risk Management Practices) (setting forth a joint PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 27005 Notice 10–57 expressed FINRA’s expectation that members develop and maintain robust funding and liquidity risk management practices and discussed results of examinations that FINRA had conducted of the practices of selected members. In addition, Regulatory Notice 15–33 provided guidance on liquidity risk management practices and described FINRA’s review of policies and practices at selected members related to managing liquidity needs in a stressed environment. FINRA believes that the proposed SLS is a logical complement to these ongoing priorities and guidance that FINRA has communicated to members and would provide essential information about members’ sources and uses of liquidity to enable FINRA to better understand their liquidity profile. FINRA notes that events in connection with market volatility and other stress stemming from the COVID–19 pandemic,7 and events such as the extreme price volatility of certain stocks in January 2021,8 have reinforced the importance of effective liquidity risk monitoring. As such, FINRA believes that the proposed SLS is necessary to enhance its ongoing monitoring of members’ liquidity risk and to have additional information that can be used to assess the impact of stress events on a member’s liquidity. Members that would be subject to the SLS requirement would provide detailed reporting, using the SLS, as to their: • Reverse repurchase and repurchase agreements; • securities borrowed and securities loaned; • non-cash reverse repurchase and securities borrowed transactions; • non-cash repurchase and securities loaned transactions; • bank loan and other committed and uncommitted credit facilities; • total available collateral in the member’s custody; • margin and non-purpose loans; statement by the SEC, NASD and NYSE on brokerdealer risk management practices). FINRA has also discussed liquidity risk in its Annual Regulatory and Examination Priorities Letters. See, e.g., 2019 Annual Risk Monitoring and Examination Priorities Letter, available at: <finra.org>. 7 See, e.g., S.P. Kothari et al., U.S. Credit Markets: Interconnectedness and the Effects of the COVID– 19 Economic Shock (October 2020) (report of the SEC Division of Economic and Risk Analysis regarding market stress during the COVID–19 shock of March 2020), available at: <https://www.sec.gov/ files/US-Credit-Markets_COVID-19_Report.pdf>. 8 See Acting Chair Allison Herren Lee, Commissioners Hester M. Peirce, Elad L. Roisman, and Caroline A. Crenshaw, Public Statement Regarding Recent Market Volatility (January 29, 2021), available at: <https://www.sec.gov/news/ public-statement/joint-statement-market-volatility2021-01-29>. E:\FR\FM\18MYN1.SGM 18MYN1 27006 Federal Register / Vol. 86, No. 94 / Tuesday, May 18, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES • collateral securing margin loans; • deposits at clearing organizations; and • cash and securities received and delivered on derivative transactions not cleared through a central clearing counterparty (‘‘CCP’’). In developing the proposed SLS, FINRA has engaged in extensive outreach and discussions with industry participants. In January 2018, FINRA published an earlier version of the proposed SLS for comment 9 and, as discussed further below, in response to comments, and based on dialogue with and feedback from industry participants, has tailored and clarified the proposed SLS and Instructions. Under the proposed SLS, unless otherwise permitted by FINRA in writing, the SLS would be required to be filed by each carrying member with $25 million or more in free credit balances, as defined under SEA Rule 15c3– 3(a)(8),10 and by each member whose aggregate amount outstanding under repurchase agreements, securities loan contracts and bank loans is equal to or greater than $1 billion, as reported on the member’s most recently filed FOCUS report. The SLS must be completed as of the last business day of each month (the ‘‘SLS date’’) and filed within 24 business days after the end of the month. A member need not file the SLS for any period where the member does not meet the $25 million or $1 billion thresholds.11 FINRA notes that, with these $25 million and $1 billion thresholds, the proposal would apply to approximately 85 to 100 members that have the largest 9 See Regulatory Notice 18–02 (January 2018) (Liquidity Reporting and Notification). 10 17 CFR 240.15c3–3 (hereinafter cited as SEA ‘‘Rule 15c3–3’’). 11 FINRA notes that members that have elected to be treated as capital acquisition brokers (‘‘CABs’’) would be subject to the rule change to the extent that FINRA Rule 4524, pursuant to CAB Rule 452(b), applies to CABs. However, the proposed rule change would unlikely impact CABs. The proposed $25 million free credit balances threshold applies to carrying members and as such would not affect CABs because, pursuant to CAB Rule 016(c)(2), CABs are prohibited among other things from carrying customer accounts, or from holding or handling customer funds or securities. With respect to the proposed $1 billion threshold, FINRA believes that it is unlikely any CABs would meet this level of financing given the limited nature of their business under the CAB rules. The proposed rule change would not apply to funding portal members because such members are not subject to Rule 4524. Even if Rule 4524 were to apply, the rule change would unlikely affect funding portal members because, pursuant to Regulation Crowdfunding Rule 300(c)(2)(iv), such members are prohibited from holding, possessing, managing or otherwise handling investor funds or securities. Further, again by virtue of the limited nature of their business, funding portal members are unlikely to meet the proposed $1 billion threshold. VerDate Sep<11>2014 16:40 May 17, 2021 Jkt 253001 customer and counterparty exposures, and as such, is tailored to apply to members whose liquidity events could have the greatest potential impact on customers, counterparties, and markets. If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 30 days following Commission approval. The effective date will be no later than 180 days following publication of the Regulatory Notice announcing Commission approval. 2. Statutory Basis The proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,12 which requires, among other things, that FINRA rules must 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. Consistent with the provisions of the Act, the proposed rule change will enable FINRA to more effectively monitor the liquidity risk of members with the largest customer and counterparty exposures, thereby enhancing FINRA’s ability to supervise the financial responsibility of larger member firms and maintain investor protection. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The proposed SLS is designed to improve FINRA’s ability to monitor liquidity risk of the members that would be subject to the requirement and provide additional warning of market stress. FINRA has designed the proposed SLS to achieve its intended and necessary regulatory purpose while minimizing the burden on firms. Ready access to the information is important for FINRA to efficiently monitor on an ongoing basis the liquidity profile of members. In particular, the information would facilitate FINRA’s efforts to understand and respond to firms that may appear similar based on their balance sheet, but in fact have different liquidity risk profiles, which could negatively impact their ability to fund their operations during periods of market or other stress events. In the absence of this reporting requirement, FINRA would need to request this information repeatedly on a 12 15 PO 00000 U.S.C. 78o–3(b)(6). Frm 00115 Fmt 4703 Sfmt 4703 firm-by-firm basis as need arises, resulting in similar, or even potentially larger, costs for the firms. FINRA notes that, as discussed above, the proposal would apply to approximately 85 to 100 members that meet the thresholds as defined by the proposal. Given that these firms have the largest customer and counterparty exposures, they are likely to have the largest potential liquidity risk, to which the proposed SLS is aimed at providing increased monitoring and transparency. The underlying information required to complete the proposed SLS should be readily available to members due to members’ obligations to maintain books and records for those items required to be reported on the SLS. FINRA further notes that out of the approximately 85 to 100 firms for which the proposal would apply to, about one quarter of those are members of large bank holding companies (‘‘BHCs’’). This subset of firms are required to provide similar information in reporting at the BHC and material entity level to the Federal Reserve Board.13 FINRA believes that the threshold for the SLS reporting requirement may result in some competitive effects, for firms that fall above or below the reporting threshold, in addition to firms that do and do not report overlapping information through the FR 2052a report. However, the overall direction of these effects is not clear, and FINRA does not believe the effects are significant when weighed against the value of the SLS report. FINRA has reviewed in this regard the information requested by the proposed SLS versus the information requested by the FR 2052a report. A broker-dealer that is a material entity within a BHC may report some of the same information under this proposal that the broker-dealer provides for purposes of the FR 2052a report.14 To the extent there is some overlap in reporting, FINRA expects that additional costs from providing the information for purposes of the SLS would be minimal. These firms should be able to rely on their existing compliance systems and infrastructure for the reporting of these items. However, some costs are anticipated due to differences in the information required for the two reports and differences in the frequency of the 13 This reporting is done using the Complex Institution Liquidity Monitoring Report (FR 2052a) (hereinafter referred to as the ‘‘FR 2052a report’’), available at: <https://www.federalreserve.gov/apps/ reportforms/default.aspx>. 14 The instructions to the FR 2052a report provide that ‘‘. . . each material entity required to report will report on a consolidated basis,’’ except as otherwise specified in the instructions. E:\FR\FM\18MYN1.SGM 18MYN1 Federal Register / Vol. 86, No. 94 / Tuesday, May 18, 2021 / Notices reporting. Where this reporting is not duplicative, firms will incur some startup costs to establish the reporting system and then ongoing costs in providing the information, and the relevant supervisory and compliance systems. In contrast, firms that are not within a BHC will incur new start-up costs that may be greater than the incremental start-up costs of firm within a BHC, while firms below the threshold will not incur these costs. Nonetheless, FINRA believes the thresholds are well tailored to require disclosure from firms whose liquidity impacts substantially outweigh the collection and reporting costs of the SLS. jbell on DSKJLSW7X2PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The proposed rule change was published for comment in Regulatory Notice 18–02 (January 2018) (the ‘‘Notice’’). Three comments were received in response to the Regulatory Notice.15 Exhibit 2a is a copy of the Regulatory Notice. Exhibit 2b contains copies of the comment letters received in response to the Regulatory Notice. Below is a summary of the comments and FINRA’s responses. In the Notice, in addition to seeking comment on a proposed earlier version of the SLS, FINRA sought comment on proposed amendments to FINRA Rule 4521 (Notifications, Questionnaires and Reports) that would have imposed additional requirements on members subject to the SLS to notify FINRA no more than 48 hours after specified events that may signal an adverse change in liquidity risk. Most of the concerns expressed by commenters focused on these proposed amendments to Rule 4521. In particular, SIFMA and Vining Sparks expressed concern that the proposed amendments were complex and operationally burdensome, were in need of further clarification, should be tailored to permit members to use models specific to their firms, or should be aligned or coordinated with potential future Commission action in the area of broker-dealer liquidity and risk monitoring. In response, FINRA notes that it has been engaging, and 15 See Letter from Allen Riggs, CFO, Vining Sparks IBP, L.P., to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated February 21, 2018 (‘‘Vining Sparks’’); Letter from Jon Zindel, Chief Financial Officer, William Blair & Company, LLC, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated March 7, 2018 (‘‘William Blair’’); and Letter from Mary Kay Scucci, Managing Director, Securities Industry and Financial Markets Association, to Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA, dated March 8, 2018 (‘‘SIFMA’’). VerDate Sep<11>2014 16:40 May 17, 2021 Jkt 253001 plans to continue to engage, with industry participants and with other regulators with regard to these concerns and will give further consideration as to potential rule changes to address effective liquidity monitoring. As such, FINRA is not at this time proposing amendments to Rule 4521 as part of the proposed rule change. With regard to the proposed SLS as originally proposed in the Notice, all three commenters suggested clarifications and revisions. William Blair and Vining Sparks expressed concern that, because the $25 million threshold as proposed in the Notice would have been based on ‘‘total credits’’ under Exhibit A of Rule 15c3– 3, smaller firms that engage mostly in institutional trades on a delivery versus payment/receive versus payment (‘‘DVP/RVP’’) basis would fall within the proposed requirement by virtue of the credits they are obliged to report in connection with ‘‘failed to receive’’ transactions. Commenters believed this would include firms whose business activities do not present significant liquidity risk in the SLS reporting requirement. In response, FINRA has engaged with industry participants and has revised the $25 million threshold to reference ‘‘free credit balances’’ as defined under SEA Rule 15c3–3(a)(8). FINRA believes that referencing free credit balances for the $25 million threshold more directly identifies firms that should be subject to the SLS and is consistent with FINRA’s intent to reach only members with the highest potential liquidity risk. As discussed above, the proposal would apply to approximately 85 to 100 firms, generally FINRA’s largest members, which is the appropriate scope in light of its regulatory purpose. Vining Sparks expressed concern that the SLS, as originally proposed in the Notice, would require disclosure of the names of the reporting member’s top five counterparties for certain of the specified categories of information, which Vining Sparks suggested could raise privacy and confidentiality concerns. In response, FINRA has revised the Instructions to the proposed SLS so that members would have the option to specify a counterparty type or name in the portions of the SLS that request top five counterparty information. FINRA believes that permitting members this flexibility is appropriate because specifying counterparty types rather than counterparty names achieves the overall goal of helping to understand and monitor the impact from counterparties on the liquidity profile of the member PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 27007 submitting the SLS. Further, FINRA notes that it has the ability to request further information as to any counterparty transaction should such be warranted. SIFMA expressed concern that the purpose of and need for the SLS as proposed in the Notice is unclear, that the SLS would require the disclosure of information that should be kept confidential, that the proposal is duplicative of requirements that apply to firms that are already part of BHCs, that the proposal should not go forward until the SEC acts in the area of liquidity monitoring, and that the information required on the proposed SLS is unhelpful or unnecessary to understanding a firm’s liquidity or is operationally burdensome to track. FINRA engaged with industry participants and SIFMA to discuss these concerns. FINRA believes that the purpose of, and regulatory need for, the proposal, as set forth in the Notice and as reiterated in this filing, is clear. To address the concerns expressed by commenters with regard to the potential burdens of the proposal, FINRA, based on extensive discussions with industry participants, has made several revisions to the proposed SLS. For example, FINRA has revised the proposed SLS so that members with de minimis total reverse repurchase or repurchase agreements may elect not to complete the securities collateral subcategories in Lines 1 through 5 under Reverse Repurchase and Repurchase Agreements, and may elect not to complete the Top Five Counterparties portion that corresponds with that section.16 As revised, also under the Reverse Repurchase and Repurchase Agreements section, the proposed SLS would permit members flexibility to allocate contracts collateralized by more than two security types among those types of collateral for purposes of their reporting. With regard to reporting counterparties, FINRA has revised the SLS so that members electing to report counterparties by type rather than by name will be permitted to use the counterparty classifications and definitions given in the FR 2052a report, thereby helping members in BHCs align their SLS reporting with the FR 2052a report. Similarly, FINRA has added language to the proposed SLS designed to align reporting for non-cash 16 Members would need to complete Lines 6a, 6b, 6c and 7, as applicable. FINRA has made a corresponding revision to the Securities Borrowed and Securities Loaned section. E:\FR\FM\18MYN1.SGM 18MYN1 27008 Federal Register / Vol. 86, No. 94 / Tuesday, May 18, 2021 / Notices and collateral upgrade transactions with members’ other regulatory reporting.17 SIFMA requested that FINRA further clarify the reporting date for the SLS, and suggested that data should be reported as of month-end. In response, FINRA has revised the SLS to provide that the SLS must be completed as of the last business day of each month (as noted above, the SLS date) and filed within 24 business days after the end of the month. FINRA notes the 24 business days is meant to afford members additional time to file versus the 22 business days as proposed in the Notice. SIFMA requested clarification as to who within a member would be responsible for completing the proposed SLS. In response, it is not FINRA’s intention to impose an additional potential burden by designating specific persons within the firm that would need to complete the SLS. Given the SLS is intended as a supplement to the FOCUS reporting for which a member is already responsible, FINRA understands that members may handle the SLS as a financial and operational report consistent with their FOCUS and other financial-related reporting processes and obligations. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments jbell on DSKJLSW7X2PROD with NOTICES Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 17 FINRA has made additional miscellaneous revisions to the SLS designed to clarify categories in the Instructions such as ‘‘term loans’’ and ‘‘deposits at clearing organizations.’’ Further, in the Instructions, FINRA has also revised the Bank Loan and Other Committed and Uncommitted Credit Facilities section to clarify that Line 4 under that section (Drawn Amounts of Uncommitted Credit Facilities) includes, for example, commercial paper. VerDate Sep<11>2014 16:40 May 17, 2021 Jkt 253001 Electronic Comments DEPARTMENT OF STATE • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2021–009 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2021–009. 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 website (https://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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2021–009 and should be submitted on or before June 8, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–10390 Filed 5–17–21; 8:45 am] BILLING CODE 8011–01–P [Public Notice Number: 11424] Overseas Schools Advisory Council Notice of Meeting The Overseas Schools Advisory Council, Department of State, will hold its Summer Committee Meeting on Thursday, June 17, 2021, from 11:00 a.m. until approximately 2:30 p.m. Based on federal and state guidance in response to the COVID–19 pandemic, this meeting will be held virtually. In accordance with the Federal Advisory Committee Act (FACA), the meeting will be made available to the public; see below. The Overseas Schools Advisory Council works closely with the U.S. business community on improving those American-sponsored schools overseas that are assisted by the Department of State and attended by dependents of U.S. government employees, and the children of employees of U.S. corporations and foundations abroad. This meeting will address issues related to the work and the support provided by the Overseas Schools Advisory Council to the Americansponsored overseas schools. There will be a report and discussion about the status of the Council-sponsored Child Protection Project and discussion on the most recent project addressing school based mental health issues. Moreover, the Regional Education Officers in the Office of Overseas Schools will make presentations on the activities and initiatives in the American-sponsored overseas schools. Members of the public may attend the meeting virtually and join in the discussion, subject to the instructions of the Chair. Members of the public who plan to virtually attend should advise the office of Mr. Thomas Shearer, Office of Overseas Schools, Department of State, telephone 202–261–8200, prior to June 10, 2021. Interested members of the public will be asked to provide their name and preferred email address and whether they need reasonable accommodation, and a valid link will be sent prior to the meeting. The link provided to attendees should not be shared with other individuals. Amanda E. Rydel, Administrative Officer, Office of Directives Management. [FR Doc. 2021–10395 Filed 5–17–21; 8:45 am] 18 17 PO 00000 CFR 200.30–3(a)(12). Frm 00117 Fmt 4703 Sfmt 9990 BILLING CODE 4710–24–P E:\FR\FM\18MYN1.SGM 18MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 94 (Tuesday, May 18, 2021)]
[Notices]
[Pages 27005-27008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10390]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91876; File No. SR-FINRA-2021-009]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt a
Supplemental Liquidity Schedule, and Instructions Thereto, Pursuant to
FINRA Rule 4524 (Supplemental FOCUS Information)

May 12, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 30, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

FINRA is proposing to adopt a Supplemental Liquidity Schedule, and
Instructions thereto, pursuant to FINRA Rule 4524 (Supplemental FOCUS
Information).
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
FINRA Rule 4524 provides in part that, as a supplement to filing
FOCUS Reports required pursuant to SEA Rule 17a-5 \3\ and FINRA Rule
2010, each member, as FINRA shall designate, shall 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. Pursuant to FINRA Rule 4524, FINRA is proposing to
adopt a Supplemental Liquidity Schedule (``SLS''), and Instructions
thereto (the ``Instructions'').\4\ The proposed SLS, which would be
filed as a supplement to the FOCUS Report, is tailored to apply only to
members with the largest customer and counterparty exposures, as
discussed further below. The SLS is designed to improve FINRA's ability
to monitor for events that signal an adverse change in the liquidity
risk of the members that would be subject to the requirement.
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\3\ 17 CFR 240.17a-5 (hereinafter cited as SEA ``Rule 17a-5'').
SEA Rule 17a-5 governs financial and operational reporting by
brokers and dealers. Members are required to file with FINRA,
through the eFOCUS System, reports concerning their financial and
operational status using SEC Form X-17A-5 (the ``FOCUS Report'').
See, e.g., Information Notice, November 23, 2020 (2021 and First
Quarter of 2022 Report Filing Due Dates); Regulatory Notice 18-38
(November 2018) (Amendments to the SEC's Financial Reporting
Requirements--eFOCUS System Updates and Annual Audit Requirements).
``FOCUS'' stands for Financial and Operational Combined Uniform
Single.
\4\ The proposed SLS and Instructions are included as Exhibit 3
to this rule filing.
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Effective monitoring of liquidity and funding risks is an essential
element of members' financial responsibility and an ongoing focus for
FINRA's financial supervision programs. Liquidity and funding stress
was a significant factor in the financial crisis of 2008.\5\ Since that
time, FINRA has looked closely at members' liquidity and funding risk
management practices.\6\ Regulatory Notice 10-57 expressed FINRA's
expectation that members develop and maintain robust funding and
liquidity risk management practices and discussed results of
examinations that FINRA had conducted of the practices of selected
members. In addition, Regulatory Notice 15-33 provided guidance on
liquidity risk management practices and described FINRA's review of
policies and practices at selected members related to managing
liquidity needs in a stressed environment. FINRA believes that the
proposed SLS is a logical complement to these ongoing priorities and
guidance that FINRA has communicated to members and would provide
essential information about members' sources and uses of liquidity to
enable FINRA to better understand their liquidity profile. FINRA notes
that events in connection with market volatility and other stress
stemming from the COVID-19 pandemic,\7\ and events such as the extreme
price volatility of certain stocks in January 2021,\8\ have reinforced
the importance of effective liquidity risk monitoring. As such, FINRA
believes that the proposed SLS is necessary to enhance its ongoing
monitoring of members' liquidity risk and to have additional
information that can be used to assess the impact of stress events on a
member's liquidity. Members that would be subject to the SLS
requirement would provide detailed reporting, using the SLS, as to
their:
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\5\ See, e.g., Final Report of the National Commission on the
Causes of the Financial and Economic Crisis in the United States
(January 2011), available at: <https://fraser.stlouisfed.org/title/financial-crisis-inquiry-report-5034>.
\6\ See Regulatory Notice 10-57 (November 2010) (Risk
Management) and Regulatory Notice 15-33 (September 2015) (Liquidity
Risk). However, even prior to the financial crisis, FINRA noted the
importance of risk management practices. See, e.g., Notice to
Members 99-92 (November 1999) (Risk Management Practices) (setting
forth a joint statement by the SEC, NASD and NYSE on broker-dealer
risk management practices). FINRA has also discussed liquidity risk
in its Annual Regulatory and Examination Priorities Letters. See,
e.g., 2019 Annual Risk Monitoring and Examination Priorities Letter,
available at: <finra.org>.
\7\ See, e.g., S.P. Kothari et al., U.S. Credit Markets:
Interconnectedness and the Effects of the COVID-19 Economic Shock
(October 2020) (report of the SEC Division of Economic and Risk
Analysis regarding market stress during the COVID-19 shock of March
2020), available at: <https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf>.
\8\ See Acting Chair Allison Herren Lee, Commissioners Hester M.
Peirce, Elad L. Roisman, and Caroline A. Crenshaw, Public Statement
Regarding Recent Market Volatility (January 29, 2021), available at:
<https://www.sec.gov/news/public-statement/joint-statement-market-volatility-2021-01-29>.
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Reverse repurchase and repurchase agreements;
securities borrowed and securities loaned;
non-cash reverse repurchase and securities borrowed
transactions;
non-cash repurchase and securities loaned transactions;
bank loan and other committed and uncommitted credit
facilities;
total available collateral in the member's custody;
margin and non-purpose loans;

[[Page 27006]]

collateral securing margin loans;
deposits at clearing organizations; and
cash and securities received and delivered on derivative
transactions not cleared through a central clearing counterparty
(``CCP'').
In developing the proposed SLS, FINRA has engaged in extensive
outreach and discussions with industry participants. In January 2018,
FINRA published an earlier version of the proposed SLS for comment \9\
and, as discussed further below, in response to comments, and based on
dialogue with and feedback from industry participants, has tailored and
clarified the proposed SLS and Instructions. Under the proposed SLS,
unless otherwise permitted by FINRA in writing, the SLS would be
required to be filed by each carrying member with $25 million or more
in free credit balances, as defined under SEA Rule 15c3-3(a)(8),\10\
and by each member whose aggregate amount outstanding under repurchase
agreements, securities loan contracts and bank loans is equal to or
greater than $1 billion, as reported on the member's most recently
filed FOCUS report. The SLS must be completed as of the last business
day of each month (the ``SLS date'') and filed within 24 business days
after the end of the month. A member need not file the SLS for any
period where the member does not meet the $25 million or $1 billion
thresholds.\11\
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\9\ See Regulatory Notice 18-02 (January 2018) (Liquidity
Reporting and Notification).
\10\ 17 CFR 240.15c3-3 (hereinafter cited as SEA ``Rule 15c3-
3'').
\11\ FINRA notes that members that have elected to be treated as
capital acquisition brokers (``CABs'') would be subject to the rule
change to the extent that FINRA Rule 4524, pursuant to CAB Rule
452(b), applies to CABs. However, the proposed rule change would
unlikely impact CABs. The proposed $25 million free credit balances
threshold applies to carrying members and as such would not affect
CABs because, pursuant to CAB Rule 016(c)(2), CABs are prohibited
among other things from carrying customer accounts, or from holding
or handling customer funds or securities. With respect to the
proposed $1 billion threshold, FINRA believes that it is unlikely
any CABs would meet this level of financing given the limited nature
of their business under the CAB rules.
The proposed rule change would not apply to funding portal
members because such members are not subject to Rule 4524. Even if
Rule 4524 were to apply, the rule change would unlikely affect
funding portal members because, pursuant to Regulation Crowdfunding
Rule 300(c)(2)(iv), such members are prohibited from holding,
possessing, managing or otherwise handling investor funds or
securities. Further, again by virtue of the limited nature of their
business, funding portal members are unlikely to meet the proposed
$1 billion threshold.
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FINRA notes that, with these $25 million and $1 billion thresholds,
the proposal would apply to approximately 85 to 100 members that have
the largest customer and counterparty exposures, and as such, is
tailored to apply to members whose liquidity events could have the
greatest potential impact on customers, counterparties, and markets.
If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice to be published no later than 30 days following Commission
approval. The effective date will be no later than 180 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
The proposed rule change is consistent with the provisions of
Section 15A(b)(6) of the Act,\12\ which requires, among other things,
that FINRA rules must 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. Consistent with the provisions of the Act, the
proposed rule change will enable FINRA to more effectively monitor the
liquidity risk of members with the largest customer and counterparty
exposures, thereby enhancing FINRA's ability to supervise the financial
responsibility of larger member firms and maintain investor protection.
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\12\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The proposed SLS is designed to
improve FINRA's ability to monitor liquidity risk of the members that
would be subject to the requirement and provide additional warning of
market stress. FINRA has designed the proposed SLS to achieve its
intended and necessary regulatory purpose while minimizing the burden
on firms. Ready access to the information is important for FINRA to
efficiently monitor on an ongoing basis the liquidity profile of
members. In particular, the information would facilitate FINRA's
efforts to understand and respond to firms that may appear similar
based on their balance sheet, but in fact have different liquidity risk
profiles, which could negatively impact their ability to fund their
operations during periods of market or other stress events. In the
absence of this reporting requirement, FINRA would need to request this
information repeatedly on a firm-by-firm basis as need arises,
resulting in similar, or even potentially larger, costs for the firms.
FINRA notes that, as discussed above, the proposal would apply to
approximately 85 to 100 members that meet the thresholds as defined by
the proposal. Given that these firms have the largest customer and
counterparty exposures, they are likely to have the largest potential
liquidity risk, to which the proposed SLS is aimed at providing
increased monitoring and transparency. The underlying information
required to complete the proposed SLS should be readily available to
members due to members' obligations to maintain books and records for
those items required to be reported on the SLS.
FINRA further notes that out of the approximately 85 to 100 firms
for which the proposal would apply to, about one quarter of those are
members of large bank holding companies (``BHCs''). This subset of
firms are required to provide similar information in reporting at the
BHC and material entity level to the Federal Reserve Board.\13\ FINRA
believes that the threshold for the SLS reporting requirement may
result in some competitive effects, for firms that fall above or below
the reporting threshold, in addition to firms that do and do not report
overlapping information through the FR 2052a report. However, the
overall direction of these effects is not clear, and FINRA does not
believe the effects are significant when weighed against the value of
the SLS report. FINRA has reviewed in this regard the information
requested by the proposed SLS versus the information requested by the
FR 2052a report. A broker-dealer that is a material entity within a BHC
may report some of the same information under this proposal that the
broker-dealer provides for purposes of the FR 2052a report.\14\ To the
extent there is some overlap in reporting, FINRA expects that
additional costs from providing the information for purposes of the SLS
would be minimal. These firms should be able to rely on their existing
compliance systems and infrastructure for the reporting of these items.
However, some costs are anticipated due to differences in the
information required for the two reports and differences in the
frequency of the

[[Page 27007]]

reporting. Where this reporting is not duplicative, firms will incur
some start-up costs to establish the reporting system and then ongoing
costs in providing the information, and the relevant supervisory and
compliance systems. In contrast, firms that are not within a BHC will
incur new start-up costs that may be greater than the incremental
start-up costs of firm within a BHC, while firms below the threshold
will not incur these costs. Nonetheless, FINRA believes the thresholds
are well tailored to require disclosure from firms whose liquidity
impacts substantially outweigh the collection and reporting costs of
the SLS.
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\13\ This reporting is done using the Complex Institution
Liquidity Monitoring Report (FR 2052a) (hereinafter referred to as
the ``FR 2052a report''), available at: <https://www.federalreserve.gov/apps/reportforms/default.aspx>.
\14\ The instructions to the FR 2052a report provide that ``. .
. each material entity required to report will report on a
consolidated basis,'' except as otherwise specified in the
instructions.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

The proposed rule change was published for comment in Regulatory
Notice 18-02 (January 2018) (the ``Notice''). Three comments were
received in response to the Regulatory Notice.\15\ Exhibit 2a is a copy
of the Regulatory Notice. Exhibit 2b contains copies of the comment
letters received in response to the Regulatory Notice. Below is a
summary of the comments and FINRA's responses.
---------------------------------------------------------------------------

\15\ See Letter from Allen Riggs, CFO, Vining Sparks IBP, L.P.,
to Jennifer Piorko Mitchell, Office of the Corporate Secretary,
FINRA, dated February 21, 2018 (``Vining Sparks''); Letter from Jon
Zindel, Chief Financial Officer, William Blair & Company, LLC, to
Jennifer Piorko Mitchell, Office of the Corporate Secretary, FINRA,
dated March 7, 2018 (``William Blair''); and Letter from Mary Kay
Scucci, Managing Director, Securities Industry and Financial Markets
Association, to Jennifer Piorko Mitchell, Office of the Corporate
Secretary, FINRA, dated March 8, 2018 (``SIFMA'').
---------------------------------------------------------------------------

In the Notice, in addition to seeking comment on a proposed earlier
version of the SLS, FINRA sought comment on proposed amendments to
FINRA Rule 4521 (Notifications, Questionnaires and Reports) that would
have imposed additional requirements on members subject to the SLS to
notify FINRA no more than 48 hours after specified events that may
signal an adverse change in liquidity risk. Most of the concerns
expressed by commenters focused on these proposed amendments to Rule
4521. In particular, SIFMA and Vining Sparks expressed concern that the
proposed amendments were complex and operationally burdensome, were in
need of further clarification, should be tailored to permit members to
use models specific to their firms, or should be aligned or coordinated
with potential future Commission action in the area of broker-dealer
liquidity and risk monitoring. In response, FINRA notes that it has
been engaging, and plans to continue to engage, with industry
participants and with other regulators with regard to these concerns
and will give further consideration as to potential rule changes to
address effective liquidity monitoring. As such, FINRA is not at this
time proposing amendments to Rule 4521 as part of the proposed rule
change.
With regard to the proposed SLS as originally proposed in the
Notice, all three commenters suggested clarifications and revisions.
William Blair and Vining Sparks expressed concern that, because the $25
million threshold as proposed in the Notice would have been based on
``total credits'' under Exhibit A of Rule 15c3-3, smaller firms that
engage mostly in institutional trades on a delivery versus payment/
receive versus payment (``DVP/RVP'') basis would fall within the
proposed requirement by virtue of the credits they are obliged to
report in connection with ``failed to receive'' transactions.
Commenters believed this would include firms whose business activities
do not present significant liquidity risk in the SLS reporting
requirement. In response, FINRA has engaged with industry participants
and has revised the $25 million threshold to reference ``free credit
balances'' as defined under SEA Rule 15c3-3(a)(8). FINRA believes that
referencing free credit balances for the $25 million threshold more
directly identifies firms that should be subject to the SLS and is
consistent with FINRA's intent to reach only members with the highest
potential liquidity risk. As discussed above, the proposal would apply
to approximately 85 to 100 firms, generally FINRA's largest members,
which is the appropriate scope in light of its regulatory purpose.
Vining Sparks expressed concern that the SLS, as originally proposed in
the Notice, would require disclosure of the names of the reporting
member's top five counterparties for certain of the specified
categories of information, which Vining Sparks suggested could raise
privacy and confidentiality concerns. In response, FINRA has revised
the Instructions to the proposed SLS so that members would have the
option to specify a counterparty type or name in the portions of the
SLS that request top five counterparty information. FINRA believes that
permitting members this flexibility is appropriate because specifying
counterparty types rather than counterparty names achieves the overall
goal of helping to understand and monitor the impact from
counterparties on the liquidity profile of the member submitting the
SLS. Further, FINRA notes that it has the ability to request further
information as to any counterparty transaction should such be
warranted.
SIFMA expressed concern that the purpose of and need for the SLS as
proposed in the Notice is unclear, that the SLS would require the
disclosure of information that should be kept confidential, that the
proposal is duplicative of requirements that apply to firms that are
already part of BHCs, that the proposal should not go forward until the
SEC acts in the area of liquidity monitoring, and that the information
required on the proposed SLS is unhelpful or unnecessary to
understanding a firm's liquidity or is operationally burdensome to
track. FINRA engaged with industry participants and SIFMA to discuss
these concerns.
FINRA believes that the purpose of, and regulatory need for, the
proposal, as set forth in the Notice and as reiterated in this filing,
is clear. To address the concerns expressed by commenters with regard
to the potential burdens of the proposal, FINRA, based on extensive
discussions with industry participants, has made several revisions to
the proposed SLS. For example, FINRA has revised the proposed SLS so
that members with de minimis total reverse repurchase or repurchase
agreements may elect not to complete the securities collateral
subcategories in Lines 1 through 5 under Reverse Repurchase and
Repurchase Agreements, and may elect not to complete the Top Five
Counterparties portion that corresponds with that section.\16\ As
revised, also under the Reverse Repurchase and Repurchase Agreements
section, the proposed SLS would permit members flexibility to allocate
contracts collateralized by more than two security types among those
types of collateral for purposes of their reporting. With regard to
reporting counterparties, FINRA has revised the SLS so that members
electing to report counterparties by type rather than by name will be
permitted to use the counterparty classifications and definitions given
in the FR 2052a report, thereby helping members in BHCs align their SLS
reporting with the FR 2052a report. Similarly, FINRA has added language
to the proposed SLS designed to align reporting for non-cash

[[Page 27008]]

and collateral upgrade transactions with members' other regulatory
reporting.\17\
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\16\ Members would need to complete Lines 6a, 6b, 6c and 7, as
applicable. FINRA has made a corresponding revision to the
Securities Borrowed and Securities Loaned section.
\17\ FINRA has made additional miscellaneous revisions to the
SLS designed to clarify categories in the Instructions such as
``term loans'' and ``deposits at clearing organizations.'' Further,
in the Instructions, FINRA has also revised the Bank Loan and Other
Committed and Uncommitted Credit Facilities section to clarify that
Line 4 under that section (Drawn Amounts of Uncommitted Credit
Facilities) includes, for example, commercial paper.
---------------------------------------------------------------------------

SIFMA requested that FINRA further clarify the reporting date for
the SLS, and suggested that data should be reported as of month-end. In
response, FINRA has revised the SLS to provide that the SLS must be
completed as of the last business day of each month (as noted above,
the SLS date) and filed within 24 business days after the end of the
month. FINRA notes the 24 business days is meant to afford members
additional time to file versus the 22 business days as proposed in the
Notice. SIFMA requested clarification as to who within a member would
be responsible for completing the proposed SLS. In response, it is not
FINRA's intention to impose an additional potential burden by
designating specific persons within the firm that would need to
complete the SLS. Given the SLS is intended as a supplement to the
FOCUS reporting for which a member is already responsible, FINRA
understands that members may handle the SLS as a financial and
operational report consistent with their FOCUS and other financial-
related reporting processes and obligations.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2021-009 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2021-009. 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 website (https://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 website 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. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2021-009 and should be submitted on or before June 8, 2021.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10390 Filed 5-17-21; 8:45 am]
BILLING CODE 8011-01-P

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