A new rule proposed by FINRA to help carrying and clearing firms transfer customer accounts if they go bust will be too cumbersome and costly to follow.
That was the tone in the handful of responses to the proposal. Comments were due by December 9.
Prompted by Lehman Brothers' bankruptcy in 2008, the new Rule 4516 would require each carrying or clearing firm to designate a contact person responsible for maintaining the records. The records may be maintained electronically, although they must be “uniquely tagged and appropriately indexed." The records must also be accessible or kept within the firm’s principal office in electronic form.
The customer records, says FiNRA, should include a description of all accounts and ranges on the general ledger including associated persons assigned, mapping of the general ledger accounts to trial balances, description of all critical systems, list of bank accounts, executed agreements with clearing agencies, clearing banks, and custodians, and significant outsourcing agreements.
Introducing broker-dealers -- who interface with customers -- hire carrying or clearing firms to process their transactions so they can avoid the cost of maintaining a full-service back-office.
“If a carrying or clearing member firm can no longer continue to operate due to financial or operational problems, it is essential that regulators be able to take prompt action to protect investors,” wrote FINRA “Regulators may need, among other things, to identify a clearing firm that would be able to take all customer accounts of the liquidating member firm in an expedited manner.”
“The additional costs for compliance and meeting the demands as outlined in the new rule proposal does little to enhance existing books and records requirements in any meaningful and practical way,” says Robert Gaeta, senior compliance officer for Assent, a broker-dealer subsidiary of SunGard in its letter to the SEC. “New Rule 4516 is duplicative and does little to enhance those record requests when considering Rule 8210 (g).”
In fact, the new rule will create an “operational and compliance burden” as well as increased costs on clearing and carrying firms, he says.
Gaeta proposes that FINRA adopt a tiered system for clearing firms, similar to its approach for examinations. “A clearing firm that carries over a certain number of accounts or more than a dollar size of customer assets should have greater requirements than a firm not over a given threshold,” he says.
Integrated Management Solutions was even sharper in its criticism. “FINRA has been espousing principle-based rules, but the proposed rule is yet another example of micro-management in a rare situation, when a carrying or clearing member firm is forced to liquidate,” say Howard Spindel, senior managing director and Cassondra Joseph, managing director of the New York-based compliance consulting firm in a letter to the SEC. “It ignores the many rules FINRA, the SEC and other financial services industry regulators have in place that already provide them with access to the same information and documents.”
Spindel and Joseph went on to say that the cost of preparing for “Armageddon” far exceed any possible benefit. “Generally, many of the good controls and procedures that the proposed rule mandates probably exist in many well-managed firms, but not exactly the format that a liquidator might prefer,” they claim. “Rather, they exist so firms can function on a daily basis.”
In an “Armageddon” scenario, Spindel and Joseph argue, only the failure of larger member firms that are fully subject to the rules of segregating customer assets from their own could have an impact on the market or unsettle investor confidence. However, the burden of the proposed rule would fall on all carrying or clearing member firms regardless of their size.
Chris Kentouris writes for
