
[Federal Register Volume 77, Number 228 (Tuesday, November 27, 2012)]
[Notices]
[Pages 70860-70862]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28682]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68270; File No. SR-FINRA-2012-050]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt a 
Supplementary Schedule for Derivatives and Other Off-Balance Sheet 
Items Pursuant to FINRA Rule 4524 (Supplemental FOCUS Information)

November 20, 2012.
    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 November 15, 2012, 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 and 
II below, which Items have been substantially prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt a supplementary schedule for 
derivatives and other off-balance sheet items pursuant to FINRA Rule 
4524 (Supplemental FOCUS Information).
    The text of the proposed rule change is available on FINRA's Web 
site at http://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 requires each firm, as FINRA shall designate, to 
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 as a supplement to the FOCUS reports. 
Pursuant to FINRA Rule 4524, FINRA is proposing the adoption of a 
supplemental schedule to the FOCUS reports to capture important 
information that is not otherwise reported on certain firms' balance 
sheets. To that end, the proposal would require all carrying or 
clearing firms to file with FINRA the Derivatives and Other Off-Balance 
Sheet Items Schedule (``OBS'') within 22 business days of the end of 
each calendar quarter. The proposed OBS is necessary for FINRA to more 
effectively examine for compliance with, and enforce, its rules on 
capital adequacy. The proposed OBS enables FINRA to examine on an 
ongoing basis the potential impact off-balance sheet activities may 
have on carrying and clearing firms' net capital, leverage and 
liquidity, and ability to fulfill their customer protection 
obligations.
    In the aftermath of the financial crisis, FINRA began to closely 
monitor firms' levels of leverage and available liquidity to meet their 
funding needs and began to collect certain additional information from 
certain carrying and clearing firms with regard to their proprietary 
positions, financing transactions and certain off-balance sheet 
transactions. FINRA believes the proposed OBS will allow FINRA to 
obtain more comprehensive and consistent information regarding carrying 
and clearing firms' off balance sheet assets, liabilities and other 
commitments. The proposed OBS would require firms to report their gross 
exposures in financing transactions (e.g., reverse repos, repos and 
other transactions that are otherwise netted under generally accepted 
accounting principles, reverse repos and repos to maturity and 
collateral swap transactions), interests in and exposure to variable 
interest entities, non-regular way settlement transactions (including 
to be announced or TBA securities and delayed delivery/settlement 
transactions), underwriting and other financing commitments, and gross 
notional amounts in centrally cleared and non-centrally cleared 
derivative contracts involving equities, commodities, interest rates, 
foreign exchange derivatives and credit default swaps. However, the 
proposed OBS contains a de minimis off-balance sheet activity exception 
for each reporting period. If the total of all off-balance sheet items 
is less than 10% of the firm's excess net capital on the last day of 
the reporting period, the firm will not be required to file the 
proposed OBS for the reporting period.\3\
---------------------------------------------------------------------------

    \3\ For purposes of the proposed OBS, the term ``excess net 
capital'' means net capital reduced by the greater of the minimum 
dollar net capital requirement or two percent of combined aggregate 
debit items as shown in the Formula for Reserve Requirements 
pursuant to 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    The proposed rule change will be effective upon Commission 
approval. FINRA will announce the first quarterly reporting period 
(i.e., the implementation date for purposes of the proposed off-balance 
sheet schedule) in a regulatory notice to be published no later than 60 
days following

[[Page 70861]]

Commission approval of the proposed rule change. The due date for the 
first proposed schedule will be no later than 210 days following 
Commission approval of the proposed rule change.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\4\ 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. FINRA believes that the proposed rule change is 
consistent with the provisions of the Act noted above in that the 
proposed OBS will permit FINRA to assess more effectively on an ongoing 
basis the potential impact off-balance sheet activities may have on 
carrying and clearing firms' net capital, leverage and liquidity, and 
ability to fulfill their customer protection obligations. FINRA also 
believes the rule change is consistent with Section 712(b)(3)(B) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act in that it is 
necessary to enable FINRA to more effectively examine for compliance 
with, and enforce, its rules on capital adequacy.\5\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78o-3(b)(6).
    \5\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

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. FINRA believes the proposed OBS 
will allow it to better understand the potential impact off-balance 
sheet activity may have on carrying and clearing firms' net capital, 
leverage and liquidity, and ability to fulfill their customer 
protection obligations. FINRA has carefully crafted the proposed OBS 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 financial 
condition of firms. In the absence of this reporting requirement, FINRA 
would need to request this information repeatedly on a firm-by-firm 
basis, resulting in similar costs for the firms.
    The information required to complete the proposed OBS should be 
readily available to firms due to firms' obligations to maintain books 
and records and take applicable capital charges in relation to off-
balance sheet activity. Further, firms that are owned by a publicly 
held company provide much of the information required by the proposed 
OBS to the SEC on the quarterly Form 10-Q or on the annual Form 10-K. 
Finally, for those firms that conduct limited off-balance sheet 
activity, the proposed OBS contains a de minimis exception for each 
reporting period.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed OBS was published for comment in Regulatory Notice 12-
23 (May 2012) (the ``Notice''). FINRA received two comment letters in 
response to the Notice.\6\ Below is a summary of the comments and 
FINRA's responses.
---------------------------------------------------------------------------

    \6\ See Letter from Chris Charles, President, Wulff, Hansen & 
Co., to Marcia E. Asquith, Senior Vice President and Corporate 
Secretary, dated May 31, 2012 (``Wulff''); and letter from Holly H. 
Smith, Sutherland Asbill & Brennan LLP, to Marcia E. Asquith, Senior 
Vice President and Corporate Secretary, dated June 4, 2012 
(``Sutherland'').
---------------------------------------------------------------------------

    In the Notice, FINRA specifically requested comment on whether 
there is a category of carrying or clearing firms that should not be 
required to file the proposed OBS based upon de minimis off-balance 
sheet activity. One commenter believed that a de minimis threshold for 
the proposed OBS would benefit both firms and FINRA.\7\ The commenter 
stated that it would be reasonable to set a threshold for the reporting 
of off-balance sheet items of 5% or 10% of net capital.\8\ The 
commenter suggested that the proposed OBS should not be required if no 
items exceed a threshold.\9\ Another commenter stated ``that a de 
minimis standard alone may not result in identifying the firms that 
pose off-balance sheet risk to such a degree that regulatory attention 
is warranted.'' \10\ The commenter assumed that the term ``carrying or 
clearing firm'' includes all broker-dealers that are not exempt from 17 
CFR 240.15c3-3 and had concerns about the proposed OBS applying to 
firms that distribute variable insurance products and shares of 
investment companies, and firms that introduce their business to 
clearing firms.\11\ The commenter requested ``that FINRA try to more 
closely identify the nature of the firms for whom off-balance sheet 
activity reporting is appropriate, and limit the application of the OBS 
to those firms, rather than assuming that all firms that are not exempt 
from Rule 15c3-3 are engaging in off-balance sheet activity as a 
regular course of business.'' \12\
---------------------------------------------------------------------------

    \7\ Wulff.
    \8\ Wulff.
    \9\ Wulff.
    \10\ Sutherland.
    \11\ Sutherland.
    \12\ Sutherland.
---------------------------------------------------------------------------

    FINRA has considered these comments and believes a de minimis 
exception for the proposed OBS is appropriate. As stated above, if the 
total of all off-balance sheet items is less than 10% of the firm's 
excess net capital on the last day of the reporting period, the firm 
will not be required to file the proposed OBS for the reporting period. 
Basing a de minimis exception on the aggregate of all off-balance sheet 
items instead of each individual item will allow FINRA to capture those 
firms that may not meet the threshold for any one particular item, but 
still would be viewed as having in the aggregate a material amount of 
off-balance sheet activity for the reporting period. Further, FINRA 
does not agree with the commenter's characterization of a ``carrying or 
clearing'' firm for purposes of the proposed OBS. The proposal would 
require all carrying or clearing firms, subject to the de minimis 
exception, to file the proposed OBS with FINRA within 22 business days 
of the end of each calendar quarter. For purposes of the proposed OBS, 
FINRA identifies carrying or clearing firms as those firms that self-
clear or clear transactions for others or firms that carry customer 
accounts.
    One commenter believes that reporting underwriting commitments for 
securities that have already been sold is not useful.\13\ The commenter 
suggested that FINRA ``[e]liminate the need to separately report an 
entire unsettled underwriting commitment, where all (or all but a non-
material amount) of the securities have been sold as of the balance 
sheet date.'' \14\ FINRA agrees with the commenter's suggestion and has 
clarified the instructions to state that a firm would only need to 
report the market value of open contractual commitments at month-end, 
net of confirmed sales.
---------------------------------------------------------------------------

    \13\ Wulff.
    \14\ Wulff.
---------------------------------------------------------------------------

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

[[Page 70862]]

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-050 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2012-050. 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 Web site (http://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 Web site 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; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2012-050 and should be submitted 
on or before December 18, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-28682 Filed 11-26-12; 8:45 am]
BILLING CODE 8011-01-P


