June 22, 2018

Via Electronic Mail ([email protected])

Ms. Jennifer Piorko Mitchell
Office of the Corporate Secretary
Financial Industry Regulatory Authority
1735 K Street, NW
Washington, DC 20006-1506

Re: FINRA Regulatory Notice 18-10 | FINRA Requests Comment on the Effectiveness and Efficiency of Its Carrying Agreements Rule (FINRA Rule 4311)

Dear Ms. Mitchell:

The Clearing Firms Committee (“Committee”) of the Securities Industry and Financial Markets Association (“SIFMA”)1 submits this letter to the Financial Industry Regulatory Authority, Inc. (“FINRA”) in response to FINRA’s request for comment on the effectiveness and efficiency of its carrying agreements rule, FINRA Rule 4311 (“Rule 4311”). 2 The Committee appreciates the opportunity to provide FINRA with insights whenever it undertakes a review of existing rule requirements, and applauds FINRA’s initiative to evaluate the current state of its clearing arrangement oversight. As an overall observation, the Committee notes that while the four corners of Rule 4311 are generally black and white, the application of the rule by FINRA examiners, and the reference to the rule in the context of other rule interpretations and guidance, has colored Rule 4311 gray in many cases.

While the purpose of this letter is to provide FINRA with general observations regarding the experiences of our clearing firm members with the application of Rule 4311, this letter is also meant to initiate a multi-faceted dialogue with FINRA regarding Rule 4311. In recognition of the central role that clearing arrangements have in the securities markets, we believe that a series of in-depth, follow-up discussions with FINRA are vital in order to provide FINRA with a holistic understanding of the impact that its oversight has on clearing firms and the introducing firms that use their services. In the interim, below we provide some initial observations on how Rule 4311 has been applied that we anticipate will result in further dialogue with FINRA regarding the rule.

1. Is the rule effective in ensuring clear allocation of responsibilities between parties to a carrying agreement? If not, why not? Are there additional responsibilities that the rule should specifically require to be allocated? Are there responsibilities that the rule should not permit to be allocated? Why?

As a general matter, FINRA Rule 4311 has been effective in providing introducing firms and clearing firms the flexibility to allocate responsibilities among themselves. This has particularly been the case in situations where Rule 4311 does not specifically impose requirements that must be allocated, or when new regulatory requirements are such that introducing firms and clearing firms must determine among themselves the most appropriate and effective means of allocating new responsibilities.

At the same time, however, issues regarding the allocation of responsibility often manifest themselves during regulatory inquiries of both types of firms. With respect to clearing firms, they often experience situations where FINRA examination staff take the view that clearing firms (i) have de facto responsibility for issues that are not expressly allocated in a clearing agreement and (ii) are responsible for performing regulatory and compliance oversight of the introducing firms with which they do business in a manner that serves as a proxy to FINRA’s oversight responsibilities. For instance, while FINRA Rule 4311(c)(2) states that carrying firms are responsible for the safeguarding of funds and securities for the purposes of Rule 15c3-3 of the Exchange Act, paragraph (c)(1) indicates that the clearing firm and the introducing firm can allocate responsibilities regarding the receipt and delivery of funds and securities. FINRA examination staff appear to read into these provisions a requirement that clearing firms take extra measures to ensure that an introducing firm’s instructions and customer authorizations that impact the receipt and delivery of funds and securities are valid notwithstanding that a clearing agreement may allocate these responsibilities to the introducing firm. This position, taken to an extreme, has gone so far as to suggest that a clearing firm is responsible for reimbursing an introducing firm’s customer when an introducing firm makes mistakes in connection with a function specifically allocated to that introducing firm.

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1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $20 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 FINRA Regulatory Notice 18-10, Retrospective Rule Review; FINRA Requests Comment on the Effectiveness and Efficiency of Its Carrying Agreements Rule (March 23, 2018).