FINRA Proposes Clearing Firm Books and Records Requirements to Facilitate Orderly Transition in the Event of Firm Liquidation

November 11, 2011

On Oct. 21, 2011, the Financial Industry Regulatory Authority (FINRA) proposed a new rule (Rule 4516) that would require carrying and clearing member firms to, among other things, maintain and keep current certain records in a specifically designated central location.1 The Proposed Rule is designed to promote a rapid and orderly transfer of accounts if a clearing firm fails. Comments on the new rule must be filed by Dec. 9, 2011.

Maintenance of certain records in a designated area where they are “immediately available”

The proposal’s central element is a requirement that clearing and carrying members maintain certain key records “at an area within its principal office that the member shall specifically designate.” These records must be readily identifiable. They must also be kept current and “indicate the date such records were last updated.” Firms would be required to designate to FINRA a “contact person ” responsible for complying with the rule.

The proposal is intended to enable regulators to “take prompt action to protect investors” in the event a carrying or clearing firm is unable to continue, particularly with respect to transferring customer accounts to another firm “in an expedited manner.” The proposal requires the specified records to be “immediately available and accessible” to FINRA, the Securities and Exchange Commission (SEC) and the Securities Investor Protection Corporation (SIPC) ― not merely “promptly” or “easily accessible” as required in certain cases under Securities Exchange Act of 1934 Rule 17a-4. As FINRA states, the Proposed Rule is, in part, a response to the “inability to locate certain documents and information” in connection with the Lehman Brothers, Inc. (“LBI”) liquidation. Indeed, the proposal tracks several of the recommendations contained in the LBI Trustee’s Preliminary Investigation Report and Recommendations, which is cited in FINRA’s proposal.

The bankruptcy filing of MF Global on Oct. 31, 2011 underscores, as a general matter, the continued relevance of the advance liquidation planning issues addressed by the proposal and could inform further FINRA’s views concerning these issues.2

Records subject to the Proposed Rule

The Proposed Rule would apply to the following records and information:

  • Descriptions of all accounts and ranges on the general ledger including the names of the associated persons assigned primary and supervisory responsibility for each such account pursuant to Rule 4523(b)
  • Mappings of the general ledger accounts and ranges to the trial balance, including a list of all affiliated accounts
  • Descriptions of all mission critical systems as defined in Rule 4370(g), including recordkeeping systems and the names of contact persons for each
  • Lists of all bank accounts and authorized signatories as well as copies of executed agreements with such banks and “no lien” letters, where applicable
  • Identification of all accounts and ranges on the stock record
  • Identification of all foreign and domestic control locations pursuant to SEA Rule 15c3-3 with the names of contact persons at each institution
  • Copies of all executed subordination agreements and nonconforming subordination agreements
  • Copies of all executed agreements with any clearing agencies, clearing banks and custodians
  • Copies of all executed agreements relating to the outsourcing of any significant activities or functions that are critical to the transfer of customer accounts and the liquidation of the member
  • Most recent copy of the member’s business continuity plan

Although these records are generally required by current rules or otherwise maintained by firms, the Proposed Rule could require firms to compile them in a new manner or with additional detail, such as the requirement to provide a contact person for “each”  mission critical system. Furthermore, firms would need to consolidate all of these records in the designated location within the principal office, and ensure that all documents and information in that  repository are kept current. 

If the records in question are maintained on electronic storage media, they must be “uniquely tagged and appropriately indexed so as to be readily identifiable as such.” These electronically stored records would also need to be accessible from the member’s principal office.

Agreements with clearing agencies, clearing banks and custodians

The proposal would require clearing firms to enter into an agreement with any clearing agency, clearing bank or custodian with which it does business for the purpose of providing regulators with access to electronic systems in the event of “the commencement of a liquidation” of the clearing firm. The agreement would require the clearing agency, clearing bank or custodian to provide FINRA, the SEC and SIPC with read-only access to such electronic systems in that event.


Compliance with the Proposed Rule (assuming its ultimate adoption) would require firms to institute procedures in order to, among other things, centrally maintain and keep current the records designated in the Rule. FINRA’s proposal specifically requests comment with respect to whether the list of required documents should be adjusted and the costs of compliance. Clearing firms should consider the burdens or any other concerns posed by the Proposed Rule and whether they wish to provide comments to FINRA on those issues. 

For additional information concerning this alert, please contact the following lawyers:

Matthew C. Applebaum, Partner, Broker-Dealer; Co-chair, Securities Area, 617.951.8488

David C. Boch, Partner, Broker-Dealer Group, 617.951.8485

Michael R. Weissmann Partner, Broker-Dealer Group, 617.951.8705

Roger P. Joseph, Practice Group Leader, Investment Management Group; Co-chair, Financial Services Area, 617.951.8247

Edwin E. Smith, Partner, Financial Restructuring Group; Co-chair, Financial Services Area, 617.951.8615

Tim Burke, Practice Group Leader, Broker-Dealer Group; Co-chair, Financial Services Area, 617.951.8620

1 See FINRA Regulatory Notice 11-48 (Oct. 21, 2011).
Doering, Christopher, “MF Global Slow to Turn Over Data to Regulators-Source,” Reuters, Oct. 31, 2011.

This article was originally published by Bingham McCutchen LLP.