The Financial Industry Regulatory Authority said it is soliciting comment on a proposal to establish new requirements for member firms to manage liquidity risks, reports InvestmentNews.
In Regulatory Notice 23-11, FINRA said the potential rule would be labeled Rule 4610. It would be intended to ensure that firms have sufficient liquid assets to meet their funding needs in both normal conditions and times of stress.
The proposal details three areas where a rule might address liquidity risk, including liquidity stress testing, contingent funding plans and a requirement to maintain sufficient liquidity on a current basis at all times. Firms would be required to maintain enough cash or liquid assets to meet their funding obligations as they come due, and could be required to restrict their business activities should they have insufficient liquidity.
In its notice, FINRA noted that effective monitoring of liquidity and funding risks is an essential element of broker-dealers’ financial responsibility and is a focus of its financial supervision programs. “Recent events have reinforced the importance of these efforts,” FINRA said. “For example, in 2020, effective liquidity risk management practices were critically important in navigating market volatility and other stress stemming from the COVID-19 pandemic.”
In monitoring liquidity, FINRA said it has observed instances in which members did not have sufficient liquidity risk management practices, adding that insufficiently managing liquidity impacts all aspects of a broker-dealer’s business and puts customers and other market participants at risk.
The potential rule would require each member to design liquidity stress tests for a projected rolling 30-calendar-day period based upon reasonable, data-supported assumptions. These tests measure potential liquidity under stressed conditions. In addition, each member would be required to establish a contingency funding plan to help mitigate adverse fluctuations in liquidity.
FINRA would take any feedback into account while considering the proposed rule, which would need to be reviewed and approved by the FINRA Board of Governors, and then approved by the Securities and Exchange Commission.
FINRA encouraged all interested parties to submit comment, which must be received by August 11.
The attorneys at Lewitas Hyman fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. We have decades of experience representing clients with respect to examinations, investigations and enforcement proceedings initiated by the SEC, FINRA, state securities regulatory agencies and other self-regulatory organizations. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.