August 11, 2023

Submitted electronically to: [email protected]

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 2006-1506

Re: Regulatory Notice 23-11 – FINRA Seeks Comment on Concept Proposal for a Liquidity Risk Management Rule

Dear Ms. Mitchell:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to provide comments to the Financial Industry Regulatory Authority (“FINRA”) with respect to FINRA’s concept proposal regarding liquidity risk management that would apply to FINRA members meeting the criteria specified in Regulatory Notice 23-11 (the “Proposal”).2

SIFMA understands the underlying policy objectives of the Proposal to strengthen the liquidity risk management practices of FINRA members, and we appreciate FINRA’s past efforts to foster best practices through its publications to members and bilateral dialogues as part of member supervision. However, by going beyond those measures to impose particular liquidity risk management requirements, assumptions and rebuttable presumptions, the Proposal seems likely to have far-reaching unintended consequences. In particular, the Proposal does not provide sufficient clarity regarding how its new liquidity risk standard should be applied to certain members, nor does it provide justification regarding how the proposed rebuttable presumptions indicate a liquidity risk management issue. Significant clarity and engagement with member firms is required before a proposed liquidity risk standard is finalized to ensure the standard does not conflict with existing liquidity risk management practices and regulatory requirements to which member firms are subject.

For members that are subsidiaries of holding companies subject to prudential regulation by the Federal Reserve and related non-U.S. supervisors, the Proposal would lead to unworkable inconsistencies and complications vis-à-vis substantially similar but not identical liquidity risk management requirements and standards imposed by those other regulatory authorities, which the limited exception from the Proposal’s rebuttable presumptions would not remediate because it would not cover other aspects of the Proposal. In addition, firms not subject to the Federal Reserve’s enhanced prudential standards would face a suite of rebuttable presumptions which, in many cases, are defined ambiguously and broadly, thus capturing certain normal-course business activities and creating unjustified operational burdens.

More generally, the Proposal would run counter to the prudent practice of managing liquidity cushions on a group-wide basis, which helps to mitigate the impact of liquidity stresses and fosters effective resolution and recovery of firms. We are not aware of any firm failures or other market events that would justify upending this practice or otherwise implementing the significant changes that the Proposal would require.

For those reasons, we think FINRA should identify specific, widespread events or issues (beyond a few isolated, firm-specific incidents) before adopting additional regulations in the liquidity risk area. If FINRA nonetheless decides to proceed with the Proposal, it should at a minimum remove the ambiguously defined liquidity standard and rebuttable presumptions provided in the Proposal. With respect to the remaining aspects of the Proposal (i.e., adoption of a liquidity risk management program, including liquidity stress testing and a contingency funding plan), SIFMA also supports providing exceptions with respect to all members that are subject directly or indirectly to prudential standards for liquidity risk management.

EXECUTIVE SUMMARY

SIFMA’s comments regarding the Proposal can be summarized as follows:

(i) The Proposal would duplicate existing regulatory requirements and supervisory processes without sufficient justification – As discussed in Part I below, FINRA has not provided adequate justification for imposing a new liquidity risk management standard in light of the existing regulations and supervisory processes that overlap with the Proposal.

(ii) The scope of the Proposal is overbroad, particularly as applied to members that are subject to liquidity requirements on a consolidated basis – As discussed in Part II below, the Proposal should not apply to members with parent companies subject to prudential liquidity requirements. Other aspects of the scope of the Proposal relating to broker-dealer subsidiaries of a member firm and the criterion for outstanding borrowings should be modified as well.

(iii) The general liquidity requirement in the Proposal lacks specificity, resulting in uncertain application and overbroad FINRA discretion – As discussed in Part III below, the general liquidity requirement in the Proposal needs additional specificity, and FINRA should incorporate a safe harbor for firms with reasonably designed liquidity risk management processes, which would reduce inconsistent application and enhance regulatory certainty.

(iv) Application of the rebuttable presumptions raises significant issues – As discussed in Part IV below, the rebuttable presumption and FINRA notification construct in the Proposal would lead to unintended consequences. If FINRA retains some form of rebuttable presumption approach, the presumptions should not apply to members with parent companies subject to prudential liquidity requirements, and many additional aspects of the individual presumptions should be revised and clarified.

(v) The liquidity stress testing and contingency funding plan requirements are overbroad and duplicative as applied to members subject to prudential regulation – As discussed in Part V below, the liquidity stress testing assumptions of a member subject to prudential liquidity requirements on a consolidated basis should be presumed to be reasonable. Similarly, these members should be presumed to satisfy the contingency funding plan requirements in the Proposal.

(vi) The Proposal’s FINRA notification and reporting requirements would raise unintended consequences and operational burdens – As discussed in Part VI below, the Proposal should incorporate a cure period prior to requiring FINRA notification and reporting, which would reduce unintended consequences and operational burdens.

(vii) Additional specificity is needed regarding the restriction and suspension of business provisions in the Proposal – As discussed in Part VII below, enhanced specificity is needed regarding the potential actions FINRA may take—along with proposed timing—in the event of a FINRA determination of insufficient liquidity, in light of the severe consequences of restrictions and suspensions of business on members, their parent companies and the financial system more broadly.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 FINRA RN 23-11 (June 12, 2023), available here: https://www.finra.org/rulesguidance/notices/23-11.