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Vedder Thinking | Articles FINRA Seeks Comment on Liquidity Risk Management Rule for Certain Member Firms


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On June 12, 2023, FINRA released Regulatory Notice 23-11, seeking comment on a potential liquidity risk management rule for certain member firms. The proposal is very much in its early stages, with the FINRA staff seeking comment before FINRA’s Board of Governors would authorize FINRA to make a formal rule filing with the SEC. Rule 4610, as proposed by the FINRA staff, would protect customers and other creditors in the event a broker-dealer fails and would work in conjunction with similar rules such as the Net Capital Rule and the Customer Protection Rule. Proposed Rule 4610 uniquely targets the issue of liquidity risk, or the risk that a firm will not have sufficient cash or other liquid assets to meet its obligations as they arise. The staff proposal cites recent events such as market volatility and stress caused by the onset of the COVID-19 pandemic in 2020 and trading in certain “meme stocks” in 2021 as potential reasons for a liquidity risk management rule. During those periods, some firms became subject to collateral calls from clearing corporations and experienced other unforeseen needs for liquid assets due to extreme market volatility and other factors.

As proposed by the FINRA staff, Rule 4610 would apply to (1) members that carry customer accounts and clear transactions and (2) members that carry the customer accounts of other broker-dealers. The rule would specifically require certain member firms to maintain a liquidity risk management program, including written policies and procedures reasonably designed to assess, manage and periodically review the risks to a member’s liquidity. The program would require a member firm both to conduct liquidity stress testing and to maintain a contingency funding plan.

In addition, Rule 4610 would require certain member firms at all times to maintain sufficient liquidity on a current basis. That is, firms would need to have available cash and other liquid assets sufficient to meet their funding obligations as they come due. The staff-proposed rule includes eight conditions that, if even one occurs, would create a rebuttable presumption that the member is not sufficiently liquid. The conditions generally focus on a firm’s current borrowings and borrowing ability, such as reductions in credit lines, reduced funding from securities financing arrangements or increased reliance on potentially available funds in the member’s Rule 15c3-3 customer reserve account. If any of the eight triggering conditions were to occur, FINRA could restrict or suspend the member’s business, unless the member can rebut the presumption that it does not have sufficient current liquidity or it takes corrective action to bolster its liquidity.

Comments on the staff proposal are due by August 11, 2023.

FINRA Regulatory Notice 23-11 is available here.


Nathaniel Segal


Jacob C. Tiedt


David W. Soden