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FINRA Notice Reminds Firms Of Obligation To Thoughtfully Craft Strong Rules In Advance
March 19, 2021
On March 18, 2021, FINRA issued a 13-page Regulatory Notice: Customer Order Handling, Margin and Liquidity / FINRA Reminds Member Firms of Their Obligations Regarding Customer Order Handling, Margin Requirements and Effective Liquidity Management Practices During Extreme Market Conditions (FINRA Regulatory Notice 21-12) https://www.finra.org/sites/default/files/2021-03/Regulatory-Notice-21-12.pdf
As set forth in part in the "Summary" portion of the Regulatory Notice:
FINRA is issuing this Notice to remind member firms of their obligations during extreme market conditions with respect to handling customer orders, maintaining appropriate margin requirements and effectively managing their liquidity.
Right off the bat -- gotta tell ya -- I got a problem with FINRA Regulatory Notice 21-12. Frankly, it's symptomatic of just about everything that's wrong with FINRA and with Wall Street's lame version of self-regulation. We're in the midst of a horrible pandemic. Wall Street employees are working from home. Hardly a day goes by when we are not regaled with unsettling stories about the so-called "gamification" of the stock market. Daily, we read about the industry's lack of operational capacity in the face of surging volumes. And just how does FINRA respond to all of this? Why, of course, it does what any bureaucracy does, which is a combination of nothing and doing something that makes doing nothing look like you're doing something when you're not.
The opening line of Regulatory Notice 21-12 tells you everything you need to know about the nonsense that parades as Wall Street self-regulation. FINRA has issued a notice to remind member firms of their obligations. A notice. A reminder. About pre-existing obligations. What's next? The Department of Justice will issue a notice reminding us not to commit murder? Will the Securities and Exchange Commission issue a notice reminding us not to commit securities fraud?
In more substantive terms under "Background and Discussion," FINRA Regulatory Notice 21-12 states:
Imagine that you are an industry compliance officer. You're telecommuting. You're trying to handle, remotely, customer complaints and the run-of-the-mill emergencies that come across your plate. With little time to spare these days, you are alerted to FINRA's issuance of its 12th -- count 'em: 12 -- regulatory notice for 2021. Being the somewhat dyspeptic fellow that you are, you note that March 18, 2021, is the 76th day of the year. Which means that FINRA is issuing one Regulatory Notice every 6.33 days. Okay, let's round that up to one notice each week. What then is this 12th notice for 2021 about? What is its import? Well, like I said earlier, it's not just a notice but the all-important notice that's reminding you about your obligations. Sure -- grab another hot cup of coffee and, go ahead, like who's gonna know if you take two more donuts while you're perusing all 13 pages of FINRA's document. I read through all 13 pages. That's about 20 minutes out of my life that I will never get back.Member firms should maintain strong procedures, thoughtfully crafted in advance, to reasonably ensure they can continue to provide investors access to the securities markets during times of extreme market volatility, as in the past several months. These procedures include order handling procedures designed to maintain best execution for customers; margin procedures to prevent a firm from becoming overextended from lending in support of customer trades; and liquidity management practices to ensure the firm is able to continue to provide customers with access to the markets despite abnormal liquidity demands.The foundation of the securities industry is fair dealing with customers. Fair dealing is a core principle that underlies many FINRA rules, and FINRA guidance repeatedly has emphasized the importance of preserving fair customer treatment, even during times of market stress. In light of recent market events, including the extreme volatility of certain stocks' trading prices, FINRA is reminding member firms that the duty of best execution requires the fair, consistent and reasonable treatment of customer orders at all times. Further, it is important that customers are informed about member firms' order handling procedures, particularly during volatile market periods, and FINRA is reminding firms of prior guidance that addresses the kinds of disclosures firms should consider making in connection with their fair dealing obligations.In addition, FINRA is reminding member firms that the recent extreme price volatility and trading volume of certain stocks has the potential to expose firms and investors to rapid and severe losses, particularly when such securities may have been purchased using margin or sold short. Member firms are reminded to consider the need for additional margin consistent with Rule 4210. Relatedly, FINRA also is providing guidance on sound liquidity practices that firms can use to meet their obligations to maintain reasonable funding and liquidity risk management.FINRA's ongoing surveillance and examination programs will continue to review member firms' compliance with these obligations
I'm guessing that the folks who drafted FINRA Regulatory Notice 21-12 had too much time on their hands -- maybe they were working from home and had to take valuable time away from a Double Bonus Score day of Microsoft Solitaire? I say that because it's hard to imagine that a professional Wall Street regulator would write such material and not immediately recognize the sheer stupidity of the prose. For example, how the hell did this line ever see the light of day:
Member firms should maintain strong procedures, thoughtfully crafted in advance, to reasonably ensure they can continue to provide investors access to the securities markets during times of extreme market volatility, as in the past several months.
Seriously? That's the mission of FINRA? You're actually telling your member firms that they "should" maintain "strong procedures?" Should? Really?? Just "should?" And just what the hell is the difference between "strong" procedures and the more mundane, plain procedures? Do you folks really, truly, honestly believe that such crapola is helpful?
Making matters worse, much worse, is the asinine parenthetical expression that firms' strong procedures should be "thoughtfully crafted in advance." Lemme write this down while the dog is barking, the kids are watching porn instead of doing their online studies, my spouse is baking yet another loaf of bread, my in-box is exploding with urgent queries from stockbrokers, and I just learned that our website crashed and clients are screaming that they can't get any real-time data. If only I could get back into the office instead of working from the basement in my home. Oh well, let's see what FINRA wants me to do.
Oh my. Like who knew? Thoughtfully, that's two "l's" and then there's that crafted, not drafted, hmmm, I wonder what's the difference, and, oh, gee, now they want me to do the thoughtful crafting in advance. Thoughtfully. Crafted. In Advance. Who the hell drafts procedures in retrospect and how would you even do that?
In reality -- and reality is a sobering thing -- many FINRA member firms never put pen to paper when it comes to their procedures. In case the good folks at FINRA don't know yet, many policies and procedures are purchased from a third-party vendor. Oh sure, we can all go along with the fiction that these out-of-the-box written supervisory procedures were thoughtfully crafted in advance in bespoke fashion. After all, there are many alternate and alternative realities.
As we work our way through another fact-filled paragraph in the FINRA regulatory notice, we learn that the "foundation of the securities industry is fair dealing with customers." Yeah, of course it is. Keep drinking the Kool-Aid. If you ask me (go ahead, ask me -- oh, thanks for asking), Wall Street's foundation is cracked and in need of repair. I hope that in reforming Wall Street's failed regulation that FINRA will thoughtfully craft new, strong rules in advance. I also hope that FINRA will watch the news and recognize that now is not the time to burden its member firms with such dubious observations about the ethical foundations of our industry.
Talking about the times and the news, we come across this in the "Background and Discussion," is this nugget:
In addition, FINRA is reminding member firms that the recent extreme price volatility and trading volume of certain stocks has the potential to expose firms and investors to rapid and severe losses, particularly when such securities may have been purchased using margin or sold short.. . .
So . . . FINRA has issued a regulatory notice to "remind" its member firms about the dangers of volatile markets. Why the hell, now, on March 18th, is FINRA reminding its members about such obviousness? FINRA is not announcing a new rule. FINRA is not proposing a new rule. FINRA is not even offering any substantive help or guidance. If you read through the 13 pages of regulatory pronouncements, it's largely a waste of time with reminders and self-serving observations, and references to previously published materials. Don't you folks have anything better to do?