September 21, 2021

Volume XI, Number 264

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September 20, 2021

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FINRA Publishes Answer to Frequently Asked Questions Under Rule 4521(d) on Margin Balance Reporting

On April 13, the Financial Industry Regulatory Authority (FINRA) issued answers to several Frequently Asked Questions to aid members with their reporting obligations under FINRA Rule 4521(d) (the Rule).

The Rule provides that each member carrying margin accounts for customers must submit, on a settlement date basis, as of the last business day of the month: 1) the total of all debit balances in securities margin accounts, and 2) the total of all free credit balances in all cash accounts and all securities margin accounts.

Further, the Rule provides that under paragraph (d): 1) Only free credit balances in cash and securities margin accounts shall be included in the member’s report. Balances in short accounts and in special memorandum accounts shall not be considered free credit balances. 2) Reported debit or credit balance information shall not include the accounts of other FINRA members, or of the associated persons of the member submitting the report where the associated person’s account is excluded from the definition of the customer pursuant to SEA Rule 15c3-3.

FINRA’s answers to these Frequently Asked Questions included, among other guidance, clarifying that the definition of a “free credit balance” for purposes of the Rule is set forth in Rule 15c3-3(a)(8). A free credit balance means the liabilities of a broker or dealer to customers subject to immediate cash payment on demand. The liabilities may result from sales of securities, dividends, interest, deposits or otherwise, excluding funds in commodity accounts segregated in accordance with the Commodity Exchange Act or funds carried in a proprietary account.

Regarding the valuation of short positions, FINRA indicated that if a firm does not maintain separate sub-accounts for the margin debit balance and short credit balance, then the current market value of the settled short securities on the computation date should be used to determine the short market value.

If a firm maintains separate cash and margin accounts for customers where the cash accounts contain a balance that is neither a free credit balance nor a short credit balance, but the margin account does contain a balance, FINRA provided the following guidance: if the credit balance in a customer’s cash account is neither a free credit balance nor a short credit balance, then it should be netted with the debit balance in the margin account for purposes of reporting if the firm considers the credit balance in the cash account to determine the customer’s maintenance excess or deficiency. However, if the credit balance in the cash account is a free credit balance, a short credit balance or is not considered to determine the customer’s maintenance excess or deficiency, then it should not be netted with the debit balance in the customer’s margin account for purposes of reporting.

Further, if a firm uses separate sub-accounts within the customer’s margin account to track different trading strategies or types of securities, resulting in three sub-accounts for the customer — one with a credit balance, another with a debit balance, and a third with a short credit balance — for purposes of reporting, the firm should consider the sub-accounts as a single margin account and accordingly net debits and credits together, except short credit and free credit balances.

A firm should not report balances in non-securities accounts (including commodities accounts) or balances in security-based swap accounts, as they are not considered cash accounts or margin accounts for purposes of the Rule.

Regarding Regulation T good faith accounts, a firm should report balances in such accounts when reporting the debit and free credit balances required by the Rule, as a good faith account, other than a non-securities account, is considered a margin account. FINRA also clarified that a member carrying the omnibus account of another member, pursuant to Regulation T 220.7(f), is not required to report the balances in the other member’s omnibus account because each omnibus firm has its own, separate obligation under the Rule to report the debit and free credit balances in the accounts of its customers.

If a firm does not currently report debit balances and free credit balances per FINRA’s guidance, members should begin reporting these balances consistent with this guidance as soon as practicable. If a member believes it will need an extended period of time to implement this guidance, it should contact its Risk Monitoring Analyst to discuss an implementation timetable.

Frequently Asked Questions Under FINRA Rule 4521(d)

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume XI, Number 106
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About this Author

Susan Light, Katten Law Firm, Finance Law Attorney, New York
Partner

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

...
212-940-8599
Associate

Shelby Kost represents a variety of clients in the financial services industry in a wide range of transactional and corporate matters, advising clients with respect to restructurings, fund formation, mergers and acquisitions, joint ventures, as well as various types of employment, advising and trading agreements.

A background of experience that leads to a wealth of knowledge

While in law school, Shelby served as a lead articles editor for the Loyola University Chicago Law Journal, and represented Loyola University Chicago School of Law at the National Moot Court...

312-902-5444
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