Under new FINRA Rule 4160, Verification of Assets, which takes effect 2/1/11, member firms will be prohibited, when notified by FINRA, from continuing to custody or retain record ownership of assets at a non-member financial institution, which, upon FINRA staff’s request, fails promptly to provide FINRA with written verification of assets maintained by the member at such financial institution. 

    FINRA Contacts.  SVP Anand Ramtahal, Risk Oversight & Operational Regulation;  Counsel Matthew Vitek, Office of General Counsel.

FINRA seeks to strengthen its ability to independently verify assets maintained by a member at a non-member financial institution.  When notified by FINRA, a member firm will be prohibited from continuing to custody or retain record ownership of assets - proprietary or customer assets - at a non-member financial institution which, upon FINRA’s staff’s request, fails to promptly to provide FINRA with written verification of assets maintained by the member at such financial institution.

Under the new rule, members will not be required to enter into written contracts with non-member financial institutions maintaining their proprietary or customer assets that would obligate the institutions to comply with FINRA staff’s requests for verification.  That said, FINRA strongly encourages members to enter into such contracts.  Keep in mind that the existence of such a contract, or lack thereof, will not factor into FINRA's enforcement of FINRA Rule 4160 requirements.  When called upon by FINRA, a member firm must transfer such assets to another financial institution.

    Two Exemptions Under FINRA Rule 4160(b).   The rule does not apply to:  (i) proprietary assets of members that are treated as non-allowable assets under SEA Rule 15c3-1; or, (ii) instances where FINRA determines that there's no independent custody or record ownership of the assets.

    Supplementary Materials.   Supplementary Material .01 (Asset Transfers) to the rule sets forth that in the event a member is required to transfer its assets pursuant to the rule, the member shall effect such transfer in a reasonable period of time.  Supplementary Material .02 (Member Obligations Under SEA Rule 15c3-3) to the rule clarifies that nothing in the rule shall be construed as altering in any manner a member’s obligations under SEA Rule 15c3-3.  

For further details, click onto:   [FINRA RegNote 10-61, December]