FINRA Updates Margin Rule Interpretations
Commentary by Steven Lofchie and Nihal Patel
FINRA updated two sets of interpretations to Rule 4210 ("Margin Requirements"). The interpretations address (i) the margin rules applicable to control and restricted securities, and (ii) the consolidation of multiple margin accounts for a single customer.
The interpretations of Rule 4210(e)(8)(B)(i) and (e)(8)(D) generally clarify that specialized provisions relating to control and/or restricted securities are not applicable where such securities are saleable without restriction by the broker-dealer upon a default by the customer. The updates remind firms of the requirement, under Rule 4210(f)(1), to collect "substantial additional margin" for concentrated positions that may not be able to be liquidated promptly.
In addition, FINRA updated interpretations of Rule 4210(f)(5) to (i) clearly look to Regulation T Section 220.4(a)(2) as to when a customer may be permitted to maintain more than one margin account at a single broker-dealer and (ii) identify the circumstances in which a broker-dealer can maintain separate subaccounts of a single margin account.
Commentary
These are both sensible interpretations. The margin requirements are generally intended to protect broker-dealers from making overly risky loans where they cannot really liquidate the collateral. Therefore, it makes perfect sense that broker-dealers would not have to collect additional margin where they are able immediately to sell securities provided as collateral even where the customer might have been limited in its ability to sell.
The second interpretation really is not substantive. If a broker-dealer collects and records margin in different subaccounts that all roll up to a single account, there has not been any change in the amount of credit that a broker-dealer can extend. This interpretation is just ratifying a practice where broker-dealers could give their customers detailed position information at the sub-account level, a practice which was not at all controversial.
Commentary
As a process matter, FINRA should consider voluntarily treating published interpretations of this sort as akin to rules. These are essentially made immediately effective in PDF form, and do not have the benefit of one (rather useful) feature of the FINRA website that allows users to see past and (where applicable) future versions of the rules. Further, the PDF file continues to reflect an outdated version of the actual rule text (as the copyright line notes, other than these most recent updates, everything else is dated as of the last update of the interpretations - 2010). Beyond these (admittedly minor) quibbles, as a substantive matter these types of written interpretations tend to be given significant weight by examiners and FINRA staff (including many years into the future after personnel have changed); treating them with a little more process might be worthwhile.