Regulatory Notice 07-58
FINRA Solicits Comments on Proposed Guidance Regarding International Prime Brokerage Practices
Given the growth of the international prime brokerage (IPB) business, FINRA recently interviewed representatives from many of the largest prime brokerage firms to determine how this business is conducted. The interviews covered the various practices used by the prime brokers and how they differed from practices used in domestic prime brokerage, as outlined in the SEC's 1994 No-Action letter.1 For purposes of this Notice and the Proposed Guidance, international prime brokerage is defined as the practice whereby a foreign domiciled customer executes transactions through a member firm(the executing broker) that are settled and carried by another member (the international prime brokerage custodian) on behalf of its affiliated foreign broker-dealer (the foreign prime broker or FPB).
FINRA's review found inconsistencies between member firms with regard to legal documentation/agreements, settlement practices, books and records, and other areas important in defining the roles and obligations of the parties when a prime broker customer (who is generally foreign domiciled) purchases or sells U.S. securities with a foreign prime broker and a U.S. executing broker.
In an attempt to establish consistency among our member firms, share best practices, and apply fair and consistent standards to all firms that are active in this business, FINRA is soliciting comments from member firms and other interested parties on our Proposed Guidance regarding the IPB practices described herein.
As outlined in Attachment A, the Proposed Guidance extends the existing requirements set forth by the SEC in the 1994 No-Action letter to IPB transactions relating to: (1) account arrangement, (2) delivery instructions, (3) affirmation of trades, (4) books and records, (5) documentation, (6) confirmation of trades, (7) notification and (8) net capital.
Questions regarding this Notice should be directed to Bernadette Chichetti, Senior Principal Associate, Risk Oversight & Operations Regulation (RO&OR), at (212) 656-6934; or Yui Chan, Managing Director, RO&OR, at (212)656-8115.
1 See SEC No-Action letter of January 25, 1994 to SIA Prime Broker Committee.