Update on FINRA’s Actions in Response to Recent Market Events

An Important Message from Mary Schapiro, NASD Chairman and CEO

October 8, 2008

I have received a number of inquiries about the role FINRA has played during the current credit crisis and spoken to some of you directly. While our activities are not widely discussed in the press, I wanted to take this opportunity to update you on FINRA's actions in response to recent market events.

As you know, FINRA's primary responsibilities are regulating broker-dealers and the broker-dealer subsidiary of any newly formed bank holding companies, as well as protecting customer accounts. We do not have jurisdiction over the holding companies.

We have been working closely with other regulators, providing guidance to firms, examining for compliance with FINRA rules and federal securities laws, and, when rules are violated, investigating and enforcing those rules. We have also committed considerable resources to educating investors and arming them with information they need to make sound investment choices in this difficult environment.

FINRA has taken steps on multiple fronts to address the current situation:

Compliance with Financial Requirements

FINRA staff has been working around the clock with the SEC and the Federal Reserve to monitor the financial health of our firms and to ensure that customer assets are protected—and, where necessary, to facilitate the orderly transfer of customer accounts.

While monitoring for compliance with capital requirements is always a central focus for us, our examination and surveillance team has been singularly committed to this issue during the last several months. Our coordinator staff has been continuously monitoring the financial condition of firms with particular focus on those firms that have incurred losses, those carrying a large number of customer margin balances, as well as those with sizeable fixed income proprietary positions. And our credit regulation group has been watching the impact of margin calls and evaluating the potential for temporary increases in margin requirements.

Through these efforts, FINRA's primary responsibility in this crisis has been—and continues to be—protecting customer accounts.

We also have an important role in educating investors. On September 15, we issued an Investor Alert, If a Brokerage Firm Closes Its Doors, providing guidance to retail investors regarding how their accounts are safeguarded and the steps they can take to protect themselves when a brokerage firm fails. Many of you asked us to develop educational materials about the protections for brokerage accounts that can be used with your clients. This material should serve that purpose.

Short Selling

Short selling has been a major concern, culminating with the SEC's September 19 emergency order imposing restrictions on short selling. In response, FINRA is working closely with the SEC and our SRO partners to monitor firm compliance with this order and to investigate recent trading activity in a number of highly volatile stocks.

Reserve Funds

On September 16 and 17, The Reserve announced that the net asset value of Reserve Primary Fund, the Reserve Yield Plus Fund and the Reserve International Liquidity Fund had fallen below $1 per share. As a result of this announcement, FINRA issued a Regulatory Notice on September 18 to announce a special allowance to permit bulk exchange of shares of certain reserve funds.

We also issued an Investor Alert titled Treasury's Guarantee Program for Money Market Mutual Funds: What You Should Know, to make investors aware of a new U.S. Treasury Program to guarantee money market funds that "break the buck."

Transfer of Registered Reps

For firms that have closed this year or have been acquired by other firms—such as Bear Stearns/JP Morgan Chase and Lehman Brothers/Barclays Capital—FINRA staff has accomplished the transfer of registered individuals and branch offices. Our staff coordinates with the firms, states and other SROs to facilitate the movement of thousands of registered individuals and branch offices from one firm to another. This prevents firms from having to make individual transfers and saves the industry and other regulators significant time and resources.

As these activities show, FINRA is taking a multi-pronged approach to address areas within our regulatory authority to ensure investors are protected and that firms are in compliance with the rules. I believe this work serves to underscore the critical importance of FINRA's mission.

During the next year, we expect Congress and the new administration to engage in a serious debate about the future of the financial landscape in this country and how regulation should be restructured to better serve investors. Be assured, FINRA will be an active participant in that debate.

We know these are challenging times for firms and we will work closely with you to ensure that America's capital markets and investors are safeguarded.


Mary L. Schapiro
Chief Executive Officer