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Series 27 > Chapter 7 - Recordkeepers and Reporting Requirements > Flashcards

Chapter 7 - Recordkeepers and Reporting Requirements Flashcards

1
Q

SEC Rule 17a-3

A

Requires BDs to create specific records

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2
Q

SEC Rule 17a-4

A

Requires records be kept for a certain number of years (either life, 6 years or 3 years). All records must be kept in an easily accessible place for first 2 years.

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3
Q

17a-4 Lifetime records

A

Partnership articles/articles of incorporation, minute books, stock certificate books

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4
Q

17a-4 6-year records

A
  1. Blotters
  2. General ledger
  3. Customer account ledgers (from date of last update or date account was closed)
  4. Stock record
  5. Records listing each office
  6. Records listing each principal
  7. Account records (T&C)
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5
Q

Blotter

A

Daily records of itemized sales/purchases/receipts/deliveries of securities and cash and any other debits/credits

AKA diary, journal, day book

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6
Q

17a-4 3-year records

A

Securities in transfer
Dividends/interest received
Securities/money borrowed and loaned
FTD and FTR
Stock record differences
Agency and principal order tickets
Confirmations and comparisons
Options records
Trial balances
Subsidiary ledgers
All communications relating to business
Form U4 employment application (3 years after termination)

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7
Q

Posting requirements

A

Table in book

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8
Q

Exceptions to Rule 17a-3

A

A BD is not required to prepare 17a-3 records if it clears trades through a bank who prepares the records, with an agreement stating the records are BD property and notification to the SEC that the records are available for inspection

If BD clears (on fully disclosed basis) through a clearing BD, responsibility for records is with the clearing BD

Omnibus account – introducing BD is responsible for record keeping

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9
Q

SEC Rule 17a-5

A

Requires BDs to file certain reports with the SEC on a regular basis

FOCUS report – monthly
Annual financial report

Oath and affirmation must be attached to these reports stating information is true and correct (from a general partner or authorized officer)

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10
Q

FOCUS report

A

For BDs which clear transactions and carry customer accounts:
Part I monthly within 10 BDs
Part II quarterly within 17 BDs

For BDs which don’t clear transactions or carry customer accounts:
Only Part IIA quarterly within 17 BDs

If a BD’s fiscal year =/= calendar year, must file an additional FOCUS report (fifth FOCUS report)

Must be signed by principal executive officer, principal financial officer, and principal operations officer

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11
Q

17a-5 annual report

A
  • Must be audited by an independent accountant (must notify SEC when hired or fired)
  • Must be filed as of the same fixed or determinable date each year (if year-end changes, must notify SEC)
  • Must contain stmt of fin condition, stmt of income/loss, stmt of changes in fin position, stmt of equity (or partners capital), and stmt of changes in subordinated liabilities
  • Supporting schedules, including computation of net capital and computation of reserve requirement
  • Auditor SIPC opinion
  • Must be filed no later than 60 calendar days after YE
  • An extension (typically up to 10 BDs) must be requested from FINRA at least 3 BDs prior to due date, must include letter from auditor
  • Must be filed with SEC, SEC regional office, and exchanges which it’s a member (considered filed when received by SEC)
  • Not required to send physical statements if it provides disclosure with instructions to obtain statements on website or phone
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12
Q

17a-5 requirements regarding auditors

A

When an auditor is retained or terminated, must file a report with the SEC containing:
- Name, address, phone, reg number of BD
- Name, address, phone of auditor
- Date of fiscal year of annual reports covered
- Whether engagement is for single year or ongoing

If change in relationship between BD and auditor, must notify SEC

Upon termination of auditor, notify SEC within 15 BDs

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13
Q

SIPC filings

A
  • SIPC-6 General Assessment Payment Form – filed for first half of year, due 30 days after period end
  • SIPC-7 General Assessment Reconciliation Form – Filed at year-end, less any SIPC-6 payment. Due 60 days after year-end
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14
Q

17a-5 rules re: Statements to customers

A

Must send customers audited annual F/S within 105 days of YE. For purposes of this rule, only BDs holding client funds or securities are considered to have customers. Get an extra 30 days if BD sends with next mailing of customer statements. Statement must contain a balance sheet, net capital, and required net capital and must direct customers to the SEC for the full financial report and whether auditor found any material inadequacies.

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15
Q

17a-5 mid-year F/S

A

Customers must also be sent unaudited mid-year statements, within 65 days of date

Not required to send physical statements if it provides disclosure with instructions to obtain statements on website or phone

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16
Q

Exception to 17a-5 F/S

A

BDs which only deal with other BDs that are members of an exchange are not required to prepare audited F/S

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17
Q

Report filed upon termination of membership interest

A

If a BD holds membership in and ceases to be a member in good standing with national securities exchange/association, the firm must file Part II or Part IIA of Form X-17a-5 with the SEC within 2 BDs

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18
Q

PCAOB

A

Created by SOX Act to oversee accounting professionals. Auditor of 17a-5 report must be registered with PCAOB

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19
Q

SEC Rule 17H-1T and 2T

A

BD must maintain an org chart with firm and all associated persons, and must designate MAPs

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20
Q

MAP designation

A

Material associated person

Consider:
- Overall financing requirement of BD and the associated person
- Level of risk present in person’s activities
- Level of operational support and services provided by the person
- Extent to which person has authority to cause a withdrawal of capital from the BD

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21
Q

Form 17H

A

“Risk Assessment report for BDs”

Quarterly within 60 days

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22
Q

FINRA audit requirement

A

If FINRA is concerned with accuracy of books and records, it can require a BD to do an independent audit

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23
Q

SEC Rule 17a-11

A

BDs must notify regulators in the case of deteriorating financial conditions or operational events

All filings must be filed with SEC DC office, SEC regional office, and DEA and may be emailed

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24
Q

17a-11 net capital violation (notice requirements)

A

If net capital falls below minimum requirements, BD must notify on the day it occurs. Notice must state BDs net capital and requirement.

Same requirement applies if outstanding amount of subordinated debt >70% of debt-equity total for a period exceeding 90 days.

This must be filed even if BD is notified by SEC/DEA that it is below requirement and the BD disagrees. BD may include basis for disagreement.

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25
Q

Early warning notice

A

If BD has AI:NC ratio > 12:1, or if dollar amount of net capital is <120% of minimum, must notify SEC/DEA within 24 hours

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26
Q

Other requirements to file notice under 17a-11

A
  • Non current books and records (must notify that day and file a report within 48 hours on how they will remedy)
  • Material inadequacies (notify within 24 hours and file a report within 48 hours on how they will remedy)
  • Highly leveraged BDs (if total amount of money payable against all securities loaned or subject to repo agreement, or total contract value of all securities borrowed or reverse repo agreement, excluding govt securities, exceeds 2500% TNC)
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27
Q

SIC

A

Securities Information Center

SIC acts as clearinghouse for information regarding these securities.

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28
Q

SEC Rule 17f-1

A

Deals with missing, lost, counterfeit, or stolen securities

BD is required to make inquiry of SIC for all securities except:
1. Received from issuer or issuer’s agent
2. Received from another reporting institution or Fed
3. Registered in the name of seller
4. Was previously sold to customer, verified by internal records
5. Received as part of a transaction which has a face/market value of $10k or less

If security is registered in BD’s name, is delivered by a non-customer, or are bearer bonds >$10k, inquiry is required

29
Q

Reporting to SIC

A

If securities are missing/criminal activity suspected, BD must report it to SIC, as well as FBI and transfer agent within one BD

If securities are missing but no criminal activity suspected, must report to SIC and transfer agent if BD isn’t able to resolve it within 2 BDs

If security certificates are not received, delivering BD must provide certificate numbers within 2 BDs of request, and receiving BD must report to SIC within 1 BD of receipt of certificate numbers

If security certificates are lost, stolen or missing while in transit, delivering BD must report to SIC within 2 BDs of notice of non-receipt

If securities are discovered missing as a result of a count or internal audit and criminal activity is not suspected, must file a report within 10 BDs or as soon as verification of certificate numbers can be completed

If lost/stolen securities are later recovered, must notify applicable agencies within 1 BD

30
Q

Form X-17f-1A

A

Used when filing reports with SIC

Requires the following:
- Issuer
- Type of security/series
- Date of issue/maturity date
- Denomination
- Interest rate
- Certificate number
- Registered name
- Distinguishing characteristics (for counterfeiting)
- Date of discovery of loss/recovery
- Type of loss
- CUSIP
- FINS number

31
Q

FINS

A

Financial Industry Numbering System

32
Q

FINRA required information when opening a new customer account

A
  • Customer name and address (residence address may not be a PO box)
  • Whether legal age
  • Name of RR (N/A for institutional accounts)
  • If account is for non-individual, names of authorized individuals
  • Signature of approving principal

Must obtain this info/approval prior to entering any order

Before settlement of initial transaction, RR must make reasonable effort to obtain:
- TIN/SSN
- Occupation/employer
- Whether customer is associated with another member firm

This requirement doesn’t apply to instituational accounts or accounts limited to non-recommended investment company shares

33
Q

Institutional account

A

Account established for a bank, savings and loan institution, insurance company, registered investment company, RIA, or person with assets at least $50m

34
Q

Trusted contact person

A

Requires BD to make reasonable effort to obtain name and contact info for contact person at time of opening of non-institutional account and for existing customers

Intended to be resource for BD in administering customer’s account and protecting assets

Contact person doesn’t have authority in the account but is a resource for questions on financial exploitation, health status, or information on executor/legal guardian, etc.

35
Q

Financial exploitation of customers

A

If BD believes financial exploitation has occurred, it may place a temporary hold on the account and notify trusted contact person and all authorized individuals

36
Q

Discretionary accounts

A

Account in which an RR is the authorized third party

Some BDs don’t allow discretionary accounts

A principal must have a discretionary authorization in writing before it’s effective and must get a signed power of attorney which grants trading authorization

Firms are required to maintain manual signatures of each authorized person on an account (Any other new account signatures may be electronic)

Each discretionary order must be approved promptly by a principal and accounts must be reviewed frequently to ensure transactions are appropriate

37
Q

SEC recordkeeping rules for discretionary accounts

A
  1. Copy of POA – must be kept for 3 years
  2. Customer’s signature and date (6 years after termination)
38
Q

Time/price exception for discretionary accounts

A

RR may accept verbal authorization if customer specifies:
1. Buy/sell
2. Which security
3. Number of shares/units

i.e. if RR’s discretion is limited to time and price, not considered a discretionary order

39
Q

Required signatures for opening a new account

A

Approving principal must sign each new account form

Customers opening margin or options accounts

Industry rules don’t require a customer signature for a cash account (though many BDs require it)

40
Q

SEC required information for customer accounts (17a-3)

A

BDs must maintain:
- Name
- TIN/SSN
- Address
- Phone
- DOB
- Employment status/occupation and whether customer is associated with a BD
- Annual income and net worth (excluding principal residence)
- Investment objectives

In practice, this is all obtained prior to opening account.

Not required:
- Educational background

Customers may refuse to provide some info, but RRs should document the attempt to obtain (put “refused” on the form). However principals may deny an application if there is insufficient information to determine investment objectives.

41
Q

Customer account information requirements after opening

A
  • Must send copy of account record within 30 days of opening or with customer’s next stmt (same requirement for updates to customer information)
  • Then, periodic updates of account information are required every 36 months
  • Change in address – must notify previous address and registered personnel within 30 days

If any specific terms are used to describe investment objectives, must include definitions.

42
Q

Tax information requirements for customer accounts

A

BDs must request TIN/SSN. Customers may be subject to backup withholding if they don’t provide it. Many firms require this number to open an account.

Customer is also typically required to fill out a W-9 (attest TIN is accurate and customer not subject to backup withholding) (W-8 for foreign entities/non-residents)

Customers subject to backup withholding are required by the IRS to notify the BD

43
Q

Numbered account

A

Number instead of name, but not anonymous – normal required info still required

BD should have customer sign a written acknowledgment of ownership to keep on file

44
Q

Customer account statement requirements

A

At least quarterly (typically monthly for accounts with activity)

Must include:
- Description of security positions
- Money balances
- Account activity since last stmt

Account activity = sales, purchases, interest credits or debits, charges or credits, dividends, transfer activity, securities receipts/deliveries, and JEs relating to securities in BD possession

45
Q

Account stmt valuation

A

FINRA requires firms to estimate value of non-traded or unlisted REITs

46
Q

Permitted valuation methods for REITs

A
  1. Net investment – for 2 years + 150 days, must use information from prospectus (offering price less commissions, dealer fees, org expenses)
  2. Appraised value – based on assets and liabilities, performed at least annually, conducted by third party expert, derived from standard methodology
47
Q

AML

A

Anti money laundering

48
Q

USA PATRIOT Act

A

Passed after 9/11 to prevent money laundering relating to terrorist activity

49
Q

3 stages of money laundering

A
  1. Placement – purchase securities with illegal cash
  2. Layering – execute transactions in stages to avoid detection and triggering reporting requirements
  3. Integration – take out proceeds from transactions and using them legitimately
50
Q

Types of layering

A

Structuring = A form of layering involves purchase of several blocks of securities all with cashier’s checks from different banks and all under $10k

Another form of layering involves taking opposite positions of the same security short/long in different customer accounts

51
Q

Required reports relating to AML

A
  1. BCTR: Bank Secrecy Act Currency Transaction Reports are required to be filed with FinCEN for all cash (or CE) transactions executed by a single customer during one BD that exceed $10k in the aggregate
  2. CMIR: Currency and Monetary Instrument Report must be filed when a person physically transports or receives cash (or CE) or monetary instruments in an amount of $10k or more into or out of the US. Applies to wire transfers. BDs must collect information about transactions >$3k including names of both customers and must verify identity of recipient if not a customer.
  3. SAR: Suspicious Activity Reports must be filed whenever a transaction or group of transactions >$5k and the firm suspects criminal violation, illegal funds, structured transactions, or transactions with no apparent legitimate purpose. SARs are confidential and may not be disclosed to customer in question.
52
Q

FinCEN

A

Financial Crime Enforcement Network. Part of Dept of US Treasury

53
Q

Mandatory AML compliance programs

A

BDs are required to, at a minimum:
1. Policies and procedures that can be reasonably expected to detect/report suspicious transactions and deter money laundering
2. Designation of compliance officer responsible for AML
3. Ongoing employee training
4. Independent audit function to test effectiveness of AML program

FINRA requires this program to be in writing and approved by a member of senior mgmt

54
Q

Customer Identification Procedures

A

BDs must create CIPs and use reasonable measures to verify identity of anyone who opens an account, and must maintain records of information used to verify and determine whether that person is listed as a known or suspected terrorist

Minimum info:
- Name
- DOB
- Address
- TIN/SSN (or copy of application for TIN)

BD can verify identity after account is opened/transactions begin

55
Q

Customer verification procedures

A

A BD may use documentary (inspecting a form of govt ID) or non-documentary (contacting the individual) forms of verification

56
Q

Records retention for customer verification

A

5 years following closing of account

57
Q

SDN List

A

SDN = Specially designated nationals and blocked persons list

Identifies known/suspected terrorists, other criminals, and pariah nations like Syria/Iran

BD must ensure they don’t do business with anyone on this list. If it discovers a customer is on the list, must block transactions immediately and inform LI.

Special due diligence is required when opening accounts for foreign individuals. BDs are also prohibited from maintaining accounts for foreign shell banks (no physical presence).

58
Q

Penalties for violating AML laws

A

RR guilty of facilitating ML can face 20 years in prison/fines of greater of $500k per transaction or twice the amount of funds involved

Can face civil penalties as well

Can be liable even if they were just willfully blind to the activity

59
Q

Regulation S-P

A

S-P = Safeguard procedures

Created after laws were abolished which now allowed banks/brokerages/insurance companies to merge, so SEC wanted to protect clients’ privacy

Requires all BDs, insurance companies, and investment advisers registered with the SEC to adopt policies and procedures that are reasonably designed to protect client privacy, which must be provided to clients

60
Q

Customers vs consumers for purposes of Reg S-P

A

Customer = person with ongoing relationship with the firm

Consumer = Person who provides info to firm in connection with potential transaction

61
Q

Requirements for transferring accounts

A

Must be done with written instructions and must be clear of liens

If both firms are members of ACATS, must use that system for the transfer

Receiving firm must submit transfer request to carrying firm immediately upon receipt from the customer, and the carrying firm must either validate the instructions or take exception within one business day. Any exceptions must be resolved rapidly by the two member firms.

62
Q

Protesting a transfer

A

Carrying firm may take exception to a transfer if:
- No record of account on its books
- Transfer instructions are incomplete
- Transfer instructions contain an invalid signature

If a transfer is protested, both firms must resolve differences promptly

63
Q

Validating a transfer

A

Account must be frozen while validating transfer instructions (all orders must be canceled, with the exception of options positions expiring within 7 BDs, and no new orders)

Transfer instructions must include a listing of all positions, money balances, and market values

Within 3 calendar days of validation, transfer must be completed

64
Q

Rules regarding non-transferable assets

A

Customer must be informed, either in writing on the transfer instructions or on a separate document, whether any assets cannot be readily (or within required time frame) transferred. Receiving firm is not required to accept delivery of those assets.

Carrying firm must notify customer in writing and await instructions regarding disposition (liquidation, retention, transfer to customer or third party)

If customer instructs the firm to liquidate a non-transferable asset, distribution must be made within 5 business days of receiving the customer’s instructions

65
Q

Non-transferable assets examples

A
  • Proprietary to carrying firm
  • Third party product with whom receiving firm doesn’t have a relationship
  • Asset of bankrupt issuer
  • Asset is limited partnership interest
66
Q

Interfering with transfer of customer accounts

A

Under FINRA rules, member firms and their employees are prohibited from interfering with a customer’s account transfer request. Often relates to change in employment of an RR from one firm to another. Firms are prohibited from seeking court orders to restrict movement of customer assets once customer has given written consent to transfer (unless there’s a lien on the account).

67
Q

Bulk transfers of client accounts

A

Allowed through use of a negative consent letter if:
- There’s been a merger/acquisition
- BD seeks to enter a clearing arrangement
- BD is no longer in business
- BD is experiencing financial/operational difficulties
- A financial institution has terminated its networking arrangement with a BD

Not allowed in the case of a RR who is changing firms to facilitate transfer of individual customer accounts

68
Q

Negative consent letter

A

Notification to customer that there’s been an underlying change in the business of the firm. If client doesn’t respond within certain timeframe, client is deemed to have consented.

69
Q

Reg S-P notices - timing and content

A

Timing depends on client’s relationship, either customers or consumers. Customers must get privacy notice when relationship is first established + updated version annually. Consumers must get privacy notice before the BD discloses any non-public personal information to any non-affiliated 3rd party. (Aggregated/blind data is not considered non-public)

Privacy notices must state the types of personal info that the firm collects and categories of both affiliated and unaffiliated 3rd parties to whom the information may be disclosed + option to opt out and how

Series 27 (9 decks)

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